-----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, TxjvEmnHpPUp4EGSP/YRi2fGucrf2avhhmuX2YCVe8KyblrbuN6DiyYxiKt80yPi lUVVpV9D49rNepiIeoA+VA== 0000950117-02-002741.txt : 20021118 0000950117-02-002741.hdr.sgml : 20021118 20021115121333 ACCESSION NUMBER: 0000950117-02-002741 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20020930 FILED AS OF DATE: 20021114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PHARMACIA CORP /DE/ CENTRAL INDEX KEY: 0000067686 STANDARD INDUSTRIAL CLASSIFICATION: CHEMICALS & ALLIED PRODUCTS [2800] IRS NUMBER: 430420020 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-02516 FILM NUMBER: 02829038 BUSINESS ADDRESS: STREET 1: 100 ROUTE 206 NORTH CITY: PEAPACK STATE: NJ ZIP: 07977 BUSINESS PHONE: 9089018000 MAIL ADDRESS: STREET 1: 100 ROUTE 206 NORTH CITY: PEAPACK STATE: NJ ZIP: 07977 FORMER COMPANY: FORMER CONFORMED NAME: MONSANTO CHEMICAL CO DATE OF NAME CHANGE: 19711003 FORMER COMPANY: FORMER CONFORMED NAME: MONSANTO CO DATE OF NAME CHANGE: 19920703 10-Q 1 a33727.txt PHARMACIA CORPORATION UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____ TO _____ --------------------------------------------------------- COMMISSION FILE NUMBER 1-2516 PHARMACIA CORPORATION (Exact name of registrant as specified in its charter) Delaware 43-0420020 (State of incorporation) (I. R. S. Employer Identification No.) Pharmacia Corporation, 100 Route 206 North, Peapack, NJ 07977 (Address of principal executive offices) (Zip Code) Registrant's telephone number 908/901-8000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months, and (2) has been subject to such filing requirements for the past 90 days. YES X NO The number of shares of Common Stock, $2 Par Value, outstanding as of November 11, 2002 was 1,292,916,725. Page 1 of 48 pages PHARMACIA CORPORATION QUARTERLY REPORT ON FORM 10-Q QUARTER ENDED SEPTEMBER 30, 2002 INDEX OF INFORMATION INCLUDED IN REPORT
Page ---- PART I - FINANCIAL INFORMATION.........................................................3 Item 1. Financial Statements...........................................................3 Consolidated Statements of Earnings.................................................3 Condensed Consolidated Statements of Cash Flows.....................................4 Condensed Consolidated Balance Sheets...............................................5 Notes to Consolidated Financial Statements..........................................6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.........................................................20 Item 3. Quantitative and Qualitative Disclosures about Market Risk....................37 Item 4. Controls and Procedures.......................................................37 PART II - OTHER INFORMATION...........................................................38 Item 1. Legal Proceedings.............................................................38 Item 5. Other Information.............................................................40 Item 6. Exhibits and Reports on Form 8-K..............................................42 Signature.............................................................................43 Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.........................................44 Exhibit Index.........................................................................48
2 PART I - FINANCIAL INFORMATION Item 1. Financial Statements PHARMACIA CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (Dollars in millions, except per-share data) (Unaudited)
For the Three Months For the Nine Months Ended September 30, Ended September 30, -------------------- ------------------- 2002 2001 2002 2001 ---- ---- ---- ---- Net sales $ 3,579 $ 3,530 $10,259 $10,153 Cost of products sold 740 711 2,216 2,207 Research and development 565 537 1,731 1,728 Selling, general and administrative 1,556 1,427 4,541 4,235 Amortization of goodwill -- 24 -- 79 Merger and restructuring 3 100 34 399 Interest expense 37 62 132 202 Interest income (17) (17) (54) (100) All other, net (76) 65 (882) 49 - ------------------------------------------------------------------------------------------------- Earnings from continuing operations before income taxes 771 621 2,541 1,354 Provision for income taxes 179 153 674 260 - ------------------------------------------------------------------------------------------------- Earnings from continuing operations 592 468 1,867 1,094 Income (loss) from discontinued operations, net of tax -- (40) -- 340 Loss on disposal of discontinued operations, net of tax (1,021) -- (932) (8) - ------------------------------------------------------------------------------------------------- Earnings (loss) before extraordinary items and cumulative effect of accounting change (429) 428 935 1,426 Extraordinary items, net of tax -- -- 649 (12) Cumulative effect of accounting change, net of tax -- -- (1,541) 1 - ------------------------------------------------------------------------------------------------- Net earnings (loss) $ (429) $ 428 $ 43 $ 1,415 ================================================================================================= Net earnings per common share: Basic Earnings from continuing operations $ .46 $ .35 $ 1.44 $ .83 Net earnings (loss) (.33) .32 .03 1.08 Diluted Earnings from continuing operations $ .45 $ .35 $ 1.42 $ .82 Net earnings (loss) (.33) .32 .03 1.06 =================================================================================================
See accompanying notes. 3 PHARMACIA CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in millions) (Unaudited)
For the Nine Months Ended September 30, --------------------- 2002 2001 ---- ---- Net cash provided by continuing operations $ 1,130 $ 1,307 Net cash provided by discontinued operations 79 73 - ----------------------------------------------------------------------------------------------- Net cash provided by operations 1,209 1,380 - ----------------------------------------------------------------------------------------------- Cash flows provided (required) by investment activities: Purchases of property, plant and equipment (841) (608) Other acquisitions and investments (1,065) (202) Investment and property disposal proceeds 101 158 Proceeds from sale of equity investments 1,671 21 Discontinued operations, net 224 158 - ----------------------------------------------------------------------------------------------- Net cash provided (required) by investment activities 90 (473) - ----------------------------------------------------------------------------------------------- Cash flows provided (required) by financing activities: Repayment of long-term debt (48) (750) Repayment of ESOP debt (47) (62) Net increase in short-term borrowings 14 299 Issuance of stock 132 159 Treasury stock purchases (620) (315) Dividend payments (536) (481) - ----------------------------------------------------------------------------------------------- Net cash required by financing activities (1,105) (1,150) - ----------------------------------------------------------------------------------------------- Effect of exchange rate changes on cash 129 (93) - ----------------------------------------------------------------------------------------------- Increase (decrease) in cash and cash equivalents 323 (336) - ----------------------------------------------------------------------------------------------- Cash and cash equivalents, beginning of year 1,276 2,035 - ----------------------------------------------------------------------------------------------- Cash and cash equivalents, end of period $ 1,599 $ 1,699 ===============================================================================================
See accompanying notes. 4 PHARMACIA CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Dollars in millions) (Unaudited)
September 30, December 31, 2002 2001 ---- ---- ASSETS Current Assets: Cash and cash equivalents $ 1,599 $ 1,276 Short-term investments 1,067 119 Short-term notes receivable-Monsanto -- 254 Trade accounts receivable, less allowance of $131 (2001: $132) 2,560 2,434 Inventories 2,008 1,684 Deferred income taxes 1,005 932 Receivables-Monsanto -- 87 Other current assets 938 880 - ------------------------------------------------------------------------------------------------- Total Current Assets 9,177 7,666 Long-term investments 170 288 Properties, net 5,425 4,875 Goodwill, net 1,103 1,059 Other intangible assets, net 412 425 Other noncurrent assets 1,494 1,748 Net assets of discontinued operations -- 6,316 - ------------------------------------------------------------------------------------------------- Total Assets $ 17,781 $ 22,377 ================================================================================================= LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Short-term debt $ 466 $ 484 Short-term notes payable-Monsanto -- 30 Trade accounts payable 806 1,048 Income taxes payable 1,043 685 Payables-Monsanto -- 44 Other accrued liabilities 2,618 2,712 - ------------------------------------------------------------------------------------------------- Total Current Liabilities 4,933 5,003 Long-term debt and guarantee of ESOP debt 2,637 2,731 Other noncurrent liabilities 2,398 2,253 - ------------------------------------------------------------------------------------------------- Total Liabilities 9,968 9,987 - ------------------------------------------------------------------------------------------------- Shareholders' Equity: Preferred stock, one cent par value; at stated value; authorized 10 million shares; issued 6,206 shares (2001: 6,401 shares) 250 258 Common stock, two dollar par value; authorized 3 billion shares; issued 1.485 billion shares 2,970 2,970 Capital in excess of par value 3,615 3,499 Retained earnings 6,573 11,586 ESOP-related accounts (218) (294) Treasury stock, at cost (3,281) (2,789) Accumulated other comprehensive loss (2,096) (2,840) - ------------------------------------------------------------------------------------------------- Total Shareholders' Equity 7,813 12,390 - ------------------------------------------------------------------------------------------------- Total Liabilities and Shareholders' Equity $ 17,781 $ 22,377 =================================================================================================
See accompanying notes. 5 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (Dollars in millions, except per-share data unless otherwise indicated) The term "the company" or "Pharmacia" is used to refer to Pharmacia Corporation or to Pharmacia Corporation and its subsidiaries, as appropriate to the context. The term "former Monsanto" is used to refer to operations of the former Monsanto Company before the merger with Pharmacia & Upjohn on March 31, 2000 and "Monsanto" refers to the agricultural subsidiary, which was spun off by Pharmacia to its shareholders on August 13, 2002 as further discussed in Note E. As outlined in Note E, beginning in the fourth quarter of 2001, the company began treating its agricultural subsidiary, Monsanto, as a discontinued operation. Accordingly, the focus of these financial statements and related notes is on the company's pharmaceutical businesses unless otherwise indicated. The historical results of operations and net assets of Monsanto are reflected on one line of the consolidated statements of earnings and the condensed consolidated balance sheets, respectively. Similar adjustments were made to the historical consolidated statements of cash flows. As outlined in Note K, Pharmacia has entered into a definitive merger agreement with Pfizer Inc. (Pfizer). The close of the transaction is subject to shareholder approval at both Pharmacia and Pfizer, governmental and regulatory approvals and other usual and customary closing conditions. The company is targeting closing the transaction by year-end 2002; however, the final regulatory review process may result in the closing occurring early in the first quarter of 2003. On October 21, 2002, the SEC declared effective Pfizer's Registration Statement on Form S-4 in connection with the proposed acquisiton of Pharmacia Corporation. This Registration Statement includes a joint proxy statement/prospectus that has been sent to the shareholders of both companies. We have scheduled a meeting for shareholders to take place on December 9, 2002 to vote on the proposed acquisition. Pfizer's shareholder meeting is scheduled to occur on December 6, 2002. Trademarks owned by, or licensed to, Pharmacia Corporation are indicated in all upper case letters. In the notes that follow, per-share amounts are presented on a diluted, after-tax basis, unless otherwise indicated. A - INTERIM CONSOLIDATED FINANCIAL STATEMENTS The consolidated financial information presented herein is unaudited, other than the condensed balance sheet at December 31, 2001, which is derived from audited financial statements. The interim financial statements and notes thereto do not include all disclosures required by U.S. generally accepted accounting principles and should be read in conjunction with the financial statements and notes thereto included in Pharmacia Corporation's annual report filed on Form 10-K for the year ended December 31, 2001. In the opinion of management, the interim consolidated financial statements reflect all adjustments of a normal recurring nature necessary for a fair statement of the results for interim periods. The current period's results of operations are not necessarily indicative of results that ultimately may be achieved for the year. Prior year data have been reclassified for the discontinued operations treatment of Monsanto and certain other reclassifications were made to conform the prior period's data to the current presentation. B - NEW ACCOUNTING STANDARDS AND CHANGES IN ACCOUNTING PRINCIPLE Exit or Disposal Activities In June 2002, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 146 "Accounting for Costs Associated with Exit or Disposal Activities". The new rules amend existing accounting for these costs by requiring that a liability be recorded at fair value when incurred. The liability would be reviewed regularly for changes in fair value with adjustments recorded in the consolidated financial statements. Previous rules 6 permitted certain types of costs to be recognized when future settlement was probable. SFAS No. 146 also provides specific guidance for lease termination costs and one-time employee termination benefits when incurred as part of an exit or disposal activity. The company is currently evaluating the effects the new rules may have on its consolidated financial statements and will adopt SFAS No. 146 on January 1, 2003. Classification of the Extinguishment of Debt On May 1, 2002, the FASB issued SFAS No. 145, "Rescission of SFAS Nos. 4, 44, and 64, Amendment of SFAS 13, and Technical Corrections". Under the current rules, SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt," requires that all gains and losses from the extinguishment of debt be classified as extraordinary on the company's consolidated statements of earnings, net of applicable taxes. SFAS No. 145 rescinds the automatic classification as extraordinary and requires that the company evaluate whether the gains or losses qualify as extraordinary under Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions". The company is evaluating the effects the new rules may have on its consolidated financial statements and will adopt SFAS No. 145 on January 1, 2003. Asset Impairments On January 1, 2002, SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," became effective. It provides guidance on the accounting for the impairment or disposal of long-lived assets. For long-lived assets to be held and used, the new rules are similar to previous guidance which required the recognition of an impairment when the undiscounted cash flows would not recover its carrying amount. The impairment to be recognized will continue to be measured as the difference between the carrying amount and fair value of the asset. The computation of fair value now removes goodwill from consideration and incorporates a probability-weighted cash flow estimation approach as an alternative to the traditional present value method. The previous guidance provided in SFAS No. 121 is to be applied to assets that are to be disposed of by sale. Additionally, assets qualifying for discontinued operations treatment have been expanded beyond the former major line of business or class of customer approach. Long-lived assets to be disposed of by other than sale are now considered assets to be held and used until the disposal date. There was no material impact on the company's consolidated financial statements due to the adoption of these rules. Asset Retirements In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated retirement costs. The company is currently evaluating the effects the new rules may have on its consolidated financial statements and will adopt SFAS No. 143 on January 1, 2003. Business Combinations, Goodwill and Intangibles In June 2001, the FASB issued SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." The provisions of SFAS No. 141 require that the purchase method of accounting be used for all business combinations initiated after June 30, 2001, and set out specific criteria for the initial recognition and measurement of intangible assets apart from goodwill. SFAS No. 141 also requires that, upon adoption of SFAS No. 142, unamortized negative goodwill be written off immediately as a change in accounting principle instead of being deferred and amortized, and that certain intangible assets be reclassified into or out of goodwill. The provisions of SFAS No. 142 prohibit the amortization of goodwill and indefinite-lived intangible assets and require that they be tested annually for impairment or on an 7 interim basis if indications of a possible impairment arise. If the book value of goodwill or an indefinite-lived intangible is greater than its fair value, an impairment loss is recognized for the difference. In addition, SFAS No. 142 requires that reporting units be identified for purposes of assessing potential future impairments of goodwill, and removes the 40-year limitation on the amortization period of intangible assets that have finite lives. The company adopted the provisions of SFAS No. 141 on January 1, 2002 (requirement to use the purchase method of accounting for all business combinations initiated after June 30, 2001 became effective with the issuance of the standard). The provisions of SFAS No. 142 were adopted effective as of January 1, 2002 with no impairment losses recognized related to its continuing operations. Monsanto also adopted SFAS No. 142 as of January 1, 2002, and an impairment analysis resulted in the recognition of a $1,822 net-of-tax loss related to the corn and wheat reporting units. As required by the accounting pronouncement, the loss was recorded as a cumulative effect of accounting change, net of tax, effective as of January 1, 2002. Earnings results for Pharmacia have been restated for the first quarter of 2002 to reflect its $1,541 portion of the loss based on Pharmacia's then approximately 85% ownership of Monsanto. The impairment charge had no effect on Pharmacia's or Monsanto's liquidity or cash flow. The following tables reflect information pertaining to other intangible assets relating to the continuing operations of the company.
September 30, 2002 December 31, 2001 ------------------------------------- -------------------------------------- Amortized Amortized ------------------- ------------------ Not Subject to Accumulated Not Subject to Accumulated Amortization Gross Amortization Net Amortization Gross Amortization Net - -------------------------------------------------------------------------------------------------------- Patents and trademarks $ 58 $ 422 $ (292) $ 188 $ 58 $ 413 $ (263) $ 208 Rights and licenses -- 508 (294) 214 -- 441 (256) 185 Other -- 38 (28) 10 -- 74 (42) 32 - -------------------------------------------------------------------------------------------------------- Total $ 58 $ 968 $ (614) $ 412 $ 58 $ 928 $ (561) $ 425 ========================================================================================================
Intangible assets acquired during the nine months ended September 30, 2002 totaled $17, and consisted of rights and licenses. Intangible Assets Amortization Expense - -------------------------------------- Year ended December 31, 2001 $ 59 Three months ended September 30, 2002 $ 16 Nine months ended September 30, 2002 $ 47 Annual amortization expense for the years ending 2002 through 2006 is estimated to be $68, $68, $61, $54 and $34, respectively. 8 Goodwill - -------- The changes in the carrying amount of goodwill relating to continuing operations for the nine months ended September 30, 2002, are as follows:
Prescription Total Pharmaceuticals All Other - -------------------------------------------------------------------------------------------------------- Balance December 31, 2001 $1,059 $ 954 $ 105 Net intangible reclassifications (6) (6) -- Purchase acquisitions 14 -- 14 Foreign exchange 36 40 (4) - -------------------------------------------------------------------------------------------------------- Balance September 30, 2002 $1,103 $ 988 $ 115
Earnings Excluding Goodwill Amortization - ----------------------------------------
For the Three Months Ended September 30, 2002 2001 ----------------------- ---------------------- Earnings Earnings Before Net Before Net Items* Earnings Items* Earnings - ----------------------------------------------------------------------------------------------------- Earnings (loss) as reported $ (429) $ (429) $ 428 $ 428 Adjust for goodwill, net of tax -- -- 24 24 - ----------------------------------------------------------------------------------------------------- Adjusted earnings (loss) $ (429) $ (429) $ 452 $ 452 Basic earnings per share: Earnings (loss) as reported $ (0.33) $ (0.33) $ 0.32 $ 0.32 Adjust for goodwill -- -- 0.02 0.02 - ----------------------------------------------------------------------------------------------------- Adjusted earnings (loss) $ (0.33) $ (0.33) $ 0.34 $ 0.34 Diluted earnings per share: Earnings (loss) as reported $ (0.33) $ (0.33) $ 0.32 $ 0.32 Adjust for goodwill -- -- 0.02 0.02 - ----------------------------------------------------------------------------------------------------- Adjusted earnings (loss) $ (0.33) $ (0.33) $ 0.34 $ 0.34
For the Nine Months Ended September 30, 2002 2001 ----------------------- ---------------------- Earnings Earnings Before Net Before Net Items* Earnings Items* Earnings - ----------------------------------------------------------------------------------------------------- Earnings as reported $ 935 $ 43 $1,426 $1,415 Adjust for goodwill, net of tax -- -- 76 76 - ----------------------------------------------------------------------------------------------------- Adjusted earnings $ 935 $ 43 $1,502 $1,491 Basic earnings per share: Earnings as reported $ 0.72 $ 0.03 $ 1.09 $ 1.08 Adjust for goodwill -- -- 0.06 0.06 - ----------------------------------------------------------------------------------------------------- Adjusted earnings $ 0.72 $ 0.03 $ 1.15 $ 1.14 Diluted earnings per share: Earnings as reported $ 0.71 $ 0.03 $ 1.07 $ 1.06 Adjust for goodwill -- -- 0.06 0.06 - ----------------------------------------------------------------------------------------------------- Adjusted earnings $ 0.71 $ 0.03 $ 1.13 $ 1.12
* Excludes extraordinary items and cumulative effect of accounting change as applicable. 9 Other The Emerging Issues Task Force Issue No. 01-09 "Accounting for Consideration Given by a Vendor to a Customer" codified several individual issues regarding the recognition and classification of payments between a vendor and a customer. Of the codified issues, only two topics were applicable to the company: sales incentives and payments to resellers. The company adopted the guidance for sales incentives (coupons) prospectively, as allowed under the rules, on January 1, 2001 and for payments to resellers on January 1, 2002. In both cases, the impact of adoption to the company was insignificant and, accordingly, prior period financial statements were not reclassified. The following does not constitute a change in Pharmacia accounting policies. Rather, it is an expansion and clarification of existing policies and should be read in conjunction with Note 1-Significant Accounting Policies and Other-Research and Development as disclosed in the company's annual report on Form 10-K for the year ended December 31, 2001. Upfront and milestone payments made to third parties that constitute the acquisition of in-process research and development (R&D) are expensed as incurred. Generally, the intangibles being acquired have not been approved by the U.S. Food and Drug Administration or comparable regulatory body and, as such, are not complete. Once the intangible has been approved, it is considered an asset resulting from R&D. C - COMPREHENSIVE INCOME (LOSS) Comprehensive income (loss) equals net earnings (loss) plus other comprehensive income (loss). For Pharmacia Corporation, other comprehensive income (loss) includes currency translation adjustments (CTA), deferred amounts for hedging purposes, unrealized holding gains and losses on available-for-sale securities (AFS) and minimum pension liability adjustments. Comprehensive income (loss) for the three months ended September 30, 2002 and 2001, was $(757) and $383, respectively. For the nine months ended September 30, 2002 and 2001, comprehensive income (loss) was $(233) and $1,046, respectively. Increases in the minimum pension liability coupled with increases in unrealized holding losses on AFS securities made up a large part of the difference between the net loss and other comprehensive loss for both the third quarter and year-to-date periods in 2002. The increase in the minimum pension liability is the result of a remeasurement of Monsanto pension plans in conjunction with the spin-off of Monsanto in August 2002. Also affecting the difference for both the third quarter and year-to-date periods in 2002, were increases in CTA as a result of certain currencies weakening against the dollar, mainly from Latin America countries. The main contributors for the difference between net income and comprehensive income for the third quarter and year-to-date 2001 periods were increases in unrealized holding losses on AFS securities. The increase in unrealized holding losses for the third quarter of 2001 was partially offset by favorable changes in CTA as a result of certain foreign currencies strengthening against the dollar, while year-to-date 2001 reflects increases in CTA as a result of certain currencies weakening against the dollar. D - EXTRAORDINARY ITEMS During the first quarter of 2002, the company sold its 45 percent minority interest in Amersham Biosciences to Amersham plc for $1,000. The investment basis as of March 2002 was $227. The sale resulted in a gain of $649 (net of taxes of $124). The gain on the sale has been classified as an extraordinary item in the accompanying consolidated statements of earnings in accordance with Accounting Principles Board Opinion No. 16 "Business Combinations" because the sale of this investment took place within the two-year period following the merger of Pharmacia & Upjohn and former Monsanto, which was accounted for under the pooling of interests accounting method. The sale of this investment was not contemplated at the time of the pooling. On June 28, 2001, the company retired certain debt obligations relating to one of the employee stock ownership plans. The principal amount of the debt was $65. Certain costs related to the transaction, including a premium to retire the debt and other direct costs, were $4 (net of taxes of $2) and have been classified as an extraordinary item on the company's consolidated statements of earnings. Through a private transaction entered into on June 29, 2001, the company retired debt related to adjustable conversion-rate equity securities in the principal amount of $700. Premium on the debt and other direct costs of $8 (net of taxes of $5) were accrued as an extraordinary item. 10 E - DISCONTINUED OPERATIONS Monsanto On November 28, 2001, the board of directors approved a formal plan to distribute to Pharmacia shareholders the outstanding shares of Monsanto common stock held by the company, in a tax-free spin-off transaction. On July 18, 2002, the Pharmacia board of directors approved the completion of the spin-off of Monsanto through the distribution of shares of Monsanto common stock to Pharmacia shareholders of record on July 29, 2002. In order to effect the distribution, the Pharmacia board of directors declared a special dividend of the 220 million shares of Monsanto common stock held by the company which, as of July 29, 2002, represented approximately 84% of Monsanto's outstanding stock. Each Pharmacia shareholder received .170593 shares of Monsanto common stock for each share of Pharmacia stock owned on the record date. The shares were distributed at the close of business on August 13, 2002. In connection with the spin-off of Monsanto, Pharmacia recorded a loss on disposal of discontinued operations of $928 for the nine months ended 2002, which was comprised of $53 of net income from discontinued operations offset by an impairment loss of $981 calculated by comparing the recorded amount of Monsanto shares on August 13, the date of the spin-off, to Monsanto's fair value based upon the closing stock price on August 13, 2002 of $15.81. On September 1, 2000, the company entered into a Transition Services Agreement with Monsanto. Under the agreement, Pharmacia primarily provides information technology support for Monsanto while Monsanto provides certain administrative support services for Pharmacia. Pharmacia and Monsanto also lease research and office space from each other. Since the initiation of the agreement, each party has charged the other entity rent based on a percentage of occupancy multiplied by the cost to operate the facilities. These services are continuing beyond August 13, 2002.
Net Assets of Monsanto: September 30, December 31, 2002 2001 - -------------------------------------------------------------------------------------------------------- Current assets $ -- $ 4,797 Noncurrent assets -- 6,676 - -------------------------------------------------------------------------------------------------------- Total assets -- 11,473 - -------------------------------------------------------------------------------------------------------- Current liabilities -- 2,367 Noncurrent liabilities -- 1,695 - -------------------------------------------------------------------------------------------------------- Total liabilities -- 4,062 - -------------------------------------------------------------------------------------------------------- Net assets of Monsanto before minority interest -- 7,411 Minority interest -- 1,095 - -------------------------------------------------------------------------------------------------------- Net assets of discontinued operations $ -- $ 6,316 ========================================================================================================
11 Other In the third quarter and year-to-date periods of 2002, the company recorded an additional $4 loss from discontinued operations in connection with the sale of the artificial sweetener ingredient business that occurred in 2000. The majority of the $8 loss from the disposal of other discontinued operations recorded in the year-to-date period of 2001 consisted of legal and related costs also in connection with the sale of the artificial sweetener ingredient business. There were no sales included in the company's consolidated financial statements during the quarter or year-to-date periods ended September 30, 2002 and 2001 related to the disposal of other discontinued businesses.
For The Three Months Ended September 30, ------------------------------------------------ 2002 2001 ---------------------- --------------------- Monsanto Other Monsanto Other - --------------------------------------------------------------------------------------------------- Net sales $ 162 -- $ 936 -- - --------------------------------------------------------------------------------------------------- Income (loss) from discontinued operations, before tax (58) (6) (64) -- Income tax (benefit) (22) (2) (24) -- - --------------------------------------------------------------------------------------------------- Income (loss) from discontinued operations $ (36)* $ (4)* $ (40) -- ===================================================================================================
For The Nine Months Ended September 30, ------------------------------------------------ 2002 2001 ---------------------- --------------------- Monsanto Other Monsanto Other - --------------------------------------------------------------------------------------------------- Net sales $ 2,936 -- $ 4,253 -- - --------------------------------------------------------------------------------------------------- Income (loss) from discontinued operations, before tax 72 (6) 544 (13) Income tax expense (benefit) 19 (2) 204 (5) - --------------------------------------------------------------------------------------------------- Income (loss) from discontinued operations $ 53* $ (4)* $ 340 $ (8)* ====================================================================================================
* Reported as part of loss on disposal of discontinued operations, net of tax. F - MERGER AND RESTRUCTURING CHARGES The company recorded an additional $3 of merger and restructuring charges during the third quarter of 2002. Approximately $1 of net expense was recorded in connection with the merger and integration of former Monsanto and Pharmacia & Upjohn companies into Pharmacia Corporation. These charges are part of the comprehensive integration plan approved by the board of directors during 2000. The company also recorded $2 of additional merger costs relating to the proposed Pfizer transaction. The $3 recorded during the quarter is comprised of $4 of current merger costs and a $1 net reversal of restructuring costs. During the third quarter of 2001, the company recorded $100 in merger and restructuring costs. The $100 recorded on the merger and restructuring line of the consolidated statements of earnings is made up of $82 of merger costs and $18 in restructuring charges. For the nine months ended September 30, 2002, the company recorded a total of $34 of merger and restructuring costs. This total is comprised of $18 of merger costs and $16 of net restructuring costs. For the nine months ended 2001, the company recorded a total of $399 in merger and restructuring expense. This total is comprised of $276 in merger costs and $123 in restructuring charges. 12 Merger Costs The $4 of merger costs for the quarter and the $18 of merger costs year-to-date include costs necessary to integrate the former companies into a single organization, such as consultant, relocation and information technology integration costs. The $82 in third quarter 2001 merger costs and $276 in year-to-date 2001 merger costs relate to costs necessary to integrate the former companies into a single organization such as consultant fees for system and process integration, information technology integration costs, contract termination fees, employee relocation costs and other costs necessary to complete the merger. Restructuring Costs The $1 of net restructuring reversals for the third quarter of 2002 relate to a $4 charge to prescription pharmaceuticals and approximately $5 of reversals. The $18 of total restructuring charges during the third quarter of 2001 is comprised of $17 associated with prescription pharmaceuticals and $1 in connection with corporate and administrative functions. The year-to-date 2002 restructuring amount of $16 is comprised of $18 relating to prescription pharmaceuticals, $3 relating to other pharmaceuticals and reversals of $5. Year-to-date 2001 consists of $123 of total restructuring charges and is comprised of $105 associated with prescription pharmaceuticals, $16 in connection with corporate and administrative functions and $2 in connection with other pharmaceutical operations. The $4 of expense for the third quarter of 2002 relates to contract termination fees in the prescription pharmaceutical business. The $17 of third quarter 2001 expense relating to prescription pharmaceuticals consists of $9 relating to the involuntary separation of approximately 113 employees, $6 associated with other exit costs and $2 relating to the write-down of assets such as duplicative computer systems and leasehold improvements. The $18 of year-to-date 2002 expenses for prescription pharmaceuticals is made up of $5 relating to the separation of approximately 45 employees, $9 relating to contract and lease termination costs and $4 relating to other exit costs. For the nine months ended September 30, 2001, the $105 of restructuring charges relating to prescription pharmaceuticals is comprised of $72 in connection with the separation of approximately 473 employees, $19 resulting from asset write-downs and $14 associated with other exit costs. The $1 relating to corporate and administrative functions for the third quarter of 2001 represents the separation of approximately 10 employees. For the nine months ended 2001, the $16 charge for corporate and administrative functions is comprised of $11 relating to the separation of approximately 100 employees and $5 relating to asset write-offs. The $3 associated with the other pharmaceutical operations for year-to-date September 30, 2002, is in connection with the involuntary separation of approximately 35 employees. The year-to-date 2001 other pharmaceutical operations restructuring balance includes $2 associated with the involuntary separation of approximately 10 employees. The $5 of reversals during the third quarter of 2002 consist of liabilities established in 1999 and 2000 relating to the Monsanto and Pharmacia & Upjohn merger. These restructuring liabilities were reversed primarily as a result of lower actual severance costs than originally estimated. 13 A roll-forward from year-end 2001 of restructuring charges and spending associated with the current restructuring plans relating to the integration of the former Monsanto and Pharmacia & Upjohn companies is included in the table below. As of September 30, 2002, the company has paid a total of $428 relating to the separation of approximately 2,740 employees associated with these restructuring plans.
Workforce Reductions Other Exit Costs Total - ----------------------------------------------------------------------------------------------- December 31, 2001 $ 115 $ 10 $ 125 Year-to-date charges 7 9 16 Year-to-date spending (83) (4) (87) Year-to-date reversals (5) -- (5) - ----------------------------------------------------------------------------------------------- September 30, 2002 $ 34 $ 15 $ 49 ===============================================================================================
G - EARNINGS PER SHARE Basic earnings per share is computed by dividing the earnings measure by the weighted average number of shares of common stock outstanding. Diluted earnings per share is computed assuming the exercise of stock options, conversion of preferred stock, and the issuance of stock as incentive compensation to certain employees. Also in the diluted computation, earnings from continuing operations and net earnings are reduced by an incremental contribution to the Employee Stock Ownership Plan (ESOP). This contribution is the after-tax difference between the income that the ESOP would have received in preferred stock dividends and the dividend on the common shares assumed to have been outstanding. The following table reconciles the numerators and denominators of the basic and diluted earnings per share computations:
For the Three Months Ended September 30, ------------------------------------------------- 2002 2002 2001 2001 Basic Diluted Basic Diluted - --------------------------------------------------------------------------------------------------- EPS numerator: Earnings from continuing operations $ 592 $ 592 $ 468 $ 468 Less: Preferred stock dividends, net of tax (3) -- (4) -- Less: ESOP contribution, net of tax -- (2) -- (2) - --------------------------------------------------------------------------------------------------- Earnings from continuing operations available to common shareholders $ 589 $ 590 $ 464 $ 466 =================================================================================================== EPS denominator: Average common shares outstanding 1,290 1,290 1,299 1,299 Effect of dilutive securities: Stock options and stock warrants -- 9 -- 10 Convertible instruments and incentive compensation -- 12 -- 12 - --------------------------------------------------------------------------------------------------- Total shares (in millions) 1,290 1,311 1,299 1,321 =================================================================================================== Earnings (loss) per share: Continuing operations $ .46 $ .45 $ .35 $ .35 Discontinued operations (.79) (.78) (.03) (.03) Extraordinary items -- -- -- -- - --------------------------------------------------------------------------------------------------- Net earnings (loss) $ (.33) $ (.33) $ .32 $ .32 ===================================================================================================
14
For the Nine Months Ended September 30, -------------------------------------------------- 2002 2002 2001 2001 Basic Diluted Basic Diluted - --------------------------------------------------------------------------------------------------- EPS numerator: Earnings from continuing operations $ 1,867 $ 1,867 $ 1,094 $ 1,094 Less: Preferred stock dividends, net of tax (10) -- (10) -- Less: ESOP contribution, net of tax -- (6) -- (6) - --------------------------------------------------------------------------------------------------- Earnings from continuing operations available to common shareholders $ 1,857 $ 1,861 $ 1,084 $ 1,088 =================================================================================================== EPS denominator: Average common shares outstanding 1,293 1,293 1,299 1,299 Effect of dilutive securities: Stock options and stock warrants -- 10 -- 13 Convertible instruments and incentive compensation -- 12 -- 12 - --------------------------------------------------------------------------------------------------- Total shares (in millions) 1,293 1,315 1,299 1,324 =================================================================================================== Earnings (loss) per share: Continuing operations $ 1.44 $ 1.42 $ .83 $ .82 Discontinued operations (.72) (.71) .26 .25 Extraordinary items .50 .49 (.01) (.01) Cumulative effect of accounting change (1.19) (1.17) -- -- - --------------------------------------------------------------------------------------------------- Net earnings $ .03 $ .03 $ 1.08 $ 1.06 ===================================================================================================
H - INVENTORIES
September 30, December 31, 2002 2001 - --------------------------------------------------------------------------------------------------- Estimated replacement cost (FIFO basis): Finished products $ 113 $ 202 Raw materials, supplies and work-in-process 2,131 1,662 - --------------------------------------------------------------------------------------------------- Inventories (FIFO basis) 2,244 1,864 Less reduction to LIFO cost (236) (180) - --------------------------------------------------------------------------------------------------- Total $ 2,008 $ 1,684 ===================================================================================================
Inventories valued on the LIFO method had an estimated replacement cost (FIFO basis) of $1,381 at September 30, 2002, and $1,060 at December 31, 2001. I - COMMITMENTS, CONTINGENT LIABILITIES AND LITIGATION The consolidated balance sheets include accruals for estimated product, intellectual property and other litigation and environmental liabilities. The latter includes exposures related to discontinued operations, including the industrial chemical facility referred to below and several sites that, under the Comprehensive Environmental Response, Compensation and Liability Act, are commonly known as Superfund sites. The company's ultimate liability in connection with Superfund sites depends on many factors, including the number of other responsible parties and their financial viability and the remediation methods and technology to be used. Actual costs to be incurred may vary from the estimates, given the inherent uncertainties in evaluating environmental exposures. 15 Environmental Matters With regard to the company's discontinued industrial chemical facility in North Haven, Connecticut, the company will be required to submit a corrective measures study report to the U.S. Environmental Protection Agency. It is reasonably possible that a material increase in accrued liabilities will be required. It is not possible, however, to estimate a range of potential losses. Accordingly, it is not possible to determine what, if any, additional exposure exists at this time. Litigation Matters The company has been a defendant, along with a number of other manufacturers and wholesalers, in several civil antitrust lawsuits, including a federal class action, brought by retail pharmacies alleging that the defendants violated the law by providing discounts to hospitals, nursing homes, mail-order pharmacies and health maintenance organizations that were not offered on equal terms to retail pharmacies. Pharmacia & Upjohn, a subsidiary of the company, settled the federal class action for $103, and G.D. Searle & Co. (Searle), another subsidiary of the company, received a favorable verdict in the federal class action in 1999. State class action lawsuits seeking damages based on the same alleged conduct were filed in 14 states and the District of Columbia, all but one of which have been settled or dismissed. A number of the federal cases brought by plaintiffs who opted out of the federal class action are still pending. The company and Pfizer are defendants in a lawsuit brought by the University of Rochester in Federal Court in New York alleging infringement of the University's U.S. patent by the sale and use of CELEBREX. The University's patent has claims directed to a method of treating human patients by administering a selective COX-2 inhibitor. The case, which seeks injunctive relief and monetary damages, is expected to be tried during the first half of 2003. The company is a defendant in a lawsuit brought by CP Kelco in Federal Court in Delaware seeking compensatory and punitive damages for alleged breach of contract, fraud and securities law violations arising out of the purchase of the company's Kelco biogums business in 2000 by Lehman Brothers Merchant Bank Partners II, L.P. (Lehman), which combined the company's Kelco biogums business with a business purchased from Hercules, Inc. to form CP Kelco. The company has asserted counterclaims against the plaintiff for the return of certain payments and specific performance of plaintiff's contractual obligation to provide severance benefits to certain employees of the company who were transferred to CP Kelco. The company has also asserted indemnification claims against Lehman and Hercules in a third-party complaint. Discovery has been completed in the lawsuit. A September 2002 Report and Recommendation (September Report) issued by the magistrate judge in the case granted Lehman's and Hercules' motion for judgment on the pleadings. The company has filed objections to the September Report and those objections have not been ruled upon. An October 2002 Report and Recommendation (October Report) granted in part and denied in part the company's motion for summary judgment. The company has filed objections to that portion of the October Report that denied its motion. Those objections have not been ruled upon. There is no trial date in the matter, as the judge originally handling the action resigned from the bench and has not yet been replaced. The company, Searle and Pfizer are defendants in a purported class action complaint filed in Federal Court in New Jersey seeking damages based on the claim that the defendants misrepresented and over-promoted CELEBREX in violation of state law and misled and defrauded the U.S. Food and Drug Administration during the CELEBREX approval process. The complaint seeks economic damages and claims no specific medical injury. The company, Searle and Pfizer were also sued in State Court in New Jersey by a purported class alleging the same set of facts and seeking the same relief as the federal case. 16 The company, Pfizer and Merck & Co., Inc. are defendants in a purported class action complaint filed in Federal Court in New York alleging medical concerns related to Vioxx and CELEBREX and seeking reimbursement of the purchase price, for the Vioxx and CELEBREX used by the plaintiffs, medical expenses and attorneys' fees. The complaint also seeks revised labeling for the products, emergency notice to the class and a medical monitoring program funded by defendants. Pursuant to the Separation Agreement between Pharmacia and Monsanto, as amended (the "Separation Agreement"), Monsanto assumed and agreed to indemnify Pharmacia for liabilities related to the agricultural business. In addition, in the proceedings where the company is the defendant, Monsanto will indemnify the company for costs, expenses and any judgments or settlements; and in the proceedings where the company is the plaintiff, Monsanto will pay the fees and costs of, and receive any benefits from, the litigation. Therefore, Pharmacia may remain the named party in certain legal proceedings, but Monsanto will manage the litigation including indemnifying Pharmacia for costs, expenses and any judgments or settlements. In connection with the spin-off of Solutia Inc. (Solutia) on September 1, 1997, Solutia assumed from Pharmacia liabilities related to the former Monsanto chemical businesses pursuant to the Distribution Agreement, as amended (the "Distribution Agreement"). As a result, Pharmacia remains the named defendant in certain legal proceedings but Solutia manages the litigation and pays all costs, expenses and any judgments or settlements. As a result, Solutia assumed responsibility for litigation currently pending in state and federal court in Alabama brought by several thousand plaintiffs, alleging property damage, anxiety and emotional distress and personal injury arising from exposure to polychlorinated biphenyls (PCBs), which were discharged from an Anniston, Alabama plant site that was owned by former Monsanto and that was transferred to Solutia as part of the spin-off. This litigation includes, but is not limited to, the Abernathy litigation referred to below. Pursuant to the terms of the Distribution Agreement, Solutia is required to indemnify Pharmacia for liabilities that Pharmacia incurs in connection with this litigation. Solutia is defending itself and Pharmacia in connection with Sabrina Abernathy, et al. v. Monsanto Company, et al., currently pending in state court in Alabama. The jury has found Solutia and Pharmacia (former Monsanto) liable with respect to certain claims in this litigation, and proceedings have commenced to determine damages. Solutia has requested that Pharmacia commit to posting any appeal bond that may be required to stay execution of any judgment in this litigation pending an appeal. Pursuant to a Protocol agreement dated as of July 1, 2002, Pharmacia, Monsanto and Solutia have agreed that, if Solutia does not post a bond sufficient to stay the execution of any judgment in the litigation pending an appeal, Pharmacia will post such a bond if it is able to do so on commercially reasonable terms. Solutia shall pay the expenses incurred in connection with obtaining any such bond. The agreement also specifies which party or parties would control any decisions regarding settlement of the Abernathy litigation, depending upon whether or not collateral must be provided to secure the bond and, if so, which party provides it. Under the agreement, the continued defense of the Abernathy litigation and the prosecution of any appeal will continue to be managed by Solutia, at Solutia's expense. Pursuant to the terms of the Separation Agreement, Monsanto has assumed, and agreed to indemnify Pharmacia for, any liabilities primarily related to former Monsanto's former chemical businesses, including any liabilities that Solutia has assumed from Pharmacia in connection with the spin-off of Solutia, to the extent Solutia fails to pay, perform or discharge these liabilities. This indemnification obligation applies to litigation, environmental and other liabilities assumed by Solutia. With respect to the matters described above, the company cannot estimate a range of potential losses or what, if any, additional exposure exists at this time. The company believes it has valid defenses to these matters and intends to vigorously contest them. 17 The company is involved in other legal proceedings arising in the ordinary course of its business. While the results of litigation cannot be predicted with certainty, management's belief is that any potential remaining liability from such proceedings that might exceed amounts already accrued will not have a material adverse effect on the company's consolidated financial position, profitability or liquidity. J - AGREEMENTS WITH SANOFI~SYNTHELABO Pursuant to previously existing agreements, the company had rights from Sanofi~Synthelabo (Sanofi) to manufacture, sell and market two products in North America: Ambien and Kerlone. On April 16, 2002, Sanofi exercised its right to acquire all rights to the products in North America in accordance with the agreements. In connection with such acquisition, the company received a pretax payment of $671 ($661 net pretax gain) for its interest. This payment was recorded in the second fiscal quarter of 2002 in all other, net in the consolidated statements of earnings. See Pharmacia Corporation Form 8-K filed with the Securities and Exchange Commission on April 30, 2002. K - INTENTION TO MERGE WITH PFIZER On July 13, 2002, the company entered into a definitive merger agreement with Pfizer. In accordance with the agreement, each Pharmacia shareholder of record on the closing date will receive 1.4 shares of Pfizer stock for each share of Pharmacia stock owned. It is estimated that the shares of Pfizer common stock to be issued to Pharmacia shareholders in the merger will represent approximately 23 percent of the outstanding Pfizer common stock after the merger on a fully diluted basis. Until the closing date, which is targeted to occur by year-end, Pharmacia will continue to operate independently of Pfizer. The closing of the transaction is contingent upon an affirmative vote by Pharmacia and Pfizer shareholders and approval by certain regulatory authorities including the U.S. Federal Trade Commission. The final regulatory review process may result in the closing occurring early in the first quarter of 2003. On October 21, 2002, the SEC declared effective Pfizer's Registration Statement on Form S-4 in connection with the proposed acquisiton of Pharmacia Corporation. This Registration Statement includes a joint proxy statement/prospectus that has been sent to the shareholders of both companies. We have scheduled a meeting for shareholders to take place on December 9, 2002 to vote on the proposed acquisition. Pfizer's shareholder meeting is scheduled to occur on December 6, 2002. L - SEGMENT INFORMATION The company's core business is the development, manufacture and sale of pharmaceutical products. Prescription pharmaceuticals is the company's only reportable segment and includes primary care, hospital care, cancer care, ophthalmology and endocrine care products. The company also operates several business units that do not constitute reportable business segments. These operating units include consumer health care, animal health, diagnostics, contract manufacturing and bulk pharmaceutical chemicals. Due to the size of these operating units, they have been grouped into the other pharmaceuticals category. Corporate amounts represent general and administrative expenses of corporate support functions, restructuring charges and other corporate items such as litigation accruals, merger costs and non-operating income and expense. Certain goodwill (prior year) and intangible assets and associated amortization are not allocated to categories. The following table shows revenues and earnings by category and reconciling items necessary to total to the amounts reported in the consolidated financial statements. Information about interest income and expense, and income taxes is not provided on a segment level as the segments are reviewed based on earnings before interest and income taxes (EBIT). There are no inter-category revenues. Long-lived assets are not allocated to categories and, accordingly, depreciation is not available at that level. 18
For The Three Months Ended September 30, -------------------------------------------- Sales Earnings --------------------- -------------------- 2002 2001 2002 2001 - ----------------------------------------------------------------------------------------------- Prescription pharmaceuticals $ 3,095 $ 3,075 $ 784 $ 720 Other pharmaceuticals 484 455 148 109 Corporate -- -- (141) (163) - ----------------------------------------------------------------------------------------------- Total Pharmacia - Sales $ 3,579 $ 3,530 - EBIT * 791 666 - ----------------------------------------------------------------------------------------------- Interest expense, net (20) (45) Income tax provision (179) (153) - ----------------------------------------------------------------------------------------------- Earnings from continuing operations $ 592 $ 468 ===============================================================================================
For The Nine Months Ended September 30, -------------------------------------------- Sales Earnings --------------------- -------------------- 2002 2001 2002 2001 - ----------------------------------------------------------------------------------------------- Prescription pharmaceuticals $ 8,824 $ 8,747 $ 2,042 $ 1,801 Other pharmaceuticals 1,435 1,406 387 304 Corporate -- -- 190 (649) - ----------------------------------------------------------------------------------------------- Total Pharmacia - Sales $10,259 $10,153 - EBIT* 2,619 1,456 - ----------------------------------------------------------------------------------------------- Interest expense, net (78) (102) Income tax provision (674) (260) - ----------------------------------------------------------------------------------------------- Earnings from continuing operations $ 1,867 $ 1,094 ===============================================================================================
* Earnings before interest and taxes (EBIT) is presented here to provide additional information about the company's operations. This item should be considered in addition to, but not as a substitute for or superior to, net earnings, cash flow or other measures of financial performance prepared in accordance with U.S. generally accepted accounting principles. Determination of EBIT may vary from company to company. 19 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The term "the company" or "Pharmacia" is used to refer to Pharmacia Corporation or to Pharmacia Corporation and its subsidiaries, as appropriate to the context. The term "former Monsanto" is used to refer to pre-merger operations of the former Monsanto Company before the merger with Pharmacia & Upjohn on March 31, 2000 and "Monsanto" refers to the agricultural subsidiary, which was spun-off by Pharmacia to its shareholders on August 13, 2002 as discussed below. Product names indicated in all upper case letters are trademarks owned by, or licensed to, Pharmacia Corporation. In the following discussion of consolidated results, per-share amounts are presented on a diluted, after-tax basis, unless otherwise indicated. On July 13, 2002, Pharmacia entered into a definitive merger agreement with Pfizer Inc. (Pfizer). The transaction is targeted to close by year-end and until that time Pharmacia will continue to operate independently of Pfizer. The closing of the transaction is contingent upon an affirmative vote by Pharmacia and Pfizer shareholders and approval by certain regulatory authorities including the U.S. Federal Trade Commission. The final regulatory review process may result in the closing occurring early in the first quarter of 2003. On November 28, 2001, the board of directors approved a formal plan to distribute to Pharmacia shareholders the outstanding shares of Monsanto common stock held by the company, in a tax-free spin-off transaction. On July 18, 2002, the Pharmacia board of directors approved the completion of the spin-off of Monsanto through the distribution of shares of Monsanto common stock to Pharmacia shareholders of record on July 29, 2002. The shares were distributed at the close of business on August 13, 2002. On October 21, 2002, the SEC declared effective Pfizer's Registration Statement on Form S-4 in connection with the proposed acquisition of Pharmacia Corporation. This Regisration Statement includes a joint proxy statement/prospectus that has been sent to the shareholders of both companies. We have scheduled a meeting for shareholders to take place on December 9, 2002 to vote on the proposed acquisition. Pfizer's shareholder meeting is scheduled to occur on December 6, 2002. FINANCIAL REVIEW Overview The table below provides a comparative overview of consolidated results for the third quarter and first nine-month periods of 2002 and 2001.
For the Three Months Ended For the Nine Months Ended September 30, September 30, ---------------------------- ----------------------------- (Dollars in millions, % % except per share data) 2002 Change 2001 2002 Change 2001 - -------------------------------------------------------------------------------------------------------- Sales $3,579 1% $3,530 $10,259 1% $10,153 Earnings from continuing operations before income taxes 771 24 621 2,541 88 1,354 Earnings from continuing operations 592 27 468 1,867 71 1,094 Net earnings (loss) (429) -- 428 43 (97) 1,415 - -------------------------------------------------------------------------------------------------------- Earnings from continuing operations per common share (EPS): Basic $ .46 31% $ .35 $ 1.44 73% $ .83
20 Diluted .45 29 .35 1.42 73 .82 - -------------------------------------------------------------------------------------------------------- Net earnings (loss) per common share (EPS): Basic $ (.33) --% $ .32 $ .03 (97)% $ 1.08 Diluted (.33) -- .32 .03 (97) 1.06 ========================================================================================================
The company has six key growth products: CELEBREX, BEXTRA, XALATAN, DETROL LA/DETROL, CAMPTOSAR and ZYVOX. Sales for these key prescription products increased 12 percent in the third quarter of 2002 as compared with the third quarter of 2001. On a year-to-date basis, sales of these key growth drivers increased 14 percent compared to the same period of 2001. The increase in sales is partially due to the launch of BEXTRA during April of 2002. On December 31, 2001, the company relinquished control over Ambien to Sanofi~Synthelabo, Inc. (Sanofi) and ceased recording sales and expenses of Ambien. In the third quarter and year-to-date 2001 results, Ambien was included in sales and the company reported related payments to Sanofi as an expense. During the year-to-date period ended September 30, 2002, the company recorded its final share of profits of $73 million and a gain on the transfer of its interests of $661 million ($424 million net of tax or $0.32 per share) in all other, net. Excluding Ambien from prior year data, sales of continuing products rose 11 percent over the third quarter of 2001 and 8 percent over year-to-date 2001. Excluding Ambien and the impact of foreign exchange, sales rose 9 percent and 8 percent for the quarter and year-to-date periods, respectively. Earnings from continuing operations increased 27 percent to $592 million or $0.45 per share during the third quarter of 2002. On a year-to-date basis, earnings from continuing operations increased 71 percent to $1.9 billion or $1.42 per share. Quarter-to-quarter and year-to-year comparisons are impacted by special items in research and development (R&D), selling, general and administrative (SG&A), merger and restructuring and all other, net. Year-to-date 2002 includes a $30 million ($19 million net of tax or $0.02 per share) payment to Altana AG, which was recorded in R&D, related to the co-promotion and co-development agreement for the compound roflumilast. Third quarter and year-to-date 2001 includes a $30 million ($19 million net of tax or $0.02 per share) payment to Orion Corporation, related to the development and commercialization of deramciclane. Also included in 2001 year-to-date amounts are charges of $67 million ($42 million net of tax or $0.03 per share) associated with the Sensus purchase acquisition and a $50 million ($31 million net of tax or $0.02 per share) upfront R&D payment related to the agreement with Celltech Group plc for the compound CDP 870. Year-to-date 2002 includes a $75 million ($46 million net of tax or $0.04 per share) charge to SG&A relating to a charitable contribution to the Pharmacia Foundation. Merger and restructuring charges totaled $3 million ($2 million net of tax with no per share impact) and $100 million ($88 million net of tax or $0.06 per share) during the third quarter of 2002 and 2001, respectively. Year-to-date merger and restructuring charges for 2002 and 2001 total $34 million ($22 million net of tax or $0.01 per share) and $399 million ($239 million net of tax or $0.18 per share), respectively. All other, net for the year-to-date period of 2002, in addition to other items, includes the aforementioned $661 million gain for the return of product rights to Sanofi and a $28 million gain ($17 million net of tax or $0.02 per share) related to the sale of clinical data to Boehringer Ingelheim. The loss of $429 million for the third quarter of 2002, was primarily due to a loss on disposal of discontinued operations of approximately $1.0 billion, net of tax ($0.78 per share), representing the company's share of Monsanto's operating results and an impairment loss as of the date of the spin-off of Monsanto. The impairment loss was the difference between the fair value and the recorded amount of Monsanto shares on August 13, the date of the spin-off, in the amount of 21 $981 million. This impairment loss was the principal cause of the year-to-date net loss on disposal of discontinued operations of $932 million, net of tax ($0.71 per share). Year-to-date net earnings decreased 97 percent to $43 million. The decrease is primarily due to the events mentioned above, and the cumulative effect of an accounting change of $1.5 billion net of tax ($1.17 per share), which relates to the write-down of Monsanto goodwill in accordance with the adoption of SFAS No. 142 on January 1, 2002. Also affecting the year-to-year comparability is the $649 million net of tax ($0.49 per share) extraordinary gain on the sale of Amersham Biosciences Corporation (Amersham) recorded in March 2002. Net Sales
Sales by Segment For the Three Months Ended For the Nine Months Ended September 30, September 30, ------------------------------- ------------------------------- % % (Dollars in millions) 2002 Change 2001 2002 Change 2001 - -------------------------------------------------------------------------------------------------------- Prescription pharmaceuticals $3,095 1% $3,075 $ 8,824 1% $ 8,747 Other pharmaceuticals 484 6 455 1,435 2 1,406 - -------------------------------------------------------------------------------------------------------- Total consolidated sales $3,579 1% $3,530 $10,259 1% $10,153 ========================================================================================================
The increase in consolidated sales for the third quarter of 2002 is the result of a favorable impact from foreign exchange of 2 percent, which is partially offset by a 1 percent decrease in volume. The increase in consolidated sales for the first nine months of 2002 is the result of price increases of 1 percent. Volume comparisons were affected significantly by the absence of Ambien sales during 2002 due to the transfer of that product to Sanofi at the end of 2001. Excluding Ambien from 2001 data, volume rose 8 percent and 7 percent in the quarter and year-to-date periods, respectively.
Geographic Sales For the Three Months Ended For the Nine Months Ended September 30, September 30, -------------------------- ------------------------- %Chg. %Chg. % Excl. % Excl. (Dollars in millions) 2002 Change Ex.* 2001 2002 Change Ex.* 2001 - --------------------------------------------------------------------------------------------------------- United States $1,965 (7)% (7)% $2,117 $ 5,613 (1)% (1)% $ 5,679 Japan 223 8 6 207 614 (2) 2 628 Italy 153 19 7 128 463 10 6 421 Germany 134 15 4 117 389 8 4 361 United Kingdom 143 22 14 117 382 12 10 339 France 123 9 (1) 113 365 (5) (8) 386 Rest of world 838 15 14 731 2,433 4 6 2,339 - --------------------------------------------------------------------------------------------------------- Net sales $3,579 1% -- $3,530 $10,259 1% 1% $10,153 =========================================================================================================
* Underlying growth reflects the percentage change excluding currency exchange effects. The decline in U.S. sales was solely attributable to the transfer of rights to Ambien at the end of 2001. Excluding Ambien from prior year data, sales in the U.S. increased 8 percent and 11 percent in the quarter and year-to-date, respectively.
Sales of Top Products For the Three Months Ended For the Nine Months Ended September 30, September 30, -------------------------- --------------------------- % % (Dollars in millions) 2002 Change 2001 2002 Change 2001 - --------------------------------------------------------------------------------------------------- CELEBREX $ 824 (3)% $ 851 $2,238 1 % $2,210 BEXTRA 139 N/A -- 286 N/A -- XALATAN 256 16 221 685 16 592 DETROL LA/DETROL 197 5 189 562 17 482 CAMPTOSAR 153 7 145 437 (5) 462 GENOTROPIN 136 12 121 386 5 369
22 NICORETTE Line 111 48 75 283 39 204 DEPO-PROVERA 104 30 80 278 24 224 PHARMORUBICIN/ELLENCE 83 27 65 252 30 193 MEDROL 99 29 77 243 3 236 XANAX 60 (20) 75 233 (4) 242 CLEOCIN 69 (5) 74 206 (7) 223 FRAGMIN 61 5 58 189 12 169 ARTHROTEC 72 70 42 186 13 164 CABASER/DOSTINEX 62 59 39 175 47 119 ALDACTONE/Spiro Line 50 18 43 142 5 135 MIRAPEX 36 51 24 133 28 104 ZYVOX 25 19 22 130 75 75 COVERA/CALAN 23 (9) 26 113 3 110 PLETAL 19 (21) 22 85 24 68 - --------------------------------------------------------------------------------------------------- Total $2,579 15% $2,249 $7,242 13% $6,381 ===================================================================================================
Costs and Expenses
For The Three Months Ended For The Nine Months Ended September 30, September 30, ---------------------------- ---------------------------- % of % of % of % of (Dollars in millions) 2002 Sales 2001 Sales 2002 Sales 2001 Sales - -------------------------------------------------------------------------------------------------------- Cost of products sold $ 740 20.7% $ 711 20.1% $2,216 21.6% $2,207 21.7% Research and development 565 15.8 537 15.2 1,731 16.9 1,728 17.0 Selling, general and administrative 1,556 43.5 1,427 40.4 4,541 44.3 4,235 41.7 Merger and restructuring 3 0.1 100 2.8 34 0.3 399 3.9
Cost of products sold for the quarter ended September 30, 2002 and 2001 was $740 million and $711 million, respectively. Cost of products sold as a percentage of net sales increased slightly for the current year quarter primarily due to additional compliance costs. Cost of products sold was $2.2 billion for both nine month periods ended September 30, 2002 and 2001 and generally remained unchanged in the current year period as a percentage of net sales. R&D spending increased by $28 million to $565 million in the third quarter of 2002 compared to $537 million in the third quarter of 2001. An increase in external development costs was the main contributor to the quarter-to-quarter change. Year-to-date expenditures remained constant at $1.7 billion for both years. The ratio of expense to sales was lowered fractionally to 16.9 percent. Increased development costs offset by fewer one-time payments for R&D agreements resulted in essentially unchanged spending for the period. SG&A expense of $1.6 billion in the third quarter of 2002 increased $129 million or 9 percent compared to the third quarter of 2001. For the year-to-date periods ended September 30, 2002 and 2001, SG&A expenses were $4.5 billion and $4.2 billion, respectively. The increase in the third quarter of 2002 is attributable to co-marketing payments as well as promotional and sales force spending for the company's new key product BEXTRA. Also affecting quarter-to-quarter comparability is an increase in corporate expenses, primarily compensation and benefit costs. Year-to-date increases for 2002 include items mentioned above as well as increased co-marketing payments related to CELEBREX and the commitment to a contribution of $75 million to the Pharmacia Foundation. Prescription Pharmaceuticals
For the Three Months Ended For the Nine Months Ended September 30, September 30, ------------- ------------- % % (Dollars in millions) 2002 Change 2001 2002 Change 2001 - -------------------------------------------------------------------------------------------------------- Net sales $3,095 1 % $3,075 $8,824 1 % $8,747 Cost of products sold 547 (2) 558 1,616 (1) 1,640 Research and development 539 7 506 1,643 2 1,610 Selling, general and administrative 1,251 4 1,200 3,678 4 3,533
23 EBIT, before merger and restructuring * 784 9 720 2,042 13 1,801
- -------------------- * Earnings before interest and taxes (EBIT) and before merger and restructuring is presented here to provide additional information about the company's operations and is in keeping with the manner in which the company manages its segments. This item should be considered in addition to, but not as a substitute for or superior to, net earnings, cash flows or other measures of financial performance prepared in accordance with U.S. generally accepted accounting principles. Determination of EBIT may vary from company to company. Prescription pharmaceutical net sales constituted 86 percent of total consolidated sales for both the third quarter and year-to-date periods ended September 30, 2002. Sales increased 1 percent for both the third quarter and year-to-date periods as compared with prior year periods. Excluding the impact from the transfer of Ambien, sales increased 12 percent in the third quarter of 2002 and 9 percent year-to-date. CELEBREX, BEXTRA, XALATAN, DETROL LA/DETROL, CAMPTOSAR and ZYVOX drove sales growth in the prescription pharmaceutical business. Sales of these products for the quarter totaled $1.6 billion, a 12 percent increase from the prior year period, and represented 52 percent of the quarter's prescription pharmaceutical sales compared to 46 percent for the same period in 2001. Year-to-date sales of these products totaled $4.3 billion, a 14 percent increase from the prior year period, and represented 49 percent of the first nine months of prescription pharmaceutical sales compared to 44 percent for the same period in 2001. The following product analysis discusses product achievements and fluctuations in product sales versus comparable prior periods. While some sales comparisons include variances resulting from normal fluctuations in trade inventory levels from period to period, there has been no material change in the company's estimate of total trade inventory. Pharmacia markets three products that are members of a class of drugs known as selective COX-2 inhibitors. These drugs include CELEBREX, BEXTRA, and the injectable COX-2 inhibitor, DYNASTAT, which has been approved in many European and Latin American markets. In the third quarter, sales of the company's COX-2 inhibitors increased 13 percent to $966 million. On a year-to-date basis, sales increased 14 percent to $2.5 billion. CELEBREX, the company's leading product and the number-one selling prescription arthritis medication worldwide, recorded sales of $824 million in the third quarter, a decline of 3 percent compared to the prior year period. Year-to-date sales of CELEBREX increased 1 percent to $2.2 billion. BEXTRA, the company's second selective COX-2 inhibitor, was approved by the U.S. Food and Drug Administration (FDA) in November 2001 for the treatment of osteoarthritis, rheumatoid arthritis and primary dysmenorrhea (menstrual pain). The full launch of BEXTRA in the U.S. occurred in April 2002. BEXTRA achieved sales of $139 million in the quarter and $286 million in the first nine months as a result of rapid acceptance by physicians. XALATAN, the number-one prescribed glaucoma medication in the U.S., Europe and Japan, increased 16 percent in the quarter and year-to-date. European sales contributed significantly to the growth of the franchise in the third quarter with sales up 34 percent to $77 million. European growth is benefiting from the introduction of XALACOM, a fixed combination of XALATAN and timolol, and the recent European launch of XALATAN for first-line therapy of patients with glaucoma. XALATAN sales also increased in the U.S. and Japan. Sales of DETROL LA/DETROL, the world's leading treatment for overactive bladder, increased 5 percent in the third quarter and 17 percent on a year-to-date basis, reflecting strong demand for the once-daily DETROL LA. DETROL LA has been launched in 12 countries, including the U.S. and Europe since January 2001. Outside the U.S., the once-daily formulation is sold under various trade names including DETRUSITOL SR. 24 CAMPTOSAR, the leading treatment for metastatic colorectal cancer in the U.S., recorded sales of $153 million, a 7 percent increase. CAMPTOSAR sales decreased 5 percent in the year-to-date period largely reflecting the impact of trade inventory fluctuations in the fourth quarter of 2001 and first quarter of 2002. GENOTROPIN, the world's leading growth hormone, recorded sales of $136 million during the third quarter, a 12 percent increase over the prior year. Sales in the U.S. increased 19 percent to $34 million in the third quarter, as the company continues to increase market share. In the first nine months, worldwide sales increased 5 percent to $386 million and U.S. sales increased 27 percent to $101 million. Sales outside the U.S. have been negatively impacted by foreign exchange rates and a government mandated reduction in the reimbursement price in Japan, which took effect in April 2002. Sales of ZYVOX, the company's antibiotic for Gram-positive infections, increased 19 percent to $25 million in the quarter. U.S. sales declined 26 percent in the third quarter, following increased trade purchasing in the first half of the year. On a year-to-date basis, ZYVOX sales increased 75 percent to $130 million globally and 52 percent to $104 million in the U.S. DEPO-PROVERA, the company's long-lasting monthly injectable for contraception, increased 30 percent in the third quarter driven by the U.S. where sales increased 52 percent. Trade purchasing as a result of a price increase and continued strong demand positively impacted U.S. sales of DEPO-PROVERA in the third quarter and first nine months. Sales in the first nine months of 2002 increased 24 percent to $278 million. PHARMORUBICIN, a widely used chemotherapeutic agent for breast cancer, increased 27 percent and 30 percent in the third quarter and year-to-date periods, respectively. Sales of ELLENCE, the trade name for PHARMORUBICIN in the U.S., have doubled this year, driving the overall increase in sales of the PHARMORUBICIN brand. A regimen containing ELLENCE is being rapidly adopted by physicians for the treatment of early breast cancer following surgery or radiation therapy. The company's Parkinson's disease drugs, MIRAPEX and CABASER continued to grow at a rapid pace. MIRAPEX increased 51 percent in the third quarter, in part due to the impact of trade purchasing. MIRAPEX sales increased 28 percent in the first nine months. Meanwhile, sales of CABASER/DOSTINEX for Parkinson's disease and hyperprolactinemia grew 59 percent and 47 percent in the third quarter and first nine months, respectively. Sales of the Parkinson's disease drugs are growing as the company continues to take a greater share of the Parkinson's disease market. Among the company's older products, XANAX, for anxiety, and the antibiotic CLEOCIN decreased in the quarter and year-to-date periods due to generic competition. Meanwhile, the anti-inflammatory steroid MEDROL and arthritis medication ARTHROTEC increased in the quarter due to trade inventory purchasing. On a year-to-date basis, MEDROL and ARTHROTEC have increased slightly. On September 30, 2002, the U.S. Food and Drug Administration granted marketing approval for Pharmacia's INSPRA (eplerenone tablets), the first agent designed to selectively block aldosterone, for the treatment of high blood pressure. The approval is based on clinical trials involving approximately 3,000 patients that demonstrated the effectiveness of INSPRA in lowering high blood pressure, both alone and in combination with other anti-hypertensive therapies. The U.S. launch of INSPRA is expected to occur in 2003. Key prescription pharmaceutical segment operating expenses, stated as a percentage of net prescription pharmaceutical sales, are provided in the table below. 25
For The Three Months Ended For The Nine Months Ended September 30, September 30, -------------------------- -------------------------- 2002 2001 2002 2001 - -------------------------------------------------------------------------------------------------------- Cost of products sold 17.7% 18.2% 18.3% 18.8% Research and development 17.4 16.4 18.6 18.4 Selling, general and administrative 40.4 39.0 41.7 40.4 EBIT, before merger and restructuring * 25.3 23.4 23.1 20.6
* Earnings before interest and taxes (EBIT) and before merger and restructuring is presented here to provide additional information about the company's operations and is in keeping with the manner in which the company manages its segments. This item should be considered in addition to, but not as a substitute for or superior to, net earnings, cash flows or other measures of financial performance prepared in accordance with U.S. generally accepted accounting principles. Determination of EBIT may vary from company to company. Cost of products sold for the quarter and year-to-date periods ended September 30, 2002 and 2001 was $547 million and $558 million and $1.6 billion and $1.6 billion, respectively. Favorable shifts in the product mix and lower royalty costs resulted in cost of products sold as a percentage of sales improving slightly versus the prior periods. R&D expense increased $33 million, or 7 percent, for the quarter ended September 30, 2002 versus the same period in the prior year. As a percent of sales, R&D expense increased 1 percentage point to 17 percent. The increase in expense was mainly the result of increases in development costs for CDP 870 (rheumatoid arthritis), Phase IV expenses for BEXTRA and GENOTROPIN and R&D administrative costs. Partially offsetting the impact of these increases in the current year was a $30 million 2001 payment to Orion Corporation in connection with an agreement to collaborate in the development and commercialization of deramciclane (anti-anxiety) in the U.S. R&D spending for the year-to-date periods ending September 30, 2002 and 2001 was unchanged at $1.6 billion. For the nine-month period ended September 30, 2002, increases were realized versus the prior period for development costs primarily related to CDP 870. Additionally, Phase IV costs, mainly related to ongoing studies for BEXTRA and GENOTROPIN, and R&D administrative costs rose for the year-to-date period. Also impacting the current year period was a second quarter $30 million payment to Altana AG in connection with the acquisition of rights for the development of roflumilast, a new compound being developed for the treatment of respiratory diseases. Offsetting these increases were certain expenses in 2001 that were not present in the 2002 year-to-date period. These 2001 year-to-date expenses include $29 million related to the former plasma business that was spun off in the third quarter of 2001 under the name Biovitrum AB (Biovitrum) and first quarter costs of $67 million relating to the acquisition of Sensus Drug Development Corporation. Also, during the first quarter of 2001, the company entered into an agreement with Celltech plc for the development and promotion of CDP 870. In connection with the agreement, the company recorded an R&D expense of $50 million. During the third quarter of 2001, the company recorded the aforementioned $30 million of R&D expense for a payment to Orion Corporation in connection with an agreement to collaborate in the development and commercialization of deramciclane in the U.S. SG&A expense increased $51 million, or 4 percent, during the third quarter ended September 30, 2002 versus the same prior year quarter. SG&A expense stated as a percentage of sales increased over the prior year quarter by 1 percentage point to 40 percent. The primary reason for the increase in SG&A for the period was due to co-marketing agreement payments relating to BEXTRA for the North American market. Additionally, increased promotional and sales force expenditures for BEXTRA, INSPRA (eplerenone tablets) and XALATAN were realized during the quarter. BEXTRA, valdecoxib tablets, was launched in April of 2002. On a year-to-date basis, SG&A increased $145 million to $3.7 billion. This represents an increase of 4 percent over the prior year period. Similar to the quarterly change, co-marketing payments relating to CELEBREX and BEXTRA were the main contributors to the increase. Also, direct sales force expenditures rose versus the prior year period in the United States, mainly relating to the April 2002 launch of BEXTRA. 26 Other Pharmaceuticals
For the Three Months Ended For the Nine Months Ended September 30, September 30, ----------------------------- ------------------------------- % % (Dollars in millions) 2002 Change 2001 2002 Change 2001 - --------------------------------------------------------------------------------------------------- Sales $484 6 % $455 $1,435 2 % $1,406 Cost of products sold 183 1 181 554 (6) 591 Research and development 26 (17) 32 88 (26) 118 Selling, general and administrative 138 (5) 144 428 -- 426
Sales in the company's other pharmaceuticals businesses are comprised of consumer health care (over the counter products), animal health, contract manufacturing, bulk pharmaceutical chemicals and diagnostics. Sales for the third quarter and year-to-date periods increased by 6 percent and 2 percent, respectively, compared with the prior year periods. Sales in the consumer health care business increased for both the third quarter and year-to-date periods by 23 percent and 14 percent, respectively. The business' leading products are for the treatment of tobacco dependency and hereditary hair loss. Sales growth for the quarter and year-to-date periods was driven primarily from market share growth of NICORETTE in Canada, increased demand of tobacco dependence products in the U.S. and the acquisition of LUDEN'S during September of 2001. There was a slight decrease in the U.S. sales of ROGAINE due to non-branded competition, which was partially offset by the re-launch of the hair care therapy PROGAINE. Sales in the animal health business increased for both the third quarter and year-to-date by 10 percent and 8 percent, respectively. Sales growth was driven by the antibiotic NAXCEL/EXCENEL, which is used to treat a variety of infections in animals. Third quarter and year-to-date sales of NAXCEL/EXCENEL increased by 24 percent to $45 million and 22 percent to $124 million, respectively. Partially offsetting the increase in both the consumer health care and animal health care businesses was the continuing planned cutback in the contract manufacturing business. Corporate and Other In addition to normal corporate administrative costs, items that are not assigned to a specific business or are of a non-recurring nature are designated as corporate. Corporate items resulted in a net expense amount of $141 million in the third quarter of 2002, as compared with a net expense amount of $163 million for the third quarter of 2001. The decrease in expense from third quarter 2001 to 2002 is primarily attributable to the decrease in merger and restructuring expenses during 2002. Third quarter 2002 merger and restructuring expenses totaled $3 million as compared with $100 million during the same period of 2001. This decrease was significantly offset by an increase in other corporate expenses, primarily compensation and benefits. Year-to-date 2002 corporate income totaled $190 million as compared to $649 million of corporate expense for the same period in 2001. Corporate income for year-to-date 2002 includes the $661 million gain relating to the transfer of Ambien to Sanofi, $28 million gain relating to the sale of clinical study data to Boehringer Ingelheim, partially off-set by a $75 million charitable contribution to the Pharmacia Foundation and $34 million of merger and restructuring charges. The net expense during the same period of 2001 includes $276 million of merger costs and $123 million of restructuring charges. The favorable earnings impact is mainly attributable to the one-time 27 transfer payment relating to Ambien and the decrease in merger and restructuring costs in 2002 as compared with 2001. Net interest expense decreased $25 million to $20 million compared to $45 million net expense in the third quarter of the prior year. The quarter-to-quarter change is mainly attributable to lower U.S. interest rates on debt, coupled with repayments of long-term debt and partially offset by lower interest income. On a year-to-date basis net interest expense for 2002 decreased to $78 million, as compared with 2001 net interest expense of $102 million. The estimated annual effective tax rate for 2002 is 24 percent, excluding merger, restructuring and certain other items. This compares with a tax rate of 25 percent for the full year 2001 and represents a 50 basis point reduction from the previously anticipated full-year tax rate for 2002. Changing the rate in the third quarter of 2002 resulted in the quarterly effective tax rate being 23.2 percent. In October 2002, Pharmacia settled patent infringement suits with Alcon Inc. (Alcon) and Allergan Inc. (Allergan), who each manufacture products that compete with XALATAN. The cases involved disputes over patent infringement by Alcon and Allergan related to Pharmacia's intellectual property. In the settlement with Allergan, Pharmacia will receive an estimated $100-$110 million, net of amounts transferable to another licensor, and certain royalty payments on sales of Allergan's glaucoma medication. Pharmacia will also receive royalty payments from Alcon on sales of its glaucoma medication. Merger and Restructuring Charges The company recorded an additional $3 million of merger and restructuring charges during the third quarter of 2002. Approximately $1 million of net expense was recorded in connection with the merger and integration of former Monsanto and Pharmacia & Upjohn companies into Pharmacia Corporation. These charges are part of the comprehensive integration plan approved by the board of directors during 2000. The company also recorded $2 million of additional merger costs relating to the proposed Pfizer transaction. The $3 million recorded during the quarter is comprised of $4 million of total merger costs and a $1 million net reversal of restructuring costs. During the third quarter of 2001, the company recorded $100 million in merger and restructuring costs. The $100 million recorded on the merger and restructuring line of the consolidated statements of earnings is made up of $82 million of merger costs and $18 million in restructuring charges. For the nine months ended September 30, 2002, the company recorded a total of $34 million of merger and restructuring costs. This total is comprised of $18 million of merger costs and $16 million of net restructuring costs. For the nine months ended 2001, the company recorded a total of $399 million in merger and restructuring expense. This total is comprised of $276 million in merger costs and $123 million in restructuring charges. Merger Costs The $4 million of merger costs for the quarter and the $18 million of merger costs year-to-date include costs necessary to integrate the former companies into a single organization, such as consultant, relocation and information technology integration costs. The $82 million in third quarter 2001 merger costs and $276 million in year-to-date 2001 merger costs relate to costs necessary to integrate the former companies into a single organization such as consultant fees for system and process integration, information technology integration costs, contract termination fees, employee relocation costs and other costs necessary to complete the merger. Restructuring Costs 28 The $1 million of net restructuring reversals for the third quarter of 2002 relate to a $4 million charge to prescription pharmaceuticals and approximately $5 million of reversals. The $18 million of total restructuring charges during the third quarter of 2001 is comprised of $17 million associated with prescription pharmaceuticals and $1 million in connection with corporate and administrative functions. The year-to-date 2002 restructuring amount of $16 million is comprised of $18 million relating to prescription pharmaceuticals, $3 million relating to other pharmaceuticals and reversals of $5 million. Year-to-date 2001 consists of $123 million of total restructuring charges and is comprised of $105 million associated with prescription pharmaceuticals, $16 million in connection with corporate and administrative functions and $2 million in connection with other pharmaceutical operations. The $4 million of expense for the third quarter of 2002 relates to contract termination fees in the prescription pharmaceutical business. The $17 million of third quarter 2001 expense relating to prescription pharmaceuticals consists of $9 million relating to the involuntary separation of approximately 113 employees, $6 million associated with other exit costs and $2 million relating to the write-down of assets such as duplicative computer systems and leasehold improvements. The $18 million of year-to-date 2002 expense for prescription pharmaceuticals is made up of $5 million relating to the separation of approximately 45 employees, $9 million relating to contract and lease termination costs and $4 million relating to other exit costs. For the nine months ended September 30, 2001, the $105 million of restructuring charges relating to prescription pharmaceuticals is comprised of $72 million in connection with the separation of approximately 473 employees, $19 million resulting from asset write-downs and $14 million associated with other exit costs. The $1 million relating to corporate and administrative functions for the third quarter of 2001 represents the separation of approximately 10 employees. For the nine months ended 2001, the $16 million charge is comprised of $11 million relating to the separation of approximately 100 employees and $5 million relating to asset write-offs. The $3 million associated with the other pharmaceutical operations for year-to-date September 30, 2002, is in connection with the involuntary separation of approximately 35 employees. The year-to-date 2001 other pharmaceutical operations restructuring balance includes $2 million associated with the involuntary separation of approximately 10 employees. The $5 million of reversals during the third quarter of 2002 consist of liabilities established in 1999 and 2000 relating to the Monsanto and Pharmacia & Upjohn merger. These restructuring liabilities were reversed primarily as a result of lower actual severance costs than originally estimated. A roll-forward from year-end 2001 of restructuring charges and spending associated with the current restructuring plans relating to the integration of the former Monsanto and Pharmacia & Upjohn companies is included in the table below. As of September 30, 2002, the company has paid a total of $428 million relating to the separation of approximately 2,740 employees associated with these restructuring plans.
Workforce (Dollars in millions) Reductions Other Exit Costs Total - --------------------------------------------------------------------------------------------------- December 31, 2001 $ 115 $10 $125 Year-to-date charges 7 9 16 Year-to-date spending (83) (4) (87) Year-to-date reversals (5) -- (5) - --------------------------------------------------------------------------------------------------- September 30, 2002 $ 34 $15 $ 49 ===================================================================================================
29 Due to the comprehensive nature of the restructuring and integration, the company anticipates the restructuring activities to continue into 2003 as Pharmacia continues to streamline operations. The company's aggregate merger and restructuring charges relating to the Pharmacia merger have been approximately $1.7 billion and the restructuring plan is expected to yield annual savings of approximately $600 million that will be reinvested into the company's operations. Comprehensive Income (Loss) Comprehensive income (loss) equals net earnings (loss) plus other comprehensive income (loss). For Pharmacia Corporation, other comprehensive income (loss) includes currency translation adjustments (CTA), deferred amounts for hedging purposes, unrealized holding gains and losses on available-for-sale securities (AFS) and minimum pension liability adjustments. Comprehensive income (loss) for the three months ended September 30, 2002 and 2001, was $(757) million and $383 million, respectively. For the nine months ended September 30, 2002 and 2001, comprehensive income (loss) was $(233) million and $1.0 billion, respectively. Increases in the minimum pension liability coupled with increases in unrealized holding losses on AFS securities made up a large part of the difference between the net loss and other comprehensive loss for both the third quarter and year-to-date periods in 2002. The increase in the minimum pension liability is the result of a remeasurement of Monsanto pension plans in conjunction with the spin-off of Monsanto in August 2002. Also affecting the difference for both the third quarter and year-to-date periods in 2002, were increases in CTA as a result of certain currencies weakening against the dollar, mainly from Latin America countries. The main contributors for the difference between net income and comprehensive income for the third quarter and year-to-date 2001 periods were increases in unrealized holding losses on AFS securities. The increase in unrealized holding losses for the third quarter of 2001 was partially offset by favorable changes in CTA as a result of certain foreign currencies strengthening against the dollar, while year-to-date 2001 reflects increases in CTA as a result of certain currencies weakening against the dollar. Financial Condition, Liquidity, and Capital Resources On July 13, 2002, the company entered into a definitive merger agreement with Pfizer. Until the acquisition closes, Pharmacia will continue to operate independently and does not expect a negative impact on financial condition, liquidity or sales resulting from the intention to merge.
September 30, December 31, (Dollars in millions) 2002 2001 - ------------------------------------------------------------------------------------- Working capital $4,244 $2,663 Current ratio 1.86:1 1.53:1 Debt to total capitalization 28.4% 20.1%
Working capital for the quarter ended September 30, 2002 increased $1.6 billion or 59 percent versus the prior year end. Similarly, the current ratio improved during the first nine months of fiscal 2002 increasing 22 percent over prior year-end levels. Increases in cash, inventories and short-term investments coupled with declines in accounts payable and other accrued expenses are the main factors contributing to the improvement. An increase in income taxes payable partially offset the overall improvement in these measures. Cash received from the transfer of Ambien and the sale of the Amersham Biosciences investment contributed to the increased cash and short-term investments at September 30, 2002. Cash outflows to purchase land and buildings in New Jersey from AT&T Corp. for $200 million in the third quarter and reduced accounts payable and other accrued liabilities during the period tempered overall cash inflows. Accounts payable and accrued liabilities decreased mainly due to timing differences of actual payments. Net gains resulting from the Amersham and Ambien transactions also contributed to the increase in income taxes payable. 30 During the period, there was a net decrease in total outstanding debt resulting from recurring principal payments and retirements. The debt-to-total- capitalization ratio was unfavorably affected during the period by the distribution of the remaining 84% of Monsanto common stock through a dividend to the shareholders of Pharmacia common stock. The special dividend was charged against retained earnings, thereby significantly reducing shareholders' equity. During the second quarter, the company completed the transfer of Ambien to Sanofi. In connection with the transfer, the company received a one-time payment of $671 million. The company will use these funds for general corporate purposes. For the nine months ended September 30, 2002, $620 million of Pharmacia shares were repurchased under the $3.0 billion stock buy-back program. Since inception of the program in the fourth quarter of 2001, $1.5 billion of company shares have been acquired. Shares repurchased through the buy-back program are used principally to fund employee benefit programs. The buy-back program has been suspended since the company entered into a definitive merger agreement with Pfizer. During the first quarter of 2002, the company completed the sale of its minority interest in Amersham Biosciences. Proceeds received from the sale of these shares were $1.0 billion. The company will use the funds for general corporate purposes. Qualified U.S. pension plan funding requirements for the 2002 plan year are estimated to be approximately $65 million. This amount may be contributed any time prior to September 2003. Consideration is being given to making a voluntary contribution in the fourth quarter of 2002. It is expected that additional funding may be required in future periods, but the amounts have not yet been calculated. Also, the company may choose to make contributions in excess of the required amounts. During the fourth quarter of 2002, the company intends to fund a trust to satisfy certain employee benefit payment obligations as a result of the planned merger with Pfizer. This will be a revocable trust and the funding may be retrieved if the planned merger with Pfizer does not close. The expected $350 - $400 million that will be invested in the trust will be restricted and not available for general corporate purposes. However, the company's liquidity will not be significantly affected and future cash provided by operations and borrowing capacity are expected to cover normal operating cash flow needs, planned capital acquisitions and dividend payments as approved by the board of directors for the foreseeable future. Contingent Liabilities and Litigation The consolidated balance sheets include accruals for estimated product, intellectual property and other litigation and environmental liabilities. The latter includes exposures related to discontinued operations, including the industrial chemical facility referred to below and several sites that, under the Comprehensive Environmental Response, Compensation and Liability Act, are commonly known as Superfund sites. The company's ultimate liability in connection with Superfund sites depends on many factors, including the number of other responsible parties and their financial viability and the remediation methods and technology to be used. Actual costs to be incurred may vary from the estimates, given the inherent uncertainties in evaluating environmental exposures. Environmental Matters With regard to the company's discontinued industrial chemical facility in North Haven, Connecticut, the company will be required to submit a corrective measures study report to the U.S. Environmental Protection Agency. It is reasonably possible that a material increase in accrued liabilities will be required. It is not possible, however, to estimate a range of potential losses. Accordingly, it is not possible to determine what, if any, additional exposure exists at this time. 31 Litigation Matters The company has been a defendant, along with a number of other manufacturers and wholesalers, in several civil antitrust lawsuits, including a federal class action, brought by retail pharmacies alleging that the defendants violated the law by providing discounts to hospitals, nursing homes, mail-order pharmacies and health maintenance organizations that were not offered on equal terms to retail pharmacies. Pharmacia & Upjohn, a subsidiary of the company, settled the federal class action for $103 million, and G.D. Searle & Co. (Searle), another subsidiary of the company, received a favorable verdict in the federal class action in 1999. State class action lawsuits seeking damages based on the same alleged conduct were filed in 14 states and the District of Columbia, all but one of which have been settled or dismissed. A number of the federal cases brought by plaintiffs who opted out of the federal class action are still pending. The company and Pfizer are defendants in a lawsuit brought by the University of Rochester in Federal Court in New York alleging infringement of the University's U.S. patent by the sale and use of CELEBREX. The University's patent has claims directed to a method of treating human patients by administering a selective COX-2 inhibitor. The case, which seeks injunctive relief and monetary damages, is expected to be tried during the first half of 2003. The company is a defendant in a lawsuit brought by CP Kelco in Federal Court in Delaware seeking compensatory and punitive damages for alleged breach of contract, fraud and securities law violations arising out of the purchase of the company's Kelco biogums business in 2000 by Lehman Brothers Merchant Bank Partners II, L.P. (Lehman), which combined the company's Kelco biogums business with a business purchased from Hercules, Inc. to form CP Kelco. The company has asserted counterclaims against the plaintiff for the return of certain payments and specific performance of plaintiff's contractual obligation to provide severance benefits to certain employees of the company who were transferred to CP Kelco. The company has also asserted indemnification claims against Lehman and Hercules in a third-party complaint. Discovery has been completed in the lawsuit. A September 2002 Report and Recommendation (September Report) issued by the magistrate judge in the case granted Lehman's and Hercules' motion for judgment on the pleadings. The company has filed objections to the September Report and those objections have not been ruled upon. An October 2002 Report and Recommendation (October Report) granted in part and denied in part the company's motion for summary judgment. The company has filed objections to that portion of the October Report that denied its motion. Those objections have not been ruled upon. There is no trial date in the matter, as the judge originally handling the action resigned from the bench and has not yet been replaced. The company, Searle and Pfizer are defendants in a purported class action complaint filed in Federal Court in New Jersey seeking damages based on the claim that the defendants misrepresented and over-promoted CELEBREX in violation of state law and misled and defrauded the U.S. Food and Drug Administration during the CELEBREX approval process. The complaint seeks economic damages and claims no specific medical injury. The company, Searle and Pfizer were also sued in State Court in New Jersey by a purported class alleging the same set of facts and seeking the same relief as the federal case. The company, Pfizer and Merck & Co., Inc. are defendants in a purported class action complaint filed in Federal Court in New York alleging medical concerns related to Vioxx and CELEBREX and seeking reimbursement of the purchase price, for the Vioxx and CELEBREX used by the plaintiffs, medical expenses and attorneys' fees. The complaint also seeks revised labeling for the products, emergency notice to the class and a medical monitoring program funded by defendants. Pursuant to the Separation Agreement between Pharmacia and Monsanto, as amended (the "Separation Agreement"), Monsanto assumed and agreed to indemnify Pharmacia for liabilities related to the agricultural business. In addition, in the proceedings where the company is the 32 defendant, Monsanto will indemnify the company for costs, expenses and any judgments or settlements; and in the proceedings where the company is the plaintiff, Monsanto will pay the fees and costs of, and receive any benefits from, the litigation. Therefore, Pharmacia may remain the named party in certain legal proceedings, but Monsanto will manage the litigation including indemnifying Pharmacia for costs, expenses and any judgments or settlements. In connection with the spin-off of Solutia Inc. (Solutia) on September 1, 1997, Solutia assumed from Pharmacia liabilities related to the former Monsanto chemical businesses pursuant to the Distribution Agreement, as amended (the "Distribution Agreement"). As a result, Pharmacia remains the named defendant in certain legal proceedings but Solutia manages the litigation and pays all costs, expenses and any judgments or settlements. As a result, Solutia assumed responsibility for litigation currently pending in state and federal court in Alabama brought by several thousand plaintiffs, alleging property damage, anxiety and emotional distress and personal injury arising from exposure to polychlorinated biphenyls (PCBs), which were discharged from an Anniston, Alabama plant site that was owned by former Monsanto and that was transferred to Solutia as part of the spin-off. This litigation includes, but is not limited to, the Abernathy litigation referred to below. Pursuant to the terms of the Distribution Agreement, Solutia is required to indemnify Pharmacia for liabilities that Pharmacia incurs in connection with this litigation. Solutia is defending itself and Pharmacia in connection with Sabrina Abernathy, et al. v. Monsanto Company, et al., currently pending in state court in Alabama. The jury has found Solutia and Pharmacia (former Monsanto) liable with respect to certain claims in this litigation, and proceedings have commenced to determine damages. Solutia has requested that Pharmacia commit to posting any appeal bond that may be required to stay execution of any judgment in this litigation pending an appeal. Pursuant to a Protocol agreement dated as of July 1, 2002, Pharmacia, Monsanto and Solutia have agreed that, if Solutia does not post a bond sufficient to stay the execution of any judgment in the litigation pending an appeal, Pharmacia will post such a bond if it is able to do so on commercially reasonable terms. Solutia shall pay the expenses incurred in connection with obtaining any such bond. The agreement also specifies which party or parties would control any decisions regarding settlement of the Abernathy litigation, depending upon whether or not collateral must be provided to secure the bond and, if so, which party provides it. Under the agreement, the continued defense of the Abernathy litigation and the prosecution of any appeal will continue to be managed by Solutia, at Solutia's expense. Pursuant to the terms of the amended Separation Agreement, Monsanto has assumed, and agreed to indemnify Pharmacia for, any liabilities primarily related to former Monsanto's former chemical businesses, including any liabilities that Solutia has assumed from Pharmacia in connection with the spin-off of Solutia, to the extent Solutia fails to pay, perform or discharge these liabilities. This indemnification obligation applies to litigation, environmental and other liabilities assumed by Solutia. With respect to the matters described above, the company cannot estimate a range of potential losses or what, if any, additional exposure exists at this time. The company believes it has valid defenses to these matters and intends to vigorously contest them. The company is involved in other legal proceedings arising in the ordinary course of its business. While the results of litigation cannot be predicted with certainty, management's belief is that any potential remaining liability from such proceedings that might exceed amounts already accrued will not have a material adverse effect on the company's consolidated financial position, profitability or liquidity. Extraordinary Items 33 During the first quarter of 2002, the company sold its 45 percent minority interest in Amersham Biosciences to Amersham plc for $1.0 billion. The investment basis as of March 2002 was $227 million. The sale resulted in a gain of $649 million (net of taxes of $124 million). The gain has been classified as an extraordinary item in the accompanying consolidated statements of earnings in accordance with Accounting Principles Board Opinion No. 16 "Business Combinations" because the sale of this investment took place within the two-year period following the merger of Pharmacia & Upjohn and former Monsanto which was accounted for under the pooling of interests accounting method. The sale of this investment was not contemplated at the time of the pooling. On June 28, 2001, the company retired certain debt obligations relating to one of the employee stock ownership plans. The principal amount of the debt was $65 million. Certain costs related to the transaction, including a premium to retire the debt and other direct costs, were $4 million (net of taxes of $2 million) and have been classified as an extraordinary item on the company's consolidated statements of earnings. Through a private transaction occurring on June 29, 2001, the company retired debt related to adjustable conversion-rate equity securities in the principal amount of $700 million. Premium on the debt and other direct costs of $8 million (net of taxes of $5 million) were accrued as an extraordinary item. The physical settlement, including the exchange of cash, occurred in July 2001. Discontinued Operations Monsanto On November 28, 2001, the Pharmacia board of directors approved a formal plan to distribute to Pharmacia shareholders the shares of Monsanto common stock held by the company, in a tax-free spin-off transaction. On July 18, 2002, the Pharmacia board of directors approved the completion of the spin-off of Monsanto through the distribution of shares of Monsanto common stock to Pharmacia shareholders of record on July 29, 2002. In order to effect the distribution, the Pharmacia board of directors declared a special dividend of the 220 million shares of Monsanto common stock held by the company which, as of July 29, 2002, represented approximately 84% of Monsanto's outstanding common stock. Each Pharmacia shareholder received .170593 shares of Monsanto common stock for each share of Pharmacia stock owned on the record date. The shares were distributed at the close of business on August 13, 2002. In connection with the spin-off of Monsanto, Pharmacia recorded a loss from discontinued operations of $928 million which was comprised of $53 million of net income from discontinued operations offset by an impairment loss of $981 million calculated by comparing the net assets of Monsanto recorded on Pharmacia's books to Monsanto's fair value based upon the closing stock price on August 13, 2002 of $15.81. On September 1, 2000, the company entered into a Transition Services Agreement with Monsanto. Under the agreement, Pharmacia primarily provides information technology support for Monsanto while Monsanto provides certain administrative support services for Pharmacia. Pharmacia and Monsanto also lease research and office space from each other. Since the initiation of the agreement, each party has charged the other entity rent based on a percentage of occupancy multiplied by the cost to operate the facilities. These services are continuing beyond August 13, 2002. Other 34 In the third quarter and year-to-date period of 2002, the company recorded an additional $4 loss from discontinued operations in connection with the sale of the artificial sweetener ingredient business that occurred in 2000. The majority of the $8 million loss from other discontinued operations recorded in the year-to-date 2001 period consisted of legal and related costs also in connection with the sale of the artificial sweetener ingredient business. There were no net sales included in the company's consolidated financial statements during the quarters ended September 30, 2002 and 2001 related to other discontinued businesses. Agreements with Sanofi~Synthelabo Pursuant to previously existing agreements, the company had rights from Sanofi to manufacture, sell and market two products in North America: Ambien and Kerlone. Ambien is a prescription medicine used in the treatment of sleep disorders including insomnia. Kerlone, also a prescription medicine, is used in the treatment of hypertension and cardiovascular disease. On December 31, 2001, the company relinquished control over the products to Sanofi and ceased recording sales and expenses of Ambien and Kerlone. In the first quarter of 2002, the company received a payment for its share of Ambien and Kerlone earnings of $73 million that was recorded in all other, net on the consolidated statements of earnings. On April 16, 2002, Sanofi exercised its right to acquire all rights to the products in North America in accordance with the agreements. In connection with such acquisition, the company received a pretax payment of $671 million ($661 million net pretax gain) for its interest. For additional information on the effects of this transaction, see Pharmacia Corporation Form 8-K filed with the Securities and Exchange Commission on April 30, 2002. New Accounting Standards In June 2002, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". The new rules amend existing accounting for these costs by requiring that a liability be recorded at fair value when incurred. The liability would be reviewed regularly for changes in fair value with adjustments recorded in the consolidated financial statements. Previous rules permitted certain types of costs to be recognized when future settlement was probable. SFAS No. 146 also provides specific guidance for lease termination costs and one-time employee termination benefits when incurred as part of an exit or disposal activity. The company is currently evaluating the effects the new rules may have on its consolidated financial statements and will adopt SFAS No. 146 on January 1, 2003. On May 1, 2002, the FASB issued SFAS No. 145, "Rescission of FAS Nos. 4, 44, and 64, Amendment of SFAS 13, and Technical Corrections". Under the current rules, SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt," requires that all gains and losses from the extinguishment of debt be classified as extraordinary on the company's consolidated statements of earnings, net of applicable taxes. SFAS No. 145 rescinds the automatic classification as extraordinary and requires that the company evaluate whether the gains or losses qualify as extraordinary under Accounting Principles Board Opinion No. 30 "Reporting the Results of Operations--Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions". The company is evaluating the effects the new rules may have on its consolidated financial statements and will adopt SFAS No. 145 on January 1, 2003. On January 1, 2002, SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," became effective. It provides guidance on the accounting for the impairment or disposal of long-lived assets. For long-lived assets to be held and used, the new rules are similar to previous guidance which required the recognition of an impairment when the undiscounted cash flows would not recover its carrying amount. The impairment to be recognized will continue to be 35 measured as the difference between the carrying amount and fair value of the asset. The computation of fair value now removes goodwill from consideration and incorporates a probability-weighted cash flow estimation approach as an alternative to the traditional present value method. The previous guidance provided in SFAS No. 121 is to be applied to assets that are to be disposed of by sale. Additionally, assets qualifying for discontinued operations treatment have been expanded beyond the former major line of business or class of customer approach. Long-lived assets to be disposed of by other than sale are now considered assets to be held and used until the disposal date. There was no material impact on the company's consolidated financial statements due to the adoption of these rules. In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated retirement costs. The company is currently evaluating the effects the new rules may have on its consolidated financial statements and will adopt SFAS No. 143 on January 1, 2003. In June 2001, the FASB issued SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." The provisions of SFAS No. 141 require that the purchase method of accounting be used for all business combinations initiated after June 30, 2001, and set out specific criteria for the initial recognition and measurement of intangible assets apart from goodwill. SFAS No. 141 also requires that, upon adoption of SFAS No. 142, unamortized negative goodwill be written off immediately as a change in accounting principle instead of being deferred and amortized, and that certain intangible assets be reclassified into or out of goodwill. The provisions of SFAS No. 142 prohibit the amortization of goodwill and indefinite-lived intangible assets and require that they be tested annually for impairment or on an interim basis if indications of a possible impairment arise. If the book value of goodwill or an indefinite-lived intangible is greater than its fair value, an impairment loss is recognized for the difference. In addition, SFAS No. 142 requires that reporting units be identified for purposes of assessing potential future impairments of goodwill, and removes the 40-year limitation on the amortization period of intangible assets that have finite lives. The company adopted the provisions of SFAS No. 141 on January 1, 2002 (requirement to use the purchase method of accounting for all business combinations initiated after June 30, 2001 became effective with the issuance of the standard). The provisions of SFAS No. 142 were adopted effective as of January 1, 2002 with no impairment losses recognized related to its continuing operations. Monsanto also adopted SFAS No. 142 as of January 1, 2002, and an impairment analysis resulted in the recognition of a $1.8 billion net-of-tax loss related to the corn and wheat reporting units. As required by the accounting pronouncement, the loss was recorded as a cumulative effect of accounting change, net of tax, effective as of January 1, 2002. Earnings results for Pharmacia have been restated for the first quarter of 2002 to reflect its $1.5 billion portion of the loss based on Pharmacia's then approximately 85% ownership of Monsanto. The impairment charge had no effect on Pharmacia's or Monsanto's liquidity or cash flow. The Emerging Issues Task Force Issue No. 01-09 "Accounting for Consideration Given by a Vendor to a Customer" codified several individual issues regarding the recognition and classification of payments between a vendor and a customer. Of the codified issues, only two topics were applicable to the company: sales incentives and payments to resellers. The company adopted the guidance for sales incentives (coupons) prospectively as allowed under the rules, on January 1, 2001 and for payments to resellers on January 1, 2002. In both cases, the impact of adoption to the company was insignificant and accordingly prior period financial statements were not reclassified. Intention to Merge with Pfizer 36 On July 13, 2002, the company entered into a definitive merger agreement with Pfizer. In accordance with the agreement, each Pharmacia shareholder of record on the closing date will receive 1.4 shares of Pfizer stock for each share of Pharmacia stock owned. It is estimated that the shares of Pfizer common stock to be issued to Pharmacia shareholders in the merger will represent approximately 23 percent of the outstanding Pfizer common stock after the merger on a fully diluted basis. The closing of the transaction is contingent upon an affirmative vote by Pharmacia and Pfizer shareholders and approval by certain regulatory authorities including the U.S. Federal Trade Commission. Until the closing date, which is targeted to close by year-end (although the final regulatory review process may result in a delay until early in the first quarter of 2003), Pharmacia will continue to operate independently of Pfizer. On October 21, 2002, the SEC declared effective Pfizer's Registration Statement on Form S-4 in connection with the proposed acquisition of Pharmacia Corporation. This Regisration Statement includes a joint proxy statement/prospectus that has been sent to the shareholders of both companies. We have scheduled a meeting for shareholders to take place on December 9, 2002 to vote on the proposed acquisition. Pfizer's shareholder meeting is scheduled to occur on December 6, 2002. Item 3. Quantitative and Qualitative Disclosures about Market Risk There are no material changes related to market risk from the disclosures in Pharmacia Corporation's Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 2001. Item 4. Controls and Procedures Within the 90-day period prior to the filing of this report, an evaluation was carried out under the supervision and with the participation of Pharmacia's management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the company's disclosure controls and procedures (as defined in Rule 13a-14(c) under the Securities Exchange Act of 1934). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the design and operation of these disclosure controls and procedures were effective. No significant changes were made in the company's internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation. 37 PART II - OTHER INFORMATION Item 1. Legal Proceedings References to Pharmacia throughout Part II, Item I will include "former Monsanto" when referring to the pre-merger activities of the former Monsanto Company. References to "Monsanto" or "new Monsanto" refers to Monsanto Company, Pharmacia's former agricultural subsidiary which was spun-off by Pharmacia to its shareholders on August 13, 2002. Pursuant to the Separation Agreement between Pharmacia and Monsanto, as amended (the "Separation Agreement"), Monsanto assumed and agreed to indemnify Pharmacia for liabilities related to the agricultural business. In addition, in the proceedings where the company is the defendant, Monsanto will indemnify the company for costs, expenses and any judgments or settlements; and in the proceedings where the company is the plaintiff, Monsanto will pay the fees and costs of, and receive any benefits from, the litigation. Therefore, Pharmacia may remain the named party in certain legal proceedings, but Monsanto will manage the litigation including indemnifying Pharmacia for costs, expenses and any judgments or settlements. Monsanto has notified the U.S. Securities and Exchange Commission's staff of certain books and records and compliance irregularities involving Monsanto's Indonesian affiliate companies and certain of their foreign national employees. In connection with the spin-off of Solutia Inc. ("Solutia") on September 1, 1997, Solutia assumed from Pharmacia liabilities related to the former Monsanto chemical businesses pursuant to the Distribution Agreement, as amended (the "Distribution Agreement"). As a result, Pharmacia remains the named defendant in certain legal proceedings but Solutia manages the litigation and pays all costs, expenses and any judgments or settlements. Solutia assumed responsibility for litigation currently pending in state and federal court in Alabama brought by several thousand plaintiffs, alleging property damage, anxiety and emotional distress and personal injury arising from exposure to polychlorinated biphenyls (PCBs), which were discharged from an Anniston, Alabama plant site that was owned by former Monsanto and that was transferred to Solutia as part of the spin-off. This litigation includes, but is not limited to, the Abernathy litigation referred to below. Pursuant to the terms of the Distribution Agreement, Solutia is required to indemnify Pharmacia for liabilities that Pharmacia incurs in connection with this litigation. Solutia is defending itself and Pharmacia in connection with Sabrina Abernathy, et al. v. Monsanto Company, et al., currently pending in state court in Alabama. The jury has found Solutia and Pharmacia (former Monsanto) liable with respect to certain claims in this litigation, and proceedings have commenced to determine damages. Solutia has requested that Pharmacia commit to posting any appeal bond that may be required to stay execution of any judgment in this litigation pending an appeal. Pursuant to a Protocol agreement dated as of July 1, 2002, Pharmacia, Monsanto and Solutia have agreed that, if Solutia does not post a bond sufficient to stay the execution of any judgment in the litigation pending an appeal, Pharmacia will post such a bond if it is able to do so on commercially reasonable terms. Solutia shall pay the expenses incurred in connection with obtaining any such bond. The agreement also specifies which party or parties would control any decisions regarding settlement of the Abernathy litigation, depending upon whether or not collateral must be provided to secure the bond and, if so, which party provides it. Under the agreement, the continued defense of the Abernathy litigation and the prosecution of any appeal will continue to be managed by Solutia, at Solutia's expense. Pursuant to the terms of the Separation Agreement, Monsanto has assumed, and agreed to indemnify Pharmacia for, any liabilities primarily related to former Monsanto's former chemical businesses, including any liabilities that Solutia has assumed from Pharmacia in connection with the spin-off of Solutia, to the extent Solutia fails to pay, perform or discharge these liabilities. This 38 indemnification obligation applies to litigation, environmental and other liabilities assumed by Solutia. On April 19, 2002, NeoPharm filed a Demand for Arbitration with the company pursuant to the terms of the February 19, 1999 License Agreement. A contractual dispute has arisen between NeoPharm and Pharmacia involving our partnership to develop LEP (Liposomal Encapsulated Paclitaxel) and LED (Liposomal Encapsulated Doxorubicin). NeoPharm claims that Pharmacia failed to use "reasonable efforts" to develop, market and sell LEP/LED. NeoPharm is seeking specific performance and monetary damages. In May 2002, the company filed its response and counter-claim. The States of Nevada, Montana and Minnesota have sued the company, in their respective state courts, alleging that the company manipulated the "average wholesale price" ("AWP") of Medicare Part B "Covered Drugs," causing the states' respective Medicaid agencies, and their respective Medicare and Medicaid beneficiaries, among others, to pay artificially inflated prices for "Covered Drugs." In addition, the Nevada and Montana suits allege that the company did not report to the states its "best price" under the Medicaid Program. Each of the suits alleges various causes of action, including, but not limited to, deceptive trade practices and Medicaid fraud, purportedly sounding in state law. The suits seek monetary and other relief, including civil penalties and treble damages. The company believes that the claims stated in these lawsuits are not actionable and are without merit. The company will vigorously contest them. In addition, the company has been named in the following self-styled class action lawsuits, brought by private individuals, public interest groups and employee welfare benefit plans in which similar allegations of AWP manipulation have been made: Board of Trustees of Carpenters and Millwrights of Houston and Vicinity Welfare Trust Fund v. Abbott Laboratories, Inc., et, al., 5:01 CV 339 (E.D.Tex.); Citizens for Consumer Justice, et. seq. v. Abbott Laboratories, et. al., C.A. No. 01-12257 (D. Mass.); Congress of California Seniors, et. al. v. Abbott Laboratories, et. al., BC282102 (Ca. Sup. Ct., Los Angeles Co.); Geller v. Abbott Laboratories, et. al., CV 02-00553 (C.D. Cal.); Rice v. Abbott Laboratories, et. al., C 02-3925 (N.D. Cal.); Robinson and Hudson v. Abbott Laboratories, et. al, CV02-0493-S (W.D.La.); Swanston v. TAP Pharmaceutical Products Inc., et. al., CV2002-004988 (Az. Sup. Ct., Maricopa Co.); Thompson v. Abbott Laboratories, et. al., CGC-02-411813 (Ca. Sup. Ct., San Francisco Co.); Teamsters Health & Welfare Fund of Philadelphia and Vicinity v. Abbott Laboratories, Inc., et. al., 02 CV 2002 (E.D.Pa.); Turner v. Abbott Laboratories, et. al., 412357 (Ca. Sup. Ct., San Francisco Co.); United Food and Commercial Workers Unions, et. seq. v. Pharmacia Corporation, et. al., 3:01 CV 5427 (D.N.J.); and Virag v. Allergan, Inc., et. al, BC282690 (Ca. Sup. Ct., Los Angeles Co.). Typical claims asserted in these suits include fraud, unfair competition and unfair trade practices. Some of the suits assert claims under the Racketeer Influenced and Corrupt Organizations Act ("RICO"). Some suits assert antitrust claims. The suits seek various measures of injunctive, monetary and other relief, including civil penalties and treble damages. The company believes that the claims stated in these lawsuits are not actionable and are without merit. The company will vigorously contest them. All of the private plaintiff lawsuits, with the exception of the Swanston suit in Arizona state court, have been consolidated for pretrial purposes and transferred to the federal district court for Massachusetts, in the multidistrict litigation captioned, In re Pharmaceutical Industry Average Wholesale Price Litigation, MDL 1456, Master File No. 01-CV-12257-PBS (D. Mass.). On November 4, 2002, the company joined the other defendants in the MDL 1456 in moving to dismiss all claims asserted against defendants in the master consolidated complaint. Briefing on that, and related, motions in the case is expected to be completed in 2002, and oral argument of the motions is scheduled for January 2003. During this same period, defendants will be providing limited discovery to the plaintiffs. 39 The Montana and Nevada suits have been removed to those states' respective federal courts and transferred to MDL 1456. The company also has removed the Minnesota suit to federal court and sought transfer of the suit to MDL 1456. The magistrate judge in the Minnesota suit issued a September 2002 Report and Recommendation (Report) granting plaintiff's motion to remand the suit to state court. The company has filed objections to the Report and those objections have not yet been ruled upon by the district court judge. On July 15, 2002, a suit was filed in the Chancery Court in Delaware on behalf of a purported class of Pharmacia's shareholders against the company, Pharmacia directors and Pfizer Inc., alleging that the price to be paid for Pharmacia's shares is inadequate as a result of the Pharmacia's directors' breach of their fiduciary duties to the shareholders of Pharmacia and that Pfizer is alleged to have aided and abetted the alleged breach. The complaint, which Pfizer and Pharmacia believe to be without merit, seeks damages and to enjoin the merger. On the same date, a second suit was filed in the Chancery Court in Delaware against the company and Pharmacia directors, alleging that the price to be paid for Pharmacia's shares is inadequate as a result of the Pharmacia directors' breach of their fiduciary duties to the shareholders of Pharmacia. The complaint, which Pharmacia believes to be without merit, seeks damages and to enjoin the merger. Pharmacia will be required to submit a corrective measures study report to the EPA with regard to the company's discontinued industrial chemical facility in North Haven, Connecticut. While the company has existing reserves designated for remediation, in the light of changing circumstances, it is reasonably possible that a material increase in accrued liabilities will be required. However, it is not possible to determine what, if any, additional exposure exists at this time. Please see the discussion in Item 1, Environmental Matters, above. The company is involved in other legal proceedings arising in the ordinary course of its business. While the results of litigation cannot be predicted with certainty, the company does not believe that the resolution of these proceedings, either individually or taken as a whole, will have a material adverse effect on its financial position, profitability or liquidity. The company believes it has valid defenses to these matters and intends to vigorously contest them. Item 5. Other Information Forward-Looking Statements Certain statements contained in this Report, as well as in other documents incorporating by reference all or part of this Report, are "forward-looking statements" provided under the "safe harbor" protection of the Private Securities Litigation Reform Act of 1995. These statements are made to enable a better understanding of the company's business, but because these forward-looking statements are subject to many risks, uncertainties, future developments and changes over time, actual results may differ materially from those expressed or implied by such forward-looking statements. Examples of forward-looking statements are statements about anticipated financial or operating results, financial projections, business prospects, future product performance, future research and development results, anticipated regulatory filings and approvals and other matters that are not historical facts. Such statements often include words such as: believes, expects, anticipates, intends, plans, estimates or similar expressions. 40 These forward-looking statements are based on the information that was currently available to the company, and the expectations and assumptions that were deemed reasonable by the company, at the time when the statements were made. The company does not undertake any obligation to update any forward-looking statements in this Report or in any other communications of the company, whether as a result of new information, future events, changed assumptions or otherwise, and all such forward-looking statements should be read as of the time when the statements were made, and with the recognition that these forward-looking statements may not be complete or accurate at a later date. Many factors may cause or contribute to actual results or events being materially different from those expressed or implied by such forward-looking statements. Although it is not possible to predict or identify all such factors, they may include the following factors discussed below: Competition for our products: Competitive effects from current and new products, including generic products, sold by other companies; competition and loss of patent protection could lead to significant loss of sales. Pharmaceutical pricing: Price constraints and other restrictions on the marketing of products imposed by governmental agencies or by managed care groups, institutions and other purchasing agencies could result in lower prices for the company's products. Product discovery and approval: The company's ability to discover and license new compounds, develop product candidates, obtain regulatory approvals and market new products is risky and uncertain. Product recalls or withdrawals: Efficacy or safety concerns raised in the scientific literature, increase in trends of adverse events in the marketplace, and/or manufacturing quality issues with respect to our products, could lead to product recalls, withdrawals or declining sales. Manufacturing facilities: Failure to comply with Current Good Manufacturing Practices and other applicable regulations and quality assurance guidelines could lead to temporary manufacturing shutdowns, product shortages and delays in product manufacturing. Restrictions on marketing: Restrictions on promotion in patient populations as a result of FDA warning letters on promotional materials could effect sales of the company's products and could lead to holds on current and future New Drug Applications and supplements filed with the FDA. Legal claims: The company's ability to secure and defend its intellectual property rights; the company's involvement in numerous lawsuits including product liability claims, antitrust litigation, environmental concerns, commercial disputes, any of which could affect the company's profits or ability to sell and market its products. In addition, in connection with the separation of the agricultural business from the pharmaceutical business on September 1, 2000, Monsanto assumed, and agreed to indemnify Pharmacia Corporation for, any liabilities primarily related to Pharmacia's former agricultural or chemical businesses, including any liabilities that Solutia had assumed from Pharmacia in connection with the spin-off of Solutia on September 1, 1997, to the extent that Solutia fails to pay, perform or discharge those liabilities. This includes among other things, litigation and environmental liabilities that were assumed by Solutia. Employees: The company's ability to attract and retain management and other key employees. External pressures: Social, legal, political and governmental developments, especially those relating to health care reform, pharmaceutical pricing and reimbursement, patient privacy, and tax laws. 41 Economic conditions: Changes in foreign currency exchange rates or in general economic or business conditions including inflation and interest rates. Business combinations: Acquisitions, divestitures, mergers, restructurings or strategic initiatives that change the company's structure, including the proposed merger with Pfizer which is subject to regulatory and shareholder approval; business combinations among the company's competitors and major customers could affect our competitive position. Accounting policies and estimates: Changes to accounting standards or generally accepted accounting principles, which may require adjustments to financial statements and may affect future results. Such other factors that may be described elsewhere in this Report or in other company filings with the U.S. Securities and Exchange Commission. Item 6. Exhibits And Reports On Form 8-K (a) Exhibits - See the Exhibit Index (b) Reports on Form 8-K during the quarter ended on September 30, 2002 were filed on August 2, 2002 pursuant to Item 5 (Other Events); August 13, 2002 pursuant to Item 9 (Regulation FD Disclosure); August 16, 2002 pursuant to Item 2 (Disposition of Assets); and filed subsequent to the effective date of this report on October 22, 2002 pursuant to Item 5 (Other Events). 42 SIGNATURE: Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PHARMACIA CORPORATION (Registrant) DATE: November 14, 2002 /s/ R. G. Thompson ----------------- R. G. Thompson Senior Vice President and Corporate Controller 43 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Fred Hassan, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Pharmacia Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c. presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 8, 2002 /s/ Fred Hassan --------------- 44 Fred Hassan Chairman & CEO, Pharmacia Corporation * Provide a separate certification for each principal executive officer and principal financial officer of the registrant. See Rules 13a-14 and 15d-14. The required certification must be in the exact form set forth above. Subscribed and sworn to before me this 8th day of November 2002. /s/ Cecilia Rueda-Stephens - ----------------------------- Notary Public of New Jersey My Commission Expires: February 23, 2004 45 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Christopher J. Coughlin, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Pharmacia Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c. presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 7, 2002 46 /s/ Christopher J. Coughlin --------------------------- Christopher J. Coughlin Executive Vice President & CFO, Pharmacia Corporation * Provide a separate certification for each principal executive officer and principal financial officer of the registrant. See Rules 13a-14 and 15d-14. The required certification must be in the exact form set forth above. Subscribed and sworn to before me this 7th day of November 2002. /s/ Deborah Rein - ---------------- Notary Public of New Jersey My Commission Expires: January 13, 2004 47 EXHIBIT INDEX These Exhibits are numbered in accordance with the Exhibit Table of Item 601 of Regulation S-K. Exhibit Number Description - ------ --------------- 4. Omitted - Inapplicable 10(1) Amended Employment Agreement with Tim G. Rothwell, dated July 12, 2002. 10(2) Amended Employment Agreement with Dr. Philip Needleman, dated July 12, 2002. 10(3) Amended Employment Agreement with Carrie S. Cox, dated July 18, 2002. 10(4) Amended Employment Agreement with Dr. Goran Ando, dated July 12, 2002. 10(5) Amended and Restated Founders Performance Contingent Shares Program, effective September 17, 2002. 10(6) Amended and Restated Long-Term Performance Share Unit Incentive Plan, effective July 9, 2002. 10(7) Amended and Restated Pharmacia Corporation Operations Committee Incentive Plan, effective July 9, 2002. 10(8) Amended and Restated Pharmacia Corporation Cash Long-Term Incentive Plan, effective July 9, 2002. 11. Omitted - Inapplicable; see Note G of Notes to Financial Statements on page 14. 15. Omitted - Inapplicable 18. Omitted - Inapplicable 19. Omitted - Inapplicable 22. Omitted - Inapplicable 23. Omitted - Inapplicable 24. Omitted - Inapplicable 48 EX-10 3 ex10-1.txt EXHIBIT 10(1) EXHIBIT 10(1) AMENDED AND RESTATED EMPLOYMENT AGREEMENT This Agreement is made by and between Pharmacia Corporation, a Delaware corporation (the "Company"), and Timothy Rothwell (the "Executive"). 1. Duties and Scope of Employment. (a) Position; Duties. During the Employment Term (as defined in paragraph 2), the Company will employ Executive as Executive Vice President and President, Global Pharmaceuticals Business of the Company, with Global Supply reporting to Executive, or in such other substantially equivalent position requested by the Company's Chief Executive Officer ("CEO") for which the Executive is qualified by education, training, and experience. Executive will serve as an Officer of the Company, and will initially report to the CEO. (b) Obligations. During the Employment Term, Executive will devote substantially all of his business efforts and time to the Company. Executive agrees, during the Employment Term, not to actively engage in any other employment, occupation or consulting activity for any direct or indirect remuneration without the prior approval of the CEO; provided, however, that Executive may (i) serve on the board of directors of other companies (subject to the reasonable approval of the CEO) and boards of trade associations or charitable organizations; (ii) engage in charitable activities and community affairs; or (iii) manage Executive's personal investments and affairs, as long as such activities do not materially interfere with Executive's duties and responsibilities with the Company. 2. Employment Term. The Company hereby agrees to employ Executive and Executive hereby accepts employment, in accordance with the terms and conditions of this Agreement, commencing on June 1, 2000 (the "Employment Commencement Date"). The period of Executive's employment under this Agreement will be referred to as the "Employment Term." Subject to the Company's obligation to provide severance benefits as may be specified in this Agreement, Executive and the Company acknowledge that this employment relationship may be terminated at any time and for any or no cause or reason, at the option of either the Company or Executive. 3. Cash Compensation. During the Employment Term, the Company will pay Executive the following as cash compensation for services to the Company: (a) Base Salary. As of the Employment Commencement Date, Executive's annualized base salary will be $797,000 and will be subject to annual review pursuant to the Company's normal review policy for other similarly situated senior executives of the Company. (b) Variable Compensation. Executive will also be eligible to participate in the Company's annual incentive plan ("Incentive Plan") at a level determined by the Compensation Committee of the Board of Directors of the Company (the "Board") (such committee hereafter being referred to as the "Compensation Committee") to be appropriate based on Executive's position, job performance and Company policy. For the Year 2000, Executive's target under the Incentive Plan will be 75% of Executive's base salary. Payment of incentive compensation, if the performance criteria determined by the Compensation Committee are met, will generally be made in March of the year following the incentive plan year, unless Executive elects to defer payment pursuant to an applicable plan of the Company. 4. Equity Compensation. During the Employment Term, Executive will be eligible to participate in the Company's equity compensation plans, in accordance with the terms of such plans and any applicable grants (except as provided herein), at a level determined by the Compensation Committee to be appropriate based on the Company's equity compensation policy. Executive will receive a grant of 125,000 stock options to purchase shares of the Company's common stock pursuant to the terms of the Company's long-term incentive plan. The date of the stock option grant will be June 1, 2000. Executive will receive a grant of 100,000 restricted shares or share units under the Company's Founders Performance Contingent Shares Program, which shall vest according to the terms of the Program based on the Company's total shareholder return ranking as compared to a designated peer group and the Company's targeted five year compounded shareholder return. Except as otherwise provided in the Founders Performance Contingent Shares Program, Executive must be employed by the Company on December 31, 2004 in order for the restricted shares or share units to vest. Notwithstanding the terms of any specific grant, stock options not yet vested or exercisable will nevertheless be fully vested and exercisable immediately upon Executive's death, disability, involuntarily termination of employment by the Company other than for Cause (as defined below), or voluntary termination of employment for Good Reason within six months after learning of the event constituting Good Reason (as defined below), provided, in the case of employment termination, Executive does not enter into Competition (as defined below) with the Company within two years after Executive's employment is terminated. Notwithstanding the foregoing, in no event will this provision cause any stock options to become vested or exercisable prior to the first anniversary of the stock option grant date. 5. Employee Benefits. During the Employment Term, Executive will, to the extent eligible, be entitled to participate in all employee welfare and retirement benefit plans and programs provided by the Company to its senior executives in accordance with the terms of those plans or programs as they may be modified from time to time. Executive will be entitled to post-retirement welfare benefits as are made available by the Company to its senior executive officers at the time of Executive's retirement, provided that for this purpose Executive's period of employment shall be deemed to be the period necessary to obtain the maximum level of such benefits. In the event that adverse tax consequences may result if medical benefits are provided to Executive directly, the Company will pay Executive the amount necessary to purchase the coverage, adjusted for taxes, on an after-tax basis. 6. Financial Planning Assistance. During the Employment Term, Executive will be eligible to participate in the Company's Financial Planning Assistance program for senior executives. Executive will be entitled to up to $10,000 for the first year of financial planning assistance, and $7,000 each year thereafter, except that if Executive participated in this program 2 at the time it was provided by Pharmacia & Upjohn, Executive will receive $7,000 for each year of participation. 7. Business Expenses. During the Employment Term, and upon submission of appropriate documentation in accordance with its policies in effect from time to time, the Company will pay or reimburse Executive for all reasonable business expenses that Executive incurs in performing Executive's duties under this Agreement, including, but not limited to, travel, entertainment, professional dues and subscriptions. 8. Relocation. Executive acknowledges that the Company may at any time relocate his place of employment to such location as may at that time constitute the Company's principal offices. During the Employment Term, Executive will be entitled to relocation benefits pursuant to the Company's relocation benefit program. 9. Supplemental Retirement Benefit. During the Employment Term, Executive will be eligible to participate in the Key Executive Pension Plan. 10. Release. (a) In consideration of the agreements and undertakings of the Company set forth herein, and intending to be legally bound hereby, Executive, on behalf of himself, his spouse and his dependents, heirs, executors, administrators and assigns, past and present, and each of them (hereinafter collectively referred to as "Releasors"), agrees to release and forever discharge the Company, together with its Affiliates, and its or their officers, directors, employees, agents, predecessors, partners, successors, assigns, heirs, executors, insurers and administrators (hereinafter "Company Releasees") from any and all rights, claims, actions and causes of action of any nature whatsoever, cognizable at law or equity, which Releasors now have or claim, or might hereafter have or claim, against the Company Releasees up to the date of this Agreement relating to Executive's employment by the Company and its Affiliates, including, without limitation, claims arising under the Age Discrimination in Employment Act, 29 U.S.C. 'SS' 621 et seq.; the Older Workers Benefit Protection Act, 29 U.S.C. 'SS' 621 et seq.; Title VII of the Civil Rights Act of 1964, as amended, 42 U.S.C. 'SS' 2000e et seq.; the Employee Retirement Income Security Act of 1974, 29 U.S.C. 'SS' 1001 et seq.; the Americans With Disabilities Act, 42 U.S.C. 'SS'12101 et seq.; the Family and Medical Leave Act, 29 U.S.C. 'SS' 2601 et seq.; any anti-discrimination statutes; any claims for breach of express or implied contract; any claims for wrongful discharge or violation of public policy; any claims under any federal, state or local laws of any jurisdiction; and any common law claims now or hereafter recognized; as well as all claims for counsel fees and costs. (b) Nothing herein shall be construed to negate the provisions of this Agreement or Executive's right to enforce the provisions of this Agreement. 11. Review and Consideration of Release. Executive certifies and acknowledges: (a) that he has read the terms of this Agreement, and he understands its terms and effects, including the fact that he has agreed to RELEASE AND FOREVER DISCHARGE Company Releasees from any legal or administrative action arising out of his employment with 3 the Company, and the terms and conditions of that employment relationship, up to the date of this Agreement; (b) that he has signed this Agreement voluntarily and knowingly in exchange for the consideration provided to him and described herein. He acknowledges that he would not otherwise be entitled to the consideration provided and that the consideration provided as a result of signing this Agreement is adequate and satisfactory; (c) that he has been advised through this document that the signing of this Agreement does not waive rights or claims that may arise after the date it is executed; (d) that he has been advised through this writing to consult with an attorney concerning this Agreement prior to signing this Agreement; (e) that he has been advised that he has the right to consider this Agreement for a period of 21 days from receipt, and that he has signed on the date indicated below after concluding that this Agreement is satisfactory to him; (f) that neither the Company, nor any of its agents, representatives, employees, or attorneys has made any representations to him concerning the terms or effects of this Agreement other than those contained herein; and (g) that he understands that he has the right to revoke this Agreement within 7 days after its execution by giving written notice to the Company, and that this Agreement will not become effective or enforceable until the revocation period has expired. 12. Termination of Employment. (a) Notice of Termination. Any termination by the Company or by the Executive shall be communicated by Notice of Termination to the other party hereto given in accordance with Section 27. For purposes of this Agreement, a "Notice of Termination" means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated and (iii) specifies the date of termination which date shall not be less than fifteen (15) (thirty (30), if such termination is by the Company for Disability) nor more than sixty (60) days after the giving of such notice. The failure by the Executive or the Company to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of the Executive or the Company, respectively, hereunder or preclude the Executive or the Company, respectively, from asserting such fact or circumstance in enforcing the Executive's or the Company's rights hereunder. (b) Death or Disability. Executive's employment will terminate automatically upon Executive's death. The Company may terminate Executive's employment for disability in the event Executive has been unable, due to physical or mental incapacity, to perform Executive's material duties under this Agreement for six consecutive months (or such longer period that may be required by applicable law). In the event Executive's employment terminates as a result of death or disability, then: 4 (i) Subject to subsection 12(e) below, all unvested or unexercisable equity compensation will become fully vested and exercisable, and any stock options may be exercised after Executive's termination of employment in accordance with the terms and conditions of the applicable grant documentation; (ii) Except as otherwise provided herein, Executive will forfeit Executive's right to receive any salary, incentive compensation, equity compensation, or other compensation that has not been fully earned at the time Executive's employment terminates; provided, however, Executive will be entitled to receive any awards which become fully vested upon Executive's death or disability under the Company's Cash Long-Term Incentive Plan and Long-Term Share Unit Performance Plan and any other benefits or amounts accrued but not yet paid as of the date of termination; (iii) Executive will receive any other amounts earned, accrued or owing to Executive under the plans and programs of the Company. (iv) If, however, the Executive's employment is terminated by reason of death after a Notice of Termination has been given either by the Executive for Good Reason or by the Company other than for Cause, the Company shall also pay to the Executive's legal representatives in one lump sum the amounts specified in Sections 12(d)(i),(iv) and (v). (c) Involuntary Termination for Cause or Voluntary Termination Other Than for Good Reason. If Executive is involuntarily terminated by the Company for Cause or Executive voluntarily terminates his employment other than for Good Reason within six months after learning of the event constituting Good Reason, then: (i) All unvested or unexercisable equity compensation will be cancelled upon Executive's termination of employment; (ii) Executive will forfeit Executive's right to receive any salary, incentive compensation, equity compensation, or other compensation that has not been fully earned at the time Executive's employment terminates; provided, however, Executive will be entitled to receive any benefits or amounts accrued but not yet paid as of the date of termination; and (iii) Executive will receive any other amounts earned, accrued or owing to Executive under the plans and programs of the Company. (d) Involuntary Termination Other Than for Cause or Voluntary Termination for Good Reason. If Executive is involuntarily terminated by the Company other than for Cause or Executive voluntarily terminates his employment for Good Reason within six months after learning of the event constituting Good Reason; then, as liquidated damages and in lieu of any other damages or compensation under this Agreement or otherwise, Executive will receive the payments or other benefits described in this paragraph; provided (A) Executive does not enter into Competition (as defined below) with the Company for a period of two years following the termination of Executive's employment, and (B) Executive executes, and does not revoke, a written waiver and release, in a form prescribed by the Company, of all claims against the Company and related parties arising out of the Executive's employment or the termination of that employment, except that the condition specified in Clause (A) shall not apply if such termination 5 occurs during the two-year period after the consummation of a transaction approved by the stockholders of the Company and described in Section 13(c) or (d) of the Company's 2001 Long-Term Incentive Plan ("LTIP"), such event being hereafter referred to as a "Section 13(c) Change in Control") (and such two-year period being hereafter referred to as the "CIC Period"): (i) Executive will receive a lump sum severance payment, payable within 60 days after termination of Executive's employment, equal to three years' base salary and annual target incentive compensation (calculated using the amount of Executive's highest annual base salary and highest annual target incentive compensation within three years prior to Executive's date of termination) provided, however, if the termination occurs during a CIC Period such lump sum severance payment shall be payable within 10 days after the termination of Executive's employment; (ii) Executive will have Executive's period of employment service used to calculate retirement extended as if Executive had worked an additional three years, and the compensation used to calculate Executive's retirement benefits will be determined as if Executive had continued to receive for an additional three years salary and incentive compensation equal to the highest annual base salary and highest annual incentive compensation Executive received within three years prior to Executive's date of termination (such amounts to be payable from a non-qualified, supplemental retirement plan); (iii) Subject to subsection 12(e) below, Executive will be entitled to exercise, in accordance with their terms, any remaining stock options that had been granted prior to Executive's termination (all of which will become vested under such circumstances) for the maximum period permitted under the terms of the grant; (iv) Executive will receive a pro-rated portion of his target annual incentive compensation award in or around March of the year following Executive's termination based on the number of months (rounded to the next highest number for a partial month) of the year elapsed prior to Executive's termination provided, however, that if the termination occurs during a CIC Period any such awards which have become vested under the terms of the Annual Incentive Plan or the Operating Committee Incentive Plan shall be payable within 10 days after the termination of Executive's employment; (v) Executive and Executive's dependents will continue to participate (with the same level of coverage) for three years in all medical, dental, hospitalization, accident, disability, life insurance and any other benefit plans of the Company on the same terms as in effect immediately prior to Executive's termination unless changed for senior executives generally; provided, however, that such benefits will be offset to the extent that Executive or Executive's dependents receive benefits from another source (in such event, Executive agrees to provide reasonable notice of the receipt of benefits from another source); and, provided that in the event adverse tax consequences may result if medical benefits are provided to Executive directly, the Company will pay Executive the amount necessary to purchase the coverage, adjusted for taxes, on an after-tax basis. (vi) Executive will be entitled to outplacement services, at the expense of the Company, from a provider selected by Executive, subject to a maximum expense of $25,000; 6 (vii) Executive will be entitled to participate in the Company's Financial Planning Assistance program for three (3) consecutive years from the date of termination in accordance with the policies of the Company as in effect immediately prior to the Change in Control (as defined in the LTIP); and (viii) Executive will receive any other amounts earned, accrued or owing to Executive under the plans and programs of the Company. (e) Notwithstanding the foregoing, in no event will this paragraph cause any stock options to become vested or exercisable prior to the first anniversary of the stock option grant , unless Executive's termination occurs during a CIC Period, in which case such stock options shall become vested and exercisable and the limitations and restrictions set forth in paragraph 4 shall not apply. 13. Cause; Good Reason. (a) For purposes of this Agreement, "Cause" means: (i) a material breach by Executive of Executive's duties and responsibilities (other than as a result of incapacity due to physical or mental illness) which is demonstrably willful and deliberate on the part of Executive, which is committed in bad faith or without reasonable belief that such breach is in the best interests of the Company, and which is not remedied within 30 days after receipt of written notice from the Company specifying such breach; or (ii) Executive's conviction of a felony which is materially and demonstrably injurious to the Company as determined in the sole discretion of the Board. provided that if the Executive's employment is terminated during a CIC Period the cessation of Executive's employment shall not be deemed for Cause unless and until the Company has delivered to Executive a copy of a resolution duly adopted by not less than 75% of the entire Board (excluding Executive if Executive is a Board member) at a meeting of the Board called and held for such purpose (after reasonable notice to Executive and an opportunity for Executive, together with counsel, to be heard before the Board), finding that in the good faith opinion of the Board an event set forth above has occurred and specifying the particulars thereof in detail. (b) For purposes of this Agreement, "Good Reason" means: (i) Executive's rate of annual base salary, the target amount of Executive's annual cash incentive bonus or, if applicable, any other benefits under any long-term incentive plan is reduced in a manner that is not applied proportionately to all other senior executive officers of the Company, including the Chief Executive Officer; (ii) the Company fails to retain Executive as an Executive Vice President of the Company; 7 (iii) the Company fails to retain Executive as President, Global Pharmaceuticals Business, with Global Supply reporting to Executive, or another substantially equivalent position for which the Executive is qualified by education, training and experience; (iv) during a CIC Period, the Company assigns to the Executive any duties materially inconsistent with the Executive's title, position, status, reporting relationships, authority, duties or responsibilities as they existed immediately prior to such CIC Period, or any other action by the Company which results in a diminution in such title, position, status, reporting relationships, authority, duties or responsibilities, other than an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive; (v) a successor, or any subsidiary or affiliate thereof, to the Company fails to assume this Agreement; (vi) the Company terminates the Executive's employment other than as expressly permitted by this Agreement; (vii) during a CIC Period, the Company fails to keep in effect any employee benefit plan in which Executive is participating immediately prior to such CIC Period or provide benefits to Executive that are substantially equivalent; or (viii) during a CIC Period, Executive is required to relocate more than fifty (50) miles within the state where the Executive maintains his office immediately prior to such relocation or Executive's principal office is relocated to a different state or Executive is required to materially increase his business travel. 14. Directorships, Other Offices. In the event of termination of employment, Executive will immediately, unless otherwise requested by the Company's Board, resign from all directorships, trusteeships, other offices and employment held at that time with the Company or any of its Affiliates. 15. Confidentiality. Executive recognizes and acknowledges that by reason of Executive's employment by and service to the Company, Executive will have access to proprietary or confidential information, technical data, trade secrets or know-how relating to the Company, which may include, but is not limited to, market and product research and plans, markets, products, services, customer lists and customers, advertising, software, developments, inventions, processes, formulas, technology, designs, drawings, engineering, marketing and sales techniques, strategies and programs, distribution methods and systems, sales and profit figures, pricing and discount plans, financial and other business information (hereafter, "Confidential Information"). Executive acknowledges that such Confidential Information is a valuable and unique asset of the Company and covenants that Executive will not, either during employment or after the termination of employment, disclose any such Confidential Information to any person for any reason whatsoever (except as Executive's duties as an employee of the Company may require) without the prior written authorization of the CEO, unless such information is in the public domain through no fault of Executive or except as may be required by law or in a judicial or administrative proceeding, in which case Executive will promptly inform the Company in 8 writing of such required disclosure, but in any event at least two business days prior to the disclosure. All written Confidential Information (including, without limitation, in any computer or other electronic format) which comes into Executive's possession during the course of Executive's employment will remain the property of the Company. Unless expressly authorized in writing by the CEO, Executive will not remove any written Confidential Information from the Company's premises, except in connection with the performance of Executive's duties for the Company and in a manner consistent with the Company's policies regarding Confidential Information. Upon termination of employment, Executive agrees immediately to return to the Company all written Confidential Information in Executive's possession. For the purposes of this paragraph, the term "Company" will be deemed to include the Company and its Affiliates. For purposes of this Agreement, "Affiliate" will mean an "affiliate" as defined in Rule 12b-2 of the General Rules and Regulations under the Exchange Act. 16. Non-Compete; Non-Solicit. (a) The Company hereby agrees to pay Executive the amounts described under this Agreement as being expressly conditioned on Executive's undertakings under this paragraph as well as under paragraph 15 above. In exchange for the consideration provided in the preceding sentence, Executive agrees that during the term of Executive's employment with the Company and for a period of two years after Executive's termination of employment for any reason, Executive will not, except with the prior written consent of the CEO, directly or indirectly, engage in Competition. For purposes of this Agreement, Competition means that Executive commences employment with, or provides substantial consulting services to, any pharmaceutical company (except companies where sales from pharmaceutical products constitute less than 20% of total sales). Notwithstanding anything to the contrary herein, Executive's service solely as a member of the board of directors of a company whose annual sales are less than $100 million shall not be deemed to be Competition for purposes of this Agreement. For purposes of the preceding sentence, if a company is a subsidiary of another company, the sales of both companies shall be taken into account. Notwithstanding anything to the contrary herein, the restrictions imposed on Executive under this paragraph 16(a) shall cease to apply for all purposes upon Executive's termination of employment pursuant to paragraphs 12(c) or 12(d) during a CIC Period. (b) The foregoing restrictions will not be construed to prohibit Executive's ownership of less than five percent of any class of securities of any corporation which is engaged in any business having a class of securities registered pursuant to the Securities Exchange Act of 1934 (the "Exchange Act"), provided that such ownership represents a passive investment and that neither Executive nor any group of persons including Executive in any way, either directly or indirectly, manage or exercise control of any such corporation, guarantee any of its financial obligations, otherwise take any part in its business, other than exercising Executive's rights as a shareholder, or seek to do any of the foregoing. (c) Executive further covenants and agrees that during Executive's employment by the Company and for the period of two years thereafter, Executive will not, except with the prior written consent of the CEO, directly or indirectly, solicit, or encourage the solicitation or hiring of, any person who was an employee of the Company at any time during the term of this 9 Agreement by any employer other than the Company for any position as an employee, independent contractor, consultant or otherwise. This covenant will not prevent Executive from giving references and will not preclude the solicitation or hiring of any individual after 12 months have elapsed subsequent to the date on which such individual's employment or engagement by the Company has terminated. (d) For the purposes of this paragraph 16, the term "Company" will be deemed to include the Company and its Affiliates. 17. Remedies; Injunction. (a) Executive acknowledges and agrees that the restrictions contained in paragraphs 15 and 16 are reasonable and necessary to protect and preserve the legitimate interests, properties, goodwill and business of the Company, that the Company would not have entered into this Agreement in the absence of such restrictions and that irreparable injury will be suffered by the Company should Executive breach any of the provisions of those paragraphs. Executive represents and acknowledges that (i) Executive has been advised by the Company to consult legal counsel with respect to this Agreement, and (ii) that Executive has had full opportunity, prior to execution of this Agreement, to review thoroughly this Agreement with counsel. (b) Executive further acknowledges and agrees that a breach of any of the restrictions in paragraphs 15 and 16 cannot be adequately compensated by monetary damages. Executive agrees that, unless Executive's employment is terminated pursuant to paragraph 12(d) during a CIC Period (in which case the provisions of this sentence shall not apply), the Company will be entitled to a return of the cash consideration set forth in this Agreement as being conditioned on the covenants contained in paragraph 16 and that all remaining stock options will be forfeited if Executive breaches the provisions of that paragraph and that, in any event, the Company will be entitled to preliminary and permanent injunctive relief, without the necessity of proving actual damages, as well as provable damages and an equitable accounting of all earnings, profits and other benefits arising from any violation of paragraphs 15 or 16, which rights will be cumulative and in addition to any other rights or remedies to which the Company may be entitled. In the event that any of the provisions of paragraphs 15 or 16 should ever be adjudicated to exceed the time, geographic, service, or other limitations permitted by applicable law in any jurisdiction, it is the intention of the parties that the provision will be amended to the extent of the maximum time, geographic, service, or other limitations permitted by applicable law, that such amendment will apply only within the jurisdiction of the court that made such adjudication and that the provision otherwise be enforced to the maximum extent permitted by law. (c) Executive irrevocably and unconditionally (i) agrees that any suit, action or other legal proceeding arising out of paragraphs 15 or 16, including without limitation, any action commenced by the Company for preliminary and permanent injunctive relief and other equitable relief, may be brought in the United States District Court for the District of New Jersey, or if such court does not have jurisdiction or will not accept jurisdiction, in any court of general jurisdiction in Somerset County, New Jersey, (ii) consents to the non-exclusive jurisdiction of any such court in any such suit, action or proceeding, and (iii) waives any objection which Executive may have to the laying of venue of any such suit, action or proceeding in any such court. 10 (d) For the purposes of this paragraph 17, the term "Company" will be deemed to include the Company and its Affiliates. 18. Intellectual Property. To the fullest extent permitted by applicable law, all intellectual property (including patents, trademarks, and copyrights) which are made, developed or acquired by Executive in the course of Executive's employment with the Company will be and remain the absolute property of the Company, and Executive shall assist the Company in perfecting and defending its rights to such intellectual property. 19. Indemnification. To the fullest extent permitted by applicable law, the Company will, during and after termination of employment, indemnify Executive (including providing advancement of expenses) for any judgments, fines, amounts paid in settlement and reasonable expenses, including attorneys' fees, incurred by Executive in connection with the defense of any lawsuit or other claim or investigation to which Executive is made, or threatened to be made, a party or witness by reason of being or having been an officer, director or employee of the Company or any of its subsidiaries or affiliates. In addition, Executive will be covered under any directors and officers' liability insurance policy for his acts (or non-acts) as an officer or director of the Company or any of its subsidiaries or affiliates to the extent the Company provides such coverage for its senior executive officers for a period of 5 years following any termination of Executive's employment other than for Cause or for such longer period of limitations that may apply to any claim. 20. Arbitration. Unless other arrangements are agreed to by Executive and the Company, any disputes arising under or in connection with this Agreement, other than a dispute in which the primary relief sought is an equitable remedy such as an injunction, will be resolved by binding arbitration to be conducted pursuant to the National Rules for the Resolution of Employment Disputes of the American Arbitration Association. Costs of the arbitration, including (but not by way of limitation) reasonable attorney's fees of both parties, will be borne by the party which does not prevail in the proceedings. In the event that each party prevails as to certain aspects of the proceedings, the arbitrator(s) or the court will determine an appropriate allocation of costs between the parties. If, however, any dispute arises relating to Executive's rights or obligations as a result of the occurrence of a Section 13(c) Change in Control, the Company shall pay Executive any such costs unless the Company is determined to have substantially prevailed on all material claims. 21. Gross-Up Payment. In addition to any other payments due to Executive under this Agreement, the Company shall pay to Executive any amounts due to Executive under the terms of the Company's Excess Parachute Tax Indemnity Plan. 22. No Set-off; No Mitigation Required. The obligation of the Company to make any payments provided for hereunder and otherwise to perform its obligations hereunder will not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against Executive or others. In no event will Executive be obligated to seek other employment or take other action by way of mitigation of the amounts payable to Executive under any of the provisions of this Agreement, and such amounts will not be reduced (except as otherwise specifically provided herein) whether or not Executive obtain other employment. 11 23. Payment of Legal Fees. The Company will pay Executive's reasonable legal and financial consulting fees and costs associated with entering into this Agreement up to a maximum of $10,000. 24. Corporate Transactions, Impact on Equity Compensation. In the event of any change in the outstanding shares of the Company's Common Stock (including any increase or decrease in such shares) by reason of any stock dividend or split, recapitalization, merger, consolidation, spinoff, combination or exchange of shares or other similar corporate change, or any distributions to common stockholders other than regular cash dividends, the Compensation Committee of the Board may make such substitution or adjustment, if any, as it deems to be equitable, as to the number or kind of shares of Common Stock provided for in this Agreement. 25. Governing Law. This Agreement will be governed by and construed in accordance with the laws of the State of New Jersey. 26. Assignments; Transfers; Effect of Merger. (a) No rights or obligations of the Company under this Agreement may be assigned or transferred by the Company except that such rights or obligations may be assigned or transferred pursuant to a merger or consolidation in which the Company is not the continuing entity, or pursuant to the sale or transfer of all or substantially all of the assets of the Company, provided that the assignee or transferee is the successor to all or substantially all of the assets of the Company. (b) This Agreement will not be terminated by any merger, consolidation or transfer of assets of the Company referred to above. In the event of any such merger, consolidation or transfer of assets, the provisions of this Agreement will be binding upon the surviving or resulting corporation or the person or entity to which such assets are transferred. (c) The Company agrees that concurrently with any merger, consolidation or transfer of assets referred to above, it will cause any successor or transferee unconditionally to assume, either contractually or as a matter of law, all of the obligations of the Company hereunder. (d) This Agreement will inure to the benefit of, and be enforceable by or against, Executive or Executive's personal or legal representatives, executors, administrators, successors, heirs, distributes, designees and legatees. None of Executive's rights or obligations under this Agreement may be assigned or transferred by Executive other than Executive's rights to compensation and benefits, which may be transferred only by will or operation of law. If Executive should die while any amounts or benefits have been accrued by Executive but not yet paid as of the date of Executive's death and which would be payable to Executive hereunder had Executive continued to live, all such amounts and benefits unless otherwise provided herein will be paid or provided in accordance with the terms of this Agreement to such person or persons appointed in writing by Executive to receive such amounts or, if no such person is so appointed, to Executive's estate. 27. Notices and other Communications. All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: 12 If to the Executive: Pharmacia Corporation 100 Route 206 North Peapack, New Jersey 07977 Telecopy Number: (908) 901-1809 Attention: Timothy Rothwell If to the Company: Pharmacia Corporation 100 Route 206 North Peapack, New Jersey 07977 Telecopy Number: (908) 901-1808 Attention: Senior Vice President Human Resources or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. 28. Modification. No provisions of this Agreement may be waived, modified or discharged unless such waiver, modification or discharge is agreed to in writing signed by both Executive and the CEO. No waiver by any party hereto at any time of any breach by any other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party will be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. 29. Entire Agreement. This Agreement sets forth the entire agreement of the parties hereto in respect of the subject matter contained herein and supersedes all prior agreements, promises, covenants, arrangements, communications, representations or warranties, whether oral or written, by any officer, employee or representative of any party hereto in respect of the subject matter contained herein. 13 PHARMACIA CORPORATION /s/ Timothy Rothwell /s/ Fred Hassan _____________________________________ _________________________________________ Timothy Rothwell By: Fred Hassan Title: Chief Executive Officer July 12, 2002 July 12, 2002 _____________________________________ _________________________________________ Date Date 14 EX-10 4 ex10-2.txt EXHIBIT 10(2) EXHIBIT 10(2) AMENDED AND RESTATED EMPLOYMENT AGREEMENT This Agreement is made by and between Pharmacia Corporation, a Delaware corporation (the "Company"), and Philip Needleman, Ph.D. (the "Executive"). 1. Duties and Scope of Employment. (a) Position; Duties; Retirement Date. During the Employment Term (as defined in paragraph 2) until June 30, 2002, the Company will employ Executive as Senior Executive Vice President and Chief Scientific Officer and Chairman of Research and Development of the Company or in such other substantially equivalent position requested by the Company's Chief Executive Officer ("CEO") for which the Executive is qualified by education, training, and experience. Executive will serve as an Officer of the Company, and will initially report to the CEO. From July 1, 2002 through the effective date of his retirement ("Retirement Date"), Executive shall be employed with the Company as Senior Executive Vice President and Chief Scientific Officer, but shall no longer be the Chairman of Research and Development. During this period, Executive will perform duties and responsibilities as assigned by the CEO, in his full discretion. Executive's duties and responsibilities will primarily be advice and consultation with the CEO. Executive's Retirement Date shall be no earlier than February 28, 2003 and no later than December 31, 2003, unless a later date is mutually agreed upon. For the period between February 28, 2003 and December 31, 2003, either party may identify a specific Retirement Date by providing the other party ninety-days advance written notice. If the parties mutually agree to extend Executive's Retirement Date beyond December 31, 2003, the parties agree that (i) the Retirement Date will be no earlier than one year following the effective date of the Company's 2003 annual stock option grants, and (ii) notwithstanding the provisions of Section 3, the CEO shall determine Executive's cash compensation beyond December 31, 2003, in his sole discretion, based on Executive's duties and responsibilities as agreed upon by CEO and Executive. (b) Obligations. During the Employment Term, Executive will devote substantially all of his business efforts and time to the Company. Executive agrees, during the Employment Term, not to actively engage in any other employment, occupation or consulting activity for any direct or indirect remuneration without the prior approval of the CEO; provided, however, that Executive may (i) serve on the board of directors of other companies (subject to the reasonable approval of the CEO) and boards of trade associations or charitable organizations; (ii) engage in charitable activities and community affairs; or (iii) manage Executive's personal investments and affairs, as long as such activities do not materially interfere with Executive's duties and responsibilities with the Company. 2. Employment Term. The Company hereby agrees to employ Executive and Executive hereby accepts employment, in accordance with the terms and conditions of this Agreement, commencing on June 1,2000 (the "Employment Commencement Date"). The period of Executive's employment under this Agreement will be referred to as the "Employment Term." Subject to the Company's obligation to provide severance benefits as may be specified in this Agreement, Executive and the Company acknowledge that this employment relationship may be terminated at any time and for any or no cause or reason, at the option of either the Company or Executive. 3. Cash Compensation. During the Employment Term, the Company will pay Executive the following as cash compensation for services to the Company: (a) Base Salary. From April 1, 2002 through Executive's Retirement Date, Executive's annualized base salary will be $832,000 and will be subject to annual review pursuant to the Company's normal review policy for other similarly situated senior executives of the Company. (b) Variable Compensation. Executive will also be eligible to participate in the Company's annual incentive plan ("Incentive Plan") at a level determined by the Compensation Committee of the Board of Directors of the Company (the "Board") (such committee hereafter being referred to as the "Compensation Committee") to be appropriate based on Executive's position, job performance and Company policy. For each plan year until Executive's Retirement Date, Executive's target under the Incentive Plan will be 75% of Executive's base salary. Payment of incentive compensation, if the performance criteria determined by the Compensation Committee are met, will generally be made in March of the year following the incentive plan year, unless Executive elects to defer payment pursuant to an applicable plan of the Company. 4. Equity Compensation. During the Employment Term, Executive will be eligible to participate in the Company's equity compensation plans, in accordance with the terms of such plans and any applicable grants (except as provided herein), at a level determined by the Compensation Committee to be appropriate based on the Company's equity compensation policy. Executive will receive a grant of 125,000 stock options to purchase shares of the Company's common stock pursuant to the Company's long-term incentive plan. The date of the stock option grant will be June 1,2000. Executive will receive a grant of 100,000 restricted shares or share units under the Company's Founders Performance Contingent Shares Program, which shall vest according to the terms of the Program based on the Company's total shareholder return ranking as compared to a designated peer group and the Company's targeted five year compounded shareholder return. Except as otherwise provided in the Founders Performance Contingent Shares Program, Executive must be employed by the Company on December 31, 2004 in order for the restricted shares or share units to vest. 5. Employee Benefits. During the Employment Term, Executive will, to the extent eligible, be entitled to participate in all employee welfare and retirement benefit plans and programs provided by the Company to its senior executives in accordance with the terms of those plans or programs as they may be modified from time to time. Executive will be entitled to post-retirement welfare benefits as are made available by the Company to its senior executive officers at the time of Executive's retirement, provided that for this purpose Executive's period of employment shall be deemed to be the period necessary to obtain the maximum level of such 2 benefits. In the event that adverse tax consequences may result if medical benefits are provided to Executive directly, the Company will pay Executive the amount necessary to purchase the coverage, adjusted for taxes, on an after-tax basis. 6. Financial Planning Assistance. During the Employment Term, Executive will be eligible to participate in the Company's Financial Planning Assistance program for senior executives. Executive will be entitled to up to $10,000 for the first year of financial planning assistance, and $7,000 each year thereafter. 7. Business Expenses. During the Employment Term, upon submission of appropriate documentation in accordance with its policies in effect from time to time, the Company will pay or reimburse Executive for all reasonable business expenses that Executive incurs in performing Executive's duties under this Agreement, including, but not limited to, travel, entertainment, professional dues and subscriptions. 8. Relocation. The Company acknowledges and agrees that Executive's business location will remain in St. Louis. However, in the event Executive chooses to relocate during the Employment Term, Executive will be entitled to relocation benefits pursuant to the Company's relocation benefit program. (b) Supplemental Retirement Benefit. During the Employment Term, Executive will be eligible to participate in the Key Executive Pension Plan ("KEPP"). Notwithstanding anything in this Agreement to the contrary, if the amount of Executive's Supplemental Benefit under the KEPP is adversely impacted by the terms of this Agreement, then Executive's benefit under the KEPP shall be calculated without regard to the terms of this Agreement. In the event Executive's Retirement Date is after February 28, 2003, the Company agrees that the Executive's Supplemental Benefit under the KEPP shall be no less than a Supplement Benefit under the KEPP calculated as if he terminated from employment on February 28, 2003. 9. Release. (a) In consideration of the agreements and undertakings of the Company set forth herein, and intending to be legally bound hereby, Executive, on behalf of himself, his spouse and his dependents, heirs, executors, administrators and assigns, past and present, and each of them (hereinafter collectively referred to as "Releasors"), agrees to release and forever discharge the Company, together with its Affiliates, and its or their officers, directors, employees, agents, predecessors, partners, successors, assigns, heirs, executors, insurers and administrators (hereinafter "Company Releasees") from any and all rights, claims, actions and causes of action of any nature whatsoever, cognizable at law or equity, which Releasors now have or claim, or might hereafter have or claim, against the Company Releasees up to the date of this Agreement relating to Executive's employment by the Company and its Affiliates, including, without limitation, claims arising under the Age Discrimination in Employment Act, 29 U.S.C. 'SS' 621 et seq.; the Older Workers Benefit Protection Act, 29 U.S.C. 'SS' 621 et seq.; Title VII of the Civil Rights Act of 1964, as amended, 42 U.S.C. 'SS' 2000e et seq.; the Employee Retirement Income Security Act of 1974, 29 U.S.C. 'SS' 1001 et seq.; the Americans With Disabilities Act, 42 U.S.C. 'SS' 12101 et seq.; the Family and Medical Leave Act, 29 U.S.C. 'SS' 2601 et seq.; any anti-discrimination statutes; any claims for breach of express or implied contract; any claims for 3 wrongful discharge or violation of public policy; any claims under any federal, state or local laws of any jurisdiction; and any common law claims now or hereafter recognized; as well as all claims for counsel fees and costs. (b) Nothing herein shall be construed to negate the provisions of this Agreement or Executive's right to enforce the provisions of this Agreement. 10. Review and Consideration of Release. Executive certifies and acknowledges: (a) that he has read the terms of this Agreement, and he understands its terms and effects, including the fact that he has agreed to RELEASE AND FOREVER DISCHARGE Company Releasees from any legal or administrative action arising out of his employment with the Company, and the terms and conditions of that employment relationship, up to the date of this Agreement; (b) that he has signed this Agreement voluntarily and knowingly in exchange for the consideration provided to him and described herein. He acknowledges that he would not otherwise be entitled to the consideration provided and that the consideration provided as a result of signing this Agreement is adequate and satisfactory; (c) that he has been advised through this document that the signing of this Agreement does not waive rights or claims that may arise after the date it is executed; (d) that he has been advised through this writing to consult with an attorney concerning this Agreement prior to signing this Agreement; (e) that he has been advised that he has the right to consider this Agreement for a period of 21 days from receipt, and that he has signed on the date indicated below after concluding that this Agreement is satisfactory to him; (f) that neither the Company, nor any of its agents, representatives, employees, or attorneys has made any representations to him concerning the terms or effects of this Agreement other than those contained herein; and (g) that he understands that he has the right to revoke this Agreement within 7 days after its execution by giving written notice to the Company, and that this Agreement will not become effective or enforceable until the revocation period has expired. 11. Termination of Employment. (a) Notice of Termination. Any termination by the Company or by the Executive shall be communicated by Notice of Termination to the other party hereto given in accordance with Section 26. For purposes of this Agreement, a "Notice of Termination" means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated and (iii) specifies the date of termination which date shall not be less than fifteen (15) (thirty (30), if such termination is by the Company for Disability) nor more than sixty (60) days after the giving of 4 such notice. The failure by the Executive or the Company to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of the Executive or the Company, respectively, hereunder or preclude the Executive or the Company, respectively, from asserting such fact or circumstance in enforcing the Executive's or the Company's rights hereunder. (b) Termination Other than for Cause. Upon termination of Executive's employment on the Retirement Date, or earlier in the event of death, disability, or upon an involuntary termination by the Company other than for Cause or by the Executive for Good Reason (within 6 months after learning of the event constituting Good Reason) prior to the Retirement Date, Executive will receive the payments or other benefits described in this paragraph as liquidated damages and in lieu of any other damages or compensation under this Agreement or otherwise; provided (A) Executive does not enter into Competition (as defined in the Agreement) with the Company for a period of two years following the termination of Executive's employment (it being understood that the duration of this non-compete requirement shall not delay payment of any amounts otherwise due hereunder), and (B) Executive executes, and does not revoke a written waiver and release, in a form prescribed by the Company, of all claims against the Company and related parties arising out of the Executive's employment or the termination of that employment except that the condition specified in Clause (A) shall not apply if such termination occurs during the two-year period after the consummation of a transaction approved by the stockholders of the Company and described in Section 13(c) or (d) of the Company's 2001 Long-Term Incentive Plan ("LTIP"), such event being hereafter referred to as a "Section 13(c) Change in Control") (and such two-year period being hereafter referred to as the "CIC Period") (i) Executive will receive a lump sum severance payment, payable within 60 days after termination of Executive's employment, of $4,764,006.00; provided, however, if the termination occurs during a CIC Period such lump sum severance payment shall be payable within 10 days after the termination of Executive's employment. (ii) Executive will have Executive's period of employment service used to calculate retirement extended as if Executive had worked an additional three years, and the compensation used to calculate Executive's retirement benefits will be determined as if Executive had continued to receive for an additional three years salary and incentive compensation equal to the highest annual base salary and highest annual incentive compensation Executive received from the Company or its Affiliates within three years prior to Executive's date of termination (such amounts to be payable from a non-qualified, supplemental retirement plan); (iii) Subject to subsection 11(d) below, Executive will be entitled to exercise, in accordance with their terms, any remaining stock options that had been granted prior to Executive's termination (all of which will become vested under such circumstances) for the maximum period permitted under the terms of the grant; (iv) Executive will receive a pro-rated portion of his target annual incentive compensation award in or around March of the year following Executive's termination based on the number of months (rounded to the next highest number for a partial month) of the year elapsed prior to Executive's termination; provided, however, that if the termination occurs during a CIC Period any such awards which have become vested under the terms of the Annual 5 Incentive Plan or the Operating Committee Incentive Plan shall be payable within 10 days after the termination of Executive's employment; (v) Executive and Executive's dependents will continue to participate (with the same level of coverage) for three years in all medical, dental, hospitalization, accident, disability, life insurance and any other benefit plans of the Company on the same terms as in effect immediately prior to Executive's termination unless changed for senior executives generally; provided, however, that such benefits will be offset to the extent that Executive or Executive's dependents receive benefits from another source (in such event, Executive agrees to provide reasonable notice of the receipt of benefits from another source); and, provided that in the event adverse tax consequences may result if medical benefits are provided to Executive directly, the Company will pay Executive the amount necessary to purchase the coverage, adjusted for taxes, on an after-tax basis; (vi) Executive shall be entitled to continue any and all current individual life insurance and individual disability insurance plans at Executive's own cost. Within twenty (20) days after Executive's termination date, the Company's share of cash value under Policy #CUL0021952, determined in accordance with the terms of the Split Dollar Life Insurance Plan and as of the termination date, will be returned to the Company; the Company shall then release the collateral assignment agreement. At that point, all ownership rights in connection with Policy #CUL0021952 will be vested in the Executive or his designee. The Executive or his designee will then have the option to maintain the policy by paying the future premiums, use the remaining cash value (if any) to purchase paid-up life insurance, withdraw any remaining cash value and cancel the policy, or exercise any other ownership rights in accordance with the terms of the life insurance policy; (vii) Executive will be entitled to outplacement services, at the expense of the Company, from a provider selected by Executive, subject to a maximum expense of $25,000; provided, however, Executive shall not be entitled to such services upon his retirement from the Company on the Retirement Date; (viii) Executive will be entitled to participate in the Company's Financial Planning Assistance program for three (3) consecutive years from the date of termination in accordance with the policies of the Company as in effect immediately prior to the Change in Control (as such term is defined in the LTIP); and (ix) Executive will receive any other amounts earned, accrued or owing to Executive under the plans and programs of the Company. (c) Involuntary Termination for Cause. If Executive is involuntarily terminated by the Company for Cause, then: (i) All unvested or unexercisable equity compensation will be cancelled upon Executive's termination of employment; (ii) Executive will forfeit Executive's right to receive any salary, incentive compensation, equity compensation, or other compensation that has not been fully earned at the 6 time Executive's employment terminates; provided, however, Executive will be entitled to receive any benefits or amounts accrued but not yet paid as of the date of termination; and (iii) Executive will receive any other amounts earned, accrued or owing to Executive under the plans and programs of the Company. (d) Notwithstanding the foregoing, in no event will this paragraph cause any stock options to become vested or exercisable prior to the first anniversary of the stock option grant, unless Executive's termination occurs during a CIC Period, in which case such stock options shall become vested and exercisable. 12. Cause; Good Reason. (a) For purposes of this Agreement, "Cause" means: (i) a material breach by Executive of Executive's duties and responsibilities (other than as a result of incapacity due to physical or mental illness) which is demonstrably willful and deliberate on the part of Executive, which is committed in bad faith or without reasonable belief that such breach is in the best interests of the Company, and which is not remedied within 30 days after receipt of written notice from the Company specifying such breach; or (ii) Executive's conviction of a felony which is materially and demonstrably injurious to the Company as determined in the sole discretion of the Board; provided that if the Executive's employment is terminated during a CIC Period the cessation of Executive's employment shall not be deemed for Cause unless and until the Company has delivered to Executive a copy of a resolution duly adopted by not less than 75% of the entire Board (excluding Executive if Executive is a Board member) at a meeting of the Board called and held for such purpose (after reasonable notice to Executive and an opportunity for Executive, together with counsel, to be heard before the Board), finding that in the good faith opinion of the Board an event set forth above has occurred and specifying the particulars thereof in detail. (b) For purposes of this Agreement, "Good Reason" means: (i) Executive's rate of annual base salary, the target amount of Executive's annual cash incentive bonus, or, if applicable, any other benefit under any long-term incentive plan is reduced in a manner that is not applied proportionately to all other senior executive officers of the Company, including the Chief Executive Officer; (ii) the Company fails to retain Executive in the position specified in paragraph 1(a) or another substantially equivalent position for which the Executive is qualified by education, training and experience; or (iii) during a CIC Period, the Company assigns to the Executive any duties materially inconsistent with the Executive's title, position, status, reporting relationships, authority, duties or responsibilities as they existed immediately prior to such CIC Period, or any other action by the Company which results in a diminution in such title, position, status, reporting relationships, 7 authority, duties or responsibilities, other than an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive; (iv) a successor, or any subsidiary or affiliate thereof, to the Company fails to assume this Agreement; (v) the Company terminates the Executive's employment other than as expressly permitted by this Agreement; (vi) during a CIC Period, the Company fails to keep in effect any employee benefit plan in which Executive is participating immediately prior to such CIC Period or provide benefits to Executive that are substantially equivalent; or (vii) during a CIC Period, Executive is required to relocate more than fifty (50) miles within the state where the Executive maintains his office immediately prior to such relocation or Executive's principal office is relocated to a different state or Executive is required to materially increase his business travel. 13. Directorships, Other Offices. In the event of termination of employment, Executive will immediately, unless otherwise requested by the Board, resign from all directorships, trusteeships, other offices and employment held at that time with the Company or any of its Affiliates. 14. Confidentiality. Executive recognizes and acknowledges that by reason of Executive's employment by and service to the Company, Executive will have access to proprietary or confidential information, technical data, trade secrets or know-how relating to the Company, which may include, but is not limited to, market and product research and plans, markets, products, services, customer lists and customers, advertising, software, developments, inventions, processes, formulas, technology, designs, drawings, engineering, marketing and sales techniques, strategies and programs, distribution methods and systems, sales and profit figures, pricing and discount plans, financial and other business information (hereafter, "Confidential Information"). Executive acknowledges that such Confidential Information is a valuable and unique asset of the Company and covenants that Executive will not, either during employment or after the termination of employment, disclose any such Confidential Information to any person for any reason whatsoever (except as Executive's duties as an employee of the Company may require) without the prior written authorization of the CEO, unless such information is in the public domain through no fault of Executive or except as may be required by law or in a judicial or administrative proceeding, in which case Executive will promptly inform the Company in writing of such required disclosure, but in any event at least two business days prior to the disclosure. All written Confidential Information (including, without limitation, in any computer or other electronic format) which comes into Executive's possession during the course of Executive's employment will remain the property of the Company. Unless expressly authorized in writing by the CEO, Executive will not remove any written Confidential Information from the Company's premises, except in connection with the performance of Executive's duties for the Company and in a manner consistent with the Company's policies regarding Confidential 8 Information. Upon termination of employment, Executive agrees immediately to return to the Company all written Confidential Information in Executive's possession. For the purposes of this paragraph, the term "Company" will be deemed to include the Company and its Affiliates. For purposes of this Agreement, "Affiliate" will mean an "affiliate" as defined in Rule 12b-2 of the General Rules and Regulations under the Exchange Act. 15. Non-Compete; Non-Solicit. (a) The Company hereby agrees to pay Executive the amounts described under this Agreement as being expressly conditioned on Executive's undertakings under this paragraph as well as under paragraph 14 above. In exchange for the consideration provided in the preceding sentence, Executive agrees that during the term of Executive's employment with the Company and for a period of two years after Executive's termination of employment for any reason, Executive will not, except with the prior written consent of the CEO, directly or indirectly, engage in Competition. For purposes of this Agreement, Competition means that Executive commences employment with, or provides substantial consulting services to, any pharmaceutical company (except companies where sales from pharmaceutical products constitute less than 20% of total sales). Notwithstanding anything to the contrary herein, Executive's service solely as a member of the board of directors of a company whose annual sales are less than $100 million shall not be deemed to be Competition for purposes of this Agreement. For purposes of the preceding sentence, if a company is a subsidiary of another company, the sales of both companies shall be taken into account. Notwithstanding anything to the contrary herein, Executive's service solely as a member of the board of directors of a company whose annual sales are less than $100 million shall not be deemed to be Competition for purposes of this Agreement. For purposes of the preceding sentence, if a company is a subsidiary of another company, the sales of both companies shall be taken into account. Notwithstanding anything to the contrary herein, the restrictions imposed on Executive under this paragraph 15(a) shall cease to apply for all purposes upon Executive's termination of employment pursuant to paragraphs 11(b) or 11(c) during a CIC Period. (b) The foregoing restrictions will not be construed to prohibit Executive's ownership of less than five percent of any class of securities of any corporation which is engaged in any business having a class of securities registered pursuant to the Securities Exchange Act of 1934 (the "Exchange Act"), provided that such ownership represents a passive investment and that neither Executive nor any group of persons including Executive in any way, either directly or indirectly, manage or exercise control of any such corporation, guarantee any of its financial obligations, otherwise take any part in its business, other than exercising Executive's rights as a shareholder, or seek to do any of the foregoing. (c) Executive further covenants and agrees that during Executive's employment by the Company and for the period of two years thereafter, Executive will not, except with the prior written consent of the CEO, directly or indirectly, solicit, or encourage the solicitation or hiring of, any person who was an employee of the Company at any time during the term of this Agreement by any employer other than the Company for any position as an employee, independent contractor, consultant or otherwise. This covenant will not prevent Executive from giving references and will not preclude the solicitation or hiring of any individual after 12 9 months have elapsed subsequent to the date on which such individual's employment or engagement by the Company has terminated. (d) For the purposes of this paragraph 15, the term "Company" will be deemed to include the Company and its Affiliates. 16. Remedies; Injunction. (a) Executive acknowledges and agrees that the restrictions contained in paragraphs 14 and 15 are reasonable and necessary to protect and preserve the legitimate interests, properties, goodwill and business of the Company, that the Company would not have entered into this Agreement in the absence of such restrictions and that irreparable injury will be suffered by the Company should Executive breach any of the provisions of those paragraphs. Executive represents and acknowledges that (i) Executive has been advised by the Company to consult legal counsel with respect to this Agreement, and (ii) that Executive has had full opportunity, prior to execution of this Agreement, to review thoroughly this Agreement with counsel. (b) Executive further acknowledges and agrees that a breach of any of the restrictions in paragraphs 14 and 15 cannot be adequately compensated by monetary damages. Executive agrees that, unless Executive's employment is terminated pursuant to paragraph 11(b) during a CIC Period (in which case the provisions of this sentence shall not apply), the Company will be entitled to a return of the cash consideration set forth in this Agreement as being conditioned on the covenants contained in paragraph 15 and that all remaining stock options will be forfeited if Executive breaches the provisions of that paragraph and that, in any event, the Company will be entitled to preliminary and permanent injunctive relief, without the necessity of proving actual damages, as well as provable damages and an equitable accounting of all earnings, profits and other benefits arising from any violation of paragraphs 14 or 15, which rights will be cumulative and in addition to any other rights or remedies to which the Company may be entitled. In the event that any of the provisions of paragraphs 14 or 15 should ever be adjudicated to exceed the time, geographic, service, or other limitations permitted by applicable law in any jurisdiction, it is the intention of the parties that the provision will be amended to the extent of the maximum time, geographic, service, or other limitations permitted by applicable law, that such amendment will apply only within the jurisdiction of the court that made such adjudication and that the provision otherwise be enforced to the maximum extent permitted by law. (c) Executive irrevocably and unconditionally (i) agrees that any suit, action or other legal proceeding arising out of paragraphs 14 or 15, including without limitation, any action commenced by the Company for preliminary and permanent injunctive relief and other equitable relief, may be brought in the United States District Court for the District of New Jersey, or if such court does not have jurisdiction or will not accept jurisdiction, in any court of general jurisdiction in Somerset County, New Jersey, (ii) consents to the non-exclusive jurisdiction of any such court in any such suit, action or proceeding, and (iii) waives any objection which Executive may have to the laying of venue of any such suit, action or proceeding in any such court. (d) For the purposes of this paragraph 16, the term "Company" will be deemed to include the Company and its Affiliates. 10 17. Intellectual Property. To the fullest extent permitted by applicable law, all intellectual property (including patents, trademarks, and copyrights) which are made, developed or acquired by Executive in the course of Executive's employment with the Company will be and remain the absolute property of the Company, and Executive shall assist the Company in perfecting and defending its rights to such intellectual property. 18. Indemnification. To the fullest extent permitted by applicable law, the Company will, during and after termination of employment, indemnify Executive (including providing advancement of expenses) for any judgments, fines, amounts paid in settlement and reasonable expenses, including attorneys' fees, incurred by Executive in connection with the defense of any lawsuit or other claim or investigation to which Executive is made, or threatened to be made, a party or witness by reason of being or having been an officer, director or employee of the Company or any of its Affiliates. In addition, Executive will be covered under any directors and officers' liability insurance policy for his acts (or non-acts) as an officer or director of the Company or any of its Affiliates to the extent the Company provides such coverage for its senior executive officers for a period of 5 years following any termination of Executive's employment other than for Cause or for such longer period of limitations that may apply to any claim. 19. Arbitration. Unless other arrangements are agreed to by Executive and the Company, any disputes arising under or in connection with this Agreement, other than a dispute in which the primary relief sought is an equitable remedy such as an injunction, will be resolved by binding arbitration to be conducted pursuant to the National Rules for the Resolution of Employment Disputes of the American Arbitration Association. Costs of the arbitration, including (but not by way of limitation) reasonable attorney's fees of both parties, will be borne by the party which does not prevail in the proceedings. In the event that each party prevails as to certain aspects of the proceedings, the arbitrator(s) or the court will determine an appropriate allocation of costs between the parties. If, however, any dispute arises relating to Executive's rights or obligations as a result of the occurrence of a Section 13(c) Change in Control, the Company shall pay Executive any such costs unless the Company is determined to have substantially prevailed on all material claims. 20. Gross-Up Payment. In addition to any other payments due to Executive under this Agreement, the Company shall pay to Executive any amounts due to Executive under the terms of the Company's Excess Parachute Tax Indemnity Plan. 21. No Set-off; No Mitigation Required. The obligation of the Company to make any payments provided for hereunder and otherwise to perform its obligations hereunder will not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against Executive or others. In no event will Executive be obligated to seek other employment or take other action by way of mitigation of the amounts payable to Executive under any of the provisions of this Agreement, and such amounts will not be reduced (except as otherwise specifically provided herein) whether or not Executive obtain other employment. 22. Payment of Legal Fees. The Company will pay Executive's reasonable legal and financial consulting fees and costs associated with entering into this Agreement up to a maximum of $10,000. 11 23. Corporate Transactions, Impact on Equity Compensation. In the event of any change in the outstanding shares of the Company's Common Stock (including any increase or decrease in such shares) by reason of any stock dividend or split, recapitalization, merger, consolidation, spinoff, combination or exchange of shares or other similar corporate change, or any distributions to common stockholders other than regular cash dividends, the Compensation Committee of the Board may make such substitution or adjustment, if any, as it deems to be equitable, as to the number or kind of shares of Common Stock provided for in this Agreement. 24. Governing Law. This Agreement will be governed by and construed in accordance with the laws of the State of New Jersey. 25. Assignments; Transfers; Effect of Merger. (a) No rights or obligations of the Company under this Agreement may be assigned or transferred by the Company except that such rights or obligations may be assigned or transferred pursuant to a merger or consolidation in which the Company is not the continuing entity, or pursuant to the sale or transfer of all or substantially all of the assets of the Company, provided that the assignee or transferee is the successor to all or substantially all of the assets of the Company. (b) This Agreement will not be terminated by any merger, consolidation or transfer of assets of the Company referred to above. In the event of any such merger, consolidation or transfer of assets, the provisions of this Agreement will be binding upon the surviving or resulting corporation or the person or entity to which such assets are transferred. (c) The Company agrees that concurrently with any merger, consolidation or transfer of assets referred to above, it will cause any successor or transferee unconditionally to assume, either contractually or as a matter of law, all of the obligations of the Company hereunder. (d) This Agreement will inure to the benefit of, and be enforceable by or against, Executive or Executive's personal or legal representatives, executors, administrators, successors, heirs, distributes, designees and legatees. None of Executive's rights or obligations under this Agreement may be assigned or transferred by Executive other than Executive's rights to compensation and benefits, which may be transferred only by will or operation of law. If Executive should die while any amounts or benefits have been accrued by Executive but not yet paid as of the date of Executive's death and which would be payable to Executive hereunder had Executive continued to live, all such amounts and benefits unless otherwise provided herein will be paid or provided in accordance with the terms of this Agreement to such person or persons appointed in writing by Executive to receive such amounts or, if no such person is so appointed, to Executive's estate. 12 26. Notices and other Communications. All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: Pharmacia Corporation 100 Route 206 North Peapack, New Jersey 07977 Telecopy Number: (908) 901-7700 Attention: Phillip Needleman If to the Company: Pharmacia Corporation 100 Route 206 North Peapack, New Jersey 07977 Telecopy Number: (908) 901-7700 Attention: Senior Vice President Human Resources or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. 27. Modification. No provisions of this Agreement may be waived, modified or discharged unless such waiver, modification or discharge is agreed to in writing signed by both Executive and the CEO. No waiver by any party hereto at any time of any breach by any other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party will be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. 28. Entire Agreement. This Agreement sets forth the entire agreement of the parties hereto in respect of the subject matter contained herein and supersedes all prior agreements, promises, covenants, arrangements, communications, representations or warranties, whether oral or written, by any officer, employee or representative of any party hereto in respect of the subject matter contained herein. 13 29. PHARMACIA CORPORATION /s/ Philip Needleman /s/ Fred Hassan - ---------------------------------------- ----------------------------------- Philip Needleman, Ph.D. By: Fred Hassan Title: Chief Executive Officer July 12, 2002 July 12, 2002 - ---------------------------------------- ----------------------------------- Date Date 14 EX-10 5 ex10-3.txt EXHIBIT 10(3) EXHIBIT 10(3) AMENDED AND RESTATED EMPLOYMENT AGREEMENT This Agreement is made by and between Pharmacia Corporation, a Delaware corporation (the "Company"), and Carrie Cox (the `Executive"). 1. Duties and Scope of Employment. (a) Position; Duties. During the Employment Term (as defined in paragraph 2), the Company will employ Executive as Executive Vice President and President, Global Pharmaceutical Business (GPB) of the Company or in such other substantially equivalent position requested by the Company's Chief Executive Officer ("CEO") for which the Executive is qualified by education, training, and experience. Executive will serve as an Officer of the Company, and will initially report to the CEO. (b) Obligations. During the Employment Term, Executive will devote substantially all of her business efforts and time to the Company. Executive agrees, during the Employment Term, not to actively engage in any other employment, occupation or consulting activity for any direct or indirect remuneration without the prior approval of the CEO; provided, however, that Executive may (i) serve on the board of directors of other companies (subject to the reasonable approval of the CEO) and boards of trade associations or charitable organizations; (ii) engage in charitable activities and community affairs; or (iii) manage Executive's personal investments and affairs, as long as such activities do not materially interfere with Executive's duties and responsibilities with the Company. 2. Employment Term. The Company hereby agrees to employ Executive and Executive hereby accepts employment, in accordance with the terms and conditions of this Agreement, commencing on June 1, 2000 (the "Employment Commencement Date"). The period of Executive's employment under this Agreement will be referred to as the "Employment Term." Subject to the Company's obligation to provide severance benefits as may be specified in this Agreement, Executive and the Company acknowledge that this employment relationship may be terminated at any time and for any or no cause or reason, at the option of either the Company or Executive. 3. Cash Compensation. During the Employment Term, the Company will pay Executive the following as cash compensation for services to the Company: (a) Base Salary. As of the Employment Commencement Date, Executive's annualized base salary will be $600,000 and will be subject to annual review pursuant to the Company's normal review policy for other similarly situated senior executives of the Company. (b) Variable Compensation. Executive will also be eligible to participate in the Company's annual incentive plan ("Incentive Plan") at a level determined by the Compensation Committee of the Board of Directors of the Company (the "Board" (such committee hereafter being referred to as the "Compensation Committee") to be appropriate based on Executive's position, job performance and Company policy. For the Year 2000, Executive's target under the Incentive Plan will be 75% of Executive's base salary. Payment of incentive compensation, if the performance criteria determined by the Compensation Committee are met, will generally be made in March of the year following the incentive plan year, unless Executive elects to defer payment pursuant to an applicable plan of the Company. 4. Equity Compensation. During the Employment Term, Executive will be eligible to participate in the Company's equity compensation plans, in accordance with the terms of such plans and any applicable grants (except as provided herein), at a level determined by the Compensation Committee to be appropriate based on the Company's equity compensation policy. Executive will receive a grant of 125,000 stock options to purchase shares of the Company's common stock pursuant to the terms of the Company's long-term incentive plan. The date of the stock option grant will be June 1, 2000. Executive will receive a grant of 100,000 restricted shares or share units under the Company's Founders Performance Contingent Shares Program, which shall vest according to the terms of the Program based on the Company's total shareholder return ranking as compared to a designated peer group and the Company's targeted five year compounded shareholder return. Except as otherwise provided in the Founders Performance Contingent Shares Program, Executive must be employed by the Company on December 31, 2004 in order for the restricted shares or share units to vest. Notwithstanding the terms of any specific grant, stock options not yet vested or exercisable will nevertheless be fully vested and exercisable immediately upon Executive's death, disability, involuntarily termination of employment by the Company other than for Cause (as defined below), or voluntary termination of employment for Good Reason within six months after learning of the event constituting Good Reason (as defined below), provided, in the case of employment termination, Executive does not enter into Competition (as defined below) with the Company within two years after Executive's employment is terminated. Notwithstanding the foregoing, in no event will this provision cause any stock options to become vested or exercisable prior to the first anniversary of the stock option grant date. 5. Employee Benefits. During the Employment Term, Executive will, to the extent eligible, be entitled to participate in all employee welfare and retirement benefit plans and programs provided by the Company to its senior executives in accordance with the terms of those plans or programs as they may be modified from time to time. Executive will be entitled to post-retirement welfare benefits as are made available by the Company to its senior executive officers at the time of Executive's retirement, provided that for this purpose Executive's period of employment shall be deemed to be the period necessary to obtain the maximum level of such benefits. In the event that adverse tax consequences may result if medical benefits are provided to Executive directly, the Company will pay Executive the amount necessary to purchase the coverage, adjusted for taxes, on an after-tax basis. 6. Financial Planning Assistance. During the Employment Term, Executive will be eligible to participate in the Company's Financial Planning Assistance program for senior executives. Executive will be entitled to up to $10,000 for the first year of financial planning assistance, and $7,000 each year thereafter, except that if Executive participated in this program 2 at the time it was provided by Pharmacia & Upjohn, Executive will receive $7,000 for each year of participation. 7. Business Expenses. During the Employment Term, and upon submission of appropriate documentation in accordance with its policies in effect from time to time, the Company will pay or reimburse Executive for all reasonable business expenses that Executive incurs in performing Executive's duties under this Agreement, including, but not limited to, travel, entertainment, professional dues and subscriptions. 8. Relocation. Executive acknowledges that the Company may at any time relocate her place of employment to such location as may at that time constitute the Company's principal offices. During the Employment Term, Executive will be entitled to relocation benefits pursuant to the Company's relocation benefit program. 9. Supplemental Retirement Benefit. During the Employment Term, Executive will be eligible to participate in the Key Executive Pension Plan. Executive's total pension benefit from the Company will be no less than the benefit to which Executive would have been entitled under the terms of her prior employment agreement dated August 26, 1997. 10. Release. (a) In consideration of the agreements and undertakings of the Company set forth herein, and intending to be legally bound hereby, Executive, on behalf of herself, her spouse and her dependents, heirs, executors, administrators and assigns, past and present, and each of them (hereinafter collectively referred to as "Releasors"), agrees to release and forever discharge the Company, together with its Affiliates, and its or their officers, directors, employees, agents, predecessors, partners, successors, assigns, heirs, executors, insurers and administrators (hereinafter "Company Releasees") from any and all rights, claims, actions and causes of action of any nature whatsoever, cognizable at law or equity, which Releasors now have or claim, or might hereafter have or claim, against the Company Releasees up to the date of this Agreement relating to Executive's employment by the Company and its Affiliates, including, without limitation, claims arising under the Age Discrimination in Employment Act, 29 U.S.C.'SS'621 et seq.; the Older Workers Benefit Protection Act, 29 U.S.C. 'SS' 621 et seq.; Title VII of the Civil Rights Act of 1964, as amended, 42 U.S.C. 'SS' 2000e et seq.; the Employee Retirement Income Security Act of 1974, 29 U.S.C.'SS'1001 et seq.; the Americans With Disabilities Act, 42 U.S.C. 'SS' 12101 et seq.; the Family and Medical Leave Act, 29 U.S.C.'SS'2601 et seq.; any anti-discrimination statutes; any claims for breach of express or implied contract; any claims for wrongful discharge or violation of public policy; any claims under any federal, state or local laws of any jurisdiction; and any common law claims now or hereafter recognized; as well as all claims for counsel fees and costs. (b) Nothing herein shall be construed to negate the provisions of this Agreement or Executive's right to enforce the provisions of this Agreement. 11. Review and Consideration of Release. Executive certifies and acknowledges: (a) that she has read the terms of this Agreement, and she understands its terms and effects, including the fact that she has agreed to RELEASE AND FOREVER DISCHARGE 3 Company Releasees from any legal or administrative action arising out of her employment with the Company, and the terms and conditions of that employment relationship, up to the date of this Agreement; (b) that she has signed this Agreement voluntarily and knowingly in exchange for the consideration provided to her and described herein. She acknowledges that she would not otherwise be entitled to the consideration provided and that the consideration provided as a result of signing this Agreement is adequate and satisfactory; (c) that she has been advised through this document that the signing of this Agreement does not waive rights or claims that may arise after the date it is executed; (d) that she has been advised through this writing to consult with an attorney concerning this Agreement prior to signing this Agreement; (e) that she has been advised that she has the right to consider this Agreement for a period of 21 days from receipt, and that she has signed on the date indicated below after concluding that this Agreement is satisfactory to her; (f) that neither the Company, nor any of its agents, representatives, employees, or attorneys has made any representations to her concerning the terms or effects of this Agreement other than those contained herein; and (g) that she understands that she has the right to revoke this Agreement within 7 days after its execution by giving written notice to the Company, and that this Agreement will not become effective or enforceable until the revocation period has expired. 12. Termination of Employment. (a) Notice of Termination. Any termination by the Company or by the Executive shall be communicated by Notice of Termination to the other party hereto given in accordance with Section 27. For purposes of this Agreement, a "Notice of Termination" means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated and (iii) specifies the date of termination which date shall not be less than fifteen (15) (thirty (30), if such termination is by the Company for Disability) nor more than sixty (60) days after the giving of such notice. The failure by the Executive or the Company to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of the Executive or the Company, respectively, hereunder or preclude the Executive or the Company, respectively, from asserting such fact or circumstance in enforcing the Executive's or the Company's rights hereunder. (b) Death or Disability. Executive's employment will terminate automatically upon Executive's death. The Company may terminate Executive's employment for disability in the event Executive has been unable, due to physical or mental incapacity, to perform Executive's material duties under this Agreement for six consecutive months (or such longer period that may 4 be required by applicable law). In the event Executive's employment terminates as a result of death or disability, then: (i) Subject to subsection 12(e) below, all unvested or unexercisable equity compensation will become fully vested and exercisable, and any stock options may be exercised after Executive's termination of employment in accordance with the terms and conditions of the applicable grant documentation; (ii) Except as otherwise provided herein, Executive will forfeit Executive's right to receive any salary, incentive compensation, equity compensation, or other compensation that has not been fully earned at the time Executive's employment terminates; provided, however, Executive will be entitled to receive any awards which become fully vested upon Executive's death or disability under the Company's Cash Long-Term Incentive Plan and Long-Term Share Unit Performance Plan and any other benefits or amounts accrued but not yet paid as of the date of termination; (iii) Executive will receive any other amounts earned, accrued or owing to Executive under the plans and programs of the Company; (iv) If, however, the Executive's employment is terminated by reason of death after a Notice of Termination has been given either by the Executive for Good Reason or by the Company other than for Cause, the Company shall also pay to the Executive's legal representatives in one lump sum the amounts specified in Sections 12(d)(i),(iv) and (v). (c) Involuntary Termination for Cause or Voluntary Termination Other Than for Good Reason. If Executive is involuntarily terminated by the Company for Cause or Executive voluntarily terminates her employment other than for Good Reason within six months after learning of the event constituting Good Reason, then: (i) All unvested or unexercisable equity compensation will be cancelled upon Executive's termination of employment; (ii) Executive will forfeit Executive's right to receive any salary, incentive compensation, equity compensation, or other compensation that has not been fully earned at the time Executive's employment terminates; provided, however, Executive will be entitled to receive any benefits or amounts accrued but not yet paid as of the date of termination; and (iii) Executive will receive any other amounts earned, accrued or owing to Executive under the plans and programs of the Company. (d) Involuntary Termination Other Than for Cause or Voluntary Termination for Good Reason. If Executive is involuntarily terminated by the Company other than for Cause or Executive voluntarily terminates her employment for Good Reason within six months after learning of the event constituting Good Reason; then, as liquidated damages and in lieu of any other damages or compensation under this Agreement or otherwise, Executive will receive the payments or other benefits described in this paragraph; provided (A) Executive does not enter into Competition (as defined below) with the Company for a period of two years following the termination of Executive's employment, and (B) Executive executes, and does not revoke, a 5 written waiver and release, in a form prescribed by the Company, of all claims against the Company and related parties arising out of the Executive's employment or the termination of that employment , except that the condition specified in Clause (A) shall not apply if such termination occurs during the two-year period after the consummation of a transaction approved by the stockholders of the Company and described in Section 13(c) or (d) of the Company's 2001 Long-Term Incentive Plan ("LTIP"), such event being hereafter referred to as a "Section 13(c) Change in Control") (and such two-year period being hereafter referred to as the "CIC Period"): (i) Executive will receive a lump sum severance payment, payable within 60 days after termination of Executive's employment, equal to three years' base salary and annual target incentive compensation (calculated using the amount of Executive's highest annual base salary and highest annual target incentive compensation within three years prior to Executive's date of termination) provided, however, if the termination occurs during a CIC Period such lump sum severance payment shall be payable within 10 days after the termination of Executive's employment; (ii) Executive will have Executive's period of employment service used to calculate retirement extended as if Executive had worked an additional three years, and the compensation used to calculate Executive's retirement benefits will be determined as if Executive had continued to receive for an additional three years salary and incentive compensation equal to the highest annual base salary and highest annual incentive compensation Executive received within three years prior to Executive's date of termination (such amounts to be payable from a non-qualified, supplemental retirement plan); (iii) Subject to subsection 12(e) below, Executive will be entitled to exercise, in accordance with their terms, any remaining stock options that had been granted prior to Executive's termination (all of which will become vested under such circumstances) for the maximum period permitted under the terms of the grant; (iv) Executive will receive a pro-rated portion of her target annual incentive compensation award in or around March of the year following Executive's termination based on the number of months (rounded to the next highest number for a partial month) of the year elapsed prior to Executive's termination provided, however, that if the termination occurs during a CIC Period any such awards which have become vested under the terms of the Annual Incentive Plan or the Operating Committee Incentive Plan shall be payable within 10 days after the termination of Executive's employment; (v) Executive and Executive's dependents will continue to participate (with the same level of coverage) for three years in all medical, dental, hospitalization, accident, disability, life insurance and any other benefit plans of the Company on the same terms as in effect immediately prior to Executive's termination unless changed for senior executives generally; provided, however, that such benefits will be offset to the extent that Executive or Executive's dependents receive benefits from another source (in such event, Executive agrees to provide reasonable notice of the receipt of benefits from another source); and, provided that in the event adverse tax consequences may result if medical benefits are provided to Executive directly, the Company 6 will pay Executive the amount necessary to purchase the coverage, adjusted for taxes, on an after-tax basis; (vi) Executive will be entitled to outplacement services, at the expense of the Company, from a provider selected by Executive, subject to a maximum expense of $25,000; (vii) Executive will be entitled to participate in the Company's Financial Planning Assistance program for three (3) consecutive years from the date of termination in accordance with the policies of the Company as in effect immediately prior to the Change in Control (as such term is defined in the LTIP); and (viii) Executive will receive any other amounts earned, accrued or owing to Executive under the plans and programs of the Company. (e) Notwithstanding the foregoing, in no event will this paragraph cause any stock options to become vested or exercisable prior to the first anniversary of the stock option grant, unless Executive's termination occurs during a CIC Period, in which case such stock options shall become vested and exercisable and the limitations and restrictions set forth in paragraph 4 shall not apply. 13. Cause; Good Reason. (a) For purposes of this Agreement, "Cause" means: (i) a material breach by Executive of Executive's duties and responsibilities (other than as a result of incapacity due to physical or mental illness) which is demonstrably willful and deliberate on the part of Executive, which is committed in bad faith or without reasonable belief that such breach is in the best interests of the Company, and which is not remedied within 30 days after receipt of written notice from the Company specifying such breach; or (ii) Executive's conviction of a felony which is materially and demonstrably injurious to the Company as determined in the sole discretion of the Board. provided that if the Executive's employment is terminated during a CIC Period the cessation of Executive's employment shall not be deemed for Cause unless and until the Company has delivered to Executive a copy of a resolution duly adopted by not less than 75% of the entire Board (excluding Executive if Executive is a Board member) at a meeting of the Board called and held for such purpose (after reasonable notice to Executive and an opportunity for Executive, together with counsel, to be heard before the Board), finding that in the good faith opinion of the Board an event set forth above has occurred and specifying the particulars thereof in detail. (b) For purposes of this Agreement, "Good Reason" means: (i) Executive's rate of annual base salary, the target amount of Executive's annual cash incentive bonus or, if applicable, any other benefits under any long-term incentive plan is reduced in a manner that is not applied proportionately to all other senior executive officers of the Company, including the Chief Executive Officer; 7 (ii) the Company fails to retain Executive as an Executive Vice President of the Company; (iii) the Company fails to retain Executive as President, Global Business Management or another substantially equivalent position for which the Executive is qualified by education, training and experience; (iv) during a CIC Period, the Company assigns to the Executive any duties materially inconsistent with the Executive's title, position, status, reporting relationships, authority, duties or responsibilities as they existed immediately prior to such CIC Period, or any other action by the Company which results in a diminution in such title, position, status, reporting relationships, authority, duties or responsibilities, other than an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive; (v) a successor, or any subsidiary or affiliate thereof, to the Company fails to assume this Agreement; (vi) the Company terminates the Executive's employment other than as expressly permitted by this Agreement; (vii) during a CIC Period, the Company fails to keep in effect any employee benefit plan in which Executive is participating immediately prior to such CIC Period or provide benefits to Executive that are substantially equivalent; or (viii) during a CIC Period, Executive is required to relocate more than fifty (50) miles within the state where the Executive maintains his office immediately prior to such relocation or Executive's principal office is relocated to a different state or Executive is required to materially increase his business travel. 14. Directorships, Other Offices. In the event of termination of employment, Executive will immediately, unless otherwise requested by the Company's Board, resign from all directorships, trusteeships, other offices and employment held at that time with the Company or any of its Affiliates. 15. Confidentiality. Executive recognizes and acknowledges that by reason of Executive's employment by and service to the Company, Executive will have access to proprietary or confidential information, technical data, trade secrets or know-how relating to the Company, which may include, but is not limited to, market and product research and plans, markets, products, services, customer lists and customers, advertising, software, developments, inventions, processes, formulas, technology, designs, drawings, engineering, marketing and sales techniques, strategies and programs, distribution methods and systems, sales and profit figures, pricing and discount plans, financial and other business information (hereafter, "Confidential Information"). Executive acknowledges that such Confidential Information is a valuable and unique asset of the Company and covenants that Executive will not, either during employment or after the termination of employment, disclose any such Confidential Information to any person for any reason whatsoever (except as Executive's duties as an employee of the Company may require) without the prior written authorization of the CEO, unless such information is in the 8 public domain through no fault of Executive or except as may be required by law or in a judicial or administrative proceeding, in which case Executive will promptly inform the Company in writing of such required disclosure, but in any event at least two business days prior to the disclosure. All written Confidential Information (including, without limitation, in any computer or other electronic format) which comes into Executive's possession during the course of Executive's employment will remain the property of the Company. Unless expressly authorized in writing by the CEO, Executive will not remove any written Confidential Information from the Company's premises, except in connection with the performance of Executive's duties for the Company and in a manner consistent with the Company's policies regarding Confidential Information. Upon termination of employment, Executive agrees immediately to return to the Company all written Confidential Information in Executive's possession. For the purposes of this paragraph, the term "Company" will be deemed to include the Company and its Affiliates. For purposes of this Agreement, "Affiliate" will mean an "affiliate" as defined in Rule 12b-2 of the General Rules and Regulations under the Exchange Act. 16. Non-Compete; Non-Solicit. (a) The Company hereby agrees to pay Executive the amounts described under this Agreement as being expressly conditioned on Executive's undertakings under this paragraph as well as under paragraph 15 above. In exchange for the consideration provided in the preceding sentence, Executive agrees that during the term of Executive's employment with the Company and for a period of two years after Executive's termination of employment for any reason, Executive will not, except with the prior written consent of the CEO, directly or indirectly, engage in Competition. For purposes of this Agreement, Competition means that Executive commences employment with, or provides substantial consulting services to, any pharmaceutical company (except companies where sales from pharmaceutical products constitute less than 20% of total sales). Notwithstanding anything to the contrary herein, Executive's service solely as a member of the board of directors of a company whose annual sales are less than $100 million shall not be deemed to be Competition for purposes of this Agreement. For purposes of the preceding sentence, if a company is a subsidiary of another company, the sales of both companies shall be taken into account. Notwithstanding anything to the contrary herein, the restrictions imposed on Executive under this paragraph 16(a) shall cease to apply for all purposes upon Executive's termination of employment pursuant to paragraphs 12(c) or 12(d) during a CIC Period. (b) The foregoing restrictions will not be construed to prohibit Executive's ownership of less than five percent of any class of securities of any corporation which is engaged in any business having a class of securities registered pursuant to the Securities Exchange Act of 1934 (the "Exchange Act"), provided that such ownership represents a passive investment and that neither Executive nor any group of persons including Executive in any way, either directly or indirectly, manage or exercise control of any such corporation, guarantee any of its financial obligations, otherwise take any part in its business, other than exercising Executive's rights as a shareholder, or seek to do any of the foregoing. (c) Executive further covenants and agrees that during Executive's employment by the Company and for the period of two years thereafter, Executive will not, except with the prior 9 written consent of the CEO, directly or indirectly, solicit, or encourage the solicitation or hiring of, any person who was an employee of the Company at any time during the term of this Agreement by any employer other than the Company for any position as an employee, independent contractor, consultant or otherwise. This covenant will not prevent Executive from giving references and will not preclude the solicitation or hiring of any individual after 12 months have elapsed subsequent to the date on which such individual's employment or engagement by the Company has terminated. (d) For the purposes of this paragraph 16, the term "Company" will be deemed to include the Company and its Affiliates. 17. Remedies; Injunction. (a) Executive acknowledges and agrees that the restrictions contained in paragraphs 15 and 16 are reasonable and necessary to protect and preserve the legitimate interests, properties, goodwill and business of the Company, that the Company would not have entered into this Agreement in the absence of such restrictions and that irreparable injury will be suffered by the Company should Executive breach any of the provisions of those paragraphs. Executive represents and acknowledges that (i) Executive has been advised by the Company to consult legal counsel with respect to this Agreement, and (ii) that Executive has had full opportunity, prior to execution of this Agreement, to review thoroughly this Agreement with counsel. (b) Executive further acknowledges and agrees that a breach of any of the restrictions in paragraphs 15 and 16 cannot be adequately compensated by monetary damages. Executive agrees that, unless Executive's employment is terminated pursuant to paragraph 12(d) during a CIC Period (in which case the provisions of this sentence shall not apply), the Company will be entitled to a return of the cash consideration set forth in this Agreement as being conditioned on the covenants contained in paragraph 16 and that all remaining stock options will be forfeited if Executive breaches the provisions of that paragraph and that, in any event, the Company will be entitled to preliminary and permanent injunctive relief, without the necessity of proving actual damages, as well as provable damages and an equitable accounting of all earnings, profits and other benefits arising from any violation of paragraphs 15 or 16, which rights will be cumulative and in addition to any other rights or remedies to which the Company may be entitled. In the event that any of the provisions of paragraphs 15 or 16 should ever be adjudicated to exceed the time, geographic, service, or other limitations permitted by applicable law in any jurisdiction, it is the intention of the parties that the provision will be amended to the extent of the maximum time, geographic, service, or other limitations permitted by applicable law, that such amendment will apply only within the jurisdiction of the court that made such adjudication and that the provision otherwise be enforced to the maximum extent permitted by law. (c) Executive irrevocably and unconditionally (i) agrees that any suit, action or other legal proceeding arising out of paragraphs 15 or 16, including without limitation, any action commenced by the Company for preliminary and permanent injunctive relief and other equitable relief, may be brought in the United States District Court for the District of New Jersey, or if such court does not have jurisdiction or will not accept jurisdiction, in any court of general jurisdiction in Somerset County, New Jersey, (ii) consents to the non-exclusive jurisdiction of any such court in any such suit, action or proceeding, and (iii) waives any objection which 10 Executive may have to the laying of venue of any such suit, action or proceeding in any such court. (d) For the purposes of this paragraph 17, the term "Company" will be deemed to include the Company and its Affiliates. 18. Intellectual Property. To the fullest extent permitted by applicable law, all intellectual property (including patents, trademarks, and copyrights) which are made, developed or acquired by Executive in the course of Executive's employment with the Company will be and remain the absolute property of the Company, and Executive shall assist the Company in perfecting and defending its rights to such intellectual property. 19. Indemnification. To the fullest extent permitted by applicable law, the Company will, during and after termination of employment, indemnify Executive (including providing advancement of expenses) for any judgments, fines, amounts paid in settlement and reasonable expenses, including attorneys' fees, incurred by Executive in connection with the defense of any lawsuit or other claim or investigation to which Executive is made, or threatened to be made, a party or witness by reason of being or having been an officer, director or employee of the Company or any of its subsidiaries or affiliates. In addition, Executive will be covered under any directors and officers' liability insurance policy for her acts (or non-acts) as an officer or director of the Company or any of its subsidiaries or affiliates to the extent the Company provides such coverage for its senior executive officers for a period of 5 years following any termination of Executive's employment other than for Cause or for such longer period of limitations that may apply to any claim. 20. Arbitration. Unless other arrangements are agreed to by Executive and the Company, any disputes arising under or in connection with this Agreement, other than a dispute in which the primary relief sought is an equitable remedy such as an injunction, will be resolved by binding arbitration to be conducted pursuant to the National Rules for the Resolution of Employment Disputes of the American Arbitration Association. Costs of the arbitration, including (but not by way of limitation) reasonable attorney's fees of both parties, will be borne by the party which does not prevail in the proceedings. In the event that each party prevails as to certain aspects of the proceedings, the arbitrator(s) or the court will determine an appropriate allocation of costs between the parties. If, however, any dispute arises relating to Executive's rights or obligations as a result of the occurrence of a Section 13(c) Change in Control, the Company shall pay Executive any such costs unless the Company is determined to have substantially prevailed on all material claims. 21. Gross-Up Payment. In addition to any other payments due to Executive under this Agreement, the Company shall pay to Executive any amounts due to Executive under the terms of the Company's Excess Parachute Tax Indemnity Plan. 22. No Set-off; No Mitigation Required. The obligation of the Company to make any payments provided for hereunder and otherwise to perform its obligations hereunder will not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against Executive or others. In no event will Executive be obligated to seek other employment or take other action by way of mitigation of the amounts payable to 11 Executive under any of the provisions of this Agreement, and such amounts will not be reduced (except as otherwise specifically provided herein) whether or not Executive obtain other employment. 23. Payment of Legal Fees. The Company will pay Executive's reasonable legal and financial consulting fees and costs associated with entering into this Agreement up to a maximum of $10,000. 24. Corporate Transactions, Impact on Equity Compensation. In the event of any change in the outstanding shares of the Company's Common Stock (including any increase or decrease in such shares) by reason of any stock dividend or split, recapitalization, merger, consolidation, spinoff, combination or exchange of shares or other similar corporate change, or any distributions to common stockholders other than regular cash dividends, the Compensation Committee of the Board may make such substitution or adjustment, if any, as it deems to be equitable, as to the number or kind of shares of Common Stock provided for in this Agreement. 25. Governing Law. This Agreement will be governed by and construed in accordance with the laws of the State of New Jersey. 26. Assignments; Transfers; Effect of Merger. (a) No rights or obligations of the Company under this Agreement may be assigned or transferred by the Company except that such rights or obligations may be assigned or transferred pursuant to a merger or consolidation in which the Company is not the continuing entity, or pursuant to the sale or transfer of all or substantially all of the assets of the Company, provided that the assignee or transferee is the successor to all or substantially all of the assets of the Company. (b) This Agreement will not be terminated by any merger, consolidation or transfer of assets of the Company referred to above. In the event of any such merger, consolidation or transfer of assets, the provisions of this Agreement will be binding upon the surviving or resulting corporation or the person or entity to which such assets are transferred. (c) The Company agrees that concurrently with any merger, consolidation or transfer of assets referred to above, it will cause any successor or transferee unconditionally to assume, either contractually or as a matter of law, all of the obligations of the Company hereunder. (d) This Agreement will inure to the benefit of, and be enforceable by or against, Executive or Executive's personal or legal representatives, executors, administrators, successors, heirs, distributes, designees and legatees. None of Executive's rights or obligations under this Agreement may be assigned or transferred by Executive other than Executive's rights to compensation and benefits, which may be transferred only by will or operation of law. If Executive should die while any amounts or benefits have been accrued by Executive but not yet paid as of the date of Executive's death and which would be payable to Executive hereunder had Executive continued to live, all such amounts and benefits unless otherwise provided herein will be paid or provided in accordance with the terms of this Agreement to such person or persons appointed in writing by Executive to receive such amounts or, if no such person is so appointed, to Executive's estate. 12 27. Notices and other Communications. All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: Pharmacia Corporation 100 Route 206 North Peapack, New Jersey 07977 Telecopy Number: (908) 901-7700 Attention: Carrie Cox If to the Company: Pharmacia Corporation 100 Route 206 North Peapack, New Jersey 07977 Telecopy Number: (908) 901-7700 Attention: Senior Vice President Human Resources or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. 28. Modification. No provisions of this Agreement may be waived, modified or discharged unless such waiver, modification or discharge is agreed to in writing signed by both Executive and the CEO. No waiver by any party hereto at any time of any breach by any other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party will be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. 29. Entire Agreement. This Agreement sets forth the entire agreement of the parties hereto in respect of the subject matter contained herein and supersedes all prior agreements, promises, covenants, arrangements, communications, representations or warranties, whether oral or written, by any officer, employee or representative of any party hereto in respect of the subject matter contained herein. 13 PHARMACIA CORPORATION /s/ Carrie Cox /s/ Fred Hassan - ----------------------------- ------------------------------- Carrie Cox By: Fred Hassan Title: Chief Executive Officer July 18, 2002 July 18, 2002 - ----------------------------- ------------------------------- Date Date 14 EX-10 6 ex10-4.txt EXHIBIT 10(4) EXHIBIT 10(4) AMENDED AND RESTATED EMPLOYMENT AGREEMENT This Agreement is made by and between Pharmacia Corporation, a Delaware corporation (the "Company"), and Goran Ando, M.D. (the "Executive"). 1. Duties and Scope of Employment. (a) Position; Duties. During the Employment Term (as defined in paragraph 2), the Company will employ Executive as Executive Vice President and President, Research and Development of the Company or in such other substantially equivalent position requested by the Company's Chief Executive Officer ("CEO") for which the Executive is qualified by education, training, and experience. Initially, Executive will also have responsibility for Research and Development, Licensing, and Business Development. Executive will serve as an Officer of the Company, and will initially report to the CEO with respect to other designated responsibilities. (b) Obligations. During the Employment Term, Executive will devote substantially all of his business efforts and time to the Company. Executive agrees, during the Employment Term, not to actively engage in any other employment, occupation or consulting activity for any direct or indirect remuneration without the prior approval of the CEO; provided, however, that Executive may (i) serve on the board of directors of other companies (subject to the reasonable approval of the CEO) and boards of trade associations or charitable organizations; (ii) engage in charitable activities and community affairs; or (iii) manage Executive's personal investments and affairs, as long as such activities do not materially interfere with Executive's duties and responsibilities with the Company. 2. Employment Term. The Company hereby agrees to employ Executive and Executive hereby accepts employment, in accordance with the terms and conditions of this Agreement, commencing on June 1, 2000 (the "Employment Commencement Date"). The period of Executive's employment under this Agreement will be referred to as the "Employment Term." Subject to the Company's obligation to provide severance benefits as may be specified in this Agreement, Executive and the Company acknowledge that this employment relationship may be terminated at any time and for any or no cause or reason, at the option of either the Company or Executive. 3. Cash Compensation. During the Employment Term, the Company will pay Executive the following as cash compensation for services to the Company: (a) Base Salary. As of the Employment Commencement Date, Executive's annualized base salary will be $733,430 and will be subject to annual review pursuant to the Company's normal review policy for other similarly situated senior executives of the Company. (b) Variable Compensation. Executive will also be eligible to participate in the Company's annual incentive plan ("Incentive Plan") at a level determined by the Compensation Committee of the Board of Directors of the Company (the "Board") (such committee hereafter being referred to as the "Compensation Committee") to be appropriate based on Executive's position, job performance and Company policy. For the Year 2000, Executive's target under the Incentive Plan will be 70% of Executive's base salary. Payment of incentive compensation, if the performance criteria determined by the Compensation Committee are met, will generally be made in March of the year following the incentive plan year, unless Executive elects to defer payment pursuant to an applicable plan of the Company. 4. Equity Compensation. During the Employment Term, Executive will be eligible to participate in the Company's equity compensation plans, in accordance with the terms of such plans and any applicable grants (except as provided herein), at a level determined by the Compensation Committee to be appropriate based on the Company's equity compensation policy. Executive will receive a grant of 125,000 stock options to purchase shares of the Company's common stock pursuant to the terms of the Company's long-term incentive plan. The date of the stock option grant will be June 1, 2000. Executive will receive a grant of 100,000 restricted shares or share units under the Company's Founders Performance Contingent Shares Program, which shall vest according to the terms of the Program based on the Company's total shareholder return ranking as compared to a designated peer group and the Company's targeted five year compounded shareholder return. Except as otherwise provided in the Founders Performance Contingent Shares Program, Executive must be employed by the Company on December 31, 2004 in order for the restricted shares or share units to vest. Notwithstanding the terms of any specific grant, stock options not yet vested or exercisable will nevertheless be fully vested and exercisable immediately upon Executive's death, disability, involuntarily termination of employment by the Company other than for Cause (as defined below), or voluntary termination of employment for Good Reason within six months after learning of the event constituting Good Reason (as defined below), provided, in the case of employment termination, Executive does not enter into Competition (as defined below) with the Company within two years after Executive's employment is terminated. Notwithstanding the foregoing, in no event will this provision cause any stock options to become vested or exercisable prior to the first anniversary of the stock option grant date. 5. Employee Benefits. During the Employment Term, Executive will, to the extent eligible, be entitled to participate in all employee welfare and retirement benefit plans and programs provided by the Company to its senior executives in accordance with the terms of those plans or programs as they may be modified from time to time. Executive will be entitled to post-retirement welfare benefits as are made available by the Company to its senior executive officers at the time of Executive's retirement, provided that for this purpose Executive's period of employment shall be deemed to be the period necessary to obtain the maximum level of such benefits. In the event that adverse tax consequences may result if medical benefits are provided to Executive directly, the Company will pay Executive the amount necessary to purchase the coverage, adjusted for taxes, on an after-tax basis. 6. Financial Planning Assistance. During the Employment Term, Executive will be eligible to participate in the Company's Financial Planning Assistance program for senior executives. Executive will be entitled to up to $10,000 for the first year of financial planning 2 assistance, and $7,000 each year thereafter, except that if Executive participated in this program at the time it was provided by Pharmacia & Upjohn, Executive will receive $7,000 for each year of participation. 7. Business Expenses. During the Employment Term, and upon submission of appropriate documentation in accordance with its policies in effect from time to time, the Company will pay or reimburse Executive for all reasonable business expenses that Executive incurs in performing Executive's duties under this Agreement, including, but not limited to, travel, entertainment, professional dues and subscriptions. 8. Relocation. Executive acknowledges that the Company may at any time relocate his place of employment to such location as may at that time constitute the Company's principal offices. During the Employment Term, Executive will be entitled to relocation benefits pursuant to the Company's relocation benefit program. 9. Supplemental Retirement Benefit. During the Employment Term, Executive will be eligible to participate in the Key Executive Pension Plan. 10. Release. (a) In consideration of the agreements and undertakings of the Company set forth herein, and intending to be legally bound hereby, Executive, on behalf of himself, his spouse and his dependents, heirs, executors, administrators and assigns, past and present, and each of them (hereinafter collectively referred to as "Releasors"), agrees to release and forever discharge the Company, together with its Affiliates, and its or their officers, directors, employees, agents, predecessors, partners, successors, assigns, heirs, executors, insurers and administrators (hereinafter "Company Releasees") from any and all rights, claims, actions and causes of action of any nature whatsoever, cognizable at law or equity, which Releasors now have or claim, or might hereafter have or claim, against the Company Releasees up to the date of this Agreement relating to Executive's employment by the Company and its Affiliates, including, without limitation, claims arising under the Age Discrimination in Employment Act, 29 U.S.C. 'SS' 621 et seq.; the Older Workers Benefit Protection Act, 29 U.S.C. 'SS' 621 et seq.; Title VII of the Civil Rights Act of 1964, as amended, 42 U.S.C. 'SS' 2000e et seq.; the Employee Retirement Income Security Act of 1974, 29 U.S.C. 'SS' 1001 et seq.; the Americans With Disabilities Act, 42 U.S.C. 'SS' 12101 et seq.; the Family and Medical Leave Act, 29 U.S.C. 'SS' 2601 et seq.; any anti-discrimination statutes; any claims for breach of express or implied contract; any claims for wrongful discharge or violation of public policy; any claims under any federal, state or local laws of any jurisdiction; and any common law claims now or hereafter recognized; as well as all claims for counsel fees and costs. (b) Nothing herein shall be construed to negate the provisions of this Agreement or Executive's right to enforce the provisions of this Agreement. 11. Review and Consideration of Release. Executive certifies and acknowledges: (a) that he has read the terms of this Agreement, and he understands its terms and effects, including the fact that he has agreed to RELEASE AND FOREVER DISCHARGE Company Releasees from any legal or administrative action arising out of his employment with 3 the Company, and the terms and conditions of that employment relationship, up to the date of this Agreement; (b) that he has signed this Agreement voluntarily and knowingly in exchange for the consideration provided to him and described herein. He acknowledges that he would not otherwise be entitled to the consideration provided and that the consideration provided as a result of signing this Agreement is adequate and satisfactory; (c) that he has been advised through this document that the signing of this Agreement does not waive rights or claims that may arise after the date it is executed; (d) that he has been advised through this writing to consult with an attorney concerning this Agreement prior to signing this Agreement; (e) that he has been advised that he has the right to consider this Agreement for a period of 21 days from receipt, and that he has signed on the date indicated below after concluding that this Agreement is satisfactory to him; (f) that neither the Company, nor any of its agents, representatives, employees, or attorneys has made any representations to him concerning the terms or effects of this Agreement other than those contained herein; and (g) that he understands that he has the right to revoke this Agreement within 7 days after its execution by giving written notice to the Company, and that this Agreement will not become effective or enforceable until the revocation period has expired. 12. Termination of Employment. (a) Notice of Termination. Any termination by the Company or by the Executive shall be communicated by Notice of Termination to the other party hereto given in accordance with Section 27. For purposes of this Agreement, a "Notice of Termination" means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated and (iii) specifies the date of termination which date shall not be less than fifteen (15) (thirty (30), if such termination is by the Company for Disability) nor more than sixty (60) days after the giving of such notice. The failure by the Executive or the Company to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of the Executive or the Company, respectively, hereunder or preclude the Executive or the Company, respectively, from asserting such fact or circumstance in enforcing the Executive's or the Company's rights hereunder. (b) Death or Disability. Executive's employment will terminate automatically upon Executive's death. The Company may terminate Executive's employment for disability in the event Executive has been unable, due to physical or mental incapacity, to perform Executive's material duties under this Agreement for six consecutive months (or such longer period that may be required by applicable law). In the event Executive's employment terminates as a result of death or disability, then: 4 (i) Subject to subsection 12(e) below, all unvested or unexercisable equity compensation will become fully vested and exercisable, and any stock options may be exercised after Executive's termination of employment in accordance with the terms and conditions of the applicable grant documentation; (ii) Except as otherwise provided herein, Executive will forfeit Executive's right to receive any salary, incentive compensation, equity compensation, or other compensation that has not been fully earned at the time Executive's employment terminates; provided, however, Executive will be entitled to receive any awards which become fully vested upon Executive's death or disability under the Company's Cash Long-Term Incentive Plan and Long-Term Share Unit Performance Plan and any other benefits or amounts accrued but not yet paid as of the date of termination; (iii) Executive will receive any other amounts earned, accrued or owing to Executive under the plans and programs of the Company; (iv) If, however, the Executive's employment is terminated by reason of death after a Notice of Termination has been given either by the Executive for Good Reason or by the Company other than for Cause, the Company shall also pay to the Executive's legal representatives in one lump sum the amounts specified in Sections 12(d)(i),(iv) and (v). (c) Involuntary Termination for Cause or Voluntary Termination Other Than for Good Reason. If Executive is involuntarily terminated by the Company for Cause or Executive voluntarily terminates his employment other than for Good Reason, then: (i) All unvested or unexercisable equity compensation will be cancelled upon Executive's termination of employment; (ii) Executive will forfeit Executive's right to receive any salary, incentive compensation, equity compensation, or other compensation that has not been fully earned at the time Executive's employment terminates; provided, however, Executive will be entitled to receive any benefits or amounts accrued but not yet paid as of the date of termination; and (iii) Executive will receive any other amounts earned, accrued or owing to Executive under the plans and programs of the Company. (d) Involuntary Termination Other Than for Cause or Voluntary Termination for Good Reason. If Executive is involuntarily terminated by the Company other than for Cause or Executive voluntarily terminates his employment for Good Reason within six months after learning of the event constituting Good Reason; then, as liquidated damages and in lieu of any other damages or compensation under this Agreement or otherwise, Executive will receive the payments or other benefits described in this paragraph; provided (A) Executive does not enter into Competition (as defined below) with the Company for a period of two years following the termination of Executive's employment, and (B) Executive executes, and does not revoke, a written waiver and release, in a form prescribed by the Company, of all claims against the Company and related parties arising out of the Executive's employment or the termination of that employment, except that the condition specified in Clause (A) shall not apply if such termination occurs during the two-year period after the consummation of a transaction approved by the 5 stockholders of the Company and described in Section 13(c) or (d) of the Company's 2001 Long-Term Incentive Plan ("LTIP"), such event being hereafter referred to as a "Section 13(c) Change in Control") (and such two-year period being hereafter referred to as the "CIC Period"): (i) Executive will receive a lump sum severance payment, payable within 60 days after termination of Executive's employment, equal to three years' base salary and annual target incentive compensation (calculated using the amount of Executive's highest annual base salary and highest annual target incentive compensation within three years prior to Executive's date of termination); provided, however, if the termination occurs during a CIC Period such lump sum severance payment shall be payable within 10 days after the termination of Executive's employment; (ii) Executive will have Executive's period of employment service used to calculate retirement extended as if Executive had worked an additional three years, and the compensation used to calculate Executive's retirement benefits will be determined as if Executive had continued to receive for an additional three years salary and incentive compensation equal to the highest annual base salary and highest annual incentive compensation Executive received within three years prior to Executive's date of termination (such amounts to be payable from a non-qualified, supplemental retirement plan); (iii) Subject to subsection 12(e) below, Executive will be entitled to exercise, in accordance with their terms, any remaining stock options that had been granted prior to Executive's termination (all of which will become vested under such circumstances) for the maximum period permitted under the terms of the grant; (iv) Executive will receive a pro-rated portion of his target annual incentive compensation award in or around March of the year following Executive's termination based on the number of months (rounded to the next highest number for a partial month) of the year elapsed prior to Executive's termination; provided, however, that if the termination occurs during a CIC Period any such awards which have become vested under the terms of the Annual Incentive Plan or the Operating Committee Incentive Plan shall be payable within 10 days after the termination of Executive's employment; (v) Executive and Executive's dependents will continue to participate (with the same level of coverage) for three years in all medical, dental, hospitalization, accident, disability, life insurance and any other benefit plans of the Company on the same terms as in effect immediately prior to Executive's termination unless changed for senior executives generally; provided, however, that such benefits will be offset to the extent that Executive or Executive's dependents receive benefits from another source (in such event, Executive agrees to provide reasonable notice of the receipt of benefits from another source); and, provided that in the event adverse tax consequences may result if medical benefits are provided to Executive directly, the Company will pay Executive the amount necessary to purchase the coverage, adjusted for taxes, on an after-tax basis; (vi) Executive will be entitled to outplacement services, at the expense of the Company, from a provider selected by Executive, subject to a maximum expense of $25,000; 6 (vii) Executive will be entitled to participate in the Company's Financial Planning Assistance program for three (3) consecutive years from the date of termination in accordance with the policies of the Company as in effect immediately prior to the Change in Control (as defined in the LTIP); and (viii) Executive will receive any other amounts earned, accrued or owing to Executive under the plans and programs of the Company. (e) Notwithstanding the foregoing, in no event will this paragraph cause any stock options to become vested or exercisable prior to the first anniversary of the stock option grant, unless Executive's termination occurs during a CIC Period, in which case such stock options shall become vested and exercisable and the restrictions and limitations set forth in paragraph 4 shall not apply. 13. Cause; Good Reason. (a) For purposes of this Agreement, "Cause" means: (i) a material breach by Executive of Executive's duties and responsibilities (other than as a result of incapacity due to physical or mental illness) which is demonstrably willful and deliberate on the part of Executive, which is committed in bad faith or without reasonable belief that such breach is in the best interests of the Company, and which is not remedied within 30 days after receipt of written notice from the Company specifying such breach; or (ii) Executive's conviction of a felony which is materially and demonstrably injurious to the Company as determined in the sole discretion of the Board. provided that if the Executive's employment is terminated during a CIC Period the cessation of Executive's employment shall not be deemed for Cause unless and until the Company has delivered to Executive a copy of a resolution duly adopted by not less than 75% of the entire Board (excluding Executive if Executive is a Board member) at a meeting of the Board called and held for such purpose (after reasonable notice to Executive and an opportunity for Executive, together with counsel, to be heard before the Board), finding that in the good faith opinion of the Board an event set forth above has occurred and specifying the particulars thereof in detail. (b) For purposes of this Agreement, "Good Reason" means: (i) Executive's rate of annual base salary, the target amount of Executive's annual cash incentive bonus or, if applicable, any other benefits under any long-term incentive plan is reduced in a manner that is not applied proportionately to all other senior executive officers of the Company, including the Chief Executive Officer; (ii) the Company fails to retain Executive as an Executive Vice President of the Company; 7 (iii) the Company fails to retain Executive as President, Research and Development or another substantially equivalent position for which the Executive is qualified by education, training and experience; (iv) during a CIC Period, the Company assigns to the Executive any duties materially inconsistent with the Executive's title, position, status, reporting relationships, authority, duties or responsibilities as they existed immediately prior to such CIC Period, or any other action by the Company which results in a diminution in such title, position, status, reporting relationships, authority, duties or responsibilities, other than an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive; (v) a successor, or any subsidiary or affiliate thereof, to the Company fails to assume this Agreement; (vi) the Company terminates the Executive's employment other than as expressly permitted by this Agreement; (vii) during a CIC Period, the Company fails to keep in effect any employee benefit plan in which Executive is participating immediately prior to such CIC Period or provide benefits to Executive that are substantially equivalent; or (viii) during a CIC Period, Executive is required to relocate more than fifty (50) miles within the state where the Executive maintains his office immediately prior to such relocation or Executive's principal office is relocated to a different state or Executive is required to materially increase his business travel. 14. Directorships, Other Offices. In the event of termination of employment, Executive will immediately, unless otherwise requested by the Company's Board, resign from all directorships, trusteeships, other offices and employment held at that time with the Company or any of its Affiliates. 15. Confidentiality. Executive recognizes and acknowledges that by reason of Executive's employment by and service to the Company, Executive will have access to proprietary or confidential information, technical data, trade secrets or know-how relating to the Company, which may include, but is not limited to, market and product research and plans, markets, products, services, customer lists and customers, advertising, software, developments, inventions, processes, formulas, technology, designs, drawings, engineering, marketing and sales techniques, strategies and programs, distribution methods and systems, sales and profit figures, pricing and discount plans, financial and other business information (hereafter, "Confidential Information"). Executive acknowledges that such Confidential Information is a valuable and unique asset of the Company and covenants that Executive will not, either during employment or after the termination of employment, disclose any such Confidential Information to any person for any reason whatsoever (except as Executive's duties as an employee of the Company may require) without the prior written authorization of the CEO, unless such information is in the public domain through no fault of Executive or except as may be required by law or in a judicial or administrative proceeding, in which case Executive will promptly inform the Company in 8 writing of such required disclosure, but in any event at least two business days prior to the disclosure. All written Confidential Information (including, without limitation, in any computer or other electronic format) which comes into Executive's possession during the course of Executive's employment will remain the property of the Company. Unless expressly authorized in writing by the CEO, Executive will not remove any written Confidential Information from the Company's premises, except in connection with the performance of Executive's duties for the Company and in a manner consistent with the Company's policies regarding Confidential Information. Upon termination of employment, Executive agrees immediately to return to the Company all written Confidential Information in Executive's possession. For the purposes of this paragraph, the term "Company" will be deemed to include the Company and its Affiliates. For purposes of this Agreement, "Affiliate" will mean an "affiliate" as defined in Rule 12b-2 of the General Rules and Regulations under the Exchange Act. 16. Non-Compete; Non-Solicit. (a) The Company hereby agrees to pay Executive the amounts described under this Agreement as being expressly conditioned on Executive's undertakings under this paragraph as well as under paragraph 15 above. In exchange for the consideration provided in the preceding sentence, Executive agrees that during the term of Executive's employment with the Company and for a period of two years after Executive's termination of employment for any reason, Executive will not, except with the prior written consent of the CEO, directly or indirectly, engage in Competition. For purposes of this Agreement, Competition means that Executive commences employment with, or provides substantial consulting services to, any pharmaceutical company (except companies where sales from pharmaceutical products constitute less than 20% of total sales). Notwithstanding anything to the contrary herein, Executive's service solely as a member of the board of directors of a company whose annual sales are less than $100 million shall not be deemed to be Competition for purposes of this Agreement. For purposes of the preceding sentence, if a company is a subsidiary of another company, the sales of both companies shall be taken into account. Notwithstanding anything to the contrary herein, the restrictions imposed on Executive under this paragraph 16(a) shall cease to apply for all purposes upon Executive's termination of employment pursuant to paragraphs 12(c) or 12(d) during a CIC Period. (b) The foregoing restrictions will not be construed to prohibit Executive's ownership of less than five percent of any class of securities of any corporation which is engaged in any business having a class of securities registered pursuant to the Securities Exchange Act of 1934 (the "Exchange Act"), provided that such ownership represents a passive investment and that neither Executive nor any group of persons including Executive in any way, either directly or indirectly, manage or exercise control of any such corporation, guarantee any of its financial obligations, otherwise take any part in its business, other than exercising Executive's rights as a shareholder, or seek to do any of the foregoing. (c) Executive further covenants and agrees that during Executive's employment by the Company and for the period of two years thereafter, Executive will not, except with the prior written consent of the CEO, directly or indirectly, solicit , or encourage the solicitation or hiring of, any person who was an employee of the Company at any time during the term of this 9 Agreement by any employer other than the Company for any position as an employee, independent contractor, consultant or otherwise. This covenant will not prevent Executive from giving references and will not preclude the solicitation or hiring of any individual after 12 months have elapsed subsequent to the date on which such individual's employment or engagement by the Company has terminated. (d) For the purposes of this paragraph 16, the term "Company" will be deemed to include the Company and its Affiliates. 17. Remedies; Injunction. (a) Executive acknowledges and agrees that the restrictions contained in paragraphs 15 and 16 are reasonable and necessary to protect and preserve the legitimate interests, properties, goodwill and business of the Company, that the Company would not have entered into this Agreement in the absence of such restrictions and that irreparable injury will be suffered by the Company should Executive breach any of the provisions of those paragraphs. Executive represents and acknowledges that (i) Executive has been advised by the Company to consult legal counsel with respect to this Agreement, and (ii) that Executive has had full opportunity, prior to execution of this Agreement, to review thoroughly this Agreement with counsel. (b) Executive further acknowledges and agrees that a breach of any of the restrictions in paragraphs 15 and 16 cannot be adequately compensated by monetary damages. Executive agrees that, unless Executive's employment is terminated pursuant to paragraph 12(d) during a CIC Period (in which case the provisions of this sentence shall not apply),the Company will be entitled to a return of the cash consideration set forth in this Agreement as being conditioned on the covenants contained in paragraph 16 and that all remaining stock options will be forfeited if Executive breaches the provisions of that paragraph and that, in any event, the Company will be entitled to preliminary and permanent injunctive relief, without the necessity of proving actual damages, as well as provable damages and an equitable accounting of all earnings, profits and other benefits arising from any violation of paragraphs 15 or 16, which rights will be cumulative and in addition to any other rights or remedies to which the Company may be entitled. In the event that any of the provisions of paragraphs 15 or 16 should ever be adjudicated to exceed the time, geographic, service, or other limitations permitted by applicable law in any jurisdiction, it is the intention of the parties that the provision will be amended to the extent of the maximum time, geographic, service, or other limitations permitted by applicable law, that such amendment will apply only within the jurisdiction of the court that made such adjudication and that the provision otherwise be enforced to the maximum extent permitted by law. (c) Executive irrevocably and unconditionally (i) agrees that any suit, action or other legal proceeding arising out of paragraphs 15 or 16, including without limitation, any action commenced by the Company for preliminary and permanent injunctive relief and other equitable relief, may be brought in the United States District Court for the District of New Jersey, or if such court does not have jurisdiction or will not accept jurisdiction, in any court of general jurisdiction in Somerset County, New Jersey, (ii) consents to the non-exclusive jurisdiction of any such court in any such suit, action or proceeding, and (iii) waives any objection which Executive may have to the laying of venue of any such suit, action or proceeding in any such court. 10 (d) For the purposes of this paragraph 17, the term "Company" will be deemed to include the Company and its Affiliates. 18. Intellectual Property. To the fullest extent permitted by applicable law, all intellectual property (including patents, trademarks, and copyrights) which are made, developed or acquired by Executive in the course of Executive's employment with the Company will be and remain the absolute property of the Company, and Executive shall assist the Company in perfecting and defending its rights to such intellectual property. 19. Indemnification. To the fullest extent permitted by applicable law, the Company will, during and after termination of employment, indemnify Executive (including providing advancement of expenses) for any judgments, fines, amounts paid in settlement and reasonable expenses, including attorneys' fees, incurred by Executive in connection with the defense of any lawsuit or other claim or investigation to which Executive is made, or threatened to be made, a party or witness by reason of being or having been an officer, director or employee of the Company or any of its subsidiaries or affiliates. In addition, Executive will be covered under any directors and officers' liability insurance policy for his acts (or non-acts) as an officer or director of the Company or any of its subsidiaries or affiliates to the extent the Company provides such coverage for its senior executive officers for a period of 5 years following any termination of Executive's employment other than for Cause or for such longer period of limitations that may apply to any claim. 20. Arbitration. Unless other arrangements are agreed to by Executive and the Company, any disputes arising under or in connection with this Agreement, other than a dispute in which the primary relief sought is an equitable remedy such as an injunction, will be resolved by binding arbitration to be conducted in New Jersey pursuant to the National Rules for the Resolution of Employment Disputes of the American Arbitration Association. Costs of the arbitration, including (but not by way of limitation) reasonable attorney's fees of both parties, will be borne by the party which does not prevail in the proceedings. In the event that each party prevails as to certain aspects of the proceedings, the arbitrator(s) or the court will determine an appropriate allocation of costs between the parties. If, however, any dispute arises relating to Executive's rights or obligations as a result of the occurrence of a Section 13(c) Change in Control, the Company shall pay Executive any such costs unless the Company is determined to have substantially prevailed on all material claims. 21. Gross-Up Payment. In addition to any other payments due to Executive under this Agreement, the Company shall pay to Executive any amounts due to Executive under the terms of the Company's Excess Parachute Tax Indemnity Plan. 22. No Set-off; No Mitigation Required. The obligation of the Company to make any payments provided for hereunder and otherwise to perform its obligations hereunder will not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against Executive or others. In no event will Executive be obligated to seek other employment or take other action by way of mitigation of the amounts payable to Executive under any of the provisions of this Agreement, and such amounts will not be reduced (except as otherwise specifically provided herein) whether or not Executive obtain other employment. 11 23. Payment of Legal Fees. The Company will pay Executive's reasonable legal and financial consulting fees and costs associated with entering into this Agreement up to a maximum of $10,000. 24. Corporate Transactions, Impact on Equity Compensation. In the event of any change in the outstanding shares of the Company's Common Stock (including any increase or decrease in such shares) by reason of any stock dividend or split, recapitalization, merger, consolidation, spinoff, combination or exchange of shares or other similar corporate change, or any distributions to common stockholders other than regular cash dividends, the Compensation Committee of the Board may make such substitution or adjustment, if any, as it deems to be equitable, as to the number or kind of shares of Common Stock provided for in this Agreement. 25. Governing Law. This Agreement will be governed by and construed in accordance with the laws of the State of New Jersey. 26. Assignments; Transfers; Effect of Merger. (a) No rights or obligations of the Company under this Agreement may be assigned or transferred by the Company except that such rights or obligations may be assigned or transferred pursuant to a merger or consolidation in which the Company is not the continuing entity, or pursuant to the sale or transfer of all or substantially all of the assets of the Company, provided that the assignee or transferee is the successor to all or substantially all of the assets of the Company. (b) This Agreement will not be terminated by any merger, consolidation or transfer of assets of the Company referred to above. In the event of any such merger, consolidation or transfer of assets, the provisions of this Agreement will be binding upon the surviving or resulting corporation or the person or entity to which such assets are transferred. (c) The Company agrees that concurrently with any merger, consolidation or transfer of assets referred to above, it will cause any successor or transferee unconditionally to assume, either contractually or as a matter of law, all of the obligations of the Company hereunder. (d) This Agreement will inure to the benefit of, and be enforceable by or against, Executive or Executive's personal or legal representatives, executors, administrators, successors, heirs, distributes, designees and legatees. None of Executive's rights or obligations under this Agreement may be assigned or transferred by Executive other than Executive's rights to compensation and benefits, which may be transferred only by will or operation of law. If Executive should die while any amounts or benefits have been accrued by Executive but not yet paid as of the date of Executive's death and which would be payable to Executive hereunder had Executive continued to live, all such amounts and benefits unless otherwise provided herein will be paid or provided in accordance with the terms of this Agreement to such person or persons appointed in writing by Executive to receive such amounts or, if no such person is so appointed, to Executive's estate. 27. Notices and other Communications. All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: 12 If to the Executive: Pharmacia Corporation 100 Route 206 North Peapack, New Jersey 07977 Telecopy Number: (908) 901-7700 Attention: Goran Ando, M.D. If to the Company: Pharmacia Corporation 100 Route 206 North Peapack, New Jersey 07977 Telecopy Number: (908) 901-7700 Attention: Senior Vice President Human Resources or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. 28. Modification. No provisions of this Agreement may be waived, modified or discharged unless such waiver, modification or discharge is agreed to in writing signed by both Executive and the CEO. No waiver by any party hereto at any time of any breach by any other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party will be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. 29. Entire Agreement. This Agreement sets forth the entire agreement of the parties hereto in respect of the subject matter contained herein and supersedes all prior agreements, promises, covenants, arrangements, communications, representations or warranties, whether oral or written, by any officer, employee or representative of any party hereto in respect of the subject matter contained herein. 13 PHARMACIA CORPORATION /s/ Goran Ando /s/ Fred Hassan - ------------------------------------ --------------------------------------- Goran Ando By: Fred Hassan Title: Chief Executive Officer July 12, 2002 July 12, 2002 - ------------------------------------ --------------------------------------- Date Date: 14 EX-10 7 ex10-5.txt EXHIBIT 10(5) EXHIBIT 10(5) PHARMACIA CORPORATION FOUNDERS PERFORMANCE CONTINGENT SHARES PROGRAM As amended and restated effective September 17, 2002 ARTICLE 1 PURPOSE The Board of Directors of Pharmacia Corporation (the "Company") has adopted the Pharmacia Corporation Founders Performance Contingent Shares Program (the "Program"), amended and restated effective September 24, 2001, and hereby further amends the Program. The Program is implemented to promote an identity of interest between the Company and selected key senior officers and to encourage the officers to contribute toward the Company's growth. This Program is implemented in connection with the Pharmacia Corporation Management Incentive Plan (formerly the Monsanto Management Incentive Plan of 1996). All shares of Company stock authorized to be granted under this Program shall be issued under the Management Incentive Plan or such other shareholder-approved equity compensation plan as the Committee (as defined below) shall determine. ARTICLE 2 DEFINITIONS 2.1 "Account" means, with respect to a Participant, an account established on the books of the Company pursuant to Article 4. 2.2 "Affiliate" means any firm, partnership, or corporation that directly or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with the Company. 2.3 "Beneficiary" means the beneficiary designated by the Participant to receive any Share Units that are payable upon the death of the Participant. 2.4 "Board" means the Board of Directors of the Company. 2.5 "Change in Control" means the first to occur of any of the following events: (a) The acquisition by any individual, entity or group (a "Person"), including any "person" within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), of beneficial ownership within the meaning of Rule 13d-3 promulgated under the Exchange Act, of 33% or more of either (i) the then outstanding shares of Common Stock of the Company (the "Outstanding Company Common Stock") or (ii) the combined voting power of the then outstanding securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that the following acquisitions of Outstanding Company Common Stock or Outstanding Company Voting Securities shall not constitute a Change in Control: (A) any acquisition by the Company, (B) any acquisition by an employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company, or (C) any acquisition by any corporation pursuant to a reorganization, merger or consolidation involving the Company, if immediately after such reorganization, merger or consolidation, each of the conditions described in clauses (i), (ii) and (iii) of subsection (3) of this Section shall be satisfied; and provided, further that, for the purposes of clause (A), if any Person (other than the Company or any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company) shall become the beneficial owner of 33% or more of the Outstanding Company Common Stock or 33% or more of the Outstanding Company Voting Securities by reason of any acquisition of Outstanding Company Common Stock or Outstanding Company Voting Securities by the Company and such Person shall, after such acquisition by the Company, become the beneficial owner of any additional shares of the Outstanding Company Common Stock or any additional Outstanding Voting Securities and such beneficial ownership is publicly announced, such additional beneficial ownership shall constitute a Change in Control; or (b) Individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of such Board; provided, however, that any individual who becomes a director of the Company subsequent to the date hereof whose election, or nomination for election by the Company's stockholders, was approved by the vote of at least three-quarters of the directors then comprising the Incumbent Board (either by a specific vote or by approval of the proxy statement of the Company in which such person is named as a nominee for director, without objection to such nomination) shall be deemed to have been a member of the Incumbent Board; and provided, further, that no individual who was initially elected as a director of the Company as a result of an actual or threatened election contest, as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act, or any other actual or threatened solicitation of proxies or consents by or on behalf of any Person other than the Board shall be deemed to have been a member of the Incumbent Board; or (c) Approval by the stockholders of the Company of a reorganization, merger or consolidation involving the Company unless, in any such case, immediately after such reorganization, merger or consolidation, (i) more than 50% of the then outstanding shares of common stock of the corporation resulting from such reorganization, merger or consolidation and more than 50% of the combined voting power of the then outstanding securities of such corporation -2- entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals or entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and the Outstanding Company Voting Securities immediately prior to such reorganization, merger or consolidation and in substantially the same proportions relative to each other as their ownership, immediately prior to such reorganization, merger or consolidation, of the Outstanding Company Common Stock and the Outstanding Company Voting Securities, as the case may be, (ii) no Person (other than the Company, any employee benefit plan (or related trust) sponsored or maintained by the Company or the corporation resulting from such reorganization, merger or consolidation (or any corporation controlled by the Company), or any Person which beneficially owned, immediately prior to such reorganization, merger or consolidation, directly or indirectly, 33% or more of the Outstanding Company Common Stock or the Outstanding Company Voting Securities, as the case may be) beneficially owns, directly or indirectly, 33% or more of the then outstanding shares of common stock of such corporation or 33% or more of the combined voting power of the then outstanding securities of such corporation entitled to vote generally in the election of directors and (iii) at least a majority of the members of the board of directors of the corporation resulting from such reorganization, merger or consolidation were members of the Incumbent Board at the time of the execution of the initial agreement or action of the Board providing for such reorganization, merger or consolidation; or (d) Approval by the stockholders of the Company of a plan of complete liquidation or dissolution of the Company or (ii) the sale or other disposition of all or substantially all of the assets of the Company other than to a corporation with respect to which, immediately after such sale or other disposition, (A) more than 50% of the then outstanding shares of common stock thereof and more than 50% of the combined voting power of the then outstanding securities thereof entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and the Outstanding Company Voting Securities immediately prior to such sale or other disposition and in substantially the same proportions relative to each other as their ownership, immediately prior to such sale or other disposition, of the Outstanding Company Common Stock and the Outstanding Company Voting Securities, as the case may be, (B) no Person (other than the Company, any employee benefit plan (or related trust) sponsored or maintained by the Company or such corporation (or any corporation controlled by the Company), or any Person which beneficially owned, immediately prior to such sale or other disposition, directly or indirectly, 33% or more of the Outstanding Company Common Stock or the Outstanding Company Voting Securities, as the case may be) beneficially owns, directly or indirectly, 33% or more of the then outstanding shares of common stock thereof or 33% or more of the combined voting power of the then outstanding securities thereof entitled to vote generally in the election of directors and (C) at -3- least a majority of the members of the Board of Directors thereof were members of the Incumbent Board at the time of the execution of the initial agreement or action of the Board providing for such sale or other disposition (or were approved directly or indirectly by the Incumbent Board). 2.6 "Code" means the Internal Revenue Code of 1986, as amended from time to time. 2.7 "Committee" means the Compensation Committee of the Board. 2.8 "Company" means Pharmacia Corporation and its successors by merger or otherwise. 2.9 "Company Stock" means shares of Common Stock of the Company. 2.10 "Disabled" or "Disability" means a mental or physical condition that qualifies a Participant for total and permanent disability benefits under a Company sponsored long-term disability plan. 2.11 "Effective Date" means June 1, 2000. 2.12 "Fair Market Value" means the average of the highest and lowest price per share of the Company Stock on the New York Stock Exchange (the "NYSE"), or such other national securities exchange as may be designated by the Committee, on the applicable date, or, if there are no sales of Company Stock on the NYSE on such date, then the average of the highest and lowest price per share of the Company Stock on the last previous day on which a sale on the NYSE is reported; provided that the Committee may determine that the Fair Market Value price may be based upon the average of the highest and lowest price of the Company Stock (or depositary receipts evidencing ownership of such Company Stock) on stock exchanges outside the United States with respect to any Participants who are foreign nationals. 2.13 "Participant" means any key senior officer who is selected by the Committee to participate in the Program. 2.14 "Peer Group" shall have the meaning described in Section 4.3. 2.15 "Performance Goals" shall have the meaning set forth in Section 4.2. 2.16 "Performance Period" shall have the meaning set forth in Section 4.2. 2.17 "Program" means the Pharmacia Corporation Founders Performance Contingent Shares Program, as set forth herein and as it may be amended from time to time. 2.18 "Savings Plus Plan" means the Pharmacia Savings+Plus Plan. -4- 2.19 "Share Unit" means a phantom share, which shall be equivalent to one share of Company Stock. 2.20 "Target Award" means the target incentive award determined by the Committee for each Participant as described in Section 4.1. ARTICLE 3 PARTICIPATION The Committee shall select the key senior officers who shall participate in the Program. The initial list of Program Participants is set forth on Exhibit A. Each Participant shall be a member of a select group of management or highly compensated employees within the meaning of Sections 201(2), 301(a)(3) and 401(a)(1) of the Employee Retirement Income Security Act of 1976, as amended ("ERISA"). ARTICLE 4 TARGET AWARDS; PERFORMANCE GOALS 4.1 Target Awards. The Committee shall establish for each Participant a Target Award that will be payable if and to the extent that the Company attains the Performance Goals for the Performance Period or otherwise in connection with a Change in Control. Each Target Award shall be stated as a number of Share Units. As of the Effective Date, the Company shall credit to each Participant's Account on its records a number of Share Units equal to the Target Award. 4.2 Performance Goals. The Performance Goals shall be based on (i) the Company's total shareholder return ranking as compared to its Peer Group for the Performance Period and (ii) the Company's achievement of its targeted five-year compounded shareholder return for the Performance Period, all as set forth on Exhibit B. The Performance Period is the five-year period beginning January 1, 2000 and ending December 31, 2004. The Committee may adjust the Performance Goals as it deems appropriate to take into account corporate transactions or other extraordinary events that occur during the Performance Period. 4.3 Peer Group. The Peer Group consists of the following companies: American Home Products Corporation Bristol-Myers Squibb Company Eli Lilly and Company Johnson & Johnson Merck & Company, Inc. Pfizer, Inc. Schering-Plough Corporation -5- The Committee may adjust the Peer Group from time to time as it deems appropriate, including by adding, deleting or replacing companies, to take into account mergers and other changes in the companies consisting of the Peer Group. ARTICLE 5 VESTING OF SHARE UNITS 5.1 Vesting. At the end of the Performance Period, the Committee will determine whether and to what extent the Performance Goals have been met and the percentage of the Target Awards that will vest according to the matrix described on Exhibit B. The Target Award of each Participant who is then employed by the Company or an Affiliate shall vest according to the Company's achievement of the Performance Goals. The Committee shall rely on the audited financial statements of the Company and its Affiliates to determine whether and to what extent the Performance Goals are met. 5.2 Adjustment of Share Units. If the Company's attainment of the Performance Goals results in vesting of less than 100% according to Exhibit B, the Committee shall deduct from each Participant's Account a number of Share Units such that the Share Units credited to each Participant's Account equals the vested percentage of the Target Award. The Share Units deducted from each Participant's Account shall be forfeited. If the Company's performance results in vesting of more than 100%, the Committee will credit to each Participant's Account additional Share Units such that the number of Share Units credited to each Participant's Account equals the vested percentage of the Target Award. 5.3 Employment. Except as provided in Sections 5.4, 5.5 or 5.6 below, a Participant must be employed by the Company or an Affiliate through December 31, 2004 in order to be eligible for vesting of Target Awards. Share Units relating to vested Target Awards shall be distributed after termination of employment as described in Article 7. 5.4 Death or Disability. If a Participant dies or becomes Disabled during the Performance Period while the Participant is employed by the Company or an Affiliate, a pro rata portion of the Participant's Target Award shall become vested and shall be distributed according to Article 7. The pro rata portion shall be determined by multiplying the Target Award (at 100%) by a fraction, the numerator of which is the number of full months after June 1, 2000 during which the Participant was employed by the Company or an Affiliate before his or her death or Disability and the denominator of which is 55. The remaining Share Units relating to the Target Award shall be forfeited. If a Participant dies or becomes Disabled after the end of the Performance Period, the vested Share Units then credited to the Participant's Account shall be distributed according to Article 7. 5.5 Change in Control. If a Change in Control (which in the event of a Change in Control as described in Sections 2.5(c) or (d) herein shall mean the -6- consummation of such transactions as approved by the Company's stockholders) occurs during the Performance Period, the following provisions shall apply: (a) The Target Award of Participants who are then employed by the Company or an Affiliate shall become fully vested as of the Change in Control. The amount of the Target Award that shall become fully vested in the event of a Change in Control shall be the greater of (i) 100% of the Participant's Target Award or (ii) the percentage of the Target Award that would have vested had the Performance Period ended on the day before the Change in Control, based on the Company's achievement of the Performance Goals through that date, as determined by the Committee. The Company shall credit to each Participant's Account any additional Share Units necessary to make the number of Share Units credited to the Participant's Account equal the vested percentage of the Target Award. The Performance Period shall be considered to have ended on the day before the Change in Control. Each Participant shall be entitled to receive a distribution of his or her vested Share Units after termination of employment as described in Article 7. (b) If a Participant remains employed by the Company or an Affiliate for a period of two years following the Change in Control (the "CIC Period") or, is involuntarily terminated (which term shall be deemed to include for all purposes under this Program, as applicable, a termination for Good Reason (as such term is defined in the Participant's employment agreement) other than for cause (as defined below), within two years after the Change in Control, the Participant's Share Units earned for the Performance Period will be increased to 125% of the Participant's Target Award for the Performance Period, if such amount is greater than the Share Units previously calculated for the Performance Period pursuant to subsection (a) above. The Company will credit any additional Share Units to the Participant's Account immediately upon the earlier of (i) the second anniversary of the Change in Control or (ii) the date the Participant's employment is involuntarily terminated without cause. For purposes of this Section 5.5, the term "cause" shall have the meaning given that term in the written employment agreement between the Participant and the Company or an Affiliate as in effect on the date of the Participant's termination of employment. 5.6 Discretionary Acceleration. Notwithstanding the foregoing, except upon a Change in Control, the Committee shall have the right at any time to accelerate the vesting of Target Awards on a pro-rated basis and terminate the Performance Period early, as the Committee deems appropriate. -7- ARTICLE 6 DIVIDENDS If a dividend is declared with respect to shares of the Company's Stock, the amount of the dividend that would have been distributed with respect to the Share Units allocated to each Participant's Account, had each such Unit been a share of Company Stock, shall be converted into additional Share Units based on the Fair Market Value of the Company Stock on the date the dividend is paid. The additional Share Units shall be credited to the Participant's Account as of the date the dividend is paid. All Share Units attributable to dividends shall become vested, or shall be forfeited, according to the vesting of the Share Units to which they relate. ARTICLE 7 RIGHT TO DISTRIBUTIONS 7.1 Termination of Employment During the Performance Period. If a Participant ceases to be employed by the Company and its Affiliates during the Performance Period for any reason (other than as described in Section 5.4 or 5.5), the Participant's Share Units (and Target Award) shall be forfeited as of the date on which the Participant ceases to be employed by the Company and its Affiliates. No payments shall be made to the Participant under the Program. 7.2 Termination of Employment After the Performance Period. If a Participant ceases to be employed by the Company and its Affiliates after the end of the Performance Period for any reason, the vested Share Units then credited to the Participant's Account shall be distributed to the Participant as described below. 7.3 Form of Distribution. If a Participant's employment terminates under circumstances described above that entitle the Participant to a distribution of Share Units, the Company shall pay to the Participant, in the form of whole shares of Company Stock, that number of shares of Company Stock that equals the number of vested whole Share Units then credited to the Participant's Account. The Company shall pay to the Participant in cash an amount attributable to fractional Share Units. Except for amounts attributable to fractional Share Units, a Participant shall not receive any cash payments under the Program. Payments shall be subject to tax withholding as described in Section 10.7 and shall be made at the time or times described in Section 7.4, 7.5, 7.6 or 7.7, as applicable. 7.4 Timing of Distribution. A terminated Participant's vested Share Units shall be distributed in one of the following methods, as elected by the Participant in writing either in his or her initial grant agreement or in a separate election made at least three months prior to the beginning of the calendar year in which distribution is to occur: (i) in a lump sum or (ii) in annual installments not in excess of 10, as elected by the Participant. Any lump sum benefit payable in accordance with this Section shall be paid in, but not later than January 31 of, the calendar year following the calendar year in which occurs the Participant's -8- termination of employment. Annual installment payments, if any, shall commence not later than January 31 of the calendar year following the calendar year in which occurs the Participant's termination of employment, in an amount equal to (i) the value of the Participant's vested Account as of the last business day of the calendar year preceding the date of payment, divided by (ii) the number of annual installment payments elected by the Participant in the grant agreement or election form. The remaining annual installments shall be paid not later than January 31 of each succeeding calendar year in an amount equal to (i) the value of the Participant's vested Account as of the last business day of the immediately preceding calendar year divided by (ii) the number of installments remaining. A Participant may change the election regarding the manner of payment as described in this Section 7.4 at any time prior to October 1 of the calendar year in which occurs the Participant's termination of employment. 7.5 Death of Participant Prior to the Commencement of Benefits. In the case of a Participant who dies prior to the commencement of benefits pursuant to Section 7.4, distribution of the Participant's vested Account shall be made, as elected by the Participant in the grant agreement or as may have been changed by the Participant, (a) in a lump sum as soon as practicable following the Participant's death, or (b) in the manner and at such time as such Account would otherwise have been distributed in accordance with this Article 7. The amount of any annual installment benefit payable in accordance with this Section shall equal (a) the value of such vested Account as of the last business day of the calendar month immediately preceding the date on which such installment is paid, divided by (b) the number of annual installments to be paid pursuant to the election of the Participant in the grant agreement or as may have been changed by the Participant. 7.6 Death of Participant After Benefits Have Commenced. In the event a Participant dies after annual installment benefits payable under Section 7.4 have commenced, but before the entire balance of the Participant's vested Account has been paid, any remaining installments shall continue to be paid to the Participant's Beneficiary at such times and in such amounts as they would have been paid to the Participant had the Participant survived. 7.7 Change in Control. In the event of a Change in Control, the Committee may determine that all Participants' vested Share Units will be distributed in a lump sum payment at a date designated by the Committee. 7.8 Deferral of Distributions. Each Participant may elect to defer his or her entire vested Account balance under this Plan under the terms of the Savings Plus Plan. Such an election shall be made in the manner determined by the Committee or its delegate and shall become effective twelve months after it is filed or, if such election is made during Fall 2002 Open Enrollment, it shall become effective as of a Change in Control, if earlier. Any deferral made under this section shall cause the Fair Market Value of all of the Participant's vested Share Units to be credited to an account under the Savings Plus Plan for the Participant as of the -9- effective date of such election. If such an election is made, the Fair Market Value of any Share Units becoming vested after such an election is in effect shall be credited to an account under the Savings Plus Plan for the Participant as of the date such Share Units become vested. Such deferral shall be deemed to be invested in the investment options available under the Savings Plus Plan in accordance with the Participant's then current election applicable to new deferrals under the Savings Plus Plan. All of the applicable terms, provisions, and elections of the Savings Plus Plan shall govern any amount deferred under this section and from and after the time of such deferral, no benefit shall be payable from this Plan. ARTICLE 8 FUNDING AND SHARES 8.1 Unfunded Status of Program. The Program is intended to constitute an unfunded plan of deferred compensation for Participants. Benefits payable hereunder shall be payable out of the general assets of the Company, and no segregation of any assets for such benefits shall be made. Notwithstanding any segregation of assets or transfer to a grantor trust, with respect to any payments not yet made to a Participant, nothing contained herein shall give any such Participant any rights to assets that are greater than those of a general unsecured creditor of the Company. No Participant or other person shall under any circumstance shall acquire any property interest in any specific assets of the Company. 8.2 Shares. All shares of Company Stock authorized for payment under this Program shall be paid from the Pharmacia Corporation Management Incentive Plan (formerly the Monsanto Management Incentive Plan of 1996), or such other shareholder-approved equity compensation plan as the Committee determines. 8.3 Adjustments. If there is any change in the number or kind of shares of Company Stock outstanding (i) by reason of a stock dividend, spinoff, recapitalization, stock split, or combination or exchange of shares, (ii) by reason of a merger, reorganization or consolidation in which the Company is the surviving corporation, (iii) by reason of a reclassification or change in par value, or (iv) by reason of any other extraordinary or unusual event affecting the outstanding Company Stock as a class without the Company's receipt of consideration, or if the value of outstanding shares of Company Stock is substantially reduced as a result of a spinoff or the Company's payment of an extraordinary dividend or distribution, the number of shares covered by outstanding Share Units and Target Awards and the kind of shares covered by Share Units and Target Awards may be appropriately adjusted or substituted by the Committee to reflect any increase or decrease in the number of, or change in the kind or value of, issued shares of Company Stock. Any adjustments determined by the Committee shall be final, binding and conclusive. -10- ARTICLE 9 ADMINISTRATION OF THE PLAN AND DISCRETION 9.1 Committee Powers. The Committee shall have full power and authority to interpret the Program, to prescribe, amend and rescind any rules, forms and procedures as it deems necessary or appropriate for the proper administration of the Program and to make any other determinations, including factual determinations, and to take any other such actions as it deems necessary or advisable in carrying out its duties under the Program. All action taken by the Committee arising out of, or in connection with, the administration of the Program or any rules adopted thereunder, shall, in each case, lie within its sole discretion, and shall be final, conclusive and binding upon the Company, the Committee, all Employees, all Beneficiaries and all other persons and entities having an interest therein. 9.2 Discretion. Decisions, actions or interpretations to be made under the Program by the Committee shall be made in its sole discretion, not as a fiduciary and need not be uniformly applied to similarly situated individuals and shall be final, binding and conclusive on all persons interested in the Program. Nothing contained in this Program and no action taken pursuant hereto shall create or be construed to create a fiduciary relationship between the Company or the Committee and any Participant or any other person. To the extent that any person acquires a right to receive payment from the Company hereunder, such right shall be no greater than the right of any unsecured general creditor of the Company. ARTICLE 10 MISCELLANEOUS 10.1 Amendment and Termination. The Program may be amended, suspended, or terminated at any time by the Board or its delegate; provided, however, that no such amendment, suspension, or termination shall adversely affect the rights of any Participant with respect to Share Units that have vested as of the effective date of such amendment, suspension, or termination. 10.2 Claims Procedure. (a) Claim. A person who believes that he is being denied a benefit to which he is entitled under the Program (hereinafter referred to as a "Claimant") may file a written request for such benefit with the Committee, setting forth the claim, within sixty days after the Claimant's benefit is denied. (b) Claim Decision. Upon receipt of a claim, the Committee shall advise the Claimant that a reply will be forthcoming within ninety days and shall deliver such reply within such period. The Committee may, however, extend the reply period for an additional ninety days for reasonable cause. If the claim is denied in whole or in part, the Claimant shall be provided a written opinion, using language calculated to be understood by the Claimant, setting forth: -11- (i) The specific reason or reasons for such denial; (ii) The specific reference to pertinent provisions of this Program on which such denial is based; (iii) A description of any additional material or information necessary for the Claimant to perfect his or her claim and an explanation why such material or such information is necessary; (iv) Appropriate information as to the steps to be taken if the Claimant wishes to submit the claim for review; and (v) The time limits for requesting a review under subsection (c) and for review under subsection (d) hereof. (c) Request for Review. Within sixty days after the receipt by the Claimant of the written opinion described above, the Claimant may request in writing that the Board review the determination of the Committee. The Claimant or his duly authorized representative may review the pertinent documents and submit issues and comment in writing for consideration by the Board. If the Claimant does not request a review of the initial determination within such sixty-day period, the Claimant shall be barred and estopped from challenging the determination. (d) Review of Decision. Within sixty days after the Board's receipt of a request for review, it will review the initial determination. After considering all materials presented by the Claimant, the Board will render a written opinion, written in a manner calculated to be understood by the Claimant, setting forth the specific reasons for the decision arid containing specific references to the pertinent provisions of this Program on which the decision is based. If special circumstances require that the sixty day time period be extended, the Board will so notify the Claimant and will render the decision as soon as possible, but no later than one hundred twenty days after receipt of the request for review. 10.3 Designation of Beneficiary. Each Participant may designate a Beneficiary (which may be an entity other than a natural person) to receive any payments which may be made following the Participant's death. Such designation may be changed or canceled at any time without the consent of any such Beneficiary. Any such designation, change or cancellation must be made in a form approved by the Committee and shall not be effective until received by the Committee, or its designee. If no Beneficiary has been named, or the designated Beneficiary shall have predeceased the Participant, the Beneficiary shall be the Participant's estate. If a Participant designates more than one Beneficiary, the interests of such Beneficiaries shall be paid in equal shares, unless the Participant has specifically designated otherwise. 10.4 Limitation of Participant's Right. Nothing in this Program shall be construed as conferring upon any Participant any right to continue in the -12- employment of the Company, nor shall it interfere with the rights of the Company to terminate the employment of any Participant or to take any personnel action affecting any Participant without regard to the effect which such action may have upon such Participant as a recipient or prospective recipient of benefits under the Program. Any amounts payable hereunder shall not be deemed salary or other compensation to a Participant for the purposes of computing benefits to which the Participant may be entitled under any other arrangement established by the Company for the benefit of its employees. 10.5 No Limitation on Company Actions. Nothing contained in the Program shall be construed to prevent the Company from taking any action that is deemed by it to be appropriate or in its best interest. No Participant, Beneficiary, or other person shall have any claim against the Company as a result of such action. 10.6 Nonalienation of Benefits. No Participant or Beneficiary shall have the power or right to transfer (other than by will, the laws of descent and distribution or Beneficiary designation upon death), alienate, or otherwise encumber the Participant's interest under the Program. The Company's obligations under this Program may be assigned to any corporation or other entity which acquires all or substantially all of the Company's assets or any corporation or other entity into which the Company may be merged or consolidated. The provisions of the Program shall inure to the benefit of each Participant and the Participant's Beneficiaries, heirs, executors, administrators or successors in interest. 10.7 Withholding of Taxes. The Company may make such provisions and take such action as it may deem necessary or appropriate for the withholding of any taxes which the Company is required by any law or regulation of any governmental authority, whether Federal, state or local, to withhold in connection with any benefits under the Program, including, but not limited to, the withholding of appropriate sums from any amount otherwise payable to the Participant (or Beneficiary). Each Participant, however, shall be responsible for the payment of all individual tax liabilities relating to any such benefits. A Participant may elect to satisfy the Company's income tax withholding obligations with respect to payments under the Program by having shares of Company Stock withheld from his or her distribution up to an amount that does not exceed the Participant's minimum applicable withholding tax rate for federal (including FICA), state and local tax liabilities. 10.8 Severability. If any provision of this Program is held unenforceable, the remainder of the Program shall continue in full force and effect without regard to such unenforceable provision and shall be applied as though the unenforceable provision were not contained in the Program. 10.9 Governing Law. The Program shall be construed in accordance with and governed by the laws of the State of New Jersey, without reference to the principles of conflict of laws. -13- 10.10 Headings. Headings are inserted in this Program for convenience of reference only and are to be ignored in the construction of the provisions of the Program. 10.11 Gender, Singular and Plural. All pronouns and any variations thereof shall be deemed to refer to the masculine, feminine, or neuter, as the identity of the person or persons may require. As the context may require, the singular may read as the plural and the plural as the singular. 10.12 Notice. Any notice or filing required or permitted to be given to the Committee under the Program shall be sufficient if in writing and hand delivered, or sent by registered or certified mail, to the Human Resources Department, or to such other address as the Committee may designate from time to time. Such notice shall be deemed given as to the date of delivery, or, if delivery is made by mail, as of the date shown on the postmark on the receipt for registration or certification. -14- PHARMACIA CORPORATION FOUNDERS PERFORMANCE CONTINGENT SHARES PROGRAM EXHIBIT A PARTICIPANTS Fred Hassan Goran Ando Chris Coughlin Carrie Cox Phil Needleman Tim Rothwell EXHIBIT B Pharmacia Corporation Founders Performance Contingent Shares Program 1/1/00 - 12/31/04 5 Years Quartile Ranking Total Shareholder Return vs. Peer Group - ------------------------------------------------------------------ Q1 50.0% 65.0% 75.0% 85.0% 105.0% 110.0% - ------------------------------------------------------------------ Q2 25.0% 60.0% 70.0% 80.0% 100.0% 105.0% - ------------------------------------------------------------------ Q3 0.0% 30.0% 35.0% 40.0% 50.0% 55.0% - ------------------------------------------------------------------ Q4 0.0% 0.0% 5.0% 10.0% 15.0% 20.0% - ------------------------------------------------------------------ 11% 12% 13% 14% 15% 16% 5 Year Compounded Growth in Total Shareholder Return NOTE - Industry Growth Projected at 11% EX-10 8 ex10-6.txt EXHIBIT 10(6) EXHIBIT 10(6) PHARMACIA CORPORATION LONG-TERM PERFORMANCE SHARE UNIT INCENTIVE PLAN 1. Plan Objective Pharmacia Corporation (the "Company") has established the Pharmacia Corporation Long-Term Performance Share Unit Incentive Plan (referred to as the "Plan") which is designed to encourage results-oriented actions on the part of elected officers and certain other key executives of the Company that will drive the achievement of specific business objectives. The Company desires to and hereby amends and restates the Plan. 2. Eligibility Management employees of the Company and its subsidiaries who are elected officers of the Company or other key executives are eligible to participate in the Plan. The Administrator (as defined in Section 3 below) shall select the elected officers and other key executives who shall participate in the Plan (the "Participants"). 3. Administration (a) The Plan shall be administered by the Compensation Committee of the Board of Directors with respect to employees who are elected officers of the Company ("Elected Officers"), and the Plan shall be administered by the Chief Executive Officer of the Company ("CEO") with respect to all other employees. The CEO may delegate his authority to administer the Plan to an individual or committee. The term "Administrator" shall mean the Compensation Committee, as applied to Elected Officers, and the CEO or such individual or committee to which authority has been delegated, as applied to all other employees. (b) The Administrator shall have full power, discretion and authority to establish the rules and regulations relating to the Plan, to interpret the Plan and those rules and regulations, to select Participants for the Plan, to determine each Participant's target award, performance goals and final award, to make all factual and other determinations in connection with the Plan, and to take all other actions necessary or appropriate for the proper administration of the Plan, including the delegation of such authority, discretion or power, where appropriate. (c) All powers of the Administrator shall be executed in its sole discretion, in the best interest of the Company, not as a fiduciary, and in keeping with the objectives of the Plan and need not be uniform as to similarly situated individuals. The Administrator's administration of the Plan, including all such rules and regulations, interpretations, selections, determinations, approvals, decisions, delegations, amendments, terminations and other actions, shall be final and binding on the Company and all employees of the Company and its subsidiaries, including the Participants and their respective beneficiaries. 4. Target Awards and Performance Goals (a) The Administrator shall establish for each Participant a target award, which shall be expressed as phantom stock units and shall be payable if and to the extent that the Company attains the performance goals for the performance period as described below or otherwise in connection with a change in control (which shall be deemed to mean the consummation of a transaction approved by the Company's stockholders as described in Section 13(c) or (d) of the Company's 2001 Long Term Incentive Plan (hereinafter referred to as a "Change in Control"). The target award shall be equal to three times the annual incentive target amount in effect for the Participant at the beginning of the performance period under the Company's annual incentive plan applicable to the Participant, or such other amount as the Administrator determines, divided by the Company's stock price on January 2, 2002. The Company's stock price shall be determined by averaging the high and low sales prices of the Company's common stock on January 2, 2002 as reported on the New York Stock Exchange. The target award shall be expressed phantom stock units, each of which shall represent one hypothetical share of common stock of the Company. (b) The performance period is the three-year period beginning January 1, 2002 and ending December 31, 2004. The Administrator shall establish the performance goals for the performance period. Unless the Administrator determines otherwise, the performance goals shall be based on (i) the Company's total earnings per share growth ranking as compared to its peer group and (ii) the Company's achievement of its targeted earnings per share growth, all as set forth on Exhibit A. The Administrator may adjust the performance goals as it deems appropriate to take into account corporate transactions or other extraordinary events that occur during the performance period. (c) The peer group consists of the following companies: American Home Products Corporation Bristol-Myers Squibb Company Eli Lilly and Company Johnson & Johnson Merck & Company, Inc. Pfizer, Inc. Schering-Plough Corporation The Administrator may adjust the peer group from time to time as it deems appropriate, including the addition, deletion or replacement of companies, to take into account mergers and other changes in the companies comprising the peer group. (d) The Administrator may establish appropriate terms and conditions to accommodate newly hired and transferred employees. Unless otherwise determined by the 2 Administrator, the target award for a newly hired or transferred employee shall be prorated based on a fraction, the numerator of which is the number of months such Participant will participate in the Plan during the performance period (rounded to the nearest whole month) and the denominator of which is 36. The target award shall be equal to three times the annual incentive target amount in effect for the Participant on his or her first date of employment with the Company or on the date of transfer, as applicable, or such other amount as the Administrator determines, divided by the Company's stock price on the first date of employment with the Company or the date of transfer, as applicable. The Company's stock price shall be determined by averaging the high and low sales prices of the Company's common stock on the applicable date, as reported on the New York Stock Exchange. 5. Calculation of Incentive Awards (a) At the end of the performance period, the Administrator shall compute each Participant's incentive award for the performance period, which shall be the greater of the award calculated pursuant to subsection (i) or (ii) below: (i) The Administrator shall determine whether and to what extent the performance goals have been met for each fiscal year of the performance period, based on the Company's performance for each fiscal year, and the applicable percentage for each year, according to the matrix described on Exhibit A. The Administrator shall compute an award for each year of the performance period equal to one-third of the Participant's target award multiplied by the applicable percentage for the year according to Exhibit A. The Participant's incentive award earned for the performance period shall equal the sum of the awards earned for each of the three fiscal years of the performance period. (ii) The Administrator shall determine whether and to what extent the performance goals have been met for the entire three-year performance period, based on the Company's cumulative performance for the performance period. The Administrator shall then determine the percentage of the target award that is earned for the performance period based on such cumulative performance according to the matrix described on Exhibit A. For purposes of this subsection (ii), the Company's performance and the performance goals on Exhibit A shall be determined on a compounded basis for the three-year performance period. (b) The Administrator shall rely on the audited financial statements of the Company and its subsidiaries to determine whether and to what extent the performance goals are met. (c) Each Participant's incentive award will be subject to vesting as described in Section 6 below. On or around March 15, 2005, the Company shall credit each Participant's incentive award to a book account established for the Participant under the Pharmacia & Upjohn, Inc. Savings Plus Plan (the "Savings Plus Plan"). The incentive 3 award shall be credited to the Savings Plus Plan in the form of stock units equal to the phantom stock units earned pursuant to Section 5(a) above. All amounts credited to a Participant's book account under the Savings Plus Plan shall be administered according to the vesting provisions of Section 6 and the terms and conditions of the Savings Plus Plan. Distributions from the Participant's vested book account will be made according to the terms and conditions of the Savings Plus Plan. (d) Participants must be employed on December 31, 2004 in order to be eligible for an incentive award under the Plan, except as described below or except as the Administrator may otherwise determine. Unless the Administrator determines otherwise: (i) Participants who die during the performance period will receive a pro-rated award, which will be calculated at the end of the performance period and will be based on the Company's performance during the entire performance period as described in subsection (a)(i) or (a)(ii) above, whichever is applicable. The pro-rated award will be the award calculated for the entire performance period, multiplied by a fraction, the numerator of which is the number of months during which the Participant participated in the Plan during the performance period before the Participant's death (rounded to the nearest whole month) and the denominator of which is 36. The Company will credit the pro-rated award to a book account established for the Participant under the Savings Plus Plan on or around March 15, 2005. (ii) Participants who retire after their normal retirement age (as defined below) during the performance period will receive a pro-rated award, which will be calculated at the end of the performance period and will be based on the Company's performance during the entire performance period as described in subsection (a)(i) or (a)(ii) above, whichever is applicable. Normal retirement age is age 55, or, if the Participant has at least ten years of service, age 50. The pro-rated award will be the award calculated for the entire performance period, multiplied by a fraction, the numerator of which is the number of months during which the Participant participated in the Plan during the performance period before the Participant's retirement (rounded to the nearest whole month) and the denominator of which is 36. The Company will credit the pro-rated award to a book account established for the Participant under the Savings Plus Plan on or around March 15, 2005. (iii) Participants who leave the Company under a Company-sponsored disability program during the performance period will receive a pro-rated award, which will be calculated at the end of the performance period and will be based on the Company's performance during the entire performance period as described in subsection (a)(i) or (a)(ii) above, whichever is applicable. The pro-rated award will be the award calculated for the entire performance period, multiplied by a fraction, the numerator of which is the number of months during which the Participant participated in the Plan during the performance period before the Participant's termination date (rounded to the nearest whole month) and the denominator of which is 36. The Company will credit the pro-rated 4 award to a book account established for the Participant under the Savings Plus Plan on or around March 15, 2005. (iv) If a Change in Control of the Company occurs during the performance period, the following provisions shall apply: (A) Participants who are then employed by the Company or an Affiliate (as defined below) will receive a pro-rated award. The award will first be calculated as of the date of the Change in Control based on the greater of (i) the Participant's target award or (ii) an award calculated by the Administrator based on period-to-date performance by the Company as of the date of the Change in Control. The pro-rated award will be the award computed pursuant to the preceding sentence multiplied by a fraction, the numerator of which is the number of months during which the Participant participated in the Plan during the performance period before the effective date of the Change in Control (rounded to the nearest whole month), and the denominator of which is 36. Participants who retired, died or were disabled during the performance period as described above shall receive pro-rated incentive awards as described in subsections (i), (ii) and (iii) above but based on the Company's performance to the date of the Change in Control. The Company will credit the pro-rated award to a book account established for the Participant under the Savings Plus Plan immediately upon the effective date of the Change in Control and such amount will be fully vested and non-forfeitable. (B) If a Participant remains employed by the Company or an Affiliate for a period of two years following the Change in Control or is involuntarily terminated (which term shall be deemed to include for all purposes under this Plan, as applicable, a termination for Good Reason (as such term is defined in the Participant's employment agreement) or upon a Termination Due to Change in Control (as such term is defined in the Company's Separation Benefit Plan or Change in Control Severance Benefit Plan)) other than for cause (as defined below), within two years of a Change in Control, the Participant's award for the performance period will be increased to 200% of the Participant's target award for the performance period, if such amount is greater than the award previously calculated for the performance period pursuant to paragraph (A) above. The Company will credit any additional award amount to the book account established for the Participant under the Savings Plus Plan immediately upon the earlier of (i) the second anniversary of the Change in Control or (ii) the date the Participant's employment is involuntarily terminated without cause. Any earnings or other amounts previously credited to the Participant's account under the Savings Plus Plan with respect to the previously calculated award will remain in the Participant's account. (v) For purposes of this Plan, the term "Affiliate" shall have the meaning given that term in the Savings Plus Plan. The term "cause" shall have the meaning given that term, if applicable to the Participant, in the written employment agreement between the Participant and the Company or an Affiliate as in effect on the date of the Participant's termination of employment or in the Company's Change in Control Severance Benefit 5 Plan. Otherwise, the term "cause" shall mean (i) a material breach by a Participant of the Participant's duties and responsibilities (other than as a result of incapacity due to physical or mental illness) which is demonstrably willful and deliberate on the part of the Participant, which is committed in bad faith or without reasonable belief that such breach is in the best interests of the Company or an Affiliate, and which is not remedied within 30 days after receipt of written notice from the Company or an Affiliate specifying such breach, or (ii) the Participant's conviction of a felony which is materially and demonstrably injurious to the Company or an Affiliate. 6. Vesting of Incentive Awards (a) If a Participant earns an incentive award as described in Section 5 for the performance period, 25% of the incentive award will be vested as of the end of the performance period. The remaining portion of the Participant's incentive award will vest over a two-year period, as follows, if the Participant continues to be employed by the Company or an Affiliate through the applicable vesting date:
Vesting Date Portion of the Incentive Award that Vests ------------ ----------------------------------------- December 31, 2005 50% December 31, 2006 25%
(b) If a Participant retires at or after his or her normal retirement age (as described in Section 5(d)(ii)), leaves the Company under a Company-sponsored disability program or dies while employed by the Company or an Affiliate, the Participant's incentive award shall be fully vested at the end of the performance period or at the time such event occurs, whichever is later. If a Participant's employment with the Company and its Affiliates terminates for any other reason, any unvested incentive award, including all unvested earnings or other amounts credited with respect to the incentive award, shall be forfeited to the Company as of his or her termination date. A transfer of employment among the Company and its Affiliates shall not be considered a termination of employment for purposes of the Plan. (c) Earnings or other amounts credited with respect to a Participant's incentive award will vest pro-rata as the underlying incentive award vests. The Administrator reserves the right to accelerate vesting on a pro-rata basis or in full whenever the Administrator deems such action appropriate. (d) Notwithstanding the foregoing, the incentive award of each Participant who is employed by the Company or an Affiliate at the time of a Change in Control, or who retired at or after normal retirement age, died or left the Company under a Company-sponsored disability program on or before the date of the Change in Control, shall become fully vested upon a Change in Control. 6 7. Changes to Performance Goals and Target Awards At any time prior to the final determination of awards, the Administrator may adjust the performance goals and target awards to reflect a change in corporate capitalization (such as a stock split or stock dividend), or a corporate transaction (such as a merger, consolidation, separation, reorganization or partial or complete liquidation), or to reflect equitably the occurrence of any extraordinary event, any change in applicable accounting rules or principles, any change in the Company's method of accounting, any change in applicable law, any change due to any merger, consolidation, acquisition, reorganization, stock split, stock dividend, combination of shares or other changes in the Company's corporate structure or shares, or any other change of a similar nature. 8. Amendments and Termination The Company may at any time amend or terminate the Plan by action of the Compensation Committee; provided that no amendment or termination may be made after a Change in Control that adversely affects Participants' benefits computed under Section 5(d) for the performance period. The Administrator shall have the right to modify the terms of the Plan as may be necessary or desirable to comply with the laws or local customs of countries in which the Company operates or has employees. 9. Miscellaneous Provisions (a) This Plan is not a contract between the Company and the Participants. Neither the establishment of this Plan, nor any action taken hereunder, shall be construed as giving any Participant any right to be retained in the employ of the Company or any of its subsidiaries. Nothing in the Plan, and no action taken pursuant to the Plan, shall affect the right of the Company or a subsidiary to terminate a Participant's employment at any time and for any or no reason. The Company is under no obligation to continue the Plan. (b) A Participant's right and interest under the Plan may not be assigned or transferred, except as provided in Section 5(d) of the Plan upon death, and any attempted assignment or transfer shall be null and void and shall extinguish, in the Company's sole discretion, the Company's obligation under the Plan to pay awards with respect to the Participant. The Company's obligations under the Plan may be assigned to any corporation which acquires all or substantially all of the Company's assets or any corporation into which the Company may be merged or consolidated. (c) The Plan shall be unfunded. The Company shall not be required to establish any special or separate fund, or to make any other segregation of assets, to assure payment of awards. The Company's obligations hereunder shall constitute a general, unsecured obligation, awards shall be paid solely out of the Company's general assets, and no Participant shall have any right to any specific assets of the Company. 7 (d) All claims for benefits under this Plan shall be reviewed pursuant to the claims procedures contained in the Savings Plus Plan. (e) The Company shall have the right to deduct from awards or any other payments of wages any and all federal, state and local taxes or other amounts required by law to be withheld. (f) The Company's obligation to pay compensation as herein provided is subject to any applicable orders, rules or regulations of any government agency or office having authority to regulate the payment of wages, salaries, and other forms of compensation. (g) A Participant's acceptance of benefits under the Plan shall constitute the Participant's acceptance of all terms of the Plan, including the discretionary authority of the Administrator. (h) The validity, construction, interpretation and effect of the Plan shall exclusively be governed by and determined in accordance with the laws of the State of Delaware. 8 Exhibit A Pharmacia Corporation Performance Share Unit Incentive Plan 1/1/02 - 12/31/04 Payout as Percent of Target Quartile Q1 75.0% 100.0% 110.0% 125.0% 150.0% 175.0% 200.0% Ranking --------------------------------------------------------------------------------------------------- EPS Q2 25.0% 50.0% 75.0% 100.0% 125.0% 150.0% 175.0% Growth --------------------------------------------------------------------------------------------------- vs. Peer Q3 0.0% 0.0% 35.0% 50.0% 80.0% 100.0% 125.0% Group --------------------------------------------------------------------------------------------------- Q4 0.0% 0.0% 20.0% 35.0% 50.0% 70.0% 90.0% --------------------------------------------------------------------------------------------------- 5% or less 6% 7% 8% 9% 10% 11%+ --------------------------------------------------------------------------------------------------- Growth in Earnings per Share
(a) Target award is number of stock units based on 3x the annual incentive target amount at the beginning of the performance period. (b) When computing the performance goals on a cumulative basis for the three-year period, compounded growth in EPS shall be used EX-10 9 ex10-7.txt EXHIBIT 10(7) EXHIBIT 10(7) [LOGO] Aended and Restated O Pharmacia Corporation C Operations Committee I Incentive Plan P - -------------------------------------------------------------------------------- Pharmacia Corporation Operations Committee Incentive Plan - -------------------------------------------------------------------------------- 1. Plan Objective The Pharmacia Corporation (the "Company") hereby amends and restates its Operations Committee Incentive Plan (alternatively referred to as the "OCTP" or the "Plan") which is designed to encourage results-oriented actions on the part of members of the Operations Committee ("OC") of the Company. The Plan is intended to align closely financial rewards with the achievement of specific performance objectives. 2. Eligibility All management employees of the Company and its subsidiaries who are "Pharma" members of the OC are eligible to participate in the Plan. The Administrator (as defined in Section 3 below) shall select the management employees who shall participate in the Plan (the "Participants"). 3. Administration (a) The Plan shall be administered by the Compensation Committee of the Board of Directors (the "Committee") with respect to employees who are elected officers of the Company ("Elected Officers"), and the Plan shall be administered by the Chief Executive Officer of the Company ("CEO") with respect to all other employees. The CEO may delegate his authority to administer the Plan to an individual or other committee. The term "Administrator" shall mean the Committee, as applied to Elected Officers, and the CEO or an individual or committee to which authority has been delegated, as applied to all other employees. (b) The Administrator shall have full power and authority to establish the rules and regulations relating to the Plan, to interpret the Plan and those rules and regulations, to select Participants for the Plan, to determine each Participant's target award, performance goals and final award, to make all factual and other determinations in connection with the Plan, and to take all other actions necessary or appropriate for the proper administration of the Plan, including the delegation of such authority or power, where appropriate. Only the Committee shall take the foregoing actions with respect to Elected Officers. (c) All powers of the Administrator shall be executed in its sole discretion, in the best interest of the Company, not as a fiduciary, and in keeping with the objectives of the Plan and need not be uniform as to similarly situated individuals. The Administrator's administration of the Plan, including all such rules and regulations, interpretations, selections, determinations, approvals, decisions, delegations, amendments, terminations and other actions, shall be final and binding on the Company and all employees of the Company, including the Participants and their respective beneficiaries. 4. Target Awards and Performance Goals (a) At the beginning of each plan year designated by the Administrator (a "Plan Year"), the Administrator shall establish for each Participant a target incentive award, which shall be expressed as a dollar amount, a percentage of salary or otherwise. The Administrator shall establish for each - -------------------------------------------------------------------------------- Elected Officer a maximum award that may be paid for the Plan Year. The maximum award amount for Elected Officers will remain fixed for the entire Plan Year and may not be increased based on an increase in salary during the Plan Year or otherwise. The target awards will be based on a number of factors, including but not limited to: o Market competitiveness of the position o Job level o Base salary level o Past individual performance o Expected contribution to future Company performance and business impact (b) At the beginning of each Plan Year, the Administrator shall establish for each Participant performance goals that must be met in order for an award to be payable for the Plan Year. The Administrator shall establish in writing (i) the performance goals that must be met, (ii) the threshold, target and maximum amounts that may be paid if the performance goals are met, and (iii) any other conditions that the Administrator deems appropriate and consistent with the Plan and, in the case of Elected Officers, Section 162(m) of the Code. The Administrator shall establish objective performance goals for each Participant related to the Participant's business unit or the performance of the Company and its parents, subsidiaries and affiliates as a whole, or any combination of the foregoing. The Administrator may also establish subjective performance goals for Participants; provided that, for Elected Officers, the subjective performance goals may only be used to reduce, and not increase, the award otherwise payable under the Plan. The Company shall notify each Participant of his or her target award and the performance goals for the Plan Year. (c) The objectively determinable performance goals shall be based on one or more of the following criteria related to the Participant's business unit or the performance of the Company and its parents, subsidiaries and affiliates as a whole, or any combination of the foregoing: stock price, earnings per share, net earnings, operating or other earnings, profits, revenues, net cash flow, financial return ratios, return on assets, stockholder return, return on equity, growth in assets, unit volume, sales, market share, drug discovery or other scientific goals, pre-clinical or clinical goals, regulatory approvals, or strategic business criteria consisting of one or more objectives based on meeting specified revenue goals, market penetration goals, geographic business expansion goals, cost targets, goals relating to acquisitions or divestitures, or strategic partnerships. (d) For Elected Officers, the Administrator must establish the target awards and performance goals no later than the earlier of (i) 90 days after the beginning of the Plan Year or (ii) the date on which 25% of the Plan Year has been completed, or such other date as may be required or permitted under applicable regulations under section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"). The performance goals for each Elected Officer for each Plan Year are intended to satisfy the requirements for "qualified performance-based compensation" under section 162(m) of the Code, including the requirement that the achievement of the performance goals be substantially uncertain at the time they are established and that the performance goals be established in such a way that a third party with knowledge of the relevant facts could determine whether and to what extent the performance goals have been met. (e) Each Participant will earn an award for a Plan Year based on the achievement of the performance goals established by the Administrator. The Administrator may adjust, upward or downward, the award for each Participant who is not an Elected Officer, based on the Administrator' s determination of the Participant's achievement of personal and other performance - -------------------------------------------------------------------------------- goals established by the Administrator and other factors as the Administrator determines. The Administrator may reduce (but not increase) the award for each Elected Officer based on the Administrator's determination of the Participant's achievement of personal and other performance goals established by the Administrator and other factors as the Administrator determines. The Administrator shall not be authorized to increase the amount of any award of an Elected Officer that Would otherwise be payable pursuant to the terms of the Plan. (f) The maximum award that a Participant may receive for any Plan Year is $12,000,000. 5. Payment of Incentive Awards (a) The Administrator shall certify and announce to the Participants the awards that will be paid by the Company as soon as practicable following the final determination of the Company's financial results for the Plan Year. Payment of the awards certified by the Administrator shall be made in a single lump sum cash payment as soon as practicable following the close of the Plan Year, but in any event within 120 days after the close of the Plan Year. (b) Participants must be employed on the last day of the Plan Year to be eligible for an award from the Plan, except as described in subsections (c) and (d) below. (c) Participants who terminate employment prior to the last day of the Plan Year will not be eligible for any award payment for that Plan Year, except as the Administrator may otherwise determine. Unless the Administrator determines otherwise: (i) Participants who die or who retire under a Company-sponsored retirement program during the Plan Year will be eligible for a pro-rated award based on the achievement of the performance goals for the Plan Year and appropriate adjustment as described in Section 4. The pro-rated award will be calculated from the date when they became eligible for the Plan to the date of death or retirement. Payment will be made in a single payment at the same time as all other incentive awards for the Plan Year are distributed. In the case of the death of a Participant, any award payable to the Participant shall be paid to his or her beneficiary. For this purpose, the Company will use the beneficiary named under the Company-sponsored life insurance plan. If no life insurance beneficiary is designated, the beneficiary will be the decedent's estate. (ii) Participants who leave the Company under a Company-sponsored disability program, separation program (other than in the case of termination for cause) or other program approved by the Management Committee will be eligible for a pro-rated award based on achievement of the performance goals for the year and appropriate adjustment as described in Section 4. The awards will be calculated from the date when they became eligible for the Plan to the effective date of separation. Payment will be made in a single payment at the same time as all other incentive awards for the Plan Year are distributed. (d) For any Plan Year in which a change in control occurs, which shall mean the consummation of a transaction approved by stockholders of the Company as described in Section 13(c) or (d) of the Company's 2001 Long Term Incentive Plan (a "Change in Control"), Participants will immediately vest in an pro-rated annual award, which will be calculated by the Administrator immediately prior to the date of the Change in Control and will be the greater of (i) the Participant's target incentive award or (ii) an award reflecting the current forecasted year end performance based on year-to-date performance of the Company as of the date of the Change in - -------------------------------------------------------------------------------- Control. In the event a Participant is terminated other than for cause after a change in control and prior to the payment of the pro-rated annual award, such pro-rated award shall be paid within 10 days of such termination. (e) The Administrator may establish appropriate terms and conditions to accommodate newly hired and transferred employees, consistent, in the case of Elected Officers, with Section 162(m) of the Code. 6. Changes to Performance Goals and Target Awards At any time prior to the final determination of awards, for Participants other than Elected Officers, the Administrator may adjust the performance goals and target awards to reflect a change in corporate capitalization (such as a stock split or stock dividend), or a corporate transaction (such as a merger, consolidation, separation, reorganization or partial or complete liquidation), or to reflect equitably the occurrence of any extraordinary event, any change in applicable accounting rules or principles, any change in the Company's method of accounting, any change in applicable law, any change due to any merger, consolidation, acquisition, reorganization, stock split, stock dividend, combination of shares or other changes in the Company's corporate structure or shares, or any other change of a similar nature. The Administrator may make the foregoing adjustments with respect to Elected Officers' awards to the extent the Administrator deems appropriate, considering the requirements of Section 162(m) of the Code. 7. Amendments and Termination (a) The Company may at any time amend or terminate the Plan by action of the Committee; provided, however, that the Committee shall not amend the Plan without stockholder approval if such approval is required by Section 162(m) of the Code. Without limiting the foregoing, the Company, by action of the Administrator, shall have the right to modify the terms of the Plan as may be necessary or desirable to comply with the laws or local customs of countries in which the Company operates or has employees. Notwithstanding the foregoing, the Plan may not be terminated or amended or modified within two years of a Change in Control in a manner which would adversely affect any vested awards. (b) The Plan must be reapproved by the stockholders no later than the first stockholders meeting that occurs in the fifth year following the year in which the stockholders previously approved the Plan, if required by Section 162(m) of the Code or the regulations thereunder. 8. Miscellaneous Provisions (a) This Plan is not a contract between the Company and the Participant. Neither the establishment of this Plan, nor any action taken hereunder, shall be construed as giving any Participant any right to be retained in the employ of the Company or any of its subsidiaries. Nothing in the Plan, and no action taken pursuant to the Plan, shall affect the right of the Company to terminate a Participant's employment at any time and for any or no reason. Except as provided in Section 7(a), the Company is under no obligation to continue the Plan. (b) A Participant's right and interest under the Plan may not be assigned or transferred, except as provided in Section 5(c) of the Plan upon death, and any attempted assignment or transfer shall be null and void and shall extinguish, in the Company's sole discretion, the Company's obligation - -------------------------------------------------------------------------------- under the Plan to pay awards with respect to the Participant. The Company's obligations under the Plan may be assigned to any corporation which acquires all or substantially all of the Company's assets or any corporation into which the Company may be merged or consolidated. (c) The Plan shall be unfunded. The Company shall not be required to establish any special or separate fund, or to make any other segregation of assets, to assure payment of awards. The Company's obligations hereunder shall constitute a general, unsecured obligation, awards shall be paid solely out of the Company's general assets, and no Participant shall have any right to any specific assets of the Company. (d) The Company shall have the right to deduct from awards any and all federal, state and local taxes or other amounts required by law to be withheld. (e) It Is the intent of the Company that the Plan and awards under the Plan for Elected Officers comply with the applicable provisions of sections 162(m) of the Code. To the extent that any legal requirement of Section 162(m) of the Code as set forth in the Plan ceases to be required under Section 162(m) of the Code, that Plan provision shall cease to apply. (f) The Company's obligation to pay compensation as herein provided is subject to any applicable orders, rules or regulations of any government agency or office having authority to regulate the payment of wages, salaries, and other forms of compensation. (g) The validity, construction, interpretation and effect of the Plan shall exclusively be governed by and determined in accordance with the laws of the State of Delaware. - -------------------------------------------------------------------------------- EX-10 10 ex10-8.txt EXHIBIT 10(8) EXHIBIT 10(8) PHARMACIA Pharmacia Corporation Cash Long-Term Incentive Plan As amended and restated effective July 9, 2002 EXHIBIT C Pharmacia Corporation Cash Long-Term Incentive Plan 1. Plan Objective The Pharmacia Corporation Cash Long-Term Incentive Plan (referred to as the "Plan") is designed to encourage results-oriented actions on the part of key executives of Pharmacia Corporation (the "Company") that will drive the achievement of specific business objectives. 2. Eligibility Management employees of the Company and its subsidiaries who are "Pharma" members of the Operations Committee and other key executives are eligible to participate in the Plan. The Administrator (as defined in Section 3 below) shall select the Operations Committee members and other key executives who shall participate in the Plan (the "Participants"). 3. Administration (a) The Plan shall be administered by the Compensation Committee of the Board of Directors with respect to employees who are elected officers of the Company ("Elected Officers"), and the Plan shall be administered by the Chief Executive Officer of the Company ("CEO") with respect to all other employees. The CEO may delegate his authority to administer the Plan to an individual or committee. The term "Administrator" shall mean the Compensation Committee, as applied to Elected Officers, and the CEO or such individual or committee to which authority has been delegated, as applied to all other employees. (b) The Administrator shall have full power and authority to establish the rules and regulations relating to the Plan, to interpret the Plan and those rules and regulations, to select Participants for the Plan, to determine each Participant's target award, performance goals and final award, to make all factual and other determinations in connection with the Plan, and to take all other actions necessary or appropriate for the proper administration of the Plan, including the delegation of such authority or power, where appropriate. (c) All powers of the Administrator shall be executed in its sole discretion, in the best interest of the Company, not as a fiduciary, and in keeping with the objectives of the Plan and need not be uniform as to similarly situated individuals. The Administrator's administration of the Plan, including all such rules and regulations, interpretations, selections, determinations, approvals, decisions, delegations, amendments, terminations and other actions, shall be final and binding on the Company and all employees of the Company and its subsidiaries, including the Participants and their respective beneficiaries. 4. Target Awards and Performance Goals (a) The Administrator shall establish for each Participant a target award that will be payable if and to the extent that the Company attains the performance goals for the specified performance period or otherwise in connection with a change in control (which shall be deemed to mean the consummation of a transaction approved by the Company's stockholders as described in Section 13(c) or (d) of the Company's 2001 Long Term Incentive Plan (hereinafter referred to as a "Change in Control"). The target award shall be equal to three times the highest annual incentive target amount established for the Participant during the performance period under the Company's annual incentive plan applicable to the Participant, or such other amount as the Administrator determines. (b) The Administrator shall establish the performance goals for each performance period. Unless the Administrator determines otherwise, the performance goals shall be based on (i) the Company's total shareholder return ranking as compared to its peer group for the performance period and (ii) the Company's achievement of its targeted three-year compounded shareholder return for the performance period, all as set forth on Exhibit A. The performance period is the three-year period beginning January 1, 2001 and ending December 31, 2003. The Administrator may adjust the performance goals as it deems appropriate to take into account corporate transactions or other extraordinary events that occur during the performance period. (c) The peer group consists of the following companies: American Home Products Corporation Bristol-Myers Squibb Company Eli Lilly and Company Johnson & Johnson Merck & Company, Inc. Pfizer, Inc. Schering-Plough Corporation The Administrator may adjust the peer group from time to time as it deems appropriate, including the addition, deletion or replacement of companies, to take into account mergers and other changes in the companies consisting of the peer group. -2- 5. Calculation of Incentive Awards (a) At the end of the performance period, the Administrator will determine whether and to what extent the performance goals have been met and the percentage of the target awards that are earned according to the matrix described on Exhibit A. The Administrator shall rely on the audited financial statements of the Company and its subsidiaries to determine whether and to what extent the performance goals are met. (b) The Administrator shall compute each Participant's incentive award for the performance period based on the Company's achievement of the performance goals. Each Participant's incentive award will be subject to vesting as described in Section 6 below. On or around March 15, 2004, the Company shall credit each Participant's incentive award to a book account established for the Participant under the Pharmacia & Upjohn, Inc. Savings Plus Plan (the "Savings Plus Plan"). All amounts credited to a Participant's book account under the Savings Plus Plan shall be administered according to the vesting provisions of Section 6 and the terms and conditions of the Savings Plus Plan. Distributions from the Participant's vested book account will be made according to the terms and conditions of the Savings Plus Plan. (c) Participants must be employed on December 31, 2003 in order to be eligible for an incentive award under the Plan, except as described below or except as the Administrator may otherwise determine. Unless the Administrator determines otherwise: (i) Participants who die during the performance period will receive a pro-rated award, which will be calculated at the end of the performance period and will be based on the Company's performance during the entire performance period. The pro-rated award will be calculated from the date on which the Participant became eligible for the Plan to the date of the Participant's death. The Company will credit the pro-rated award to a book account established for the Participant under the Savings Plus Plan on or around March 15, 2004. (ii) Participants who retire after their normal retirement age (as defined below) during the performance period will receive a pro-rated award, which will be calculated at the end of the performance period and will be based on the Company's performance during the entire performance period. Normal retirement age is age 55, or, if the Participant has at least ten years of service, age 50. The pro-rated award will be calculated from the date on which the Participant became eligible for the Plan to the date of the Participant's retirement. The Company will credit the pro-rated award to a book account established for the Participant under the Savings Plus Plan on or around March 15, 2004. -3- (iii) Participants who leave the Company under a Company-sponsored disability program during the performance period will receive a pro-rated award, which will be calculated at the end of the performance period and will be based on the Company's performance during the entire performance period. The pro-rated award will be calculated from the date on which the Participant became eligible for the Plan to the Participant's termination date. The Company will credit the pro-rated award to a book account established for the Participant under the Savings Plus Plan on or around March 15, 2004. (iv) If a Change in Control of the Company occurs during the performance period, the following provisions shall apply: (A) Participants who are then employed by the Company or an Affiliate (as defined in the Savings Plus Plan) will receive a pro-rated award, which will be calculated as of the date of the Change in Control and will be based on the greater of (i) the Participant's target award or (ii) an award calculated by the Administrator based on period-to-date performance by the Company as of the date of the Change in Control. The pro-rated award will be calculated from the date on which the Participant became eligible for the Plan to the effective date of the Change in Control. Participants who retired, died or were disabled during the performance period as described above shall receive pro-rated incentive awards as described above but based on the Company's performance as of the date of the Change in Control. The Company will credit the pro-rated award to a book account established for the Participant under the Savings Plus Plan immediately upon the effective date of the Change in Control, and such amount will be fully vested and non-forfeitable. (B) If a Participant remains employed by the Company or an Affiliate for a period of two years following the Change in Control or is involuntarily terminated (which term shall be deemed to include for all purposes under this Plan, as applicable, a termination for Good Reason (as such term is defined in the Participant's employment agreement) or upon a Termination Due to Change in Control (as such term is defined in the Company's Separation Benefit Plan or Change in Control Severance Benefit Plan)), other than for cause (as defined below), within two years after the Change in Control, the Participant's award for the performance period will be increased to 200% of the Participant's target award for the performance period, if such amount is greater than the award previously calculated for the performance period pursuant to paragraph (A) above. The Company will credit any additional award amount to the book account established for the Participant under the Savings Plus Plan immediately upon the earlier of (i) the second anniversary of the Change in Control or (ii) the date the Participant's employment is involuntarily terminated without cause. Any earnings previously credited to the Participant's account under the Savings Plus Plan with respect to the previously calculated award will remain in the Participant's account. -4- (v) If a Change in Control of the Company occurs during the period commencing on December 31, 2003 and ending on December 31, 2005, and if a Participant remains employed by the Company or an Affiliate for a period of two years following the Change in Control or is involuntarily terminated, other than for cause, within two years after the Change in Control, the Participant's award for the performance period will be increased to 200% of the Participant's target award for the performance period, if such amount is greater than the award previously calculated for the performance period. The Company will credit any additional award amount to the book account established for the Participant under the Savings Plus Plan immediately upon the earlier of (i) the second anniversary of the Change in Control or (ii) the date the Participant's employment is involuntarily terminated without cause. Any earnings previously credited to the Participant's account under the Savings Plus Plan with respect to the previously calculated award will remain in the Participant's account. (vi) For purposes of this Section 5(c), the term "cause" shall have the meaning given that term, if applicable to the Participant, in the written employment agreement between the Participant and the Company or an Affiliate as in effect on the date of the Participant's termination of employment or in the Company's Change in Control Severance Benefit Plan. Otherwise, the term "cause" shall mean (i) a material breach by Participant of Participant's duties and responsibilities (other than as a result of incapacity due to physical or mental illness) which is demonstrably willful and deliberate on the part of Participant, which is committed in bad faith or without reasonable belief that such breach is in the best interests of the Company or an Affiliate, and which is not remedied within 30 days after receipt of written notice from the Company or an Affiliate specifying such breach; or (ii) Participant's conviction of a felony which is materially and demonstrably injurious to the Company or an Affiliate. (d) The Administrator may establish appropriate terms and conditions to accommodate newly hired and transferred employees. The Administrator reserves the right to accelerate vesting on a pro-rata basis whenever the Administrator deems such action appropriate. 6. Vesting of Incentive Awards (a) If a Participant earns an incentive award as described in Section 5 for the performance period, 25% of the incentive award will be vested as of the end of the performance period. The remaining portion of the Participant's incentive award will vest over a two-year period, as follows, if the Participant continues to be employed by the Company or an Affiliate through the applicable vesting date:
Vesting Date Portion of the Incentive Award that Vests - ------------ ----------------------------------------- December 31, 2004 25%
-5- December 31, 2005 50% (b) If a Participant retires at or after his or her normal retirement age (as described in Section 5(c)(ii)), leaves the Company under a Company-sponsored disability program or dies while employed by the Company or an Affiliate, the Participant's incentive award shall be fully vested at the end of the performance period or at the time such event occurs, whichever is later. If a Participant's employment with the Company and its Affiliates terminates for any other reason, any unvested incentive award, including all unvested earnings credited with respect to the incentive award, shall be forfeited to the Company as of his or her termination date. A transfer of employment among the Company and its Affiliates shall not be considered a termination of employment for purposes of the Plan. (c) Notwithstanding the foregoing, each Participant's incentive award shall become fully vested upon a Change in Control. (d) Earnings credited with respect to a Participant's incentive award will vest pro-rata as the underlying incentive award vests. 7. Changes to Performance Goals and Target Awards At any time prior to the final determination of awards, the Administrator may adjust the performance goals and target awards to reflect a change in corporate capitalization (such as a stock split or stock dividend), or a corporate transaction (such as a merger, consolidation, separation, reorganization or partial or complete liquidation), or to reflect equitably the occurrence of any extraordinary event, any change in applicable accounting rules or principles, any change in the Company's method of accounting, any change in applicable law, any change due to any merger, consolidation, acquisition, reorganization, stock split, stock dividend, combination of shares or other changes in the Company's corporate structure or shares, or any other change of a similar nature. 8. Amendments and Termination The Company may at any time amend or terminate the Plan by action of the Compensation Committee; provided that no amendment or termination may be made after a Change in Control that adversely affects Participants' benefits computed under Section 5(c)(iv) by the Administrator as in effect before the Change in Control. The Administrator shall have the right to modify the terms of the Plan as may be necessary or desirable to comply with the laws or local customs of countries in which the Company operates or has employees. -6- 9. Miscellaneous Provisions (a) This Plan is not a contract between the Company and the Participants. Neither the establishment of this Plan, nor any action taken hereunder, shall be construed as giving any Participant any right to be retained in the employ of the Company or any of its subsidiaries. Nothing in the Plan, and no action taken pursuant to the Plan, shall affect the right of the Company or a subsidiary to terminate a Participant's employment at any time and for any or no reason. Except as provided in Section 8, the Company is under no obligation to continue the Plan. (b) A Participant's right and interest under the Plan may not be assigned or transferred, except as provided in Section 5(c) of the Plan upon death, and any attempted assignment or transfer shall be null and void and shall extinguish, in the Company's sole discretion, the Company's obligation under the Plan to pay awards with respect to the Participant. The Company's obligations under the Plan may be assigned to any corporation which acquires all or substantially all of the Company's assets or any corporation into which the Company may be merged or consolidated. (c) The Plan shall be unfunded. The Company shall not be required to establish any special or separate fund, or to make any other segregation of assets, to assure payment of awards. The Company's obligations hereunder shall constitute a general, unsecured obligation, awards shall be paid solely out of the Company's general assets, and no Participant shall have any right to any specific assets of the Company. (d) The Company shall have the right to deduct from awards or any other payments of wages any and all federal, state and local taxes or other amounts required by law to be withheld. (e) The Company's obligation to pay compensation as herein provided is subject to any applicable orders, rules or regulations of any government agency or office having authority to regulate the payment of wages, salaries, and other forms of compensation. (f) The validity, construction, interpretation and effect of the Plan shall exclusively be governed by and determined in accordance with the laws of the State of Delaware. -7- -----END PRIVACY-ENHANCED MESSAGE-----