-----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, KEb+o90mlPo5Oq8MI8h1qojKRhdGPYSKJ3nu9/LEkPhfHYKV4v4t271p9mOOCXp/ P31MkDvGI2QyuXQmGhpcWQ== /in/edgar/work/0000950123-00-010636/0000950123-00-010636.txt : 20001116 0000950123-00-010636.hdr.sgml : 20001116 ACCESSION NUMBER: 0000950123-00-010636 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 20000930 FILED AS OF DATE: 20001114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PHARMACIA CORP /DE/ CENTRAL INDEX KEY: 0000067686 STANDARD INDUSTRIAL CLASSIFICATION: [2800 ] IRS NUMBER: 430420020 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-02516 FILM NUMBER: 768959 BUSINESS ADDRESS: STREET 1: 100 ROUTE 206 NORTH CITY: PEAPACK STATE: NJ ZIP: 07977 BUSINESS PHONE: 888-768-5501 MAIL ADDRESS: STREET 1: 100 ROUTE 206 NORTH CITY: PEAPACK STATE: NJ ZIP: 07977 FORMER COMPANY: FORMER CONFORMED NAME: MONSANTO CO DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: MONSANTO CHEMICAL CO DATE OF NAME CHANGE: 19711003 10-Q 1 y42526e10-q.txt PHARMACIA CORPORATION 1 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, 2000 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 9, 2000 was 1,289,649,373. Page 1 of 35 pages The exhibit index is set forth on page 32 2 QUARTERLY REPORT ON FORM 10-Q PHARMACIA CORPORATION QUARTER ENDED SEPTEMBER 30, 2000 INDEX OF INFORMATION INCLUDED IN REPORT
Page ---- PART I - FINANCIAL INFORMATION......................................................... 3 Item 1. Financial Statements - Unaudited............................................... 3 Consolidated Statements of Earnings.................................................. 3 Condensed Consolidated Statements of Cash Flows...................................... 4 Condensed Balance Sheets............................................................. 5 Notes to Consolidated Financial Statements........................................... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............................................................................. 15 Item 3. Quantitative and Qualitative Disclosures About Market Risk..................... 27 PART II - OTHER INFORMATION............................................................ 28 Item 1. Legal Proceedings.............................................................. 28 Item 5. Other Information.............................................................. 29 Item 6. Exhibits and Reports on Form 8-K............................................... 31
2 3 PART I - FINANCIAL INFORMATION Item 1. Financial Statements PHARMACIA CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (In millions of U.S. dollars, except per-share data) (Unaudited)
============================================================================================== For Three Months For Nine Months Ended September 30, Ended September 30, ============================================================================================== 2000 1999 2000 1999 - ---------------------------------------------------------------------------------------------- Net sales $ 4,286 $ 3,738 $ 13,608 $ 12,197 Cost of products sold 1,295 1,244 4,210 3,978 Research and development 669 732 2,090 2,121 Selling, general and administrative 1,602 1,438 4,958 4,196 Amortization & adjustment of goodwill 57 55 259 183 Interest expense 102 92 303 313 Interest income (34) (24) (88) (74) Merger and restructuring 226 42 798 42 All other, net 18 (65) (13) (106) - ---------------------------------------------------------------------------------------------- Earnings from continuing operations before income taxes 351 224 1,091 1,544 Provision for income taxes 78 29 340 499 - ---------------------------------------------------------------------------------------------- Earnings from continuing operations 273 195 751 1,045 Discontinued operations Earnings from discontinued operations, net of tax -- 27 -- 57 (Loss) gain on sale of discontinued operations, net of tax (26) 12 (27) 12 - ---------------------------------------------------------------------------------------------- Earnings before cumulative effect of accounting change 247 234 724 1,114 Cumulative effect of a change in accounting principle, net of tax -- -- -- (20) - ---------------------------------------------------------------------------------------------- Net earnings $ 247 $ 234 $ 724 $ 1,094 ============================================================================================== Net earnings per common share: Basic Earnings from continuing operations $ .21 $ .16 $ .58 $ .83 Net earnings .19 .19 .56 .87 Diluted Earnings from continuing operations .21 .15 .57 .81 Net earnings .19 .18 .55 .85 ==============================================================================================
See accompanying notes. 3 4 PHARMACIA CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In millions of U.S. dollars) (Unaudited)
=================================================================================== For the nine months ended September 30 2000 1999 - ----------------------------------------------------------------------------------- Net cash provided by continuing operations $ 643 $ 891 Net cash (required) by discontinued operations (25) (144) - ----------------------------------------------------------------------------------- Net cash provided by operations 618 747 - ----------------------------------------------------------------------------------- Cash flows provided (required) by investment activities: Proceeds from sale of subsidiaries 75 122 Additions of properties (960) (990) Proceeds from sales of investments 113 866 Purchases of investments (126) (204) Proceeds from sale of discontinued operations, net 1,669 301 Other (60) (96) - ----------------------------------------------------------------------------------- Net cash provided (required) by investment activities 711 (1) - ----------------------------------------------------------------------------------- Cash flows (required) provided by financing activities: Proceeds from issuance of debt 12 88 Repayment of debt (587) (259) Payments of ESOP debt (31) -- Net (decrease) increase in debt with initial maturity of 90 days or less (1,139) 256 Dividend payments (513) (479) Purchases of treasury stock -- (170) Proceeds from exercise of stock options 967 190 - ----------------------------------------------------------------------------------- Net cash (required) by financing activities (1,291) (374) - ----------------------------------------------------------------------------------- Effect of exchange rate changes on cash (130) (13) - ----------------------------------------------------------------------------------- Net change in cash and cash equivalents (92) 359 Cash and cash equivalents, beginning of year 1,600 970 - ----------------------------------------------------------------------------------- Cash and cash equivalents, end of period $ 1,508 $ 1,329 ===================================================================================
See accompanying notes. 4 5 PHARMACIA CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (All U.S. dollar amounts in millions) (Unaudited)
=============================================================================== September 30, December 31, 2000 1999 - ------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 1,508 $ 1,600 Short-term investments 107 138 Trade accounts receivable, less allowance of $266 (1999: $271) 5,286 4,131 Inventories 2,777 2,905 Other current assets 1,853 1,908 - ------------------------------------------------------------------------------- Total current assets 11,531 10,682 Long-term investments 698 476 Properties, net 6,916 6,825 Goodwill and other intangible assets, net 5,360 5,796 Other noncurrent assets 1,991 1,858 Net assets of discontinued operations --- 1,557 - ------------------------------------------------------------------------------- Total assets $ 26,496 $ 27,194 =============================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Short-term debt, including current maturities of long-term debt $ 989 $ 1,992 Trade accounts payable 944 1,272 Other current liabilities 4,019 3,910 - ------------------------------------------------------------------------------- Total current liabilities 5,952 7,174 Long-term debt and guarantee of ESOP debt 5,503 6,236 Other noncurrent liabilities 2,845 2,873 - ------------------------------------------------------------------------------- Total liabilities 14,300 16,283 - ------------------------------------------------------------------------------- Shareholders' equity: Preferred stock, one cent par value; at stated rate; authorized 10,000,000 shares; issued 6,553 (1999: 6,692 shares) 263 270 Common stock, two dollar par value; authorized 3,000,000,000 shares; issued 1,468,299,000 shares (1999: 1,465,381,000 shares) 2,937 2,931 Capital in excess of par value 2,609 1,791 Retained earnings 10,809 10,696 ESOP-related accounts and other (338) (330) Treasury stock (2,099) (2,432) Accumulated other comprehensive loss (1,985) (2,015) - ------------------------------------------------------------------------------- Total shareholders' equity 12,196 10,911 - ------------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 26,496 $ 27,194 ===============================================================================
See accompanying notes. 5 6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (ALL U.S. DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER-SHARE DATA) Trademarks of Pharmacia Corporation and its subsidiaries are indicated in all upper case letters. In the notes that follow, per-share amounts are presented on a diluted, after-tax basis. On March 31, 2000, a subsidiary of the former Monsanto Company and Pharmacia & Upjohn merged and the combined company was renamed Pharmacia Corporation ("Pharmacia" or "the company"). The merger was accounted for as a pooling of interests. As such, all data presented herein are reflective of the combined results of operations of the two predecessor companies, their statements of financial position and their cash flow as though they had always been combined, by applying consistent disclosures and classification practices. The former Monsanto Company was made up principally of a pharmaceutical business and an agricultural products business. As more fully discussed below, subsequent to the merger forming Pharmacia Corporation, the agricultural operations of the former Monsanto Company were placed into a subsidiary of the company with the name Monsanto Company (Monsanto). On October 23, 2000, Monsanto completed a partial initial public offering of 14.7% of its common stock. To avoid confusion throughout this document, "former Monsanto" will be used to refer to the pre-merger operations of the former Monsanto Company and "Monsanto" will refer to the agricultural subsidiary. Note that the animal health business of the former Pharmacia & Upjohn is not a part of Monsanto. A - INTERIM CONSOLIDATED FINANCIAL STATEMENTS The consolidated financial information presented herein is unaudited. The interim financial statements and notes thereto do not include all disclosures required by generally accepted accounting principles and should be read in conjunction with the 1999 Pharmacia Corporation consolidated financial statements and notes thereto filed on Form 8-K on May 22, 2000. In the opinion of management, the interim financial statements reflect all adjustments of a normal recurring nature necessary for a fair statement of the results for interim periods. The current period's results of operations are not necessarily indicative of results that ultimately may be achieved for the year. In 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Transactions." This statement requires companies to record derivatives on the balance sheet as assets and liabilities measured at fair value. The accounting treatment of gains and losses resulting from changes in the value of derivatives depends on the use of the derivative and whether it qualifies for hedge accounting. The company will adopt SFAS 133 and its amendments in the first quarter of 2001 and does not expect it to have a material effect on the company's results of operations, cash flows or financial position. In December 1999, the Securities and Exchange Commission (SEC) released Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB 101) which provides guidance on the recognition, presentation and disclosure of revenue in financial statements. SAB 101 allows companies to report any changes in revenue recognition related to adopting its provisions as an accounting change at the time of implementation in accordance with Accounting Principles Board (APB) Opinion No. 20, "Accounting Changes." In response to a specific dialogue with the SEC, the company recorded a cumulative effect of a change in accounting principle, effective January 1, 1999, for revenue recognized in 1998 related to the sale of certain marketing rights. The effect on earnings in 1999 was an after-tax loss of $20 ($0.02 per share). The pre-tax amount of $32 will be amortized to income over twenty years. The company is currently in the process of assessing the impact of adopting SAB 101 on its revenue recognition policies and on prior revenue transactions. The company currently anticipates that SAB 101 will not have a material impact on financial position, cash flows or results of operations. However, due primarily to certain up-front and milestone payments from co-promotion partners that were recognized in earnings in prior years, implementation of SAB 101 is expected to result in a cumulative effect adjustment. While the company has not yet finalized its review, it is currently estimated that the pre-tax amount of the cumulative adjustment will lie within a range from $250 to $400. Any accounting changes that result from the adoption of SAB 101 must be made no later than the fourth quarter of 2000, effective as of January 1, 2000. 6 7 B - MERGER On March 31, 2000, the company completed a merger accounted for as a pooling of interests. The merger was accomplished according to an Agreement and Plan of Merger dated December 19, 1999 as amended on February 18, 2000, whereby a wholly owned subsidiary of the former Monsanto Company merged with and into Pharmacia & Upjohn. In connection with this, the former Monsanto Company changed its name to Pharmacia Corporation. Pursuant to the merger agreement, each share of common stock of Pharmacia & Upjohn issued and outstanding was converted into 1.19 shares of common stock of Pharmacia Corporation and each share of Series A Convertible Perpetual Preferred Stock of Pharmacia & Upjohn issued and outstanding was converted into one share of a new series of convertible preferred stock of Pharmacia Corporation designated as Series B Convertible Perpetual Preferred Stock. The Series B preferred shares have a conversion ratio into common shares of 1,725.5:1. Approximately 620 million shares of common stock were issued and approximately 6,640 shares of preferred stock were issued in connection with the merger. As the merger was accounted for as a pooling of interests under APB Opinion No. 16, "Business Combinations", all prior period consolidated financial statements have been restated to reflect the combined results of operations, financial position and cash flows of both companies as if they had always been combined. There were no material transactions between the former Monsanto Company and Pharmacia & Upjohn prior to the combination. Certain reclassifications have been made to conform the respective earnings statement and balance sheet presentations. C - PARTIAL AGRICULTURAL BUSINESS INITIAL PUBLIC OFFERING On October 23, 2000, the company completed the offering of shares in connection with a partial initial public offering (IPO) of the agricultural business. The new publicly traded entity, Monsanto Company (Monsanto), assumes the operation of the Pharmacia agricultural business. In connection with the offering, approximately 38 million shares were sold at a price of twenty dollars per share resulting in gross proceeds of approximately $761. Estimated costs and expenses associated with the offering, including underwriting fees, are $46. Pharmacia continues to own approximately eighty-five percent of the outstanding stock of Monsanto. The portion of Monsanto that is not owned by the company will be accounted for as a minority interest in the financial statements. Proceeds received in connection with the offering were used to reduce Monsanto debt. D - INVENTORIES
- ------------------------------------------------------------------------ September 30, December 31, 2000 1999 - ------------------------------------------------------------------------ Estimated replacement cost (FIFO basis): Pharmaceutical, Agricultural and other finished products $ 976 $ 1,281 Raw materials, supplies and work-in-process 2,021 1,794 - ------------------------------------------------------------------------ Inventories (FIFO basis) 2,997 3,075 Less reduction to LIFO cost (220) (170) - ------------------------------------------------------------------------ Inventories $ 2,777 $ 2,905 ========================================================================
Inventories valued on the LIFO method had an estimated replacement cost (FIFO basis) of $1,453 at September 30, 2000, and $1,038 at December 31, 1999. 7 8 E - CONTINGENT LIABILITIES AND LITIGATION The condensed 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 which, 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 soon be required to submit a corrective measures study report to the U.S. Environmental Protection Agency (EPA). It now appears that this report will need to be submitted for EPA review during 2001. 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 - In June 1996, Mycogen Corporation, Mycogen Plant Sciences, Inc. and Agrigenetics filed suit against former Monsanto in California State Superior Court in San Diego alleging that the company failed to license, under an option agreement, technology relating to Bt corn and glyphosate-tolerant corn, cotton and canola. On October 20, 1997, the court construed the agreement as a license to receive genes rather than a license to receive germplasm. Jury trial of the damage claim for lost future profits from the alleged delay in performance ended March 20, 1998, with a verdict against the company awarding damages totaling $174.9. On June 28, 2000, the California Court of Appeals for the Fourth Appellate District issued its opinion reversing the jury verdict and related judgment of the trial court, and directed that judgment should be entered in the company's favor. Mycogen's subsequent motion for rehearing has been denied. Mycogen's petition with the California Supreme Court requesting further review was granted on October 25, 2000, and their appeal of the reversal of judgment is continuing. In April 1999, a jury verdict was returned against the company in a lawsuit filed in U.S. District Court in North Carolina. The lawsuit claims that a 1994 license agreement was induced by fraud stemming from nondisclosure of relevant information and that the company did not have the right to license, make or sell products using the plaintiff's technology for glyphosate resistance under this agreement. The jury awarded $15 in actual damages for unjust enrichment and $50 in punitive damages. The company has appealed this verdict, believes it has meritorious grounds to overturn the verdict and intends to vigorously pursue all available means to have the verdict overturned. No provision has been made in the company's consolidated financial statements with respect to the award for punitive damages. 8 9 The company has been a party along with a number of other defendants (both manufacturers and wholesalers) in several federal civil antitrust lawsuits, some of which were consolidated and transferred to the Federal District Court for the Northern District of Illinois. These suits, brought by independent pharmacies and chains, generally allege unlawful conspiracy, price discrimination and price fixing and, in some cases, unfair competition. These suits specifically allege that the company and the other named defendants violated the following: (1) the Robinson-Patman Act by giving substantial discounts to hospitals, nursing homes, mail-order pharmacies and health maintenance organizations without offering the same discounts to retail drugstores, and (2) Section 1 of the Sherman Antitrust Act by entering into agreements with other manufacturers and wholesalers to restrict certain discounts and rebates so they benefited only favored customers. The Federal District Court for the Northern District of Illinois certified a national class of retail pharmacies in November 1994. Eighteen class action lawsuits seeking damages based on the same alleged conduct have been filed in 14 states and the District of Columbia. The plaintiffs claim to represent consumers who purchased prescription drugs in those jurisdictions and four other states. Two of the lawsuits have been dismissed. The former Pharmacia & Upjohn Company announced in 1998 that it reached a settlement with the plaintiffs in the federal class action cases for $103; and Searle received a favorable verdict in 1999. On April 11, 2000, the University of Rochester filed suit in U.S. District Court for the Western District of New York, asserting patent infringement against the company and certain of its subsidiaries as well as Pfizer, Inc. The University asserts that its U.S. patent granted on April 11 is infringed by the sale and use of CELEBREX. The patent has claims directed to a method of treating human patients by administering a selective COX-2 inhibitor. The University has sought injunctive relief, as well as monetary compensation for infringement of the patent. The company is also a defendant in a suit filed by Great Lakes Chemical Company. The original complaint was filed in the U.S. District Court in Delaware on January 20, 2000, alleging violations of Federal and Indiana Securities Laws, common law fraud and breach of contract claims. The lawsuit itself is a result of Great Lakes' purchase of the NSC Technologies unit of former Monsanto. According to Great Lakes, NSC'S actual sales for 1999 were significantly below the projected sales. On May 25, 2000, the Federal Court dismissed Great Lakes' complaint for lack of federal subject matter jurisdiction holding that the sale of NSC was not a "security" under federal law. On June 9, 2000, Great lakes filed a new complaint in Delaware Superior Court. The company's motion to move the case from Superior Court to Delaware Equity Court was granted. With respect to the matters described above for which no range has been given, the company believes it is not possible to estimate a range of potential losses at this time. Accordingly, it is not possible to determine what, if any, additional exposure exists at this time. The company intends to vigorously defend itself in these matters. 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. F - COMPREHENSIVE INCOME Quarterly comprehensive income for the three months ended September 30, 2000 and 1999 was $332 and $258, respectively. Comprehensive income for the nine months ended September 30, 2000 and 1999 was $755 and $545, respectively. 9 10 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. Under these assumptions, the weighted-average number of common shares outstanding is increased accordingly, and net earnings is reduced by an incremental contribution to the applicable Employee Stock Ownership Plan (ESOP). This contribution is the after-tax difference between the income that the ESOP would have received from the preferred stock and the assumed dividend yield to be earned on the common shares. The following table reconciles the numerators and denominators of the basic and diluted earnings per share computations on earnings from continuing operations:
- ------------------------------------------------------------------------------------------------------------------------------- For the three months ended September 30, 2000 2000 1999 1999 Basic Diluted Basic Diluted - ------------------------------------------------------------------------------------------------------------------------------- EPS numerator: Earnings from continuing operations $ 273 $ 273 $ 195 $ 195 Less: Preferred stock dividends, net of tax (4) -- (4) -- Less: ESOP contribution, net of tax -- (2) -- (2) - ------------------------------------------------------------------------------------------------------------------------------- Earnings from continuing operations available to common shareholders $ 269 $ 271 $ 191 $ 193 =============================================================================================================================== EPS denominator: Average common shares outstanding 1,280 1,280 1,249 1,249 Effect of dilutive securities: Stock options and stock warrants -- 25 -- 22 Convertible instruments and incentive compensation -- 12 -- 12 - ------------------------------------------------------------------------------------------------------------------------------- Total shares (in millions) 1,280 1,317 1,249 1,283 =============================================================================================================================== Earnings per share from continuing operations $ .21 $ .21 $ .16 $ .15 =============================================================================================================================== - ------------------------------------------------------------------------------------------------------------------------------- For the nine months ended September 30, 2000 2000 1999 1999 Basic Diluted Basic Diluted - ------------------------------------------------------------------------------------------------------------------------------- EPS numerator: Earnings from continuing operations $ 751 $ 751 $ 1,045 $ 1,045 Less: Preferred stock dividends, net of tax (10) -- (10) -- Less: ESOP contribution, net of tax -- (6) -- (4) - ------------------------------------------------------------------------------------------------------------------------------- Earnings from continuing operations available to common shareholders $ 741 $ 745 $ 1,035 $ 1,041 =============================================================================================================================== EPS denominator: Average common shares outstanding 1,269 1,269 1,248 1,248 Effect of dilutive securities: Stock options and stock warrants -- 20 -- 24 Convertible instruments and incentive compensation -- 12 -- 12 - ------------------------------------------------------------------------------------------------------------------------------- Total shares (in millions) 1,269 1,301 1,248 1,284 =============================================================================================================================== Earnings per share from continuing operations $ .58 $ .57 $ .83 $ .81 ===============================================================================================================================
H - SEGMENT INFORMATION The company operates in two primary segments: pharmaceuticals and agricultural products. The pharmaceutical segment consists principally of prescription and nonprescription products for humans and animals, bulk pharmaceuticals and contract manufacturing. The agricultural segment develops, produces and markets crop protection products, seeds and related traits. Corporate and all other amounts represent general and administrative expenses and restructuring charges associated with corporate support functions and other corporate items such as litigation accruals, merger costs and nonoperating income and expense. Certain goodwill and other intangible assets and associated amortization are not allocated to segments. The following tables show net sales and earnings for the company's segments. Information about segment assets, interest income and expense, and income taxes is not provided as the segments are reviewed based on earnings before interest and income taxes. Assets are not allocated to segments and accordingly depreciation is not available. There are no intersegment revenues.
- --------------------------------------------------------------------------------------------------- For the three months ended September 30, Sales Earnings 2000 1999 2000 1999 - --------------------------------------------------------------------------------------------------- Pharmaceutical $ 3,283 $ 2,755 $ 625 $ 506 Agricultural 1,003 983 (48) (145) - --------------------------------------------------------------------------------------------------- $ 4,286 $ 3,738 577 361
10 11 Unallocated corporate and other (158) (69) - ----------------------------------------------------------------------------------------------------- Earnings from continuing operations before interest and taxes 419 292 Interest expense, net 68 68 - ----------------------------------------------------------------------------------------------------- Earnings from continuing operations before income taxes $ 351 $ 224 =====================================================================================================
For the nine months ended September 30, Sales Earnings 2000 1999 2000 1999 - ------------------------------------------------------------------------------------------------------ Pharmaceutical $ 9,315 $ 8,078 $1,704 $1,547 Agricultural 4,293 4,119 559 572 - ------------------------------------------------------------------------------------------------------ $ 13,608 $ 12,197 2,263 2,119 ======== ======== Unallocated corporate and other (957) (336) - ------------------------------------------------------------------------------------------------------ Earnings from continuing operations before interest and taxes 1,306 1,783 Interest expense, net 215 239 - ------------------------------------------------------------------------------------------------------ Earnings from continuing operations before income taxes $1,091 $1,544 ======================================================================================================
As a result of the recent merger involving the former Monsanto Company and Pharmacia & Upjohn, management reporting methodologies will tend to evolve and segment definition and related disclosures may change in future periods. I - DISCONTINUED OPERATIONS On July 1, 1999, the company announced its intention to sell the artificial sweetener (bulk aspartame and tabletop sweeteners) and biogum businesses. In addition, the company's Board of Directors approved, in 1998, the divestiture of the alginates and ORTHO lawn-and-garden businesses. Net sales and income from discontinued operations in the third quarter 2000 represent the biogums business whereas the third quarter 1999 included the alginates, biogums, bulk aspartame and tabletop sweeteners business. The principal cause for the third quarter and year-over-year decline in earnings from discontinued operations is the divestiture of discontinued businesses, reduction of proceeds from the sales of those businesses and a reversal of restructuring reserves in third quarter 1999 related to lower actual severance costs than originally estimated. Pharmacia completed the sale of the biogums business on September 29, 2000. As a result there were no net assets from discontinued operations for the period ended September 30, 2000 compared with net assets from the alginates, biogums, bulk aspartame and tabletop sweeteners business at the end of 1999. Net sales and income from discontinued operations in the first nine months of 2000 include biogums, five months of bulk asparatame and two months of the tabletop sweeteners business compared with the first nine months of 1999 which included the alginates, biogums, bulk asparatame, and tabletop sweeteners, and one month of the ORTHO lawn-and-garden products business Net sales, income and net assets from discontinued operations are as follows:
- --------------------------------------------------------------------------- Three months Ended Nine Months Ended September 30, September 30, 2000 1999 2000 1999 - --------------------------------------------------------------------------- Net Sales $ 74 $ 243 $ 350 $ 712 - ---------------------------------------------------------------------------
11 12 Income from discontinued operations, before tax -- 42 -- 87 Loss on sale of discontinued operations, before tax (38) 16 (70) 16 Discontinued operations income tax expense (benefit) (12) 19 (43) 34 - --------------------------------------------------------------------------- Income (loss) from discontinued operations $ (26) $ 39 $ (27) $ 69 - --------------------------------------------------------------------------- Diluted earnings (loss) per share: Discontinued operations $ -- $.02 $ -- $ .05 Loss on sale of discontinued operations (.02) .01 (.02) .01 - --------------------------------------------------------------------------- Total discontinued operations earnings (loss) per share $(.02) $.03 $(.02) $ .06 ===========================================================================
Net assets of discontinued operations as of: December 31, 1999 - -------------------------------------------------------------- Current assets $ 545 Non-current assets 1,240 - -------------------------------------------------------------- Total Assets $1,785 ============================================================== Current liabilities $ 213 Non-current liabilities 15 - -------------------------------------------------------------- Total liabilities $ 228 ============================================================== Net assets of discontinued operations $1,557 ==============================================================
On September 29, 2000, Pharmacia completed the sale of the biogums business to a joint venture formed between Hercules, Inc. and Lehman Brothers Merchant Banking Partners II, L.P. for cash proceeds of $592. On March 17, 2000, Pharmacia completed the sale of the tabletop sweeteners business to Merisant Company for $570 cash. On May 30, 2000, Pharmacia completed the sale of its sweetener ingredient business to J.W. Childs Equity Partners II, L.P., for $440 in cash proceeds. Pharmacia also completed the sale of equity interests in two European joint venture companies, NutraSweet A.G., and Euro-Aspartame S.A., to Ajinomoto Co., Inc., for $67 in cash proceeds. Proceeds from these transactions were used to pay down debt and for other corporate purposes. J - MERGER, RESTRUCTURING AND OTHER CHARGES Merger and restructuring charges associated with the merger transaction involving Pharmacia & Upjohn and the former Monsanto and the restructuring of operations in the agricultural product business for the first nine months of 2000 total $914. This amount is comprised of $798 on the merger and restructuring line of the earnings statement in addition to $32 included in cost of products sold relating to a second quarter write-off of inventory and an $84 adjustment to goodwill also recorded during the second quarter. During the third quarter, the company recorded merger and restructuring charges of $226 on the merger and restructuring line. 12 13 During the third quarter, the company recorded an additional $52 of merger costs on the merger and restructuring line and approximately $525 in merger-related costs year-to-date. The third-quarter charges include costs to integrate the Pharmacia & Upjohn and former Monsanto organizations such as consultant fees, contract termination costs, moving and relocation costs and travel expenses. On a year-to-date basis, these merger-related costs also include transaction costs such as investment bankers, attorneys, registration and regulatory fees and other professional services. In addition, these costs include various employee incentive and change-of-control costs directly associated with the merger. The latter includes a non-cash charge of $232 during the first quarter that was related to certain employee stock options that were repriced in conjunction with the merger pursuant to change of control provisions. Pursuant to the terms of these "premium options," at consummation of the merger, the original above-market exercise price was reduced to equal the fair market value on the date of grant. Restructuring charges of $174 were also recorded on the merger and restructuring line of the earnings statement during the third quarter. These charges included $138 associated with the separation of approximately 630 employees in the pharmaceutical and corporate functions and 215 employees in the agricultural subsidiary. The balance of the charges consisted of $26 relating to assets to be disposed of and $10 associated with contract terminations and other exit costs. The third quarter restructuring charges are comprised of $34 relating to corporate functions, $114 for pharmaceutical operations and $26 for agricultural products operations. The corporate component relates to the separation of 65 employees. Pharmaceutical operations restructuring activities include the separation of approximately 565 employees, assets to be disposed of $23 and contract terminations and other exit costs of $8. These charges are the result of integrating the former Pharmacia & Upjohn and Monsanto companies into a single organization and the resulting elimination of duplicate positions and facilities. On a year-to-date basis, pharmaceutical and corporate functions have incurred total restructuring charges of $207, all of which has been recorded on the merger and restructuring line of the earnings statement. These charges encompass the separation costs for approximately 680 employees, assets to be disposed of $23 and other exit costs of $8. As of September 30, 2000, 658 employees have been separated from the company during 2000. The third-quarter restructuring charge of the agricultural products operations for $26 includes the separation of 215 employees, asset impairments of $3 and contract termination and other exit costs of $2. These charges are part of a strategy that includes the elimination of certain food and biotech research programs. The strategy is a part of a plan that encompasses a decision to focus more stringently on the four key crops of corn, soybeans, wheat and cotton and included the elimination of human nutrition and certain food and biotech research programs as well as the consolidation of seed operations. On a year-to-date basis, agricultural products operations have incurred net restructuring charges of $183. These charges are comprised of separation costs for 590 employees, asset impairments of $132 and other exit costs of $3 and were recorded on the earnings statement as cost of products sold of $32, amortization and adjustment of goodwill of $84 and $67 to the merger and restructuring line. As of September 30, 2000, 180 employees have been separated from the company during 2000. Total restructuring charges and spending associated with the current restructuring plans relating to the integration of the former Pharmacia & Upjohn and Monsanto companies and the restructuring of the agricultural products operations are as follows: 13 14
- ------------------------------------------------------------------- Workforce Other Exit Reductions Costs - ------------------------------------------------------------------- 2000 Charges $228 $11 - ------------------------------------------------------------------- 2000 Spending 93 6 - ------------------------------------------------------------------- Remaining balance September 30, 2000 $135 $ 5 ===================================================================
During 1999, the company recorded $54 in expenses which was comprised of $57 of restructuring charges related to the merger with SUGEN, Inc., net of a $3 adjustment to the 1998 turnaround restructuring. The charge included costs pertaining to reorganizations that resulted in the elimination of certain research and development (R&D) projects as well as the elimination of 375 employee positions impacting the pharmaceutical segment and corporate and administrative functions. The objective of the restructuring was to eliminate duplicate functions and investments in R&D as well as reorganize the sales force based on anticipated future requirements of the company at the time of the restructuring. During the first three quarters of 2000, $24 was paid and charged against the liability. These amounts related to a portion of separation benefits for the approximately 160 employees severed during the first nine months of 2000 as well as some terminated during 1999. The company anticipates all activities associated with this restructuring will be substantially complete by the end of 2000. The remaining cash expenditures relating to this restructuring total $27 and are expected to be made during 2000 with some separation annuity payments being completed in 2001. At September 30, 2000, $24 remained of the $92 of restructuring accruals made during the fourth quarter of 1998 by Pharmacia & Upjohn related to a comprehensive turnaround program. The balance primarily represents annuity payments for severance that will extend into 2001. In the fourth quarter of 1998, the former Monsanto recorded net restructuring charges of $327 as part of an approved plan to close facilities, reduce the current workforce and exit non-strategic businesses. The activities that the former Monsanto planned to exit in connection with this plan principally comprised a tomato business and a business involved in the operation of membership-based health and wellness centers. The charge of $327 was comprised of facility shut-down charges of $99, workforce reduction costs of $103 and asset impairments and other costs of $125. As of September 30, 2000, all activities under this plan have been substantially completed. Approximately 300 employees were severed during the first nine months of 2000 at a cost of $36. Cash outflows associated with these separations were charged against the 1998 restructuring liability. Additional spending and adjustments of the 1998 accrual amounting to $11 were made during the year reducing the accrual balance as of September 30 to less than $2. The company expects to complete the remaining actions within the originally planned time frame. 14 15 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Trademarks of Pharmacia Corporation and its subsidiaries are indicated in all upper case letters. In the following discussion of consolidated results, per-share amounts are presented on a diluted, after-tax basis. On March 31, 2000, a subsidiary of the former Monsanto Company and Pharmacia & Upjohn merged and the combined company was renamed Pharmacia Corporation ("Pharmacia" or "the company"). The merger was accounted for as a pooling of interests. As such, all data presented herein are reflective of the combined results of operations of the two predecessor companies, their statements of financial position and their cash flows as though they had always been combined, by applying consistent disclosures and classification practices. The former Monsanto Company was made up principally of a pharmaceutical business and an agricultural products business. As more fully discussed below, subsequent to the merger forming Pharmacia Corporation, the agricultural operations of the former Monsanto Company were placed into a subsidiary of the company with the name Monsanto Company (Monsanto). On October 23, 2000, Monsanto completed a partial initial public offering of 14.7% of its common stock. To avoid confusion throughout this document, "former Monsanto" will be used to refer to the pre-merger operations of the former Monsanto Company and "Monsanto" will refer to the agricultural subsidiary. Note that the animal health business of the former Pharmacia & Upjohn is not a part of Monsanto. FINANCIAL REVIEW OVERVIEW The table below provides a comparative overview of consolidated results for the third quarter and first nine months of 2000 and 1999 in millions of U.S. dollars, except per-share data.
Third Quarter Nine Months ------------- ----------- Percent Percent 2000 Change 1999 2000 Change 1999 - ----------------------------------------------------------------------------------------------------------------------------------- Net sales $ 4,286 15% $3,738 $ 13,608 12% $ 12,197 Earnings from continuing operations before interest and income taxes 419 43 292 1,306 (27) 1,783 Earnings from continuing operations 273 40 195 751 (28) 1,045 Discontinued operations (26) n.m. 39 (27) n.m. 69 Cumulative effect of an accounting change -- n.m. -- -- n.m. (20) Net earnings 247 6 234 724 (34) 1,094 Earnings per common share: Continuing operations: Basic $ .21 31 $ .16 $ .58 (30) $ .83 Diluted .21 40 .15 .57 (30) .81 Net earnings Basic .19 -- .19 .56 (36) .87 Diluted $ .19 6 $ .18 $ .55 (35) $ .85 - -----------------------------------------------------------------------------------------------------------------------------------
n.m. = not meaningful 15 16 Year-to-year comparisons are complicated by a number of factors including charges incurred throughout the first nine months of 2000. Specifically, there are merger and restructuring charges which approximate $226 million and $914 million before tax for the quarter and year-to-date, respectively. Of these total charges, $32 million was recorded within cost of products sold in the second quarter ($20 million after tax or $0.02 per share), $84 million was recorded as adjustments to goodwill in the second quarter ($83 million after tax or $0.07 per share) and $226 million for the third quarter and $798 million year-to-date was recorded in merger and restructuring ($154 million after tax or $0.12 per share and $558 million after tax or $0.42 per share, respectively). A charitable contribution of $100 million ($62 million after tax or $0.05 per share) made during the first quarter may also have an effect on comparability, as may the divestments of certain product lines which are not included in discontinued operations. Certain other charges also affect comparability. Third quarter 1999 charges for the termination of existing research and development projects and in-process research and development totaling $29 million ($26 million net of tax or $0.02 per share) were recorded in relation to the merger with SUGEN, Inc. (Sugen) and the acquired partial interest in Sensus Drug Development Corporation. Also recorded in the third quarter of 1999 were charges incurred in connection with the restructuring associated with the integration of Sugen and the accelerated integration of the former Monsanto's agricultural chemical and seed operations. Of these charges, $20 million ($13 million net of tax or $0.01 per share) was recorded in cost of products sold, $8 million ($5 million net of tax or $0.01 per share) was recorded as amortization and adjustment of goodwill and $42 million ($26 million net of tax or $0.02 per share) was recorded on the merger and restructuring line of the earnings statement. The divestment of certain product lines that are not recorded in discontinued operations may also affect comparability. NET SALES Consolidated net sales for the third quarter of 2000 rose 15 percent to $4.3 billion as compared to the same quarter of 1999. Sales for the corresponding year-to-date periods were $13.6 billion and $12.2 billion, resulting in a 12 percent increase over 1999. The impact of currency exchange rates on consolidated sales was 3 percent and 2 percent unfavorable for both the quarter and year-to-date periods, respectively, due to weak European currencies partly offset by strength in the Japanese yen. Price increases were realized during the quarter in the pharmaceutical business while the continued implementation of the company's ROUNDUP pricing strategy in the agricultural business contributed an adverse price impact. The resulting consolidated price effect for the quarter and year-to-date periods was approximately a one-percent decrease versus 1999. Volume gains were the main contributor for sales growth resulting in a 19 percent increase for the quarter and 15 percent increase for the year-to-date period. The volume increase was led by sales of ROUNDUP, CELEBREX and other key products. 16 17 The company reports its operations within the two segments indicated in the table below. Sales of divested businesses have been excluded from the analysis.
Three months ended Nine months ended September 30, September 30, Net Percent Net Percent (U.S. dollars in millions) 2000 Change 1999 2000 Change 1999 - ----------------------------------------------------------------------------------------------------------------------------------- Sales: Pharmaceuticals $ 3,283 20% $ 2,734 $ 9,309 16% $ 8,008 Agricultural products 1,003 2 980 4,293 5 4,087 - -------------------------------------------------------------------------------------------------------------------------------- Total sales, excluding divested businesses $ 4,286 15 $ 3,714 $ 13,602 12 $12,095 - -------------------------------------------------------------------------------------------------------------------------------- Earnings: Pharmaceuticals EBIT* $ 625 24 $ 506 $ 1,704 10 $ 1,547 Agricultural products EBIT* (48) 67 (145) 559 (2) 572 - -------------------------------------------------------------------------------------------------------------------------------- EBIT from operations 577 361 2,263 2,119 Corporate and other (158) (69) (957) (336) - -------------------------------------------------------------------------------------------------------------------------------- Consolidated EBIT* 419 292 1,306 1,783 Interest expense, net (68) (68) (215) (239) Income tax provision (78) (29) (340) (499) - -------------------------------------------------------------------------------------------------------------------------------- Net Earnings from continuing operations $ 273 $ 195 $ 751 $ 1,045 ================================================================================================================================
* 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 generally accepted accounting principles. Determination of EBIT may vary from company to company. As a result of the recent merger, management is still in the process of defining the segments and the financial metric that will be used to measure segment performance. Therefore, segment reporting will tend to evolve and may change in future periods. Pharmaceutical Segment - Pharmaceutical sales for the company consist of the former Pharmacia & Upjohn businesses and the pharmaceutical business of the former Monsanto's Searle unit. Sales for the pharmaceutical segment (excluding divested businesses) were $3.3 billion for the third quarter resulting in year-to-date sales of $9.3 billion. These results reflect quarter and year-to-date growth rates of 20 percent and 16 percent over 1999, respectively. The company believes that sales growth rates for the remainder of the year will be reflective of those realized over the nine-month period ending September 30, 2000. Sales dollars for the 1999 periods on a comparable basis were $2.7 billion and $8.0 billion. The impact of exchange rates on sales was 4 percent and 3 percent unfavorable for the quarter and year-to-date, respectively. Divested businesses had no sales impact on the third quarter and positive impact of $6 million year-to-date. In 1999, divested businesses affected sales favorably by $21 million and $70 million for the quarter and year-to-date, respectively. In the company's largest market, the U.S., sales growth for the quarter and year-to-date periods was 34 percent and 25 percent, respectively. Japan, the company's second largest market, recorded sales growth rates of 12 percent and 21 percent for the same periods. The growth rate in Japan reflects, in part, favorable currency exchange movements. Sales performance by country in the following table is based on location of customer.
- ----------------------------------------------------------------------------------------------------------------- Three months ended Nine months ended September 30, September 30, ------------------ ---------------- %Chg. %Chg. Net % Excl. Net % Excl. (U.S. dollars in millions) 2000 Change Ex.* 1999 2000 Change Ex.* 1999 - ---------------------------------------------------------------------------------------------------------------- United States $1,911 34% 34% $1,429 $5,105 25% 25% $4,086 Japan 226 12 6 202 687 21 11 569 Italy 117 1 16 116 398 -- 14 397 Germany 111 -- 14 111 329 (5) 8 345 United Kingdom 99 (8) (1) 108 321 (2) 3 326 France 85 (11) 1 95 262 (11) 1 294 Rest of world 734 9 18 673 2,207 11 17 1,991 - ---------------------------------------------------------------------------------------------------------------- Total sales, excluding divested businesses 3,283 20 24 2,734 9,309 16 19 8,008 Divested businesses -- n/a n/a 21 6 n/a n/a 70 - ---------------------------------------------------------------------------------------------------------------- Consolidated net sales $3,283 19% 23% $2,755 $9,315 15% 18% $8,078 ================================================================================================================
* Underlying growth reflects the percentage change excluding currency exchange effects. 17 18 A comparison of the period-to-period consolidated net sales of the company's major pharmaceutical products (including generic equivalents where applicable) is provided in the table below.
- ------------------------------------------------------------------------------------------------------------- Three months ended Nine months ended September 30, September 30, Net Percent Net Percent (U.S. dollars in millions) 2000 Change 1999 2000 Change 1999 - -------------------------------------------------------------------------------------------------------------- CELEBREX $ 687 77% $ 389 $1,842 89% $ 974 AMBIEN 233 81 129 498 47 339 XALATAN 185 36 136 497 43 348 GENOTROPIN 104 (4) 108 345 6 326 CAMPTOSAR 134 65 81 325 55 210 DETROL/DETRUSITOL 125 45 86 319 35 236 CLEOCIN/DALACIN 79 (7) 85 254 -- 253 XANAX 82 (6) 87 247 -- 248 MEDROL 64 (12) 73 208 (5) 220 ARTHROTEC 79 (4) 82 207 (22) 265 DEPO-PROVERA 63 -- 63 188 -- 188 NICORETTE Line 50 -- 50 159 (8) 173 FRAGMIN 44 (14) 51 158 3 153 PHARMORUBICIN/ELLENCE 53 13 47 152 4 146 ALDACTONE/SPIRO Line 49 (11) 55 145 (10) 162 COVERA/CALAN/VERAPAMIL 55 38 40 135 7 126 DAYPRO 43 (19) 53 116 (36) 182 ROGAINE 32 (18) 39 100 (1) 101 HEALON 29 (3) 30 93 (5) 98 CABASER/DOSTINEX 29 26 23 85 44 59 MIRAPEX 17 6 16 77 40 55 - -------------------------------------------------------------------------------------------------------------- Total $2,236 30% $1,723 $6,150 26% $4,862 ==============================================================================================================
CELEBREX, the company's leading product and the number-one selling prescription arthritis medication worldwide, recorded sales of $687 million in the third quarter and $1.8 billion for the first nine months, representing growth of 77 percent and 89 percent, respectively. There was a minor positive effect on sales in the third quarter due to purchasing at the trade level in anticipation of the transfer of the company's CELEBREX distribution. The company continued to rollout CELEBREX in the major European countries with third quarter launches in Italy and Spain. The launch in France is expected 18 19 to occur by the end of the year. CELEBREX will be co-promoted (or, where required by law, co-marketed) by Pfizer, Inc. in Europe as in the U.S. During the quarter, results of the CELEBREX long-term safety trial were published in the Journal of the American Medical Association (JAMA). This trial of 8,000 arthritis patients evaluated the safety of CELEBREX compared to two commonly prescribed non-steroidal anti-inflammatory drugs. Patients treated with CELEBREX experienced significantly fewer gastrointestinal complications. These data were submitted in a supplemental New Drug Application (sNDA) to the Food and Drug Administration (FDA) for possible inclusion in the approved labeling of CELEBREX during the second quarter. Sales of AMBIEN, the market leading treatment for short-term insomnia in the U.S., increased 81 percent in the third quarter and 47 percent for the first nine months. Third quarter sales were positively influenced by wholesale inventory levels, which were slightly higher than normal due to purchasing prior to a September price increase. The company also initiated a direct-to-consumer advertising campaign, which contributed to the growth of AMBIEN during the third quarter. XALATAN, the top-selling glaucoma medication in the U.S. and worldwide, posted double-digit sales growth in the third quarter and first nine months of 2000 (36 percent and 43 percent, respectively). XALATAN continues to grow rapidly in all key markets as it expands its market leadership position in the U.S. and other major markets like Japan. In October, the company received a second approvable letter from the U.S. FDA for XALCOM, a combination product containing XALATAN and timolol in a single daily dose. It is likely that new brand-name competitors to XALATAN will enter the market in the U.S. in the near future. GENOTROPIN, the world's leading growth hormone, recorded sales of $104 million in the third quarter and $345 million for the first nine months. Sales in the third quarter decreased 4 percent as a result of an inventory adjustment at the wholesale level for sales recorded during the first half of the year. Sales were also negatively impacted by foreign exchange. During the third quarter, the company launched GENOTROPIN in the U.S. and Europe for the treatment of patients with Prader-Willi Syndrome, the most common genetic cause of obesity. CAMPTOSAR, the leading treatment of colorectal cancer in the U.S., recorded third quarter sales of $134 million, an increase of 65 percent. Sales were positively impacted by inventory purchasing due to a price increase in August. For the first nine months, CAMPTOSAR recorded sales of $325 million, a 55 percent increase over the prior year. As a result of its demonstrated ability to prolong survival, a CAMPTOSAR-containing regimen is now the standard of care for patients with metastatic colorectal cancer. Sales of DETROL, the world's leading treatment for overactive bladder, increased 45 percent to $125 million in the third quarter. For the first nine months, worldwide sales increased 35 percent to $319 million. For the first nine months, sales of DEPO-PROVERA, XANAX, and CLEOCIN were in line with their 1999 performance despite variations between quarters caused by typical inventory patterns. The MEDROL line, which has experienced similar quarterly fluctuations, declined 5 percent for the first nine months. NICORETTE, for smoking cessation, was flat in the third quarter, but declined 8 percent for the first nine months due to inventory contractions and the presence of a new generic competitor in the U.S. business. During the quarter, many products formerly in the Searle catalogue (excluding CELEBREX) were subject to price increases. As a result, U.S. wholesalers 19 20 increased inventory levels of the COVERA line and ARTHROTEC. For the first nine months, sales of the COVERA line were up 7 percent while ARTHROTEC sales were down 22 percent. Sales of ARTHROTEC and DAYPRO, the company's older arthritis medications, are significantly lower this year as the COX-2 inhibitors, led by CELEBREX, continue to take a larger share of the U.S. market. Sales of CABASER/DOSTINEX for Parkinson's disease/hyperprolactinemia grew 26 percent in the quarter and 44 percent for the first nine months. Sales of the company's other drug for Parkinson's disease, MIRAPEX, increased 6 percent in the third quarter and 40 percent for the first nine months. ZYVOX, introduced in the U.S. during the second quarter, recorded sales of $30 million for the year-to-date period. ZYVOX is the first antibiotic from a completely new class of antibiotics in over 30 years and is indicated for the treatment of patients with severe Gram-positive infections including pneumonia, skin and skin structure infections, and bacteremia. Cost of products sold for the quarter and year-to-date periods ending September 30, 2000 and 1999 were $746 million and $687 million and $2.2 billion and $2.0 billion, respectively. A favorable shift in the product mix and selective price increases resulted in a two-percentage point improvement in the cost of products sold as a percent of sales for the quarter and year-to-date periods. Research and development expenditures for the third quarter were $529 million or a decrease of 4 percent over the comparable quarter of 1999. Conversely, year-to-date spending increased 3 percent to $1.7 billion over 1999. Higher overall research and development expenditures related to certain projects were offset in the quarter by lower licensing fees and development spending for ZYVOX which has now received FDA approval. Selling, general and administrative expenses increased 17 percent and 21 percent for the quarter and year-to-date periods ended September 30, 2000. Co-promotion payments, promotion and marketing costs and sales force expansion were the drivers behind the increases for the quarterly and year-to-date periods. Amounts recorded in all other, net were $11 million gain and ($69) million loss and ($48) million loss and ($140) million loss for the quarter and year-to-date periods of 2000 and 1999, respectively. Reduced income from the AMBIEN collaboration and the absence of gains on divestitures that were realized in 1999 are the main drivers of the change. Merger and restructuring expenses included in pharmaceutical operations total $114 million for the third quarter and nine months of 2000. These charges, recorded on the merger and restructuring line of the earnings statement, encompass the separation of approximately 565 employees for $83 million, contract termination and other exit costs totaling $8 million, as well as $23 million of assets to be disposed. All of these charges are the result of duplicate positions and facilities due to the integration of the former Pharmacia & Upjohn and Searle organizations. Agricultural Products Segment- Net sales, as reported, increased 2 percent to $1.0 billion for the three-month period ended September 30, 2000, compared to $983 million for the three-month period ended September 30, 1999. Year-to-date net sales increased 4 percent to $4.3 billion compared to $4.1 billion for the same period in 1999. The quarter-to-quarter increase is mainly due to an increase in sales of ROUNDUP lawn-and-garden products (mainly attributable to a change in 1999 to the distribution method under which distribution channel inventory declined) and selective chemistries business. For the nine-month period, sales growth is largely attributable to an increase in glyphosate volumes. Offsetting these gains were 11 percent and 8 percent declines for the quarter and nine months ending September 30, 2000 in Monsanto's seeds 20 21 business revenue, part of which was due to the divestiture of the Stoneville Pedigreed Seed Business in December 1999. Excluding Stoneville sales from the analysis, sales growth for the nine-month period was 5 percent. On September 20, 2000, the compound per se patent protection for the active ingredient in ROUNDUP herbicide expired in the United States. Consistent with its global pricing strategy, the company expects to continue to follow a pricing strategy which selectively reduces prices to encourage new uses and increase sales volumes. Cost of products sold decreased slightly to $549 million for the three-month period ended September 30, 2000 from $557 million for the same period in 1999. For the nine month period in 2000, cost of products sold increased 5 percent to $2.0 billion from $1.9 billion for the same period in 1999. The primary reason for this increase was an 18 percent increase in glyphosate sales volumes. Start-up expenses associated with the new POSILAC manufacturing facility in Augusta, Georgia also contributed to increased cost of products sold. Research and development expenses for the quarterly and year-to-date periods ending September 30, 2000 and 1999 were $140 million and $179 million and $431 million and $517 million, respectively. These decreases are primarily due to the decision to realign the focus of research programs to core crops and a reduction of spending on certain non-core programs. Selling, general and administrative expenses decreased 7 percent to $300 million for the third quarter of 2000, compared to $324 million for the same period in 1999. This decrease is primarily due to payments under certain agreements that allow third party access to glyphosate registration data, as well as a decline in spending related to the divestiture of the Stoneville Pedigreed Seed business. Partially offsetting these reductions were increased spending on biotechnology acceptance and education programs and agency fees related to the ROUNDUP lawn and garden business. On a year-to-date basis, selling, general and administrative expenses increased 7 percent, to $988 million compared to $926 million for the same period in 1999. Part of this increase was attributable to increased spending on biotech acceptance and education programs in 2000. Also contributing were increased agency fees related to the ROUNDUP lawn and garden business. Amortization and adjustments of goodwill expenses for the quarter were relatively flat, and for the year-to-date periods ending September 30, 2000 and 1999 were $178 million and $91 million, respectively. The year-to-date increase for the nine months ending September 30, 2000 is due to an $84 million write-off related to the termination of certain nutrition programs at Calgene. During the third quarter, the agricultural segment recorded restructuring charges of $26 million, totaling a net charge of $183 million for the year. These charges are part of a strategy that included the elimination of certain food and biotech research programs. The strategy is part of a plan to focus more stringently on the four key crops of corn, soybeans, wheat and cotton and included the elimination of human nutrition and certain food and biotech research programs as well as the consolidation of seed operations. The third quarter charges, recorded on the merger and restructuring line of the earnings statement, consisted of workforce reductions of 215 employees totaling $21 million, asset impairments of $3 million and other exit costs of $2 million. On a year-to-date basis, the net charge of $183 million was comprised of asset impairments of $132 million, workforce reductions of $52 million for 590 employees and other exit costs of $3 million, net of an adjustment to a prior restructuring of $4 million. Of these charges, $32 million was recorded in cost of products sold, $84 million was recorded in amortization and adjustment of goodwill and the remaining amounts were recorded on the merger and restructuring line of the earnings statement. Corporate and Other- Corporate expenses of $158 million in the third quarter include $52 million of merger costs and $34 million of corporate restructuring charges. On a year-to-date basis, corporate expenses totaled $957 million, consisting of approximately $618 million of merger and corporate restructuring costs, a $100 million charitable contribution made in the first quarter and other items. The merger-related costs include expenditures such as moving and relocation costs, contract termination costs, investment bankers' fees, and consulting, legal and accounting costs related to the merger transaction between the former Monsanto 21 22 and Pharmacia & Upjohn. In addition, there were a number of employee benefit arrangements for which expense was recognized in direct connection with the merger. These included premium stock option awards for which the exercise price was reset coincident with the closing of the merger. Other employee benefit expenses were similarly accelerated due to the merger. The restructuring charges relate mainly to separation payments made to corporate employees of the merged companies. The restructuring charges relating to the agricultural segment and the pharmaceutical operations have been separately identified and allocated to those segments. The net interest position was unchanged for the third quarter of 2000 at $68 million. For the year-to-date period, net interest expense declined 10 percent or $24 million. Declining debt balances slightly offset by increases in interest rates are mainly responsible for this change. The estimated annual effective tax rate for 2000 is 29 percent. This includes the net effects of restructuring charges taxed in various jurisdictions, including the U.S., partially offset by certain nondeductible charges related to the merger and restructuring increasing the rate. Excluding such costs, the estimated annual effective tax rate for 2000 is 30 percent. This represents a lowering of the annual rate from the 31.5 percent reported in the second quarter due to a revised mix of taxable income sources. This third-quarter change in the effective rate caused the third-quarter rate to be approximately 22 percent. DISCONTINUED OPERATIONS The company recorded a net loss on sale of discontinued operations during the quarter ended September 30, 2000 of $26 million compared to $12 million gain for the comparative year quarter. The third quarter of 1999 also had net income from discontinued operations of $27 million. On a year-to-date basis, the current year resulted in a net loss on sale of discontinued operations of $27 million whereas the prior year period amount was a $12 million gain. The 1999 year-to-date income from discontinued operations was $57 million. For the quarter, the loss is attributable to the completed sale of the biogums business. The company received proceeds related to the sale of $592 million and retained certain liabilities. Included in the recorded year-to-date amounts for 2000 are income and expenses for the tabletop and artificial sweeteners businesses. During the second quarter, the sale of the artificial sweeteners businesses was completed resulting in gross proceeds of $507 million. These events, combined with the sale of the company's tabletop sweetener business ($570 million) in the first quarter, result in total gross proceeds of $1.7 billion on a year-to-date basis. For the prior year, income from and gains on sales of discontinued operations is attributable to the Ortho lawn-and-garden and alginates business divestitures and for reversals of restructuring accruals. RESTRUCTURINGS Merger and restructuring charges associated with the merger transaction involving Pharmacia & Upjohn and the former Monsanto and the restructuring of operations in the agricultural product business for the first nine months of 2000 total $914 million. This amount is comprised of $798 million on the merger and restructuring line of the earnings statement in addition to $32 million included in cost of products sold relating to a second quarter write-off of inventory and an $84 million adjustment to goodwill also recorded 22 23 during the second quarter. During the third quarter, the company recorded merger and restructuring charges of $226 million on the merger and restructuring line. During the third quarter, the company recorded an additional $52 million of merger costs on the merger and restructuring line and approximately $525 million in merger-related costs for the year-to-date. The third-quarter charges include costs to integrate the Pharmacia & Upjohn and former Monsanto organizations such as consultant fees, contract termination costs, moving and relocation costs and travel expenses. On a year-to-date basis, these merger-related costs also include transaction costs such as investment bankers, attorneys, registration and regulatory fees and other professional services. In addition, these costs include various employee incentive and change-of-control costs directly associated with the merger. The latter includes a non-cash charge of $232 million during the first quarter that was related to certain employee stock options that were repriced in conjunction with the merger pursuant to change of control provisions. Pursuant to the terms of these "premium options," at consummation of the merger, the original above-market exercise price was reduced to equal the fair market value on the date of grant. Restructuring charges of $174 million were also recorded on the merger and restructuring line of the earnings statement during the third quarter. These charges included $138 million associated with the separation of approximately 630 employees in the pharmaceutical and corporate functions and 215 employees in the agricultural subsidiary. The balance of the charges consisted of $26 million relating to assets to be disposed of and $10 million associated with contract terminations and other exit costs. The third quarter restructuring charges are comprised of $34 million relating to corporate functions, $114 million for pharmaceutical operations and $26 million for agricultural products operations. The corporate component relates to the separation of 65 employees. Pharmaceutical operations restructuring activities include the separation of approximately 565 employees, assets to be disposed of $23 million and contract terminations and other exit costs of $8 million. These charges are the result of integrating the former Pharmacia & Upjohn and Monsanto companies into a single organization and the resulting elimination of duplicate positions and facilities. On a year-to-date basis, pharmaceutical and corporate functions have incurred total restructuring charges of $207 million, all of which has been recorded on the merger and restructuring line of the earnings statement. These charges encompass the separation costs for approximately 680 employees, assets to be disposed of $23 million and other exit costs of $8 million. As of September 30, 2000, 658 employees have been separated from the company during 2000. The restructuring of the agricultural products operations includes the separation of 215 employees, asset impairments of $3 million and contract termination and other exit costs of $2 million. These charges are part of a strategy that includes the elimination of certain food and biotech research programs. The strategy is part of a plan that encompasses a decision to focus more stringently on the four key crops of corn, soybeans, wheat and cotton and included the elimination of human nutrition and certain food and biotech research programs as well as the consolidation of seed operations. On a year-to-date basis, agricultural products operations have incurred net restructuring charges of $183 million. These charges are comprised of separation costs for 590 employees, asset impairments of $132 million and other exit costs of $3 million. The charges were recorded on the earnings statement as cost of products sold of $32 million, amortization and adjustment of goodwill of $84 million and $67 million to the merger and restructuring line. As of September 30, 2000, 180 employees have been separated from the company during 2000. 23 24 Total restructuring charges and spending associated with the current restructuring plans relating to the integration of the former Pharmacia & Upjohn and Monsanto companies and the restructuring of the agricultural products operations are as follows:
Workforce Other Exit Reductions Costs - --------------------------------------------------------------- 2000 Charges $228 $11 - -------------------------------------------------------------- 2000 Spending 93 6 - -------------------------------------------------------------- Remaining balance September 30, 2000 $135 $ 5 ==============================================================
During 1999, the company recorded $54 million in expenses which was comprised of $57 million of restructuring charges related to the merger with Sugen, net of a $3 million adjustment to the 1998 turnaround restructuring. The charge included costs pertaining to reorganizations that resulted in the elimination of certain research and development (R&D) projects as well as the elimination of 375 employee positions impacting the pharmaceutical segment and corporate and administrative functions. The objective of the restructuring is to eliminate duplicate functions and investments in R&D as well as reorganize the sales force based on anticipated future requirements of the company at the time of the restructuring. During the first three quarters of 2000, $24 million was paid and charged against the liability. These amounts related to a portion of separation benefits for the approximately 160 employees severed during the first nine months of 2000 as well as some terminated during 1999. The company anticipates all activities associated with this restructuring to be substantially complete by the end of 2000. The remaining cash expenditures relating to this restructuring total $27 million and are expected to be made during 2000 with some separation annuity payments being completed in 2001. At September 30, 2000, $24 million remained of the $92 million of restructuring accruals made during the fourth quarter of 1998 by Pharmacia & Upjohn related to a comprehensive turnaround program. The balance primarily represents annuity payments for severance that will extend into 2001. In the fourth quarter of 1998, the former Monsanto recorded net restructuring charges of $327 million as part of an approved plan to close facilities, reduce the current workforce and exit non-strategic businesses. The activities that the former Monsanto planned to exit in connection with this plan principally comprised a tomato business and a business involved in the operation of membership-based health and wellness centers. The charge of $327 million was comprised of facility shut-down charges of $99 million, workforce reduction costs of $103 million and asset impairments and other costs of $125 million. As of September 30, 2000, all activities under this plan have been substantially completed. Approximately 300 employees were severed during the first nine months of 2000 at a cost of $36 million. Cash outflows associated with these separations were charged against the 1998 restructuring liability. Additional spending and adjustments of the 1998 accrual amounting to $11 million were made during the year reducing the accrual balance as of September 30, to less than $2 million. The company expects to complete the remaining restructuring actions within the originally planned time frame. Additional restructuring charges are expected to be incurred as the combining and restructuring of operations of the former Monsanto and Pharmacia & Upjohn continues to take place. Total merger and restructuring charges are estimated to be $2.0 billion to $2.5 billion over the next three years and yield estimated annual savings of approximately $600 million. 24 25 COMPREHENSIVE INCOME Comprehensive income equals net earnings plus other comprehensive income (OCI). For Pharmacia Corporation, OCI includes currency translation adjustments, unrealized gains and losses on available-for-sale (AFS) securities, and minimum pension liability adjustments. Comprehensive income for the three months ended September 30, 2000 and 1999, was $332 million and $258 million, respectively. For the nine months ended September 30, 2000 and 1999 comprehensive income was $755 million and $545 million, respectively. Unrealized gains in equity securities classified as AFS account for most of the third-quarter 2000 difference between net earnings and comprehensive income. The comparable 1999 period difference is comprised of favorable translation adjustments and unrealized gains on AFS securities. Offsetting these favorable amounts is an unfavorable balance in the minimum pension liability adjustment. Unrealized gains offset by translation losses account for the net favorable year-to-date difference at September 30, 2000. For the same year-to-date period in 1999, the difference between net earnings and comprehensive income was mainly due to fluctuations in currency translation adjustments reflecting changes in the strength of the dollar against other currencies. FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
- ----------------------------------------------------------------------------------------- September 30, December 31, 2000 1999 - ----------------------------------------------------------------------------------------- Working capital (U.S. dollars in millions) $ 5,580 $ 3,508 Current ratio 1.94:1 1.49:1 Debt to total capitalization 34.6% 42.9% - -----------------------------------------------------------------------------------------
Working capital has increased $2.1 billion or 59 percent over the year-to-date period ending September 30, 2000. Increases in accounts receivable due to sales volume, program changes for certain selling arrangements and seasonality accounted for the increase in current assets. Additionally, a reduction in short-term debt of approximately $1.0 billion has also contributed favorably to the measurement. The overall debt position has also shown favorable movement at the year-to-date period ending September 30, 2000. In addition to the short-term debt reduction of 50 percent, long-term debt has decreased by $726 million or 12 percent during the same period. These reductions, in addition to favorable net earnings, have reduced the debt to capitalization ratio by 8 percent over the year-to-date period. On October 23, 2000, Monsanto Company, Pharmacia's agricultural business subsidiary, completed a partial initial public offering of its shares that resulted in gross proceeds of approximately $761 million. A description of this event is detailed in a separate section of this Item number. The company's future cash provided by operations and borrowing capacity are expected to cover normal operating cash flow needs, planned capital acquisitions, and dividend payments as approved by the board of directors for the foreseeable future. 25 26 CONTINGENT LIABILITIES AND LITIGATION The company is involved in a number of legal and environmental proceedings. These include a substantial number of product liability suits claiming damages as a result of the use of the company's products, suits arising out of the company's contractual arrangements or business activities, and administrative and judicial proceedings at several "Superfund" sites. The company's estimate of the ultimate cost to be incurred in connection with environmental situations could change due to uncertainties at many sites with respect to potential cleanup remedies, the estimated cost of cleanup, and the company's share of a site's cost. With regard to the company's discontinued industrial chemical facility in North Haven, Connecticut, the company will soon be required to submit a corrective measures study report to the EPA. It now appears likely that this report will need to be submitted for EPA review during 2001, at which time it may become appropriate to reevaluate the existing reserves designated for remediation in light of changing circumstances. It is reasonably possible that a material increase in accrued liabilities will be required but it is not possible to determine what, if any, additional exposure exists at this time. In April 1999, a jury verdict was returned against the company in a lawsuit filed in U.S. District Court in North Carolina. The lawsuit claims that a 1994 license agreement was induced by fraud stemming from nondisclosure of relevant information and that company did not have the right to license, make or sell products using the plaintiff's technology for glyphosate resistance under this agreement. The jury awarded $15 million in actual damages for unjust enrichment and $50 million in punitive damages. The company has appealed this verdict, believes it has meritorious grounds to overturn the verdict and intends to vigorously pursue all available means to have the verdict overturned. No provision has been made in the company's consolidated financial statements with respect to the award for punitive damages. 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. OTHER Partial Agricultural Business Initial Public Offering - Monsanto Company, Pharmacia's agricultural business subsidiary, completed an offering of shares in connection with a partial initial public offering (IPO) on October 23, 2000. In connection with the offering, approximately 38 million shares were sold at a price of twenty dollars per share resulting in gross proceeds of approximately $761 million. Estimated costs and expenses associated with the offering, including underwriting fees, are $46 million. Pharmacia continues to own approximately eighty-five percent of the outstanding stock of Monsanto. The portion of Monsanto that will not be owned by the company will be accounted for as a minority interest in the financial statements. Proceeds received in connection with the offering were used to reduce Monsanto debt. New Biotech Venture - The company announced its intention to create a new biotech venture. The key elements of the plan, if implemented, include the creation of a separate, research-based biotechnology enterprise and the transfer of certain Pharmacia clinical development resources to an external clinical research organization (CRO). Under the plan, Pharmacia would establish a new biotech company as an independent, entrepreneurial business together with outside investors. Pharmacia would make a substantial investment in the new venture. The new company is expected to consist primarily of Pharmacia's Sweden-based metabolic diseases research group, its related biopharmaceutical development unit and the company's Plasma business. The terms and conditions of the plan have not yet been established. The implementation of the plan is subject to, among other things, further negotiations and market conditions. New Accounting Standards - In 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement requires companies to record derivatives on the balance sheet as assets and liabilities measured at fair value. The accounting treatment of gains and losses resulting from changes in the value of derivatives depends on the use of the derivative and 26 27 whether it qualifies for hedge accounting. The company will adopt SFAS 133 and its amendments in the first quarter of 2001, and does not expect it to have a material effect on the company's results of operations, cash flows or financial position. In December 1999, the Securities and Exchange Commission (SEC) released Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB 101) which provides guidance on the recognition, presentation and disclosure of revenue in financial statements. SAB 101 allows companies to report any changes in revenue recognition related to adopting its provisions as an accounting change at the time of implementation in accordance with APB Opinion No. 20, "Accounting Changes." In response to a specific dialogue with the SEC, the company recorded a cumulative effect of a change in accounting principle, effective January 1, 1999, for revenue recognized in 1998 related to the sale of certain marketing rights. The effect on earnings in 1999 was an after-tax loss of $20 million ($0.02 per share), net of taxes of $12 million. The pre-tax amount of $32 million will be amortized to income over twenty years. The company is currently in the process of assessing the impact of adopting SAB 101 on its revenue recognition policies and on prior revenue transactions. The company currently anticipates that SAB 101 will not have a material impact on financial position, cash flows or results of operations. However, due primarily to certain up-front and milestone payments from co-promotion partners that were recognized in earnings in prior years, implementation of SAB 101 is expected to result in a cumulative effect adjustment. While the company has not yet finalized its review, it is currently estimated that the pre-tax amount of the cumulative adjustment will lie within a range from $250 million to $400 million. Any accounting changes that result from the adoption of SAB 101 must be made no later than the fourth quarter of 2000, effective as of January 1, 2000. Item 3. Quantitative and Qualitative Disclosures about Market Risk During the year-to-date period ended September 30, 2000, the company has reduced its debt position by approximately $1.74 billion utilizing proceeds received from divested businesses (see Note I to the consolidated financial statements). The effect of this debt elimination will reduce the company's exposure to interest rate fluctuation. There are no other material changes related to market risk from the disclosures in Pharmacia Corporation's Form 8-K filed on May 22, 2000 with the Securities and Exchange Commission with respect to the year ended December 31, 1999. 27 28 PART II - OTHER INFORMATION Item 1. LEGAL PROCEEDINGS In June 1996, Mycogen Corporation, Mycogen Plant Sciences, Inc. and Agrigenetics filed suit against former Monsanto in California State Superior Court in San Diego alleging that we failed to license, under an option agreement, technology relating to Bt corn and glyphosate-tolerant corn, cotton and canola. On October 20, 1997, the court construed the agreement as a license to receive genes rather than a license to receive germplasm. Jury trial of the damage claim for lost future profits from the alleged delay in performance ended March 20, 1998, with a verdict against us awarding damages totaling $174.9 million. On June 28, 2000, the California Court of Appeals for the Fourth Appellate District issued its opinion reversing the jury verdict and related judgment of the trial court, and directed that judgment should be entered in the company's favor. Mycogen's subsequent motion for rehearing has been denied. Mycogen's petition with the California Supreme Court requesting further review was granted on October 25, 2000, and their appeal of the reversal of judgment is continuing. On May 19, 1995, Mycogen Plant Sciences, Inc. filed suit against former Monsanto in the U.S. District Court in California alleging infringement of its patent involving synthetic Bt genes, and seeking unspecified damages and injunctive relief. On November 10, 1999, the court granted summary judgment in the company's favor and dismissed all of Mycogen's patent claims, finding Mycogen's patent invalid on the basis of the company's prior invention. Previously, the court had also held that products containing Bt genes made prior to January 1995 did not infringe Mycogen's patent. Mycogen has filed an appeal with the Court of Appeals for the Federal Circuit seeking to overturn the dismissal and oral argument on the appeal is scheduled for November 16, 2000. Former Monsanto is also a party in interference proceedings against Mycogen in the U.S. Patent and Trademark Office to determine the first party to invent certain inventions related to Bt technology, and has requested a stay of the interference proceeding pending determination of Mycogen's appeal. Under U.S. law, patents issue to the first to invent, not the first to file for a patent on, a subject invention. If two or more parties seek patent protection on the same invention, as is the case with the company's Bt technology, the U.S. Patent and Trademark Office must hold interference proceedings to identify the party who first invented the particular invention in dispute. On September 29, 2000, the U.S. Patent and Trademark Office found in the company's favor and against Mycogen regarding patent rights to tomato plants transformed to contain full-length Bt gene technology. It is expected that Mycogen will contest this outcome via judicial proceedings. On November 20, 1997, Aventis filed suit in the U.S. District Court in North Carolina against the former Monsanto and DEKALB Genetics alleging that because DEKALB Genetics failed to disclose a research report involving the testing of plants to determine glyphosate tolerance, Aventis was induced by fraud to enter into a 1994 license agreement relating to technology incorporated into a specific type of herbicide-tolerant corn. Aventis also alleged that DEKALB Genetics did not have a right to license, make or sell products using Aventis' technology for glyphosate resistance under the terms of the 1994 agreement. On April 5, 1999, the trial court rejected Aventis's claim that the 28 29 contract language did not convey a license. Jury trial of the fraud claims ended April 22, 1999, with a verdict for Aventis and against DEKALB Genetics. The jury awarded Aventis $15 million in actual damages and $50 million in punitive damages. The trial was bifurcated to allow claims for patent infringement and misappropriation of trade secrets to be tried before a different jury. Jury trial on these claims ended June 3, 1999, with a verdict for Aventis and against DEKALB Genetics. The district court had dismissed the former Monsanto from both phases of the trial prior to verdict on the legal basis that it was a bona fide licensee of the corn technology. On or about February 8, 2000, the district court affirmed both jury verdicts against DEKALB Genetics, and enjoined DEKALB Genetics from future sales of the specific type of herbicide-tolerant corn involved in the agreement (other than materials held in DEKALB's inventory on June 2, 1999). Judgment was entered March 10, 2000. On March 8, 2000, Aventis filed with the Court of Appeals for the Federal Circuit its notice to appeal certain district court rulings that denied claims for further equitable relief against the company, including the court's ruling that Monsanto was a bona fide licensee. If the company loses, it could be precluded from marketing its current product. However, the company and DEKALB Genetics have announced their intention, as of 2001, to replace this specific type of herbicide-tolerant corn with new technology not associated with Aventis's claims in this litigation. DEKALB Genetics has also filed an appeal of the jury verdict with the U.S. Court of Appeals for the Federal Circuit, and submitted its initial appellate brief on July 31, 2000. Pending the conclusion of this litigation, the company, its licensees and DEKALB Genetics (to the extent permitted under the district court's order and an agreement with Aventis) continue to sell the specific type of herbicide-tolerant corn pursuant to a royalty-bearing agreement with Aventis. Since the 1984 termination of the class action litigation against various manufacturers, including former Monsanto, of the herbicide Agent Orange used in the Vietnam war, former Monsanto has successfully defended against various lawsuits associated with the herbicide's use. A few matters remain pending, including three separate actions, now consolidated, filed against old Monsanto and The Dow Chemical Company in Seoul, Korea in October 1999. Approximately 13,760 Korean veterans of the Vietnam war allege they were exposed to, and suffered injuries from, herbicides manufactured by the defendants. The complaints fail to assert any specific causes of action, but seek damages of 300 million won (approximately $250,000) per plaintiff. Pharmacia is also subject to ancillary actions in Korea, including a request for provisional relief pending resolution of the main lawsuit. On December 2, 1999, plaintiffs filed a class action lawsuit against former Monsanto and five other herbicide manufacturers in the U.S. District Court for the Eastern District of Pennsylvania. The plaintiffs purport to represent a class of over 9,000 Korean and 1,000 U.S. service persons allegedly exposed to the herbicide Agent Orange and other herbicides sprayed from 1967 to 1970 in or near the demilitarized zone separating North Korea from South Korea. The complaint does not assert any specific causes of action or demand a specified amount in damages. The Judicial Panel on Multidistrict Litigation has granted transfer of the case to the U.S. District Court for the Eastern District of New York for coordinated pretrial proceedings as part of In re "Agent Orange" Product Liability Litigation, which is the multidistrict litigation proceeding established in 1977 to coordinate Agent Orange-related litigation in the United States. On March 7, 2000, the U.S. Department of Justice filed suit on behalf of the EPA in U.S. District Court for the District of Wyoming against former Monsanto, Solutia (the former Monsanto's chemical business spun-off in 1997) and P4 Production (a joint venture 99% owned by Monsanto), seeking civil penalties for alleged violations of Wyoming's environmental laws and regulations, and of an air permit issued in 1994 by the Wyoming Department of Environmental Quality. The permit had been issued for a coal coking facility in Rock Springs, Wyoming that is currently owned by P4 Production. The United States sought civil penalties of up to $25,000 per day (or $27,500 per day for violations occurring after January 30, 1997) for the air violations, and immediate compliance with the air permit. In light of the government's lawsuit, the companies have voluntarily dismissed a declaratory judgement action that they had previously brought, and have raised the same issues as an affirmative defense to this action, arguing that it is precluded by the doctrine of res judicata because the companies have already paid a $200,000 fine covering the same Clean Air Act violations pursuant to a consent decree entered in the First Judicial District Court in Laramie County, Wyoming on June 25, 1999. On April 12, 2000, the Department of Justice revised its settlement demand, from $2.5 million to $1.9 million plus injunctive relief to ensure P4 Production's compliance with the Clean Air Act. On April 21, 2000, the companies filed a motion for dismissal or summary judgement on the grounds of claim preclusion, including the doctrines of res judicata and release. 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. 29 30 Item 5. OTHER INFORMATION CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING INFORMATION Except for historical information contained herein, the statements in this Report are "forward-looking statements" that inherently involve risks and uncertainties. Forward-looking statements include statements regarding anticipated financial results, growth plans, product performance, research and development, regulatory approval and public acceptance of new products, the potential impact of currency fluctuations and other economic and business developments. Forward-looking statements often include the words "believes," "expects," "will," "intends," "plans," "estimates," or similar expressions. The company's forward-looking statements are based on current expectations, currently available information and current assumptions that the company believes to be reasonable. Actual results, however, may differ materially from those expressed or implied by such forward-looking statements. Factors that may cause or contribute to those differences include, among others: management's ability to integrate the operations of the former Monsanto Company with those of the former Pharmacia & Upjohn, Inc, and to implement strategic and restructuring initiatives; the ability to fund research and development, the success of research and development activities and the speed with which regulatory authorizations and product roll-outs may be achieved; the effect of new competition; the ability to bring new products to market ahead of competition; the ability to successfully market new and existing products in new and existing domestic and international markets; the ability to meet generic and branded competition after the expiration of the company's patents, including the expiration of Monsanto's ROUNDUP herbicide patent in the United States which occurred in September 2000; domestic and foreign social, legal and political developments, especially those relating to health care reform, pricing controls, governmental and public acceptance of products developed through biotechnology, and product liabilities; the ability to successfully negotiate pricing of pharmaceutical products with managed care groups, health care organizations and government agencies worldwide; the effect of seasonal conditions and of commodity prices on agricultural markets worldwide; exposure to product liability, antitrust and other lawsuits, and contingencies related to actual or alleged environmental contamination; the company's ability to protect its intellectual property, and its success in litigation involving its intellectual property; fluctuations in foreign currency exchange rates; general domestic and foreign economic and business conditions; the effects of the company's accounting policies and general changes in generally accepted accounting practices; the company's ability to attract and retain current management and other employees of the company; and other factors that may be described elsewhere in this Report or in other filings of either the company, Pharmacia & Upjohn, Inc. or Monsanto Company with the United States Securities and Exchange Commission, especially on Forms 10-K, 10-Q and 8-K (if any), and in Monsanto Company's Registration Statement on Form S-1. The company does not assume the obligation to update any forward-looking statements. One should understand that it is not possible to predict or identify all such factors. Consequently, the reader should not consider any such list to be a complete statement of all potential risks or uncertainties. 30 31 Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits - See Exhibit Index (b) Reports on Form 8-K Report on Form 8-K dated November 1, 2000 was filed pursuant to Item 5 (Other Events) and Item 7 (Financial Statements and Exhibits). 31 32 EXHIBIT NO. DESCRIPTION - - ----------- ----------- 2 1. Agreement and Plan of Merger, dated as of December 19, 1999, as amended by Amendment No. 1 dated as of February 18, 2000, among Monsanto Company, MP Sub, Incorporated and Pharmacia & Upjohn, Inc. (incorporated herein by reference to Exhibit 2.1 of the Registrant's Form S-4 filed on February 22, 2000, File No. 333-30824) 2. Stock Option Agreement, dated as of December 19, 1999, by and between Monsanto Company, as Issuer, and Pharmacia & Upjohn, Inc., as Grantee (incorporated herein by reference to Exhibit 2.2 of the Registrant's Form S-4 filed on February 22, 2000, File No. 333-30824) 3. Stock Option Agreement, dated as of December 19, 1999, by and between Pharmacia & Upjohn, Inc. and Monsanto Company, as Grantee (incorporated herein by reference to Exhibit 2.3 of the Registrant's Form S-4 filed on February 22, 2000, File No. 333-30824) 4. Form of Separation Agreement by and between Pharmacia Corporation and Monsanto Company dated as of September 1, 2000 Grantee (incorporated herein by reference to Exhibit 2.1 of Monsanto Company's Form S-1 filed on September 22, 2000, File No. 333-36956) 3 1. Restated Certificate of Incorporation of the Company as of October 28, 1997 (incorporated herein by reference to Exhibit 3(i) of the Registrant's Form 10-Q for the quarter ended September 30, 1997) 2. Certificate of Amendment to Restated Certificate of Incorporation of the Registrant, effective March 31, 2000 (incorporated herein by reference to Exhibit 4.2 of the Registrant's Form S-8 filed on April 5, 2000) 3. By-Laws of the Registrant, as amended and restated effective March 31, 2000 (incorporated herein by reference to Exhibit 3.2 of the Registrant's Form 10-Q for the quarter ended March 31, 2000) 4 1. Form of Rights Agreement, dated as of December 19, 1999 between the Company and EquiServe Trust Company N.A., First Chicago Trust Company as successor to The First National Bank of Boston (incorporated herein by reference to Exhibit 4.1 of the Registrant's Form 8-A 32 33 filed on December 30, 1999) 2. Master Unit Agreement, dated as of November 30, 1998, by and between the Company and The First National Bank of Chicago, as Unit Agent (incorporated herein by reference to Exhibit 4.2 of the Registrant's Form 8-K filed on December 14, 1998) 3. Call Option Agreement, dated as of November 30, 1998, by and between Goldman, Sachs & Co., as Call Option Holder, and The First National Bank of Chicago, as Unit Agent and as Attorney-In-Fact (incorporated herein by reference to Exhibit 4.3 of the Registrant's Form 8-K filed on December 14, 1998) 4. Pledge Agreement, dated as of November 30, 1998, by and among the Company, Goldman, Sachs & Co., as Call Option Holder, First Union National Bank, as Collateral Agent and Securities Intermediary, and The First National Bank of Chicago, as Unit Agent and as Attorney-In-Fact (incorporated herein by reference to Exhibit 4.4 of the Registrant's Form 8-K filed on December 14, 1998) 5. Indenture dated as of February 1, 1990, with respect to debt securities issued by the Upjohn Employee Stock Ownership Trust and 9.79% Amortizing Notes, Series A, Due February 1, 2004, issued by the Upjohn Employee Stock Ownership Trust and guaranteed by the Registrant (not filed pursuant to Regulation S-K, Item 601(b)(4)(iii)(A); the Registrant agrees to furnish a copy of these documents to the Securities and Exchange Commission upon request) 6. Indenture dated as of August 1, 1991 between Pharmacia & Upjohn, Inc. and The Bank of New York, as trustee, with respect to Debt Securities issued thereunder from time to time (not filed pursuant to Regulation S-K, Item 601(b)(4)(iii)(A); the Registrant agrees to furnish a copy of these documents to the Securities and Exchange Commission upon request) 10 1. The Pharmacia & Upjohn, Inc. Long-Term Incentive Plan (as Amended and Restated as of June 1, 2000) 2. Pharmacia Corporation Management Incentive Plan (as Amended and Restated as of June 1, 2000) 3. 2000 Operations Committee Incentive Plan (as amended November 2000) 4. 2000 Operations Committee Incentive Plan 5. 1999 Operations Group Incentive Plan 6. Employment Agreement with Timothy G. Rothwell dated July 31, 2000 7. Employment Agreement with Philip Needleman, Ph.D. dated October 29, 2000 33 34 8. Phantom Share Agreement with Hendrik Verfaillie dated September 1, 2000 9. Form of Tax Sharing Agreement by and between Pharmacia Corporation and Monsanto Company dated as of September 1, 2000 (incorporated herein by reference to Exhibit 10.5 of Monsanto Company's Form S-1 filed on September 22, 2000, File No. 333-36956) 10. Form of Employee Benefits and Compensation Allocation Agreement between Pharmacia Corporation and Monsanto Company dated as of September 1, 2000 (incorporated herein by reference to Exhibit 10.6 of Monsanto Company's Form S-1 filed on September 22, 2000, File No. 333-36956) 11. Form of Intellectual Property Transfer Agreement by and between Pharmacia Corporation and Monsanto Company dated as of September 1, 2000 (incorporated herein by reference to Exhibit 10.7 of Monsanto Company's Form S-1 filed on September 22, 2000, File No. 333-36956) 12. Form of Services Agreement dated as of September 1, 2000, by and between Pharmacia Corporation and Monsanto Company (incorporated herein by reference to Exhibit 10.8 Of Monsanto Company's Form S-1 filed on September 22, 2000, File No. 333-36956) 13. Form of Corporate Agreement dated as of September 1, 2000 by and between Pharmacia Corporation and Monsanto Company (incorporated herein by reference to Exhibit 10.9 of Monsanto Company's Form S-1 filed on September 22, 2000, File No. 333-36956) 11 Omitted--Inapplicable; see "Note G of Notes to Financial Statements" 15 Omitted - Inapplicable 18 Omitted - Inapplicable 19 Omitted - Inapplicable 22 Omitted - Inapplicable 23 Omitted - Inapplicable 24 Omitted - Inapplicable 27 Financial Data Schedule (part of electronic submission only) 34 35 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, 2000 /S/R. G. Thompson R. G. Thompson Senior Vice President and Corporate Controller 35 EX-10.1 2 y42526ex10-1.txt LONG-TERM INCENTIVE PLAN 1 Exhibit 10.1 THE PHARMACIA & UPJOHN, INC. LONG-TERM INCENTIVE PLAN AMENDED AND RESTATED AS OF JUNE 1, 2000 1. PURPOSE. The purpose of the Pharmacia & Upjohn, Inc., Long-Term Incentive Plan (the "Plan") is to promote the long-term financial interests of Pharmacia & Upjohn, Inc. ("P&U") and its parent corporation, Pharmacia Corporation (the "Company"), including their growth and performance, by encouraging key employees of P&U and its subsidiaries to acquire an ownership position in the Company, enhancing the ability of the Company and its subsidiaries to attract and retain employees of outstanding ability, and providing such employees with an interest in the Company parallel to that of the Company's stockholders. 2. DEFINITIONS. Unless otherwise required by the context, the terms used in the Plan shall have the meanings set forth below: "Award" shall mean an award determined in accordance with the terms of the Plan. "Board" or "Board of Directors" shall mean the Board of Directors of the Company. "Change in Control" shall mean: (1) 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 2 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 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; (2) 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, 2 3 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; (3) 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 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 3 4 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 (4) (i) 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 4 5 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 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). "Committee" shall mean the Compensation Committee of the Board of Directors. "Common Stock" shall mean the common stock of the Company. "Effective Date" shall mean November 1, 1995. The effective date of the amended and restated Plan is June 1, 2000. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. "Fair Market Value" shall mean, per share of Common Stock, the average of the highest and lowest price of the Common Stock on the New York Stock Exchange (the "NYSE"), or such other national securities exchange as may be designated by the Board, on the applicable date, or, if there are no sales of Common Stock on the NYSE on such date, then the average of the highest and lowest price of the Common Stock on the last previous day on which a sale on the NYSE is 5 6 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 Common Stock (or depositary receipts evidencing ownership of such Common Stock) on stock exchanges outside the United States with respect to Awards granted to Participants who are foreign nationals. "Participant" shall mean an employee of P&U or its subsidiaries who is selected by the Committee to participate in the Plan. 3. SHARES SUBJECT TO THE PLAN. Subject to adjustment as provided in Section 17, the number of shares of Common Stock which shall be available for the grant of Awards under the Plan shall not exceed in any calendar year commencing after the Effective Date and before 2001, one and one-quarter percent (1.25%) of the number of shares of Common Stock outstanding as of January 1 of such year (including treasury shares); provided that, with respect to calendar year 1995, the maximum number of shares of Common Stock available for the grant of Awards under the Plan was 2,000,000 shares. The maximum number of shares set forth in the preceding sentence shall be increased with respect to any year (including years after 2000) by the number of shares available for grant in any prior years since the effective date of the Plan which were not subject to Awards granted under the Plan in such prior years plus any shares of Common Stock subject to any Award that expires unexercised or that is forfeited, terminated or canceled, in whole or in part. For the year 2001 and subsequent years, there shall be no increases in the number of shares available for grants under the Plan pursuant to the first sentence of this Section 3, but there shall be shares available for grants as a result of the second sentence of this Section 3. The shares of Common Stock issued under the Plan may be authorized and unissued shares or treasury shares, as the Company may from time to time determine. 6 7 Subject to adjustment as provided in Section 17, notwithstanding anything contained herein to the contrary, in no event shall more than 595,000 shares of Common Stock be granted pursuant to stock options or stock appreciation rights under the Plan to any Participant in any calendar year and in no event shall the number of shares of Common Stock available for issuance pursuant to incentive stock options (within the meaning of Section 422 of the Code) during the term of the Plan exceed the lesser of (a) the number of shares generally available for issuance under the Plan and (b) 59,500,000 shares. No additional incentive stock options will be granted under the Plan on or after June 1, 2000. 4. ADMINISTRATION. (a) The Plan shall be administered by the Committee. A majority of the Committee shall constitute a quorum, and the acts of a majority of a quorum shall be the acts of the Committee. To the extent permitted by law, the Committee may appoint employees of the Company or other individuals to act as its agents with respect to its duties and obligations hereunder. (b) Subject to the provisions of the Plan, the Committee shall (i) approve the selection of Participants (after such consultation with and consideration of the recommendations of management as the Committee considers desirable), (ii) determine the type of Awards to be made to Participants, (iii) determine the number of shares of Common Stock or share units subject to Awards, (iv) determine the terms and conditions, not inconsistent with the terms of the Plan, of any Award granted hereunder (including, but not limited to, any restriction and forfeiture conditions on such Award), (v) determine whether, to what extent and under what circumstances, Awards may be settled in cash, (vi) to the extent appropriate, establish and certify attainment of performance goals as required by Section 162(m) of the Internal Revenue Code of 1986, as 7 8 amended (the "Code"), and (vii) have the authority to interpret the Plan, to establish, amend, and rescind any rules and regulations relating to the Plan (which shall not be inconsistent with the terms of the Plan), to determine the terms and provisions of any agreements entered into hereunder, and to make all other determinations necessary or advisable for the administration of the Plan. The Committee may correct any defect, supply any omission or reconcile any inconsistency in the Plan or in any Award in the manner and to the extent it shall deem desirable to carry it into effect. The determinations of the Committee in the administration of the Plan, as described herein, shall be final, conclusive and binding on all persons, including the Company, its stockholders, employees and Participants granted Awards under the Plan. (c) No members of the Committee shall be personally liable for any action, determination, or interpretation made in good faith with respect to the Plan or any Award and all members of the Committee shall be fully indemnified by the Company with respect to any such action, determination, or interpretation to the fullest extent provided by the certificate of incorporation and by-laws of the Company and applicable state law. The Company shall pay all expenses incurred in the administration of the Plan. (d) Notwithstanding anything in this Section 4 or in any other provision of the Plan to the contrary, the Committee may grant authority to the chief executive officer of the Company to assume the responsibilities and duties of the Committee described in clauses (i) through (iv) of Section 4(b) with respect to Awards to employees of the Company who are not officers, and to assume the authority of the Committee with respect to such Awards in each of the sections of the Plan which set forth the authority of the Committee in determining eligibility for Awards and the terms of Awards. 8 9 5. ELIGIBILITY. Officers and other key employees of P&U and its subsidiaries who meet such standards as the Committee may from time to time determine are eligible to be granted Awards under the Plan; provided that no Awards will be granted under the Plan on or after June 1, 2000 to persons who are executive officers of the Company. For purposes of the Plan, a subsidiary corporation shall be any corporation which at the time qualifies as a subsidiary under the definition of "subsidiary corporation" in Section 424(f) of the Code. For purposes of the Plan, a parent corporation shall be any corporation (other than the Company) in an unbroken chain of corporations ending with the Company if each of the corporations other than the last corporation in the unbroken chain owns stock possessing 50% or more of the total combined voting power of all classes of stock in one or more of the other corporations in the chain. 6. AWARDS. Awards under the Plan may consist of stock options (either incentive stock options within the meaning of Section 422 of the Code or nonstatutory stock options), stock appreciation rights, performance shares, restricted stock grants, deferred Common Stock grants and other stock-based Awards. Awards of performance shares, restricted stock units and other stock-based Awards may provide the Participant with dividend equivalents prior to vesting of such Awards. Awards shall be subject to the terms and conditions of the Plan and shall be evidenced by an agreement containing such additional terms and conditions, not inconsistent with the provisions of the Plan, as the Committee shall deem desirable. 9 10 7. STOCK OPTIONS. Stock options may be granted under the Plan in such form as the Committee may from time to time approve pursuant to terms set forth in a stock option agreement. (a) Types of Stock Options. Each stock option agreement shall state whether or not the stock option will be treated as an incentive stock option or a non-qualified stock option. (b) Option Price. The purchase price per share of the Common Stock purchasable under a stock option shall be determined by the Committee, but, except as determined by the Committee, will be not less than 100% of the Fair Market Value of the Common Stock on the date of the grant of the stock option. (c) Option Period. The term of each stock option shall be fixed by the Committee, but no stock option shall be exercisable after the expiration of ten (10) years from the date the option is granted. (d) Exercisability. Stock options shall be exercisable at such time or times as determined by the Committee at or subsequent to grant. Unless otherwise determined by the Committee at or subsequent to grant, no stock option shall be exercisable during the twelve-month period ending on the day before the first anniversary date of the grant of the option, except upon a Change in Control. (e) Method of Exercise. Stock options may be exercised, in whole or in part, by giving written notice of exercise to the Company specifying the number of shares to be purchased. Such notice shall be accompanied by the payment in full of the option purchase price. Such payment shall be made through the following methods or procedures: in cash or by certified or bank check, by tender of shares of Common Stock owned by the Participant (valued at Fair Market Value determined as of the day immediately prior to exercise) or, at the discretion of the 10 11 Committee and upon such terms and conditions as the Committee may approve, through cashless exercise procedures, with other consideration or through other procedures, or by a combination of any such procedures. The Committee may determine that previously owned shares of Common Stock be held for a specified period of time prior to being used to exercise stock options. (f) Termination of Employment. Except as otherwise determined by the Committee at or subsequent to grant, any stock options held by a Participant upon termination of employment shall remain exercisable as follows: (i) If the Participant's termination of employment is due to death or permanent disability (as determined by the Committee), the stock option (to the extent exercisable as of the date of termination) shall be exercisable for one (1) year following such termination of employment (but in no event beyond the term of the option), and shall thereafter terminate; and (ii) If the Participant's termination of employment is for any other reason, the stock option (to the extent exercisable as of the date of termination) shall be exercisable for a period of ninety (90) days following such termination of employment (but in no event beyond the term of the option), and shall thereafter terminate. In the event the Committee determines that a stock option may be exercised after the periods provided for in this paragraph (f), such longer exercise period may not extend beyond the term of the option. (g) Replacement Stock Option Grants. Unless otherwise determined by the Committee, in the event an optionee who is an employee of P&U or any of its subsidiaries exercises a stock option by using previously owned shares of Common Stock, such optionee shall automatically be 11 12 granted a replacement stock option grant for the number of shares of Common Stock used to exercise the stock option. The replacement stock option shall have terms and conditions to be determined by the Committee consistent with this Section 7. (h) Effect of Exercise Upon Tandem Stock Appreciation Right. Upon exercise of a stock option with respect to which a tandem stock appreciation right (as described in Section 8) has been granted, the number of shares of Common Stock with respect to which the tandem stock appreciation right shall be exercisable shall be reduced by the number of shares with respect to which the stock option has been exercised. 8. STOCK APPRECIATION RIGHTS. Stock appreciation rights may be granted under the Plan in such form as the Committee may from time to time approve pursuant to terms set forth in a stock appreciation rights agreement. (a) Types of Stock Appreciation Rights. Stock appreciation rights may be granted in tandem with a related stock option (a "tandem stock appreciation right") or may be granted unrelated to any stock option (a "freestanding stock appreciation right"). A tandem stock appreciation right may be granted at the time of the related stock option grant or at any time during the term of such stock option; provided, however, that tandem stock appreciation rights related to an incentive stock option may only be granted at the time of the grant of such stock option and may be exercised only when the Fair Market Value of Common Stock subject to such incentive stock option exceeds the exercise price of such stock option. (b) Purchase Price. The purchase price of a stock appreciation right shall be determined by the Committee at or subsequent to the time of grant of the stock appreciation right. (c) Payment. A stock appreciation right shall entitle the holder thereof, upon exercise of the stock appreciation right or any portion thereof, to receive payment of an amount 12 13 determined by multiplying (i) the excess of the Fair Market Value per share of Common Stock on the date of exercise over the per share purchase price of the stock appreciation right, by (ii) the number of shares of Common Stock as to which such stock appreciation right is being exercised. Notwithstanding the foregoing, the Committee may limit in any manner the amount payable with respect to a stock appreciation right by including such a limit at the time of grant. (d) Exercise. Free standing stock appreciation rights shall be exercisable at such time or times, and under such conditions, as shall be determined by the Committee in its discretion at or subsequent to the time of grant and, except as otherwise determined by the Committee at or subsequent to grant, freestanding stock appreciation rights held by a Participant upon termination of employment shall be exercisable on the same terms as set forth for stock options in Section 7(f); provided, however, that no freestanding stock appreciation right shall be exercisable after the expiration of ten (10) years from the date the stock appreciation right is granted. A tandem stock appreciation right shall be exercisable at such time or times and only to the extent that the related stock option is exercisable. (e) Method of Exercise. Stock appreciation rights may be exercised, in whole or in part, by giving written notice to the Company specifying the number of shares with respect to which the stock appreciation right is being exercised. If requested by the Committee, the holder of a stock appreciation right shall deliver the agreement evidencing the stock appreciation right being exercised and, with respect to a tandem stock appreciation right, the agreement evidencing the related stock option to the Secretary of the Company who shall endorse thereon a notation of such exercise and return the agreement to the holder. (f) Form of Payment. Payment of the amount determined under this Section 8 shall be made solely in 13 14 shares of Common Stock or, at the sole discretion of the Committee, solely in cash, or in a combination of cash and shares of Common Stock (based upon the Fair Market Value of the Common Stock as of the date of exercise of the stock appreciation right). (g) Effect of Exercise of Tandem Stock Appreciation Right on Related Stock Option. Upon exercise of a tandem stock appreciation right, the number of shares of Common Stock covered by the related stock option shall be reduced by the number of shares with respect to which the stock appreciation right has been exercised. 9. PERFORMANCE SHARES. Performance shares may be granted under the Plan in such form as the Committee may from time to time approve pursuant to the terms set forth in a performance share agreement. (a) Types of Performance Shares. Performance shares may be granted in the form of actual shares of Common Stock or share units having a value equal to an identical number of shares of Common Stock. (b) Performance Conditions and Duration. The performance conditions and the length of the performance period shall be determined by the Committee, but in no event may a performance period be less than twelve (12) months, except upon a Change in Control. (c) Form of Payment. The Committee shall determine in its sole discretion whether performance shares granted in the form of share units shall be paid in cash, Common Stock, or a combination of cash and Common Stock (based upon Fair Market Value of the Common Stock as of the date of exercise or the end of the performance period, as the case may be). (d) Termination of Employment. Except as otherwise determined by the Committee at or subsequent to grant, a Participant must be employed as of the end of the relevant performance period to be entitled to receive payment with respect to a performance share award. 14 15 10. RESTRICTED STOCK. Shares of restricted stock may be issued either alone or in addition to stock options, deferred stock or other stock-based Awards granted under the Plan, as determined by the Committee pursuant to terms set forth in a restricted stock agreement. (a) Awards of Restricted Stock. Unless such requirement is waived by the Committee, the prospective recipient of an Award of shares of restricted stock shall not be deemed to have any rights with respect to such Award, until and unless such recipient shall have executed an agreement or other instrument evidencing the Award and delivered a fully executed copy thereof to the Company, and otherwise complied with the then applicable terms and conditions. (b) Stock Certificates. Each Participant granted restricted stock under the Plan shall be issued a stock certificate in respect of shares of restricted stock awarded under the Plan. Such certificate shall be registered in the name of the holder, and shall bear an appropriate legend referring to the terms, conditions, and restrictions applicable to such Award. The Committee shall require that the stock certificates evidencing such shares be held in custody by the Company until the restrictions thereon shall have lapsed, and shall require, as a condition of any restricted stock Award, that the holder shall have delivered a stock power, endorsed in blank, relating to the stock covered by such Award. (c) Restrictions and Conditions. Subject to the provisions of this Plan, during a period set by the Committee commencing with the date of such Award (the "restriction period"), the holder of shares of restricted stock shall not be permitted to sell, transfer, pledge, or assign such shares of restricted stock awarded under the Plan. Within these limits, the Committee may provide for the lapse of such restrictions in installments where deemed appropriate. Unless otherwise determined by the Committee at or subsequent to grant, the restriction period shall 15 16 remain in effect during the twelve-month period ending on the day before the first anniversary date of the grant of the shares of restricted stock, except upon a Change in Control. Subject to the provisions of the immediately following sentence, upon termination of employment for any reason during the restriction period, all shares still subject to restriction shall be forfeited by the Participant and reacquired by the Company. In the event of a Participant's retirement, permanent disability, or death, or in cases of special circumstances, the Committee may, in its sole discretion, when it finds that a waiver would be in the best interests of the Company, waive in whole or in part any or all remaining restrictions with respect to such Participant's shares of restricted stock. (d) Rights of Holder of Restricted Stock. Except as provided in paragraph (c) of this Section 10, a Participant shall have, with respect to the shares of restricted stock, all the rights of a shareholder of the Company, including the right to vote the restricted stock, and the right to receive any dividends. The Committee, in its sole discretion, may permit or require the payment of dividends to be deferred and, if the Committee so determines, reinvested in additional restricted stock or to be otherwise reinvested or subject to restrictions. (e) Restricted Stock Units. Restricted stock may also be granted in the form of restricted stock units having a value equal to an identical number of shares of Common Stock. The Committee shall determine in its sole discretion whether restricted stock granted in the form of units shall be paid in cash, Common Stock or a combination of cash and Common Stock. 11. DEFERRED AWARDS. The Committee shall have the discretion to grant Awards of the right to receive Common Stock that are not to be distributed until after a specified deferral period. Such Awards may be made either alone or in addition to other Awards granted under the Plan. If the attainment of 16 17 performance goals are specified, the Committee shall certify attainment of such performance goals prior to any delivery of deferred Common Stock. Prior to completion of the deferral period, a participant may elect to further defer receipt of an Award for a specified period or until a specified event, subject in each case to the approval of the Committee and under such terms as are determined by the Committee in its sole discretion. The Committee shall determine in its sole discretion whether such deferred Awards shall be paid in cash, Common Stock or a combination of cash and Common Stock. 12. OTHER STOCK-BASED AWARDS. Other Awards of Common Stock and other Awards that are valued in whole or in part by reference to, or are otherwise based on Common Stock, including (without limitation) dividend equivalents and convertible debentures, may be granted either alone or in addition to other Awards granted under the Plan. Any Awards under this Section 12 and any Common Stock covered by any such Award may be forfeited to the extent so provided in the Award agreement, as determined by the Committee. 13. CHANGE IN CONTROL. Upon the occurrence of a Change in Control, (i) all stock options shall become vested and exercisable in full, (ii) all stock appreciation rights which have not been granted in tandem with stock options shall become vested and exercisable in full, (iii) the restrictions applicable to all shares of restricted stock shall lapse, (iv) all restricted stock granted in the form of share units shall be paid in shares of Common Stock, (v) all performance shares shall be deemed to be earned in full and shall be paid in shares of Common Stock, and all performance shares granted in the form of share units shall be deemed to be earned in full and shall be paid in shares of Common Stock, and (vi) all deferred Awards shall be paid in shares of Common Stock. The 17 18 Committee may, in its discretion, include such further provisions and limitations in any agreement documenting such Awards as it may deem equitable and in the best interest of the Company, and may make payments with respect to restricted stock units, performance share units and deferred Awards in cash in an amount equal to the Fair Market Value of the Award as of the Change in Control. 14. WITHHOLDING. The company shall have the right to deduct from any payment to be made pursuant to the Plan the amount of any taxes required by law to be withheld therefrom, or to require a Participant to pay to the Company in cash such amount required to be withheld prior to the issuance or delivery of any shares of Common Stock or the payment of cash under the Plan. The Committee may, in its discretion, permit a Participant to elect to satisfy such withholding obligation by (i) delivering previously owned shares of Common Stock or (ii) having the Company retain shares of Common Stock which would otherwise be delivered upon exercise or payment of Awards (in an amount not exceeding the minimum applicable tax withholding amount required to satisfy federal (including FICA), state, local and foreign tax withholding requirements) or (iii) any combination of a cash payment or the methods set forth in (i) and (ii) above. For purposes of (i) and (ii) above, shares of Common Stock shall be valued at Fair Market Value determined as of the day immediately prior to exercise or payment. 15. NONTRANSFERABILITY. No Award shall be assignable or transferable by the Participant, otherwise than by will or the laws of descent and distribution, and stock options and stock appreciation rights shall be exercisable, during the Participant's lifetime, only by the Participant. 18 19 16. NO RIGHT TO EMPLOYMENT. No person shall have any claim or right to be granted an Award, and the grant of an Award shall not be constructed as giving a Participant the right to be retained in the employ of the Company, its parent or their subsidiaries. Further, the Company, its parent and their subsidiaries expressly reserve the right at any time to terminate the employment of a Participant free from any liability, or any claim under the Plan, except as provided herein or in any Award agreement entered into hereunder. 17. ADJUSTMENT OF AND CHANGES IN COMMON STOCK. In the event of any change in the outstanding shares of Common Stock (including any increase or decrease in such shares) by reason of any stock dividend or split, recapitalization, merger, consolidation, spin-off, combination or exchange of shares or other similar corporate change, or any distributions to common stockholders other than regular cash dividends, the Committee 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 or other securities reserved for issuance pursuant to the Plan, or subject to outstanding Awards, and to any other terms and conditions of outstanding Awards including the stock option or stock appreciation right purchase price or performance criteria. 18. EMPLOYMENT BY SUBSIDIARY AND PARENT COMPANIES. For purposes of the Plan, a transfer of an employee to the employ of a subsidiary of the Company (or, if provided in the grant instrument, a parent corporation) shall not be deemed to be a termination of employment and the employment by a subsidiary (or, if provided in the grant instrument, a parent corporation) shall be deemed to be employment by the Company. 19 20 19. FOREIGN EMPLOYEES. Without amending the Plan, the Committee may grant Awards to employees of the Company or its subsidiaries who are foreign nationals on such terms and conditions different from those specified in this Plan (including without limitation granting stock options with a term longer than ten years if appropriate to assure favorable tax treatment) as may in the judgment of the Committee be necessary or desirable to foster and promote achievement of the purposes of the Plan, and, in furtherance of such purposes, the Committee may make such modifications, amendments, procedures, subplans and the like as may be necessary or advisable to comply with provisions of laws in other countries in which the Company or its subsidiaries operate or have employees; provided, however, that, except as described above, any such modification, amendment, procedure, subplan or like arrangement shall not be inconsistent with the terms of the Plan. 20. AMENDMENT. The Board of Directors may amend, suspend or terminate the Plan or any portion thereof at any time, provided that no amendment shall be made that would adversely affect the rights of a Participant under an Award theretofore granted, without such Participant's written consent. 21. GENERAL PROVISIONS. (a) The Committee may require each Participant purchasing or acquiring shares pursuant to an Award under the Plan to represent to and agree with the Company in writing that such Participant is acquiring the shares for investment and without a view to distribution thereof. (b) All certificates for shares of Common Stock delivered under the Plan pursuant to any Award shall be subject to such stock-transfer orders and other restrictions as the Committee may deem advisable under the rules, regulations, and other requirements of the Securities and 20 21 Exchange Commission, any stock exchange upon which the Common Stock is then listed, and any applicable Federal, state or foreign securities law, and the Committee may cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions. If the Committee determines that the issuance of shares of Common Stock hereunder is not in compliance with, or subject to an exemption from, any applicable Federal, state or foreign securities laws, such shares shall not be issued until such time as the Committee determines that the issuance is permissible. (c) The Plan is intended to constitute an "unfunded" plan for incentive and deferred compensation. Nothing contained herein shall give any Participant any rights that are greater than those of a general creditor of the Company. In its sole discretion, the Committee may authorize the creation of trusts or other arrangements to meet the obligations created under the Plan to deliver Common Stock or payments in lieu of or with respect to Awards hereunder, provided, however, that the existence of such trusts or other arrangements is consistent with the unfunded status of the Plan. (d) Except as otherwise provided by the Committee in the applicable Award agreement, a Participant shall have no rights as a shareholder with respect to any shares of Common Stock subject to stock options, stock appreciation rights, performance share awards, restricted stock units, or deferred awards until a certificate or certificates evidencing shares of Common Stock shall have been issued to the Participant and, subject to Section 17, no adjustment shall be made for dividends or distributions or other rights in respect of any share for which the record date is prior to the date on which the Participant shall become the holder of record thereof. (e) United States law shall apply to all grants under the Plan except, in the case of an Award to a foreign national, to the extent local laws preempt United States law. 21 22 22. EFFECTIVE DATE; TERM OF PLAN. The Plan shall be effective as of November 1, 1995. Subject to earlier termination pursuant to Section 20, the plan shall have a term of ten (10) years from its Effective Date (November 1, 1995). 22 EX-10.2 3 y42526ex10-2.txt INCENTIVE PLAN 1 Exhibit 10.2 7/24/2000 PHARMACIA CORPORATION MANAGEMENT INCENTIVE PLAN AMENDED AND RESTATED AS OF JUNE 1, 2000 I. GENERAL PROVISIONS 1. PURPOSES The Pharmacia Corporation Management Incentive Plan (formerly known as the Monsanto Management Incentive Plan of 1996) is designed to: - - focus management on business performance that creates stockholder value, - - encourage innovative approaches to the business of the Company, - - reward for results, - - encourage ownership of Monsanto common stock by management, and - - encourage taking higher risks with an opportunity for higher reward. This Incentive Plan shall be effective April 15, 1996 ("Effective Date"), subject to the approval of this Incentive Plan by the stockholders of the Company. The amended and restated Incentive Plan shall apply to awards made under this Plan that are effective on or after June 1, 2000. 2. DEFINITIONS Except where the context otherwise indicates, the following definitions apply: "Associated Company" means any corporation (or partnership, joint venture, or other enterprise), of which the Company or a Parent owns or controls, directly or indirectly, 10% or more, but less than 50% of the outstanding shares of stock normally entitled to vote for the election of directors (or comparable equity participation and voting power). "Award" means any Stock Option, Stock Appreciation Right, Restricted Share, unrestricted Share, dividend equivalent unit, Performance Share, Deferred Award or other award granted under this Incentive Plan. "Board" means Board of Directors of the Company. 1 2 "Committee" means the Compensation Committee of the Board, or its permitted delegate, consisting of two or more members of the Board as may be appointed by the Board to administer this Incentive Plan pursuant to Section 3(a) of this Article I. "Company" means Pharmacia Corporation, a Delaware corporation. "Deferred Award" means a deferred award granted in accordance with Section 9 of Article II of this Incentive Plan. "Eligible Participant" means any officer or other salaried employee (including a director who is a salaried employee) of the Company, a Subsidiary, or an Associated Company. "Fair Market Value" shall mean, per share of common stock, the average of the highest and lowest sales price of the common stock on the New York Stock Exchange(the "NYSE"), or such other national securities exchange as may be designated by the Board, on the applicable date, or, if there are no sales of common stock on the NYSE on such date, then the average of the highest and lowest price of the common 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 common stock (or depositary receipts evidencing ownership of such common stock) on stock exchanges outside the United States with respect to Awards granted to Participants who are foreign nationals. "Incentive Plan" means the Pharmacia Corporation Management Incentive Plan, set forth herein. "Incentive Stock Option" or "Incentive Option" means an option meeting the definition of that term as set forth in Section 3 of Article II of this Incentive Plan. "1984 Plan" means the Monsanto Management Incentive Plan of 1984, as amended. "1986 Plan" means the Searle Monsanto Stock Option Plan of 1986, as amended. "1988/I Plan" means the Monsanto Management Incentive Plan of 1988/I, as amended. "1988/II Plan" means the Monsanto Management Incentive Plan of 1988/II, as amended. "1991 Plan" means the NutraSweet/Monsanto Stock Plan of 1991, as amended. "1994 NutraSweet/Monsanto Plan" means the NutraSweet/Monsanto Stock Plan of 1994, as amended. "1994 Plan" means the Monsanto Management Incentive Plan of 1994, as amended. "1994 Searle/Monsanto Plan" means the Searle/Monsanto Stock Plan of 1994, as amended. 2 3 "Non-Qualified Stock Option" or "Non-Qualified Option" means an option referred to in Section 4 of Article II of this Incentive Plan. "Parent" means any corporation (other than the Company) in an unbroken chain of corporations ending with the Company if each of the corporations other than the last corporation in the unbroken chain owns stock possessing 50% or more of the total combined voting power of all classes of stock in one or more of the other corporations in the chain. "Participant" means an Eligible Participant to whom an Award has been granted pursuant to this Incentive Plan. "Performance Share" means Performance Shares granted in accordance with Section 8 of Article II of this Incentive Plan. "Reporting Person" means a person subject to the reporting requirements of Section 16(a) of the Securities Exchange Act of 1934 (or any law, rule, regulation or other provision that may replace such statute) with respect to Shares. "Restricted Shares" means Shares that were made subject to restrictions in accordance with Section 6 of Article II of this Incentive Plan. "Shares" means shares of common stock of the Company and any shares of stock or other securities received as a result of a Share adjustment as set forth in Section 4 of this Article I. "Stock Appreciation Right" means a right referred to in Section 5 of Article II of this Incentive Plan. "Stock Appreciation Right Fair Market Value" or "SAR Fair Market Value" shall mean a value established by the Committee for the exercise of a Stock Appreciation Right. "Stock Option" or "Option" means Incentive Stock Options and/or Non-Qualified Stock Options. "Subsidiary" means: (i) for the purpose of an Incentive Stock Option, any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company if, at the time of the granting of the Option, each of the corporations other than the last corporation in the unbroken chain owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain; and (ii) for the purposes of other types of Awards under this Plan, any corporation (or partnership, joint venture, or other enterprise) of which the Company or a Parent owns or controls, directly or indirectly, 50% or more of the outstanding shares of stock normally entitled to vote for the election of directors (or comparable equity participation and voting power). 3 4 "Termination of Employment" means the discontinuance of employment of a Participant for any reason other than a Transfer. In the event a Participant is an employee of an entity that is a Parent, Subsidiary or Associated Company and the entity ceases to be a Parent, Subsidiary or Associated Company, the Participant shall be deemed to incur a Termination of Employment for all purposes under this Incentive Plan as of the date such entity ceases to be a Parent, Subsidiary or Associated Company. "Transfer" means a change of employment of a Participant within the group consisting of the Company and its Parent, Subsidiaries and Associated Companies, unless the Committee determines otherwise in the grant instrument. 3. ADMINISTRATION (a) This Incentive Plan shall be administered by the Compensation Committee, except to the extent the Compensation Committee delegates administration pursuant to this paragraph. The Compensation Committee may delegate all or a portion of the administration of this Incentive Plan to one or more committees or to one or more senior managers of the Company or its Parent or Subsidiaries; provided that determinations regarding the timing, pricing, amount and terms of any Award to a Reporting Person shall be made only by the Compensation Committee. (b) The Committee shall have the exclusive right to interpret this Incentive Plan, to select the persons who are to receive Awards, and to act in all matters pertaining to the granting of Awards under this Incentive Plan including, without limitation, the timing, pricing, amount and terms of any Award and the amendment thereof consistent with the provisions of this Incentive Plan. No Eligible Participant shall have any right to be considered for or to receive any Awards. All acts and decisions of the Committee with respect to any questions arising in connection with the administration and interpretation of this Incentive Plan, including the severability of any and all of the provisions thereof, shall be conclusive, final and binding upon all Eligible Participants. (c) The Committee may adopt and amend from time to time rules and regulations of general application for the administration of this Incentive Plan. (d) Without limiting the foregoing Sections 3(a), (b) and (c) of this Article I (and notwithstanding any other provisions of this Incentive Plan), the Committee is authorized to take such action as it determines to be necessary or advisable, and fair and equitable to Participants, with respect to Awards in the event of: a merger of the Company with, consolidation of the Company into, or the acquisition of the Company by, another corporation; a sale or transfer of all or substantially all of the assets of the Company to another corporation or any other person or entity; a separation from the Company, including any spin-off or other distribution to stockholders other than an ordinary cash dividend; a tender or exchange offer for Shares made by any corporation, person or entity (other than the Company); or other reorganization in which the Company will not survive 4 5 as an independent, publicly-owned corporation. Such action may include (but shall not be limited to) establishing, amending or waiving the forms, terms, conditions and duration of Stock Options, Stock Appreciation Rights, Awards of Restricted Shares, Performance Shares, Deferred Awards and other Awards so as to provide for earlier, later, extended or additional times for exercise or payments, differing methods for calculating payments, alternate forms and amounts of payment, accelerated release of restrictions or other modifications. The Committee may take such actions pursuant to this Section 3(d) by adopting rules and regulations of general applicability to all Participants or to certain categories of Participants, by including, amending or waiving terms and conditions in Awards (including, without limitation, agreements with respect to Restricted Shares), or by taking action with respect to individual Participants. The Committee may take such actions as part of the Awards, or before or after the public announcement of any such merger, consolidation, acquisition, sale or transfer of assets, separation, tender or exchange offer or other reorganization. 4. SHARE ADJUSTMENTS In the event that at any time or from time to time a stock dividend, stock split, recapitalization, merger, consolidation, or other change in capitalization, or a sale by the Company of all or part of its assets, or a separation from the Company, including any spin-off or other distribution to stockholders other than an ordinary cash dividend, results in (a) the outstanding Shares, or any securities exchanged therefor or received in their place, being exchanged for a different number or class of shares of stock or other securities of the Company, or for shares of stock or other securities of any other corporation; or (b) new, different or additional shares or other securities of the Company or of any other corporation being received by the holders of outstanding Shares, then: (i) the total number of Shares authorized for Awards under this Incentive Plan; (ii) the number and class of Shares (A) that may be subject to Stock Options, Stock Appreciation Rights and other Awards, (B) which have not been issued or transferred under outstanding Stock Options, Stock Appreciation Rights or other Awards, and (C) which have been awarded but are undelivered under this Incentive Plan; and (iii) the purchase price to be paid per Share under outstanding Stock Options and the number of Shares to be transferred in settlement of outstanding Stock Appreciation Rights and other Awards; shall in each case be appropriately adjusted by the Committee in its discretion; provided, however, that all adjustments made as the result of the foregoing in respect of each Stock Option which is granted as an Incentive Stock Option shall be made so that such Stock Option shall continue to be an Incentive Stock Option as defined in Section 422 of the Internal Revenue Code of 1986, as may be amended from time to time. 5 6 5. SHARES AUTHORIZED The total number of Shares for which awards may be granted under this Incentive Plan shall not exceed 87,605,305 Shares. Notwithstanding the foregoing, the total number of Shares that shall be available for Awards of Restricted or unrestricted Shares (which shall include stock distributions pursuant to Performance Shares, Deferred Awards and other stock-based awards as described in Section 10 of Article II) shall be 1/2 of 1% of the total number of Shares outstanding. The limitations in this Section 5 are subject to the adjustments provided for in Section 4 of this Article I; the provisions of Section 1(b) of Article II of this Incentive Plan; and the provisions of Section 3(d) of Article III of this Incentive Plan. The total number of Shares for which Awards may be granted under this Incentive Plan to any one Eligible Participant shall not exceed in any three-year period 15% of the total number of Shares for which Awards may be made under this Incentive Plan, subject to the adjustments provided for in Section 4 of this Article I. II. AWARDS 1. SHARES USED FOR AWARDS (a) The Shares for which Options may be granted under this Option Plan may be authorized but unissued Shares, or treasury Shares, or both. (b) In the event that any unexercised Stock Option granted hereunder lapses or ceases to be exercisable for any reason other than a surrender of the Option pursuant to Section l(c) of this Article II or the exercise of a Stock Appreciation Right under Section 5 of this Article II, the Shares subject to such Option shall again be available for Option grants under this Option Plan without again being charged against the authorized Shares set forth in Section 5 of Article I. Any amendment of any Option or Stock Appreciation Right by the Committee pursuant to Article I, Section 3 of this Incentive Plan shall not be considered the grant of a new Option for the purpose of Section 5 of Article I. (c) In the event of death or total and permanent disability as determined by the Committee, the Committee may, with the consent of the Participant, his legal representative, or in the event of death, a beneficiary designated in writing by the Participant during his lifetime, authorize payment, in cash or in Shares, or partly in cash and partly in Shares, as the Committee may direct, of an amount equal to the difference at the time between the Fair Market Value of the Shares subject to an Option and the Option price in consideration of the surrender of the Option. In such an event the Shares subject to the Option so surrendered shall be charged against the limitations set forth in Section 5 of Article I. (d) In the event that any Award or installment thereof ceases to be payable for any reason, the Shares subject to such Award shall again be available for Award without again being charged against the limitations on the number of Shares set forth in Section 5 of Article I. 6 7 2. INCIDENTS OF OPTIONS AND STOCK APPRECIATION RIGHTS (a) An Award of Stock Options or Stock Appreciation Rights may be made at such time or times determined by the Committee following the Effective Date to any Eligible Participant, except that Incentive Options may not be awarded to employees of Associated Companies. Each Stock Option and Stock Appreciation Right shall be granted subject to such terms and conditions, if any, not inconsistent with this Incentive Plan, as shall be determined by the Committee, including any provisions as to continued employment as consideration for the grant or exercise of such Option or Stock Appreciation Right, provisions as to performance conditions and any provisions which may be advisable to comply with applicable laws, regulations or rulings of any governmental authority. (b) An Incentive Stock Option or Stock Appreciation Right shall not be transferable by the Participant otherwise than by will, by the laws of descent and distribution, or pursuant to a written beneficiary designation, and shall be exercisable during the lifetime of the Participant only by him or by his guardian or legal representative. A Non-Qualified Stock Option or Stock Appreciation Right shall not be transferable except by will, by the laws of descent and distribution, pursuant to a written beneficiary designation, or pursuant to a qualified domestic relations order as defined by the Internal Revenue Code of 1986, as amended, or Title I of the Employee Retirement Income Security Act or the rules thereunder. (c) Shares purchased upon exercise of a Stock Option shall be paid for in such amounts, at such times and upon such terms as shall be determined by the Committee and specified in the grant of the Option. Without limiting the foregoing, the Committee may establish payment terms for the exercise of Stock Options which permit the Participant to deliver Shares (or other evidence of ownership of Shares satisfactory to the Company), including, at the Committee's option, Restricted Shares, with a Fair Market Value equal to the Option price as payment. (d) The Option price per share shall be established by the grant and shall not be decreased thereafter except pursuant to Section 4 of Article I of this Incentive Plan. (e) The Committee, in its discretion, may provide for the escalation of the Option price per Share over all or part of the term of the Option. (f) The Committee, in its discretion, may offer Participants the opportunity to elect to receive an Option grant in lieu of a salary increase or a bonus or may offer Participants the opportunity to purchase Options for cash or such other consideration as the Committee in its discretion determines. 7 8 3. INCENTIVE OPTIONS An Incentive Option shall be an "Incentive Stock Option" as that term is defined in Section 422 of the Internal Revenue Code of 1986, as may be amended from time to time, as in effect at the time of the grant of any such Option, or any statutory provision that may be enacted to replace such Section. Each provision of this Incentive Plan and of each Incentive Stock Option granted hereunder shall be construed so that each such Option shall be an Incentive Stock Option, and any provision thereof that cannot be so construed shall be disregarded. Incentive Stock Options shall be granted only to purchase unrestricted Shares and only to Eligible Participants, each of whom may be granted one or more such Options at such time or times determined by the Committee following the Effective Date until April 14, 2006, subject to the following conditions: (a) The Option price per Share shall be set by the grant but shall not be less than 100% of the Fair Market Value at the time of the grant. (b) The Option and its related Stock Appreciation Right, if any, may be exercised in full or in part from time to time within ten (10) years from the date of the grant, or such shorter period as may be specified by the Committee in the grant, provided that in any event each shall lapse and cease to be exercisable upon, or within such period following, Termination of Employment as shall have been determined by the Committee and as specified in the Option or Stock Appreciation Right. The Committee may establish such terms for exercise of Options and Stock Appreciation Rights after Termination of Employment as it deems appropriate. Unless the Committee determines otherwise, such period following Termination of Employment shall not exceed twelve months unless employment shall have terminated: (i) as a result of retirement as defined by the Committee or total and permanent disability as determined by the Committee, in which event such period shall not exceed-- (A) in the case of an Option, the original term of the Option; and (B) in the case of a Stock Appreciation Right, one year after such retirement or disability or after resignation as an officer or director of the Company, whichever shall last occur (unless earlier terminated pursuant to Section 5(b) of this Article II); or (ii) as a result of death, or death shall have occurred following Termination of Employment and while the Option or Stock Appreciation Right was still exercisable; and 8 9 provided, further, that such period following Termination of Employment shall in no event extend the original exercise period of the Option or related Stock Appreciation Right. (c) The aggregate Fair Market Value (determined at the time the Option is granted) of the Shares with respect to which Incentive Stock Options are first exercisable during any calendar year by any Eligible Participant shall not exceed $100,000; however, if the Fair Market Value of Incentive Stock Option Shares (at date of grant) exceeds $100,000 in the calendar year in which Incentive Stock Options are first exercisable, Shares with a Fair Market Value at date of grant exceeding $100,000 shall not be deemed to be Incentive Stock Options. (d) Incentive Stock Options shall be granted only to an Eligible Participant who, at the time the Option is granted, does not own stock possessing more than 10% of the total combined voting power of all classes of stock of the Company. (e) Any other terms and conditions which the Committee determines, upon advice of counsel, should be imposed for the Option to qualify as an Incentive Stock Option and any other terms and conditions not inconsistent with this Incentive Plan as determined by the Committee; including provisions making the Shares subject to such Option Restricted Shares or provisions making vesting or the ability to exercise subject to performance conditions. 4. NON-QUALIFIED OPTIONS One or more Options may be granted as Non-Qualified Options to purchase unrestricted Shares or Restricted Shares to an Eligible Participant at such time or times determined by the Committee, following the Effective Date, subject to the following terms and conditions: (a) The Option price per Share shall be established by the grant but shall not be less than 100% of the Fair Market Value at the time of the grant (or such later date as the Committee shall determine to be the grant date). (b) The Option and its related Stock Appreciation Right, if any, may be exercised in full or in part from time to time within ten (10) years from the date of the grant, or such shorter period as may be specified by the Committee in the grant, provided that in any event each shall lapse and cease to be exercisable upon, or within such period following Termination of Employment as shall have been determined by the Committee and as specified in the Option or Stock Appreciation Right. The Committee may establish such terms for exercise of Options and Stock Appreciation Rights after Termination of Employment as it deems appropriate. Unless the Committee determines otherwise, that such period following Termination of Employment shall not exceed twelve months unless employment shall have terminated: 9 10 (i) as a result of retirement as defined by the Committee or total and permanent disability as determined by the Committee, in which event such period shall not exceed-- (A) in the case of an Option, the original term of the Option; and (B) in the case of a Stock Appreciation Right, one year after such retirement or disability or after resignation as an officer or director of the Company, whichever shall last occur (unless earlier terminated pursuant to Section 5(b) of this Article II); or (ii) as a result of death, or death shall have occurred following Termination of Employment and while the Option or Stock Appreciation Right was still exercisable; and provided, further, that such period following Termination of Employment shall in no event extend the original exercise period of the Option or related Stock Appreciation Right, if any. (c) The Option grant may include any other terms and conditions not inconsistent with this Incentive Plan as determined by the Committee, including provisions making the Shares subject to such Option Restricted Shares or provisions making vesting or the ability to exercise subject to the satisfaction of performance conditions. 5. STOCK APPRECIATION RIGHTS A Stock Appreciation Right may be granted to an Eligible Participant in connection with (and only in connection with) an Incentive Stock Option or a Non-Qualified Option granted under this Incentive Plan, or under any other incentive plan of the Company or its Subsidiaries which was approved by the stockholders, subject to the following terms and conditions: (a) Such Stock Appreciation Right shall entitle a holder of an Option within the period specified for the exercise of the Option in the related Option grant to surrender the unexercised Option (or a portion thereof) and to receive in exchange therefor a payment in cash or Shares having an aggregate value equal to the product of (i) the amount by which (A) the SAR Fair Market Value of each Share exceeds (B) the Option price per Share, times (ii) the number of Shares under the Option, or portion thereof, which is surrendered. (b) Except as expressly provided herein, each Stock Appreciation Right granted hereunder shall be subject to the same terms and conditions as the related Option. It shall be exercisable only to the extent such Option is exercisable and shall terminate or lapse and 10 11 cease to be exercisable when the related Option terminates or lapses. The Committee may grant Stock Appreciation Rights concurrently with grants of Options or in connection with previously granted Options under this Incentive Plan, or under any other incentive plan of the Company or its Subsidiaries which was approved by the stockholders, which are unexercised and have not terminated or lapsed. With respect to Stock Appreciation Rights granted in connection with such previously granted Options, the Committee shall provide that such Stock Appreciation Rights shall not be exercisable until the holder completes six (6) months (or such longer period as the Committee shall determine) of service with the Company, a Subsidiary, or an Associated Company immediately following the date of the grant of such Stock Appreciation Rights. (c) The Committee shall have sole discretion to determine in each case whether the payment will be in the form of all cash, all Shares (which may, at the Committee's discretion, be Restricted Shares), or any combination thereof. If payment is to be made in Shares, the number of Shares shall be determined as follows: the amount payable in Shares shall be divided by the SAR Fair Market Value of Shares. (d) Upon exercise of a Stock Appreciation Right, the number of Shares subject to exercise under the related Option shall automatically be reduced by the number of Shares represented by the Option or portion thereof which is surrendered. To the extent that a Stock Appreciation Right shall be exercised, any Shares transferred upon such exercise shall not be charged against the maximum limitations upon the grant of Options set forth in this Incentive Plan under which such Option shall have been granted but the Option in connection with which a Stock Appreciation Right shall have been granted shall be deemed to have been exercised for the purpose of such maximum limitations. (e) The Committee shall have sole discretion as to the timing of any payment made in cash, Shares, or a combination thereof upon exercise of Stock Appreciation Rights hereunder, whether in a lump sum, in annual installments or otherwise deferred and the Committee shall have sole discretion to determine whether such payments may bear amounts equivalent to interest or cash dividends. (f) For purposes of this paragraph 5(f) of Article II: (i) "Unrelated Party" means any party or group of parties acting together other than (A) the Company, its directors and officers, or (B) any nominee holder for any stock exchange; (ii) "Offer" means any tender or exchange offer made by an Unrelated Party for the Shares and shall be deemed to occur upon the first purchase or exchange of such Shares; 11 12 (iii) "Change of Control" means any acquisition, beneficially or otherwise, by any Unrelated Party of 25% or more of the combined voting power of the common and preferred stock of the Company and shall be deemed to occur upon the date that the Unrelated Party attains control of said 25% or more of the combined voting power; (iv) "Change of Control Market Value" of the Shares means the higher of -- (A) the value for which such Shares may be exchanged or offered under any Offer pursuant to which Shares are actually exchanged or purchased; or (B) the Fair Market Value of such Shares on the date of exercise of a Stock Appreciation Right. Notwithstanding the foregoing provisions of this Section 5 of Article II and without limiting the provisions of Section 3 of Article I of this Incentive Plan, in the event of an Offer or Change of Control, a Participant holding an unexercised Stock Appreciation Right may exercise such Stock Appreciation Right and elect to be paid solely in cash in an amount equal to the difference between the Option price and the Change of Control Market Value of the Shares, unless within five (5) business days after receipt of notification of such election by the Secretary of the Company, the Committee acts to disapprove the cash election. Unless it acts to disapprove, the Committee's consent shall be deemed to be given at the close of business on the fifth business day after the Secretary's receipt of notification of such election and payment shall be made as soon as practicable after expiration of such five (5) business day period. The election provided herein shall apply only: (x) during the thirty (30) day period following the first exchange or purchase of Shares pursuant to an Offer; or (y) during the thirty (30) day period following the date on which sufficient Shares are acquired to constitute a Change of Control. (g) For purposes of this paragraph 5(g) of Article II: (i) "Unrelated Party" means any party or group of parties acting together other than (A) the Company, its directors and officers, or (B) any nominee holder for any stock exchange; (ii) "Alternate Change of Control" means any acquisition, beneficially or otherwise, by any Unrelated Party of a percentage of the combined voting power of the common and preferred stock of the Company specified by the Committee (but not less than 10%) and shall be deemed to occur upon the date that the Unrelated Party attains control of said percentage of the combined voting power; 12 13 (iii) "Change of Control Termination of Employment" means the termination of employment of a Participant by the Company, the Subsidiaries or the Associated Companies without cause (as defined by the Committee) or by the Participant for good reason (as defined by the Committee) within a period of time specified by the Committee following an Alternate Change of Control; (iv) "Alternate Change of Control Market Value" of the Shares means the Fair Market Value of such Shares on the date of exercise of a Stock Appreciation Right. Notwithstanding the foregoing provisions of this Section 5 of Article II and without limiting the provisions of Section 3 of Article I of this Incentive Plan, in the event of an Alternate Change of Control and a Change of Control Termination of Employment, a Participant holding an unexercised Stock Appreciation Right who is selected by the Committee may exercise such Stock Appreciation Right and elect to be paid solely in cash in an amount equal to the difference between the Option price and the Alternate Change of Control Market Value of the Shares, unless within five (5) business days after receipt of notification of such election by the Secretary of the Company, the Committee acts to disapprove the cash election. Unless it acts to disapprove, the Committee's consent shall be deemed to be given at the close of business on the fifth business day after the Secretary's receipt of notification of such election and payment shall be made as soon as practicable after expiration of such five (5) business day period. The election provided herein shall apply only during the thirty (30) day period following a Change of Control Termination of Employment. 6. BONUS SHARES AND RESTRICTED SHARES (a) An Award of Shares or Restricted Shares may be made at such time or times determined by the Committee following the Effective Date to any person who is an Eligible Participant. The Committee shall have full discretion to determine the terms and conditions of payment of any Award, including without limitation, what part of such Award shall be paid in unrestricted Shares or Restricted Shares, the time or times of payment of any Award, and the time or times of the lapse of the restrictions on Restricted Shares. (b) For the purpose of determining the number of Shares to be used in payment of an Award, the amount of the Award payable in Shares shall be divided by the Fair Market Value of the Shares on the date of the determination of the amount of the Award by the Committee, or if the Committee so directs, the date immediately preceding the date the Award is paid. 13 14 (c) The portion of an Award payable in Restricted Shares shall be paid at the time of the Award either by book-entry registration or by delivering to the Participant, or a custodian or escrow designated by the Committee and the Participant, a certificate or certificates for such Restricted Shares, registered in the name of such Participant. The Participant shall have all of the rights of a stockholder with respect to such Shares, subject to such terms and conditions, including withholding of dividends, forfeitures or resale to the Company, if any, as may be determined by the Committee. The Committee and the Participant may designate the Company or one or more of its employees to act as custodian or escrow for the certificates. (d) Restricted Shares shall be subject to such terms and conditions, including forfeiture, if any, and to such restrictions against sale, transfer or other disposition as may be determined by the Committee at the time a Non-Qualified Option for the purchase of Restricted Shares is granted, at the time a Stock Appreciation Right to be settled with Restricted Shares is granted or at the time of making a bonus award of Restricted Shares. Any new or additional or different Shares or other securities resulting from any adjustment of such Shares of the type described in Section 4 of Article I shall be subject to the same terms, conditions, and restrictions as the Restricted Shares prior to such adjustment. The Committee may, in its discretion, remove, modify or accelerate the release of restrictions on any Restricted Shares in the event of hardship or disability of the Participant while employed, in the event that the Participant ceases to be an employee of the Company, a Subsidiary or Associated Company, as the result of death or otherwise, in the event of a relocation of a Participant to another country or for such other reasons as the Committee may deem appropriate. In the event of the death of a Participant following the transfer of Restricted Shares to him, the legal representative of the Participant, the beneficiary designated in writing by the Participant during his lifetime, or the person receiving such Shares under his will or under the laws of descent and distribution shall take such Shares subject to the same restrictions, conditions and provisions in effect at the time of his death, to the extent applicable. 7. DIVIDENDS, DIVIDEND EQUIVALENTS AND INTEREST EQUIVALENTS (a) No cash dividends shall be paid on Shares which have been awarded but not registered or delivered. The Committee may provide, however, that a Participant to whom an Option has been awarded which is exercisable in whole or in part at a future time for Shares or a Participant who has been awarded Shares payable in whole or in part at a future time, shall be entitled to receive an amount per Share, equal in value to the cash dividends, if any, paid per Share on issued and outstanding Shares, as of the dividend record dates occurring during the period between the date of the award and the time each such Share is delivered. Such amounts (herein called "dividend equivalents") may, in the discretion of the Committee, be: 14 15 (i) paid in cash or Shares either from time to time prior to or at the time of the delivery of such Shares or upon expiration of the Option if it shall not have been fully exercised (except that payment of the dividend equivalents on Incentive Options may not be made prior to exercise); or (ii) converted into contingently credited Shares (with respect to which dividend equivalents shall accrue) in such manner, at such value, and deliverable at such time or times, as may be determined by the Committee. Such Shares (whether delivered or contingently credited) shall be charged against the limitations set forth in Section 5 of Article I. (b) The Committee, in its discretion, may authorize payment of interest equivalents on any portion of any Award payable at a future time in cash, and interest equivalents on dividend equivalents which are payable in cash at a future time. (c) The Committee, in its discretion, may provide that dividends paid on restricted Shares shall, during the applicable restricted period, be held by the Company to be paid upon the lapse of restrictions or to be forfeited upon forfeiture of the Shares. 8. PERFORMANCE SHARES. Performance Shares may be granted under the Incentive Plan in such form as the Committee may from time to time approve pursuant to the terms set forth in a performance share agreement. (a) Performance Shares may be granted in the form of actual Shares or Share units having a value equal to an identical number of Shares. (b) The performance conditions and the length of the performance period shall be determined by the Committee, but in no event may a performance period be less than 12 months, except upon a change in control of the Company. (c) The Committee shall determine in its sole discretion whether Performance Shares granted in the form of Share units shall be paid in cash, Shares, or a combination of cash and Shares (based upon Fair Market Value of the Shares as of the date of exercise or the end of the performance period, as the case may be). (d) Except as otherwise determined by the Committee at or subsequent to grant, a Participant must be employed as of the end of the relevant performance period to be entitled to receive payment with respect to a Performance Share Award. 15 16 9. DEFERRED AWARDS The Committee shall have the discretion to grant Awards of the right to receive Shares that are not to be distributed until after a specified deferral period. Such Awards may be made either alone or in addition to other Awards granted under the Incentive Plan. If the attainment of performance goals are specified, the Committee shall certify attainment of such performance goals prior to any delivery of deferred Shares. Prior to completion of the deferral period, a Participant may elect to further defer receipt of an Award for a specified period or until a specified event, subject in each case to the approval of the Committee and under such terms as are determined by the Committee in its sole discretion. The Committee shall determine in its sole discretion whether such Deferred Awards shall be paid in cash, Shares or a combination of cash and Shares. 10. OTHER STOCK-BASED AWARDS The Committee may grant other Awards of Shares and Awards that are valued in whole or in part by reference to, or are otherwise based on, Shares, including (without limitation) dividend equivalents and convertible debentures, either alone or in addition to other Awards granted under the Plan. Any Awards under this Section 10 and any Shares covered by any such Award may be forfeited to the extent so provided in the Award agreement, as determined by the Committee. III. MISCELLANEOUS PROVISIONS 1. No Award shall be transferable except as provided for herein. If any Participant makes such a transfer in violation hereof, any obligation of the Company with respect to such Award shall forthwith terminate. 2. Nothing in this Incentive Plan or any booklet or other document describing or referring to this Incentive Plan shall be deemed to confer on any employee or Participant the right to continue in the employ of his employer or affect the right of his employer to terminate the employment of any such person with or without cause. 3. Nothing contained herein shall require the Company to segregate any monies from its general funds, or to create any trusts, or to make any special deposits for any immediate or deferred amounts payable to any Participant. 4. This Incentive Plan and all actions taken hereunder shall be governed by the laws of the State of Delaware. 5. The Company may make such provisions and take such steps 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, domestic or foreign, to withhold in connection with any Stock 16 17 Option or the exercise thereof, any Stock Appreciation Right or the exercise thereof, or the payment of any other Award, including, but not limited to, the withholding of cash or Shares which would be paid or delivered pursuant to such exercise or award or another exercise or award under this Incentive Plan until the Participant reimburses the Company for the amount the Company is required to withhold with respect to such taxes, or cancelling any portion of such award or another award under this Incentive Plan in an amount sufficient to reimburse itself for the amount it is required to so withhold, or selling any property contingently credited by the Company for the purpose of paying such award or another award under this Incentive Plan, in order to withhold or reimburse itself for the amount it is required to so withhold. The Committee may permit a Participant (or any beneficiary or other person authorized to act) to elect to pay a portion or all of any amounts required to be withheld to satisfy federal, state, local or foreign tax obligations by directing the Company to withhold a number of whole Shares which would otherwise be distributed and which have a fair market value sufficient to cover the amount of such required withholding taxes (in an amount not exceeding the minimum applicable tax withholding amount required to satisfy federal (including FICA), state, local and foreign tax withholding requirements). 6. The Committee may grant Stock Options to Eligible Participants who are foreign nationals or who are employed by the Company, a Subsidiary, or an Associated Company outside of the United States of America. In order to facilitate the granting of Stock Options, the Committee may provide for special terms and conditions for grants to employees who are foreign nationals or who are employed by the Company, a Parent, a Subsidiary, or an Associated Company outside of the United States of America, as the Committee may consider necessary or appropriate to accommodate differences in local law, tax policy or custom in other countries in which the Company, a Parent, a Subsidiary, or an Associated Company operates or has employees. Such special terms may include, without limitation, granting Stock Options with a term longer than ten years if appropriate to assure favorable tax treatment. The Committee may also provide for such substitutes for the Stock Options for employees who are foreign nationals or who are employed by the Company, a Parent, a Subsidiary, or an Associated Company outside of the United States of America as may be deemed necessary or appropriate by the Committee. Available Information: Each Malaysian Participant may request copies of the Company's most recent audited financial statements available. 7. Notwithstanding any other provision of this Incentive Plan, for purposes of any Award that is outstanding as of the date that the Company spins off the Company's chemical businesses into a new publicly traded company ("Chemicals") and is held by a Participant who in connection with such spinoff becomes an employee of Chemicals (or a subsidiary or associated company of 17 18 Chemicals) rather than an employee of the Company (or a Subsidiary or Associated Company of the Company), such change of employment shall not constitute a Termination of Employment. With respect to any such Award held by such a Participant, Termination of Employment shall mean such Participant's termination of employment with Chemicals other than a Transfer, with Transfer defined as a change of employment of a Participant within the group consisting of Chemicals and its subsidiaries, or, if the Committee so determines, a change of employment of a Participant within the group consisting of Chemicals, its subsidiaries, and its associated companies. For purposes of this section, a subsidiary of Chemicals means any corporation (or partnership, joint venture, or other enterprise) of which Chemicals owns or controls, directly or indirectly, 50% or more of the outstanding shares of stock normally entitled to vote for the election of directors (or comparable equity participation and voting power) and an associated company of Chemicals means any corporation (or partnership, joint venture, or other enterprise), of which Chemicals owns or controls, directly or indirectly, 10% or more, but less than 50% of the outstanding shares of stock normally entitled to vote for the election of directors (or comparable equity participation and voting power). IV. AMENDMENTS 1. The Board, upon recommendation of the Committee but not otherwise, may from time to time amend or modify this Incentive Plan, including, but not limited to, an amendment which would authorize the Committee to make Awards payable in other securities or other forms of property of a kind to be determined by the Committee, and such other amendments as may be necessary or desirable to implement such Awards, or discontinue this Incentive Plan or any provision thereof, provided that no amendments or modifications to this Incentive Plan shall, without the prior approval of the stockholders normally entitled to vote for the election of directors of the Company: (a) permit the Company to decrease the Option price on any outstanding Option; (b) permit any change which would require the approval of stockholders under [Section 16 of the Securities Exchange Act of 1934 or the rules thereunder or] under Section 422 of the Internal Revenue Code of 1986, or the rules thereunder (or any law, rule, regulation or other provision that may replace such statutes or rules); or (c) change any of the provisions of this Article IV. 18 19 2. No amendment to or discontinuance of this Incentive Plan or any provision thereof by the Board or the stockholders of the Company shall, without the written consent of the Participant, adversely affect any Stock Option or Stock Appreciation Right theretofore granted or bonus commitment or bonus award theretofore made to such Participant under this Incentive Plan. V. INTERPRETATION 1. This Incentive Plan is not intended to and shall not affect any option or stock appreciation right grant or bonus commitment or award under the 1984 Plan, the 1986 Plan, the 1988/I Plan, the 1988/II Plan, the 1991 Plan, the 1994 Plan, the 1994 Searle/Monsanto Plan, or the 1994 NutraSweet/Monsanto Plan (or any other incentive plan of the Company, its Subsidiaries, and Associated Companies). No stock options or stock appreciation rights or Awards of Restricted or unrestricted Shares shall be granted under the 1994 Plan, the 1994 Searle/Monsanto Plan, or the 1994 NutraSweet/Monsanto Plan after April 14, 1996. 2. This Incentive Plan is not intended to and shall not preclude the establishment or operation by the Company or any Subsidiary of (a) any thrift, savings and investment, achievement award, stock purchase, employee recognition or other benefit plan or arrangement for any group of employees, or (b) any other incentive or bonus plan or arrangement for any employees (hereinafter "Other Plan"), and any such Other Plan may be authorized and payments made thereunder independently of this Incentive Plan; provided, however, that no such Other Plan shall provide for the granting of options or stock appreciation rights to purchase or receive the appreciation on the shares of any class of stock of the Company, or the making of bonus commitments or bonus awards payable in any class of stock of the Company, which in either form or substance are comparable to those authorized under this Incentive Plan, unless (i) such Other Plan is established or operated in connection with the assumption by the Company or a Subsidiary of the plans, options, stock appreciation rights, bonus commitments or bonus awards of another corporation, or the substitution of an Other Plan or options, stock appreciation rights, bonus commitments or bonus awards under such Other Plan in lieu of the plans, options, stock appreciation rights, bonus commitments or bonus awards of such other corporation, arising out of a merger or consolidation with, or the acquisition of assets or stock of, such other corporation, or other transaction described in Section 424(a) of the Internal Revenue Code of 1986, as may be amended from time to time, as in effect at the time, or (ii) such Other Plan provides for grants of options, stock appreciation rights, bonus commitments or bonus awards to employees substantially all of whom are not Participants. 19 EX-10.3 4 y42526ex10-3.txt INCENTIVE PLAN 1 Exhibit 10.3 OCIP PHARMACIA 2000 Operations Committee Incentive Plan November 2000 2 2000 OPERATIONS COMMITTEE INCENTIVE PLAN (OCIP) DOCUMENT - -------------------------------------------------------------------------------- PLAN OBJECTIVE The Operations Committee Incentive Plan (alternatively referred to as the OCIP, or the Plan) is designed to encourage specific results-oriented actions on the part of members of the Company's Operations Committee (OC). The Plan closely aligns financial rewards with the achievement of specific objectives linked to business results, unit/functional and individual performance, and the participant's demonstrated commitment to the Company's Best-Managed Behaviors. The higher the level of achievement, the greater the financial reward to participants. ELIGIBILITY Eligible employees (participants) in the OCIP include all Pharma members of the OC. Ag members of the OC will be covered under their unit's respective annual incentive program. TARGET AWARDS Each OCIP participant will have a target incentive percent established at the start of the year (or effective date of hire or transfer if one becomes a participant after the start of the year). Each individual's target incentive percent is established by their senior management, including the Chief Executive Officer. The Compensation Committee of the Board of Directors of Pharmacia Corporation approves the target incentive percent for all Elected Officers. The target is set based on a number of factors, including, but not limited to: - - Market competitiveness of the position, - - Job level, - - Base salary level, - - Past individual performance, and - - Expected contribution to future company performance and business impact. PLAN DESIGN The OCIP contains specific measures related to Company results, Business Unit/Function (BU/F) and Personal results, and Best-Managed Behaviors. These measures are formally defined below. TOTAL PHARMA SALES GROWTH is defined as the percent increase of 2000 Total Pharma Net Sales over 1999 Net Sales. Total Pharma sales include Pharmaceutical and Global Specialty Operations only, and exclude the Ag portion of Pharmacia Corporation's business. For incentive determination purposes, sales figures may be restated -- following standard accounting practices -- to reflect unusual and/or non-recurring items such as acquisitions, divestitures, extraordinary accounting rule changes, etc. TOTAL COMPANY EPS is defined as Net Annual Earnings for the entire Pharmacia Corporation (including the Ag business) -- as adjusted for certain special items such as restructuring costs, extraordinary accounting rule changes, etc. -- divided by the average annual number of common shares outstanding. BU/F MEASURES will be based on each participant's achievement versus his/her PERSONAL OBJECTIVES for 2000. This component of the Plan also has a qualifier linked to CAPITAL CHARGES for the participant's designated business group. More detail on this qualifier will be covered later in the document. BEST-MANAGED BEHAVIORS will be measured based on an overall assessment made at year-end by senior management (including the CEO) of the participant's demonstrated commitment to these important management principles of the Company. 3 WEIGHTING OF INCENTIVE COMPONENTS The weighting of incentive components will vary based on the participant's designated business group. INCENTIVE COMPONENT MIX / WEIGHTING
- ------------------------------------------------------------------------------------------- TOTAL PHARMA TOTAL SALES COMPANY BU/F MEASURES & BEST-MANAGED GROWTH EPS PERSONAL OBJECTIVES BEHAVIORS TOTAL - ------------------------------------------------------------------------------------------- PHARMA MARKET REGION HEADS, 15% 15% 40% 30% 100% GBM GVPS, GSO HEAD - ------------------------------------------------------------------------------------------- ALL OTHER PARTICIPANTS 25% 25% 20% 30% 100% - ------------------------------------------------------------------------------------------- CAPITAL CHARGE QUALIFIER: The BU/F payout is funded at attained % of target if 2000 Earnings Before Taxes Minus 9% Interest on Operating Capital Base is equal to or greater than the comparable figure for 1999. If less than 1999, funding for the BU/F component is zero. - -------------------------------------------------------------------------------------------
DETERMINING INCENTIVE PAYOUTS Achievement relative to the performance goals established for each component determines the extent to which a participant receives an annual incentive award. The Compensation Committee of the Board of Directors approves the final incentive payments for all Elected Officers. COMPANY COMPONENTS For TOTAL PHARMA SALES GROWTH and TOTAL COMPANY EPS, performance is measured relative to the established targets for each component. A combined performance/payout table will be used to determine the Plan's overall incentive funding factor for these two components. This table, which shows the incentive funding factor for various combinations of sales growth and EPS performance, is provided in the back of this document. - -------------------------------------------------------------------------------- 2 4 BUSINESS UNIT/FUNCTION (BU/F) MEASURES & PERSONAL OBJECTIVES This component will be based on the participant's performance versus his/her personal objectives established for 2000. Performance against these objectives will be assessed at year-end by the participant's senior management (including the CEO), and an appropriate payout percent for this component will be determined based on this assessment. Payouts under this component may range from 0% to 200% for any individual participant. The payout for this component of the Plan will only be funded if the CAPITAL CHARGE QUALIFIER for the participant's designated business group is met. To qualify for the BU/F payout, the 2000 Capital Charge Qualifier of the participant's business group must meet or exceed the comparable figure from 1999. For purposes of this qualifier, the following points will apply: - - The designated business groups for purposes of applying this payout qualifier are as follows:
PARTICIPANTS DESIGNATED BUSINESS GROUP ------------ ------------------------- GCO, GBM and R&D Presidents, Total Pharma (Rx + GSO) Global Supply SVP and Chief Scientific Officer Pharma Market Region Heads and Pharma (Rx only) GBM Group Vice Presidents Global Specialty Operations Global Specialty Operations All Other Participants Total Company
- - Capital Charge Qualifier = Earnings Before Taxes minus 9% Interest on Operating Capital Base. - - Operating Capital Base for all participants includes: Inventory; Accounts Receivable; Net Property, Plant and Equipment; Net Intangibles from Investments after January 1, 1999; and the Net Book Value of the Company's Biotech Investment. BEST-MANAGED BEHAVIORS This component will be measured based on an overall assessment made at year-end by senior management (including the CEO) of the participant's demonstrated commitment to the Company's five Best-Managed Behaviors. These behaviors include: - - Shared Accountability and Transparency - - Participative Management - - Continuous Improvement - - Listening and Learning - - Coaching and Developing Others The payout for this component may range from 0% to 200% of target for any individual participant. OCIP PAYMENT At the end of the Plan year, after all results have been finalized for each component, the actual incentive payment for each participant will be determined. If the participant is an Elected Officer, the final incentive payment must be approved by the Compensation Committee of the Board of Directors. Final awards are expected to be issued in March 2001. - -------------------------------------------------------------------------------- 3 5 If a participant has an outstanding debt to the Company at the time an annual incentive payment would otherwise be made, the Company may apply the incentive payment to satisfy the debt. If a participant is found to have violated the Company's Business Ethics Policy, the Company may withhold, within the discretion of the Chief Compliance Officer, all or part of the participant's incentive payment. GENERAL PLAN PROVISIONS TARGET INCENTIVE PERCENTS Target incentive percents are generally established at the start of the year for all participants, or on the effective date of new hire or transfer for participants who become eligible for the OCIP after the start of the Plan year. This target usually remains fixed for the entire Plan year. In those circumstances where a participant's target incentive percent changes during the Plan year, the target in effect at the end of the Plan year will apply for determining the participant's total OCIP award (i.e., target incentive percents will not be prorated). ELIGIBLE EARNINGS Final actual incentive percents will be applied to eligible earnings to determine final payout amounts. Eligible earnings are defined as the participant's annual base salary as of December 31, 2000, plus any lump sum merit increases earned during the year. Eligible earnings will be adjusted to reflect: - - Short term disability periods in excess of 90 days. - - Any period on long term disability. - - Any period on unpaid leave of absence. PARTIAL YEAR ELIGIBILITY For the 2000 plan year, all OCIP participants will be considered participants for the entire plan year, regardless of when they became an OCIP member. In most cases, participants must be employed as of December 31, 2000, to be eligible for a payout from the 2000 OCIP. NEW HIRES -- New employees who meet the eligibility requirements of the OCIP will be eligible to receive a prorated incentive based on the time they were eligible for the Plan. Participants must be employed by the Company on December 31, 2000, to be eligible for a prorated incentive in the 2000 OCIP. TRANSFERS -- For employees who transfer from one job or employee status to another, eligibility will depend on their award eligibility before and after the transfer. - - If an employee transfers from a position that is not eligible to participate in the OCIP to one that is eligible, he/she will be considered a participant in the OCIP for the full year. The employee will not be eligible for a prorated award from the plan he/she was previously participating in. - - If an employee transfers from one OCIP-eligible position to another, the total OCIP award will be based on the eligible earnings, performance measures and annual incentive target in effect on December 31, 2000. - - If an employee transfers from an OCIP-eligible position to one that is not eligible, he/she will cease participating in the OCIP as of the date of transfer. The participant's OCIP award will be prorated based on the time they were eligible for the Plan. Awards will be calculated using the eligible earnings, performance measures and incentive target in effect on the date of transfer. The employee must be employed by the Company on December 31, 2000, to qualify for a partial year OCIP payment. For the time period following OCIP eligibility, the terms and conditions of the plan he/she transfers to will apply. - -------------------------------------------------------------------------------- 4 6 TERMINATIONS -- Participants who terminate employment prior to the last day of the incentive period (December 31, 2000) will not be eligible for any OCIP payment for that year unless it is contractually stated in a separation agreement, except for the following circumstances: - - Participants who die or who retire under a Company-sponsored retirement program during the Plan year will be eligible for a prorated award. The award will be calculated from the date when they became eligible for the 2000 OCIP to the date of death or retirement. In the case of the death of a participant, any OCIP award payable to the participant shall be paid to his/her beneficiary in a single payment at the same time as all other incentive awards are distributed. For this purpose, the Plan 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. - - Participants who leave the Company under a Company-sponsored disability program, separation program or other program approved by the Management Committee, will be eligible for a prorated OCIP award. The award will be calculated from the date when they became eligible for the 2000 OCIP to the effective date of separation. Awards for terminees who are eligible for a prorated payment under the above circumstances will be calculated using the eligible earnings, performance measures and incentive target in effect on the date of termination. LEAVE OF ABSENCE -- Participants who are not actively employed for the entire incentive period because they were on an approved leave of absence, but who are still employed on December 31, 2000, will be eligible to receive a prorated incentive payment for the period he/she was actively working, as well as short term absences and the first 90 days of disability leave. TAX CONSIDERATIONS, WITHHOLDING AND SAVINGS PLAN CONTRIBUTIONS Incentive payments under the Plan will be treated as taxable income for the year in which the participant receives the award. The Company will withhold appropriate amounts from all payments to satisfy all federal, state and local tax withholding requirements. Additionally, for employees who participate in the Company's savings plan, contributions to the savings plan will be deducted out of the participant's OCIP payment in an amount equal to the employee's current standard contribution percentage. This same principle also applies to eligible participants who have made prior elections to defer all or a portion of their annual incentive payment into the Company's Savings+Plus deferred compensation program. NO RIGHTS TO EMPLOYMENT Nothing in this Plan, and no action taken pursuant to the Plan, shall confer upon any participant the right to continue in the employ of the Company, or affect the right of the Company to terminate any participant's employment at any time and for any or no reason. PLAN ADMINISTRATION The general design of the Plan shall be approved and sponsored by the Compensation Committee of the Board of Directors of the Company. Global Human Resources shall have accountability to implement all administrative aspects of the Plan. All payments made under this Plan to Elected Officers of the Company are subject to review and approval by the Compensation Committee. The Chief Executive Officer (CEO) of the Company shall have the full power and authority to interpret the Plan, make factual determinations, and to prescribe, amend and rescind any rules, forms or procedures as deemed necessary or appropriate for the proper administration of the Plan. Any determinations, decisions, actions or interpretations to be made under the Plan by the CEO, including determinations as to issues on which the Plan Document is silent, shall be made in his sole discretion, not in any fiduciary capacity and need not be uniformly applied to similarly situated individuals. All determinations made by the CEO shall be final, conclusive and binding on the Company, all participants, and any other persons having or claiming an interest under the Plan. - -------------------------------------------------------------------------------- 5 7 AMENDMENT AND TERMINATION OF THE PLAN The Company reserves the right to amend or terminate the Plan at anytime by action of the CEO, and in the case of Elected Officers, by action of the Compensation Committee. This right includes, but is not limited to, the modification of eligibility for participation, incentive measures, performance targets and/or performance results. This right also includes the modification of 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. 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. - -------------------------------------------------------------------------------- 6 8 2000 OPERATIONS COMMITTEE INCENTIVE PLAN PERFORMANCE/PAYOUT TABLE * TOTAL COMPANY EARNINGS PER SHARE
EPS Growth over 1999> 22% 26% 31% 35% 40% 44% 49% 53%+ <$1.35 $1.35 $1.40 $1.45 $1.50 $1.55 $1.60 $1.65 > or = $1.70 Total Pharma Sales Growth ----------------------------------------------------------------------------------------------------------- > or = 18.0% 100.0% 125.0% 135.0% 142.5% 150.0% 162.5% 175.0% 187.5% 200.0% ----------------------------------------------------------------------------------------------------------- 17.0% 94.0% 119.0% 129.0% 136.5% 144.0% 156.5% 169.0% 181.5% 194.0% ----------------------------------------------------------------------------------------------------------- 16.0% 88.0% 113.0% 123.0% 130.5% 138.0% 150.5% 163.0% 175.5% 188.0% ----------------------------------------------------------------------------------------------------------- 15.0% 82.0% 107.0% 117.0% 124.5% 132.0% 144.5% 157.0% 169.5% 182.0% ----------------------------------------------------------------------------------------------------------- 14.0% 75.0% 100.0% 110.0% 117.5% 125.0% 137.5% 150.0% 162.5% 175.0% ----------------------------------------------------------------------------------------------------------- 13.0% 69.0% 94.0% 104.0% 111.5% 119.0% 131.5% 144.0% 156.5% 169.0% ----------------------------------------------------------------------------------------------------------- 12.0% 63.0% 88.0% 98.0% 105.5% 113.0% 125.5% 138.0% 150.5% 163.0% ----------------------------------------------------------------------------------------------------------- 11.0% 57.0% 82.0% 92.0% 99.5% 107.0% 119.5% 132.0% 144.5% 157.0% ----------------------------------------------------------------------------------------------------------- 10.0% 50.0% 75.0% 85.0% 92.5% 100.0% 112.5% 125.0% 137.5% 150.0% ----------------------------------------------------------------------------------------------------------- 9.0% 46.0% 71.0% 81.0% 88.5% 96.0% 108.5% 121.0% 133.5% 146.0% ----------------------------------------------------------------------------------------------------------- 8.0% 42.0% 67.0% 77.0% 84.5% 92.0% 104.5% 117.0% 129.5% 142.0% ---------------------------------------------------------------------------------------------------------- 7.0% 38.0% 63.0% 73.0% 80.5% 88.0% 100.5% 113.0% 125.5% 138.0% ----------------------------------------------------------------------------------------------------------- 6.0% 34.0% 59.0% 69.0% 76.5% 84.0% 96.5% 109.0% 121.5% 134.0% ----------------------------------------------------------------------------------------------------------- 5.0% 30.0% 55.0% 65.0% 72.5% 80.0% 92.5% 105.0% 117.5% 130.0% ----------------------------------------------------------------------------------------------------------- 4.0% 25.0% 50.0% 60.0% 67.5% 75.0% 87.5% 100.0% 112.5% 125.0% ----------------------------------------------------------------------------------------------------------- <4.0% 0.0% 25.0% 35.0% 42.5% 50.0% 62.5% 75.0% 87.5% 100.0% - -----------------------------------------------------------------------------------------------------------------------------------
* Notes: 1) Figures shown in table are stated as "% of target payout" 2) Payout funding percentage is prorated for incremental performance between the indicated performance/payout levels 3) Final payout funding percentage will be adjusted to reflect the respective weighting of sales growth and EPS incentive components of each participant - -------------------------------------------------------------------------------- 7 EX-10.4 5 y42526ex10-4.txt INCENTIVE PLAN 1 Exhibit 10.4 OCIP PHARMACIA 2000 Operations Committee Incentive Plan 2 2000 OPERATIONS COMMITTEE INCENTIVE PLAN OVERVIEW The 2000 Operations Committee Incentive Plan is summarized on the first three pages. Specific details on the Plan and how actual payouts are determined are provided in the Plan Document that follows this overview. - -------------------------------------------------------------------------------- PLAN OBJECTIVE The Operations Committee Incentive Plan (alternatively referred to as the OCIP, or the Plan) is designed to encourage specific results-oriented actions on the part of members of the Operations Committee (OC) of Pharmacia Corporation, and to recognize and reward positive results. The Plan closely aligns financial rewards with the achievement of specific objectives linked to business results, unit/functional and individual performance, and the participant's demonstrated commitment to leadership. The higher the level of the achievement, the greater the financial reward to participants. KEY FEATURES There are six key elements (identified in BOLD ITALICS below) that determine OCIP payouts: - - A TARGET INCENTIVE PERCENT is set at the beginning of the year (or effective date of hire or transfer if one becomes a participant after the start of the year) and is expressed as a percentage of a participant's eligible earnings. The target depends on a number of factors -- including market competitiveness, as well as a participant's position level, salary level, past individual performance and expected future contributions to the organization. - - Two Company performance measures -- SALES GROWTH and EARNINGS PER SHARE -- represent a significant portion of the Plan's total payout opportunity. Such a strong focus on these two measures underscores their importance to our success in creating shareholder value, in addition to generating more global consistency and teamwork across the Company. - - BUSINESS UNIT/FUNCTION (BU/F) MEASURES & PERSONAL OBJECTIVES provide opportunity for participants to earn incentives based on the performance of their unit/function, as determined from pre-established personal objectives. Funding for this component is contingent on meeting the participant's applicable CAPITAL CHARGE QUALIFIER. - - A component linked to LEADERSHIP COMMITMENTS accounts for the remainder of the Plan's payout. The maximum payout to any individual under the Plan is 200 percent of targeted payout. Payout for the 2000 Plan is expected to occur in March 2001. 2000 PERFORMANCE MEASURES COMPANY PERFORMANCE MEASURES - - TOTAL PHARMA SALES GROWTH - For incentive determination purposes, Sales Growth will be based on Total Pharma (i.e., pharmaceutical and Global Specialty Operations) performance. The target payout for this measure will be made if 10% Sales Growth is achieved, with the maximum payout awarded at 18% growth. - -------------------------------------------------------------------------------- 1 3 - - TOTAL COMPANY EARNINGS PER SHARE (EPS) - The target payout for this measure will be made if $1.50 EPS is achieved. The maximum payout will be awarded if $1.70 EPS is attained. BU/F MEASURES AND LEADERSHIP COMMITMENTS - - BU/F MEASURES are based on each participant's PERSONAL OBJECTIVES established for 2000. The payout for this component will only be made if the participant's applicable CAPITAL CHARGE QUALIFIER is met. Additional details on this qualifier are provided later in the Plan Document. - - LEADERSHIP COMMITMENTS are based on 360-degree management behaviors assessment, in addition to an overall general assessment made by the participant's senior management (including the CEO). A key basis for making this assessment will be the participant's demonstrated performance against the company's five Best Managed Behaviors. The target payout mix between components will vary based on the participant's designated business group. Refer to the overview below for the applicable payout mix of each participant. - -------------------------------------------------------------------------------------- TOTAL PHARMA TOTAL SALES COMPANY BU/F MEASURES & LEADERSHIP GROWTH EPS PERSONAL OBJECTIVES COMMITMENTS TOTAL - -------------------------------------------------------------------------------------- PHARMA MARKET REGION HEADS, GBM GVPS, 15% 15% 40% 30% 100% GSO HEAD - -------------------------------------------------------------------------------------- ALL OTHER PARTICIPANTS 25% 25% 20% 30% 100% - -------------------------------------------------------------------------------------- [Arrow Graphic] CAPITAL CHARGE QUALIFIER: The BU/F payout is funded at attained % of target if 2000 Earnings Before Taxes Minus 9% Interest on Operating Capital Base is equal to or greater than comparable figure for 1999. If less than 1999, funding for the BU/F component is zero. - --------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- 2 4 PURPOSE OF THE PLAN DOCUMENT The purpose of the Plan Document that follows is to provide eligible participants with an understanding of the key design features of the 2000 Operations Committee Incentive Plan (OCIP). In the pages that follow, participants will learn the specifics about: - - Plan measures and weighting, - - Performance objectives, - - Performance determination, - - Final payout determination, - - Definitions and terminology, and - - Plan administration. - -------------------------------------------------------------------------------- 3 5 2000 OPERATIONS COMMITTEE INCENTIVE PLAN (OCIP) DOCUMENT - -------------------------------------------------------------------------------- ELIGIBILITY Eligible employees (participants) in the OCIP include all Operations Committee (OC) members (excluding Ag) of Pharmacia Corporation. TARGET AWARDS Each OCIP participant will have a target incentive percent established at the start of the year (or effective date of hire or transfer if one becomes a participant after the start of the year). Each individual's target incentive percent is established by their senior management, including the Chief Executive Officer. The Compensation Committee of the Board of Directors of Pharmacia Corporation approves the target incentive percent for all Elected Officers. The target is set based on a number of factors, including, but not limited to: - - Market competitiveness of the position, - - Job level, - - Base salary level, - - Past individual performance, and - - Expected contribution to future company performance and business impact. The methodology for determining final incentive awards is covered later in the Plan Document. PLAN DESIGN The OCIP contains specific measures related to Company results, Business Unit/Function (BU/F) and Personal results, and Leadership Commitments. Company performance accounts for a significant portion of the incentive target of each participant, while BU/F & Personal Objectives and Leadership Commitments account for the remaining portion of the incentive target. For incentive determination purposes, Company performance is measured by year to year Sales Growth and Earnings Per Share (EPS). These measures are formally defined below. SALES GROWTH is defined as the percent increase of 2000 Total Pharma Net Sales over 1999 Total Pharma Net Sales. Total Pharma Net Sales include pharmaceutical and Global Specialty Operations sales only. For incentive determination purposes, sales figures may be restated -- following standard accounting practices -- to reflect unusual and/or non-recurring items such as large sales, divestitures, etc. EPS is defined as Net Annual Earnings for the entire Pharmacia Corporation (including Ag) -- as adjusted for certain special items such as restructuring costs -- divided by the average annual number of Pharmacia Corporation common shares outstanding. BU/F MEASURES will be based on each participant's achievement versus his/her PERSONAL OBJECTIVES for 2000. This component of the Plan also has a qualifier linked to CAPITAL CHARGES for the participant's designated business group. More detail on this qualifier will be covered later in the document. - -------------------------------------------------------------------------------- 4 6 LEADERSHIP COMMITMENTS will be measured based on the results of 360-degree management behaviors assessment, in addition to an overall assessment of leadership performance to be made at year-end by the participant's senior management (including the CEO). WEIGHTING OF INCENTIVE COMPONENTS The weighting of incentive components for all OCIP participants is as follows:
------------------------------------------------------------------------- TOTAL PHARMA TOTAL SALES COMPANY BU/F MEASURES & LEADERSHIP GROWTH EPS PERSONAL OBJECTIVES COMMITMENTS ------------------------------------------------------------------------- PHARMA MARKET REGION HEADS, 15% 15% 40% 30% GBM GVPS, GSO HEAD ------------------------------------------------------------------------- ALL OTHER PHARMA 25% 25% 20% 30% PARTICIPANTS -------------------------------------------------------------------------
DETERMINING INCENTIVE PAYOUTS Achievement relative to the performance goals established for each component determines the extent to which a participant receives an annual incentive award. The Compensation Committee of the Board of Directors approves final incentive payments for all Elected Officers. COMPANY COMPONENTS For TOTAL PHARMA SALES GROWTH and TOTAL COMPANY EPS, performance is measured relative to the established targets for each component. The payout curves for these components are illustrated on the next two pages. - -------------------------------------------------------------------------------- 5 7 2000 TOTAL PHARMA SALES GROWTH(1) [LINE GRAPH OF SALES GROWTH] (1) See Appendix I for table showing payout factor for incremental levels of Sales Growth performance 2000 TOTAL COMPANY EPS PAYOUT CURVE(2) [LINE GRAPH OF EPS PAYOUT CURVE] (2) See Appendix II for table showing payout factor for incremental levels of EPS performance - -------------------------------------------------------------------------------- 6 8 Some additional points to note regarding the Sales Growth and EPS components: - - The maximum payout is 200% of target payout for each component. - - Payouts will be prorated for incremental performance between the indicated performance/payout levels in Appendices I and II. BUSINESS UNIT/FUNCTION (BU/F) MEASURES & PERSONAL OBJECTIVES This component will be based on the participant's performance versus his/her Personal Objectives established for 2000. Performance against these objectives will be assessed at year-end by the participant's senior management (including the Chief Executive Officer), and an appropriate payout percent for this component will be determined based on this assessment. Similar to the Sales Growth and EPS components, payouts under the BU/F MEASURES & PERSONAL OBJECTIVES component may range from 0% to 200% for any individual participant. The payout for this component of the Plan will only be funded if the CAPITAL CHARGE QUALIFIER for the participant's designated business group is met. To qualify for the BU/F payout, the 2000 Capital Charge Qualifier of the participant's business group must meet or exceed the comparable figure in 1999. For purposes of this qualifier, the following points will apply: - - The designated business groups for purposes of applying this payout qualifier are as follows:
PARTICIPANTS DESIGNATED BUSINESS GROUP ------------ ------------------------- GCO, GBM and R&D Presidents, Total Pharma (Rx + GSO) Global Supply SVP and Chief Scientific Officer Pharma Market Region Heads and Pharma (Rx only) GBM Group Vice Presidents Global Specialty Operations Global Specialty Operations All Other Participants Total Company
- - Capital Charge Qualifier = Earnings Before Taxes minus 9% Interest on Operating Capital Base. - - Operating Capital Base for all participants includes: Inventory; Accounts Receivable; Net Property, Plant and Equipment; Net Intangibles from Investments after January 1, 1999; and the Net Book Value of the Company's Biotech Investment. LEADERSHIP COMMITMENTS This component will be based on the results of 360-degree management behaviors assessment, as well as an overall general assessment made by the participant's senior management (including the CEO). A key basis for making this assessment will be the participant's demonstrated performance against the company's five Best Managed Behaviors. The participant's final payout percent will be determined relative to their targeted payout level based on the collective results of these two elements. The payout for this component may range from 0% to 200% for any individual participant. - -------------------------------------------------------------------------------- 7 9 OCIP PAYMENT At the end of the Plan year, after all results have been finalized (including Company, BU/F & Personal Objectives, and Leadership Commitments), the actual incentive payment will be determined. If the participant is an Elected Officer, the final incentive payment must be approved by the Compensation Committee of the Board of Directors. Final awards are expected to be issued in March 2001. If a participant has an outstanding debt to the Company at the time an annual incentive payment would otherwise be made, the Company may apply the incentive payment to satisfy the debt. If a participant is found to have violated the Company's Business Ethics Policy, the Company may withhold, within the discretion of the Chief Compliance Officer, all or part of the participant's incentive payment. GENERAL PLAN PROVISIONS TARGET INCENTIVE PERCENTS Target incentive percents are generally established at the start of the year for all participants, or on the effective date of new hire or transfer for participants who become eligible for the OCIP after the start of the Plan year. This target usually remains fixed for the entire Plan year. In those circumstances where a participant's target incentive percent changes during the Plan year, the target in effect on December 31, 2000 will apply for determining the participant's total OCIP award (i.e., target incentive percents will not be prorated). ELIGIBLE EARNINGS Final actual incentive percents will be applied to eligible earnings to determine final payout amounts. Eligible earnings are defined as the participant's annual base salary as of December 31, 2000, plus any lump sum merit increases earned during the year. Eligible earnings will be adjusted to reflect: - - Short term disability periods in excess of 90 days. - - Any period on long term disability. - - Any period on unpaid leave of absence. PARTIAL YEAR ELIGIBILITY For the 2000 plan year, all OCIP participants will be considered participants for the entire plan year, regardless of when they became an OCIP member. In most cases, participants must be employed as of December 31, 2000, to be eligible for a payout from the 2000 OCIP. NEW HIRES -- New employees who meet the eligibility requirements of the OCIP will be eligible to receive a prorated incentive based on the time they were eligible for the Plan. To be eligible for a prorated incentive in the 2000 OCIP, both of the following criteria must be met: - - New employees must begin their employment prior to November 1, 2000. - - Participants must be employed by the Company on December 31, 2000. TRANSFERS -- For employees who transfer from one job or employee status to another, eligibility will depend on their award eligibility before and after the transfer. - - If an employee transfers from a position that is not eligible to participate in the OCIP to one that is eligible, he/she will be considered a participant in the OCIP for the full year. The employee will not be eligible for a prorated award from the plan he/she was previously participating in. - -------------------------------------------------------------------------------- 8 10 - - If an employee transfers from one OCIP-eligible position to another, the total OCIP award will be based on the eligible earnings, performance measures and annual incentive target in effect on December 31, 2000. - - If an employee transfers from an OCIP-eligible position to one that is not eligible, he/she will cease participating in the OCIP as of the date of transfer. The participant's OCIP award will be prorated based on the time they were eligible for the Plan. Awards will be calculated using the eligible earnings, performance measures and incentive target in effect on the date of transfer. The employee must be employed by the Company on December 31, 2000 to qualify for a partial year OCIP payment. For the time period following OCIP eligibility, the terms and conditions of the plan he/she transfers to will apply. TERMINATIONS -- Participants who terminate employment prior to the last day of the incentive period (December 31, 2000) will not be eligible for any OCIP payment for that year unless it is contractually stated in a separation agreement, except for the following circumstances: - - Participants who die or who retire under a Company-sponsored retirement program during the Plan year will be eligible for a prorated award. The award will be calculated from the date when they became eligible for the 2000 OCIP to the date of death or retirement. In the case of the death of a participant, any OCIP award payable to the participant shall be paid to his/her beneficiary in a single payment at the same time as all other incentive awards are distributed. For this purpose, the Plan 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. - - Participants who leave the Company under a Company-sponsored disability program, separation program or other program approved by the Management Committee, will be eligible for a prorated OCIP award. The award will be calculated from the date when they became eligible for the 2000 OCIP to the effective date of separation. Awards for terminees who are eligible for a prorated payment under the above circumstances will be calculated using the eligible earnings, performance measures and incentive target in effect on the date of termination. LEAVE OF ABSENCE -- Participants who are not actively employed for the entire incentive period because they were on an approved leave of absence, but who are still employed on December 31, 2000, will be eligible to receive a prorated incentive payment for the period he/she was actively working, as well as short term absences and the first 90 days of disability leave. TAX CONSIDERATIONS, WITHHOLDING AND SAVINGS PLAN CONTRIBUTIONS Incentive payments under the Plan will be treated as taxable income for the year in which the participant receives the award. The Company will withhold appropriate amounts from all payments to satisfy all federal, state and local tax withholding requirements. Additionally, for employees who participate in the Company's savings plan, contributions to the savings plan will be deducted out of the participant's OCIP payment in an amount equal to the employee's current standard contribution percentage. This same principle also applies to eligible participants who have made prior elections to defer all or a portion of their annual incentive payment into the Company's Savings+Plus deferred compensation program. - -------------------------------------------------------------------------------- 9 11 NO RIGHTS TO EMPLOYMENT Nothing in this Plan, and no action taken pursuant to the Plan, shall confer upon any participant the right to continue in the employ of the Company, or affect the right of the Company to terminate any participant's employment at any time and for any or no reason. PLAN ADMINISTRATION The general design of the Plan shall be approved and sponsored by the Compensation Committee of the Board of Directors of the Company. Global Human Resources shall have accountability to implement all administrative aspects of the Plan. All payments made under this Plan to Elected Officers of the Company are subject to review and approval by the Compensation Committee. The Chief Executive Officer (CEO) of the Company shall have the full power and authority to interpret the Plan, make factual determinations, and to prescribe, amend and rescind any rules, forms or procedures as deemed necessary or appropriate for the proper administration of the Plan. Any determinations, decisions, actions or interpretations to be made under the Plan by the CEO, including determinations as to issues on which the Plan Document is silent, shall be made in his sole discretion, not in any fiduciary capacity and need not be uniformly applied to similarly situated individuals. All determinations made by the CEO shall be final, conclusive and binding on the Company, all participants, and any other persons having or claiming an interest under the Plan. AMENDMENT AND TERMINATION OF THE PLAN The Company reserves the right to amend or terminate the Plan at anytime by action of the CEO, and in the case of Elected Officers, by action of the Compensation Committee. This right includes, but is not limited to, the modification of eligibility for participation, incentive measures, performance targets and/or performance results. This right also includes the modification of 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. 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. - -------------------------------------------------------------------------------- 10 12 APPENDIX I 2000 TOTAL PHARMA SALES GROWTH PAYOUT CURVE -- TABLE*
------------------------------- SALES GROWTH PAYOUT FACTOR ------------------------------- < 4.0% 0% ------------------------------- 4.0% 50% ------------------------------- 4.5% 55% ------------------------------- 5.0% 60% ------------------------------- 5.5% 64% ------------------------------- 6.0% 68% ------------------------------- 6.5% 72% ------------------------------- 7.0% 76% ------------------------------- 7.5% 80% ------------------------------- 8.0% 84% ------------------------------- 8.5% 88% ------------------------------- 9.0% 92% ------------------------------- 9.5% 96% ------------------------------- 10.0% 100% ------------------------------- 10.5% 107% ------------------------------- 11.0% 114% ------------------------------- 11.5% 120% ------------------------------- 12.0% 126% ------------------------------- 12.5% 132% ------------------------------- 13.0% 138% ------------------------------- 13.5% 144% ------------------------------- 14.0% 150% ------------------------------- 14.5% 157% ------------------------------- 15.0% 164% ------------------------------- 15.5% 170% ------------------------------- 16.0% 176% ------------------------------- 16.5% 182% ------------------------------- 17.0% 188% ------------------------------- 17.5% 194% ------------------------------- 18.0% 200% ------------------------------- >18.0% 200% -------------------------------
* Payouts are prorated for incremental performance between the indicated performance/payout levels. - -------------------------------------------------------------------------------- 11 13 APPENDIX II 2000 TOTAL COMPANY EPS PAYOUT CURVE -- TABLE*
------------------------ EPS PAYOUT FACTOR ------------------------ <$1.35 0% ------------------------ $1.35 50% ------------------------ $1.36 54% ------------------------ $1.37 58% ------------------------ $1.38 62% ------------------------ $1.39 66% ------------------------ $1.40 70% ------------------------ $1.41 73% ------------------------ $1.42 76% ------------------------ $1.43 79% ------------------------ $1.44 82% ------------------------ $1.45 85% ------------------------ $1.46 88% ------------------------ $1.47 91% ------------------------ $1.48 94% ------------------------ $1.49 97% ------------------------ $1.50 100% ------------------------ $1.51 105% ------------------------ $1.52 110% ------------------------ $1.53 115% ------------------------ $1.54 120% ------------------------ $1.55 125% ------------------------ $1.56 130% ------------------------ $1.57 135% ------------------------ $1.58 140% ------------------------ $1.59 145% ------------------------ $1.60 150% ------------------------ $1.61 155% ------------------------ $1.62 160% ------------------------ $1.63 165% ------------------------ $1.64 170% ------------------------ $1.65 175% ------------------------ $1.66 180% ------------------------ $1.67 185% ------------------------ $1.68 190% ------------------------ $1.69 195% ------------------------ $1.70 200% ------------------------ >$1.70 200% ------------------------
* Payouts are prorated for incremental performance between the indicated performance/payout levels. - -------------------------------------------------------------------------------- 12 EX-10.5 6 y42526ex10-5.txt INCENTIVE PLAN 1 Exhibit 10.5 OGIP [Pharmacia & Upjohn LOGO] 1999 Operations Group Incentive Plan 2 1999 OPERATIONS GROUP INCENTIVE PLAN OVERVIEW The 1999 Operations Group Incentive Plan is summarized on the first three pages. Specific details on the Plan and how actual payouts are determined are provided in the Plan Document that follows this overview. - -------------------------------------------------------------------------------- PLAN OBJECTIVE The Operations Group Incentive Plan (alternatively referred to as the OGIP, or the Plan) is designed to encourage specific results-oriented actions on the part of Elected Officers and members of the Operations Group (OG), and to recognize and reward positive results. The plan closely aligns financial rewards with the achievement of specific objectives linked to both business results and the participant's commitment to leadership. The higher the level of the achievement, the greater the financial reward to participants. KEY FEATURES There are six key elements (identified in BOLD ITALICS below) that determine OGIP payouts: - - A TARGET PAYOUT PERCENT is set at the beginning of the year, and is expressed as a percentage of a participant's eligible earnings. The target depends on a number of factors -- including market competitiveness, as well as a participant's position level, salary level, past individual performance and expected future contributions to the organization. - - Two Company performance measures -- SALES GROWTH and EARNINGS PER SHARE -- represent 50 percent of the plan's payout opportunity for most participants. Such a strong focus on these two measures underscores their importance to our success in creating shareholder value, in addition to generating more global consistency and teamwork across the Company. - - BUSINESS UNIT/FUNCTION (BU/F) PERFORMANCE MEASURES and a component tied to LEADERSHIP COMMITMENT account for the remainder of the Plan's payout. Funding for the BU/F component is contingent on meeting the participant's applicable CAPITAL CHARGE QUALIFIER. The maximum payout to any individual under the Plan is 200 percent of targeted payout. In previous years, incentive plans offered maximum payouts of 150 percent. This revision reflects the Company's desire to provide significant rewards for truly exemplary performance. Payout for the 1999 Plan is expected to occur in March 2000. 1999 PERFORMANCE MEASURES COMPANY PERFORMANCE MEASURES - - Sales Growth - The industry average sales growth in 1999 is expected to be 7 percent, and our goal is to at least match that average. - - Earnings Per Share - The EPS target for 1999 is $1.85, which represents a growth factor of 17 percent over prior year. Achieving this goal will require us to outperform the industry, which is expected to grow an average of approximately 11 percent in 1999. - -------------------------------------------------------------------------------- 1 3 BU/F AND LEADERSHIP COMMITMENT MEASURES - - BU/F measures are based on each participant's Personal Objectives established for 1999. The payout for this component will only be made if the participant's applicable Capital Charge Qualifier is met. Additional details on this qualifier are provided later in the Plan Document. - - Leadership Commitments are based on the results of the 360-degree management behaviors survey to be conducted in 1999, in addition to an overall general assessment made by the participant's senior management (including the Chief Executive Officer). - - The target payout mix between the BU/F and Leadership Commitment components will vary based on the participant's designated business unit. Refer to the overview below for the applicable payout mix of each business unit.
------------------------------------------------------------------------------------- SALES EPS BU/F LEADERSHIP TOTAL GROWTH MEASURES COMMITMENTS ------------------------------------------------------------------------------------- ALL PARTICIPANTS EXCEPT CHC AND ASSOCIATED BUSINESSES (AB) 25% 25% 20% 30% 100% CHC AND AB 15% 15% 40% 30% 100% PARTICIPANTS [ARROW GRAPHIC] CAPITAL CHARGE QUALIFIER: BU/F payout is funded at attained % of target if 1999 Operating Income Minus 9% Interest on Operating Asset Base is equal to or greater than 1998. If less than 1998, funding for BU/F component is zero. -------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- 2 4 PURPOSE OF THE PLAN DOCUMENT The purpose of the Plan Document that follows is to provide eligible participants with an understanding of the key design features of the 1999 Operations Group Incentive Plan (OGIP). In the pages that follow, participants will learn the specifics about: - - Plan measures and weighting; - - Performance objectives; - - Performance determination; - - Final payout determination; - - Definitions and terminology; and - - Plan administration. - -------------------------------------------------------------------------------- 3 5 1999 OPERATIONS GROUP INCENTIVE PLAN DOCUMENT - -------------------------------------------------------------------------------- ELIGIBILITY Eligible employees (participants) in the OGIP include all Elected Officers and members of the Operations Group (OG) of Pharmacia & Upjohn. TARGET AWARDS Participants in the Plan will be eligible for an annual incentive award based on the achievement of predetermined goals. Each OGIP participant will have a target incentive percent established at the start of the year (or effective date of hire or transfer if they become a participant after the start of the year). Each individual's target incentive is established by their direct management, including the CEO. The Compensation Committee of the Board of Directors of Pharmacia & Upjohn approves the target incentive for all Elected Officers. The target is set based on a number of factors, including, but not limited to: - - Market competitiveness of the position; - - Job Level; - - Base salary level; - - Past individual performance; and - - Expected contribution to future company performance and business impact. Final annual incentive award payments are determined at year-end by applying the individual's final incentive percent to eligible earnings. The methodology for determining the final payout percent, as well as the definition of eligible earnings, is covered later in the Plan Document. The Compensation Committee of the Board of Directors approves final incentive payments for all Elected Officers. PLAN DESIGN The OGIP contains specific measures related to Company results, Business Unit/Function (BU/F) results and Leadership Commitments. Company performance accounts for 50 percent of the incentive target for most participants, while BU/F and Leadership Commitments account for the remaining portion of the incentive target. Company performance is measured by year to year Sales Growth and Earnings Per Share (EPS). These measures are formally defined below: SALES GROWTH is defined as the percent increase of 1999 Net Sales over the 1998 Net Sales. For incentive determination purposes, sales figures may be restated - -- following standard accounting practices -- to reflect unusual and/or non-recurring items such as large sales, divestitures, etc. EPS is defined as Net Annual Earnings -- as adjusted for certain special items such as restructuring costs -- divided by the average annual number of common shares outstanding. - -------------------------------------------------------------------------------- 4 6 BU/F MEASURES will be based on each participant's achievement versus his/her Personal Objectives for 1999. This component of the Plan also has a qualifier linked to capital charges for the participant's designated business group. More detail on this qualifier will be covered later in the document. LEADERSHIP COMMITMENTS will be measured based on the results of the 360-degree management behaviors survey to be conducted in 1999, in addition to an overall assessment of leadership performance to be made at year-end by the participant's senior management (including the CEO). WEIGHTING OF INCENTIVE COMPONENTS The weighting of incentive components for all OGIP participants is as follows:
- ----------------------------------------------------------------- SALES BU/F LEADERSHIP GROWTH EPS MEASURES COMMITMENTS - ----------------------------------------------------------------- ALL PARTICIPANTS EXCEPT CHC AND ASSOCIATED BUSINESSES 25% 25% 20% 30% - ----------------------------------------------------------------- CHC & AB 15% 15% 40% 30% PARTICIPANTS - -----------------------------------------------------------------
DETERMINING INCENTIVE PAYOUTS Achievement relative to the performance goals established for each component determines the extent to which a participant receives an annual incentive award. COMPANY COMPONENTS For Sales Growth and EPS, company performance is measured relative to the established target for each component. The payout curves for these two components are illustrated on the next page. - -------------------------------------------------------------------------------- 5 7 COMPANY SALES GROWTH PAYOUT CURVE(1) [LINE GRAPH OF SALES GROWTH PAYOUT CURVE OMITTED] (1) See Appendix I for table showing payout factor for each level of Sales Growth performance COMPANY EPS PAYOUT CURVE(2) [LINE GRAPH OF EPS PAYOUT CURVE OMITTED] (2) See Appendix II for table showing payout factor for each level of EPS performance - -------------------------------------------------------------------------------- 6 8 Some additional points to note regarding the Sales Growth and EPS components: - - For both Sales Growth and EPS, the maximum payout is 200% of target payout for each component. - - For EPS, the payout factor for hitting the $1.85 target is 125% (versus 100%). This higher payout factor for target performance reflects the Company's desire to provide higher rewards for achievement of 1999 EPS growth of 17% -- a growth expectation that will outperform the industry. - - Payouts will be prorated for incremental performance between the indicated performance/payout levels in Appendices I and II. BUSINESS UNIT/FUNCTION (BU/F) MEASURES This component will be based on the participant's performance versus his/her Personal Objectives established for 1999. Performance against these objectives will be assessed at year-end by the participant's direct management (including the CEO), and an appropriate payout percent for this component will be determined based on this assessment. Similar to the Sales Growth and EPS components, payouts under the BU/F measures component may range from 0% to 200% for any individual participant. The payout for the BU/F component of the Plan will only be funded if the CAPITAL CHARGE QUALIFIER for the participant's designated business group is met. Please see Appendix III for the designated business group of each participant for purposes of applying this BU/F payout qualifier. To qualify for the BU/F payout, the 1999 Capital Charge Qualifier of the participant's business group must meet or exceed the comparable figure in 1998. For purposes of this qualifier, the following definitions will apply: - - Capital Charge Qualifier is defined as: Operating Income minus 9% Interest on Operating Asset Base. - - Operating Asset Base includes: Inventory; Accounts Receivable; Net Property, Plant and Equipment; Net Intangibles from Investments after 1 January 1999; and the Net Book Value of the Company's Biotech Investment. LEADERSHIP COMMITMENTS This component will be based on the results of the 360-degree management behaviors survey to be conducted in 1999, as well as an overall general assessment made by the participant's senior management (including the Chief Executive Officer). The participant's final payout percent will be determined relative to their targeted payout level based on the collective results of these two elements. The payout for this component may range from 0% to 200% for any individual participant. - -------------------------------------------------------------------------------- 7 9 OGIP PAYMENT At the end of the Plan year, after all results have been finalized (including Company, BU/F and Leadership Commitments), the actual incentive payment will be determined. If the participant is an Elected Officer, the final incentive payment must additionally be approved by the Compensation Committee of the Board of Directors. Final awards are expected to be issued in March 2000. If a participant has an outstanding debt to the Company at the time an annual incentive payment would otherwise be made, the Company may apply the incentive payment to satisfy the debt. If a participant is found to have violated the Company's Business Ethics Policy, the Company may withhold, within the discretion of the Chief Compliance Officer, all or part of the participant's incentive payment. GENERAL PLAN PROVISIONS ELIGIBLE EARNINGS Final incentive percentages will be applied to eligible earnings to determine final payout amounts. Eligible earnings are defined as all regular base salary earned during the incentive year. This includes lump sum merit increases and pay for unused vacation. Eligible earnings does not include: - - Benefits credits used to "pay" for cafeteria benefits. - - Income received while on Total & Permanent Disability, Temporary Disability, Terminal Leave to Retirement, Terminal Leave to Termination, Pharmacia & Upjohn Disability, and/or Layoff status. - - Workers' compensation payments. - - Reimbursed relocation expenses or relocation COLA's. - - Separation and/or Waiver Payments. - - Other reimbursements or payments that are not pay for services, such as Relocation Allowance, Automobile Allowance, etc. - - Special bonus payments and awards received during the plan year, such as special recognition awards, The W.E. Upjohn Award, etc. PARTIAL YEAR ELIGIBILITY In most cases, participants must be actively employed as of 31 December 1999 to be eligible for a payout from the 1999 OGIP. For those participants who are eligible for a partial year payout from the OGIP, payments will be based on applicable income while they were eligible for the Plan. - - NEW HIRES -- New employees who meet the eligibility requirements of the OGIP will be eligible to receive a prorated incentive under the Plan (assuming they are employed at year-end). The target incentive percentage will be established as of the effective date of hire. - - TRANSFERS -- For employees who transfer from one job or employee status to another, eligibility will depend on their award eligibility before and after the transfer. 8 10 -- If an employee transfers from a position that is not eligible to participate in the OGIP to one that is eligible, he/she will be eligible to receive an OGIP award for the year based on eligible earnings after becoming eligible for the Plan. -- If an employee transfers from one Company incentive plan to another (e.g., from the Annual Incentive Plan to the OGIP) due to a change in position and/or job responsibilities, the annual incentive award will be prorated between the programs based on the time, eligible earnings and target incentive level in each position. -- If an employee transfers from one OGIP-eligible position to another, participation in the OGIP will continue uninterrupted. If the positions use different performance measures or have different annual incentive targets, the annual incentive award will be prorated between the two positions. -- If an employee transfers from an OGIP-eligible position to one that is not OGIP-eligible, he/she will cease participating in OGIP as of the date of transfer and the annual incentive award will be prorated based on participation and eligible earnings up to that point. Again, the employee must be actively employed at year-end to qualify for a partial payment. - - TERMINATIONS -- Participants who terminate employment prior to the last day of the incentive period (31 December 1999) will not be eligible for any OGIP payment for that year unless it is contractually stated in a separation agreement, or except for the following circumstances: -- Participants who die or who retire under a Company-sponsored retirement program during the plan year will be eligible for a prorated award. The award will be calculated from the date when they became eligible for the OGIP to the date of death or retirement. In the case of the death of a participant, any OGIP award payable to the participant shall be paid to his/her beneficiary in a single payment at the same time as all other incentive awards are distributed. For this purpose, the Plan will use the beneficiary named under the Company-sponsored life insurance plan. If no life insurance beneficiary is designated, the beneficiary will become the first named from the following order of plans: savings plan, pension plan, stock option plan. -- Participants who leave the Company under a Company-sponsored disability program, separation program or other appropriately approved program, will be eligible for a prorated award. OGIP payments for these participants will be based on the eligible earnings up to the effective date of the leave or separation. - - LEAVE OF ABSENCE -- Participants who are not actively employed for the entire incentive period because they were on an approved leave of absence of more than 90 days, but are still considered employed as of 31 December 1999, will receive a prorated payment based on eligible earnings during their period of active employment. TAX CONSIDERATIONS AND WITHHOLDING Incentive payments under the Plan will be treated as taxable income for the year in which the participant receives the award. The Company will withhold appropriate amounts from all payments to satisfy all federal, state and local tax withholding requirements. - -------------------------------------------------------------------------------- 9 11 NO RIGHTS TO EMPLOYMENT Nothing in this Plan, and no action taken pursuant to the Plan, shall confer upon any participant the right to continue in the employ of the Company, or affect the right of the Company to terminate any participant's employment at any time and for any or no reason. PLAN ADMINISTRATION The general design of the Plan shall be approved and sponsored by the Compensation Committee of the Company. Global Human Resources shall have accountability to implement all administrative aspects of the Plan. All payments made under this Plan to Elected Officers of the Company are subject to review and approval of the Compensation Committee. The Chief Executive Officer (CEO) of the Company shall have the full power and authority to interpret the Plan, make factual determinations, and to prescribe, amend and rescind any rules, forms or procedures as deemed necessary or appropriate for the proper administration of the Plan. Any determinations, decisions, actions or interpretations to be made under the Plan by the CEO, including determinations as to issues on which the Plan Document is silent, shall be made in his sole discretion, not in any fiduciary capacity and need not be uniformly applied to similarly situated individuals. All determinations made by the CEO shall be final, conclusive and binding on the Company, all participants, and any other persons having or claiming an interest under the Plan. AMENDMENT AND TERMINATION OF THE PLAN The Company reserves the right to amend or terminate the Plan at anytime by action of the CEO, and in the case of Elected Officers, by action of the Compensation Committee. This right includes, but is not limited to, the modification of incentive measures, performance targets and/or performance results. This right also includes the modification of 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. 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. - -------------------------------------------------------------------------------- 10 12 APPENDIX I COMPANY SALES GROWTH PAYOUT CURVE -- TABLE ================================================================================
==================================== PERFORMANCE LEVEL PAYOUT FACTOR ------------------------------------ < 2.0% 0.0% ------------------------------------ 2.0% 40.0% ------------------------------------ 2.5% 46.0% ------------------------------------ 3.0% 52.0% ------------------------------------ 3.5% 58.0% ------------------------------------ 4.0% 64.0% ------------------------------------ 4.5% 70.0% ------------------------------------ 5.0% 76.0% ------------------------------------ 5.5% 82.0% ------------------------------------ 6.0% 88.0% ------------------------------------ 6.5% 94.0% ------------------------------------ 7.0% 100.0% ------------------------------------ 7.5% 108.3% ------------------------------------ 8.0% 116.7% ------------------------------------ 8.5% 125.0% ------------------------------------ 9.0% 133.3% ------------------------------------ 9.5% 141.7% ------------------------------------ 10.0% 150.0% ------------------------------------ 10.5% 158.3% ------------------------------------ 11.0% 166.7% ------------------------------------ 11.5% 175.0% ------------------------------------ 12.0% 183.3% ------------------------------------ 12.5% 191.7% ------------------------------------ (greater than or equal to) 13.0% 200.0% ====================================
Payouts are prorated for incremental performance between the indicated performance/payout levels. - -------------------------------------------------------------------------------- 11 13 APPENDIX II COMPANY EPS PAYOUT CURVE -- TABLE ================================================================================
==================================== PERFORMANCE LEVEL PAYOUT FACTOR ------------------------------------ < $1.66 0% ------------------------------------ $1.66 40% ------------------------------------ $1.67 51% ------------------------------------ $1.68 60% ------------------------------------ $1.69 69% ------------------------------------ $1.70 77% ------------------------------------ $1.71 84% ------------------------------------ $1.72 90% ------------------------------------ $1.73 95% ------------------------------------ $1.74 98% ------------------------------------ $1.75 100% ------------------------------------ $1.76 102% ------------------------------------ $1.77 104% ------------------------------------ $1.78 106% ------------------------------------ $1.79 108% ------------------------------------ $1.80 110% ------------------------------------ $1.81 112% ------------------------------------ $1.82 114% ------------------------------------ $1.83 117% ------------------------------------ $1.84 120% ------------------------------------ $1.85 125% ------------------------------------ $1.86 129% ------------------------------------ $1.87 134% ------------------------------------ $1.88 139% ------------------------------------ $1.89 144% ------------------------------------ $1.90 150% ------------------------------------ $1.91 160% ------------------------------------ $1.92 170% ------------------------------------ $1.93 180% ------------------------------------ $1.94 190% ------------------------------------ (greater than or equal to) $1.95 200% ====================================
Payouts are prorated for incremental performance between the indicated performance/p. your levels. - -------------------------------------------------------------------------------- 12 14 APPENDIX III BUSINESS GROUP DESIGNATION FOR CAPITAL CHARGE QUALIFIER ================================================================================ - -------------------------------------------------------------------------------------------------- TOTAL COMPANY: Goran Ando Chris Coughlin Paul Matson Tim Rothwell Hakan Astrom Carrie Cox Ian McInnes Mike Tansey Ken Banta Mike DuBois Christer Odqvist Bob Thompson Rick Collier Birgitta Klasen Mats Pettersson Alexandra Van Horne - -------------------------------------------------------------------------------------------------- TOTAL PHARMA: Jack Jackson Fernando Leal Rod Unsworth Toni Weitzberg - -------------------------------------------------------------------------------------------------- CHC: Jorgen Johnsson - -------------------------------------------------------------------------------------------------- ASSOCIATED BUS.: Don Parfet - --------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- 13 EX-10.6 7 y42526ex10-6.txt EMPLOYMENT AGREEMENT 1 Exhibit 10.6 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 Country Operations 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 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 ("Compensation Committee") to be appropriate based on Executive's 2 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 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 2 3 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 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. Section 621 et seq.; the Older Workers Benefit Protection Act, 29 U.S.C. Section 621 et seq.; Title VII of the Civil Rights Act of 1964, as amended, 42 U.S.C. Section 2000e et seq.; the Employee Retirement Income Security Act of 1974, 29 U.S.C. Section 1001 et seq.; the Americans With Disabilities Act, 42 U.S.C. Section 12101 et seq.; the Family and Medical Leave Act, 29 U.S.C. Section 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. 3 4 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 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) 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: (i) Subject to subsection 12(d) 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; 4 5 (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 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. (b) 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. (c) 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: (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 received by Executive within three years prior to Executive's date of termination); 5 6 (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(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; (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; and (vii) 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. 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 6 7 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 of Directors of the Company ("Board"). (b) For purposes of this Agreement, "Good Reason" means: (i) Executive's rate of annual base salary or the target amount of Executive's annual cash incentive bonus 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; (iii) the Company fails to retain Executive as President, Global Country Operations or another substantially equivalent position for which the Executive is qualified by education, training and experience; or (iv) a successor to the Company fails to assume this Agreement. 14. DIRECTORSHIPS, OTHER OFFICES. In the event of termination of employment, Executive will immediately, unless otherwise requested by the Company's Board of Directors, resign from all directorships, trusteeships, other offices and employment held at that time with the Company or any of its 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 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 7 8 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. (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 hire, 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 8 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 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 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. 9 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. 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. 21. GROSS-UP PAYMENT. (a) In the event that any amount or benefits made or provided to Executive above and under all other plans and programs of the Company (the "Covered Payments") is determined to constitute a Parachute Payment, as such term is defined in Section 280G(b)(2) of the Internal Revenue Code, the Company shall pay to Executive, prior to the time any Internal Revenue Code Section 4999 excise tax ("Excise Tax") is payable with respect to any such Covered Payment, an additional amount which is equal to the Excise Tax on the Covered Payment (the "Initial Gross-Up"), plus the amount of income tax and Excise Tax payable by Executive with respect to the Initial Gross-Up (the "Second Gross-Up"), the amount of income tax and Excise Tax payable by Executive with respect to the Second Gross-Up (the "Third Gross-Up"), the amount of income tax and Excise Tax payable by Executive with respect to the Third Gross-Up (the "Fourth Gross-Up"), and the amount of income tax and Excise Tax payable by Executive with respect to the Fourth Gross-Up. 10 11 (b) The determination of whether the Covered Payment constitutes a Parachute Payment and, if so, the amount to be paid to Executive and the time of payment pursuant to this paragraph 20 shall be made by an independent auditor (the "Auditor") jointly selected by the Company and Executive and paid by the Company. The Auditor shall be a nationally recognized United States public accounting firm which has not, during the two years preceding the date of its selection, acted in any way on behalf of the Company or any of its Affiliates. If Executive and the Company cannot agree on the firm to serve as the Auditor, then Executive and the Company shall each select one accounting firm and those two firms shall jointly select the accounting firm to serve as the Auditor. (c) In the event that upon any audit by the Internal Revenue Service, or by a state or local taxing authority, of the Covered Payment or the Gross-Up payments, a change is finally determined to be required in the amount of taxes paid by the Executive, appropriate adjustments will be made under this Agreement such that the net amount which is payable to Executive after taking into account the provisions of section 4999 of the Code will reflect the intent of the parties as expressed in subparagraph (a) above, in the manner determined by the Auditor. 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. 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 11 12 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. 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. 12 13 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. PHARMACIA CORPORATION - ------------------------------ ------------------------------- Timothy Rothwell By: Fred Hassan Title: Chief Executive Officer - ------------------------------ -------------------------------- Date Date 13 EX-10.7 8 y42526ex10-7.txt EMPLOYMENT AGREEMENT 1 Exhibit 10.7 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. During the Employment Term (as defined in paragraph 2), 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. (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 $750,000 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 ("Compensation Committee") to be appropriate based on Executive's position, job performance and Company policy. For the Year 2000, Executive's target under the 2 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 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. 2 3 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. 9. SUPPLEMENTAL RETIREMENT BENEFIT. During the Employment Term, Executive will be eligible to participate in the Key Executive Pension Plan ("KEPP"). 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. Section 621 et seq.; the Older Workers Benefit Protection Act, 29 U.S.C. Section 621 et seq.; Title VII of the Civil Rights Act of 1964, as amended, 42 U.S.C. Section 2000e et seq.; the Employee Retirement Income Security Act of 1974, 29 U.S.C. Section 1001 et seq.; the Americans With Disabilities Act, 42 U.S.C. Section 12101 et seq.; the Family and Medical Leave Act, 29 U.S.C. Section 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 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; 3 4 (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) DEATH, DISABILITY, OR TERMINATION FOR ANY REASON OTHER THAN CAUSE PRIOR TO DECEMBER 31, 2004. 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). If Executive's employment is terminated as a result of death, disability, by the Company for any reason other than Cause, or by the Executive for any reason whatsoever, prior to December 31, 2004, 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 (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: (i) Executive will receive a lump sum severance payment, payable within 60 days after termination of Executive's employment, in an amount corresponding to the date of Executive's termination as set forth in the chart below: 4 5
TERMINATION DATE SEVERANCE PAYMENT 1-1-00 to 12-31-02 $4,764,006.00 1-1-03 to 12-31-03 $3,176,004.00 1-1-04 to 12-30-04 $1,588,002.00
(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 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; (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 5 6 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; and (viii) Executive will receive any other amounts earned, accrued or owing to Executive under the plans and programs of the Company. (b) INVOLUNTARY TERMINATION OTHER THAN FOR CAUSE, OR VOLUNTARY TERMINATION FOR GOOD REASON, ON OR AFTER JANUARY 1, 2003. Notwithstanding paragraph (a) above, if, on or after January 1, 2003, Executive is involuntarily terminated by the Company other than for Cause, or Executive voluntarily terminates his employment for 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: (i) Executive will receive a lump sum severance payment, payable within 60 days after termination of Executive's employment, equal to the sum of (A) that number of years of Executive's base salary and annual target incentive compensation (calculated using the amount of Executive's highest annual base salary and highest annual target incentive compensation received by Executive within three years prior to Executive's date of termination) corresponding to the date of Executive's termination as set forth in the chart below, plus (B) the severance payment, if any, corresponding to the date of Executive's termination payable in accordance with subparagraph 12(a)(i) (such amounts restated here for ease of reference):
TERMINATION DATE EMPLOYMENT SECURITY - YEARS (A) CASH PAYMENT (B) ---------------- ------------------------------- ---------------- 1-1-03 to 12-31-03 1 $3,176,004.00 1-1-04 to 12-30-04 2 $1,588,002.00 After 12-30-04 3 0
(ii) Executive will receive the same compensation and benefits as specified in subparagraphs 12(a)(ii)-(vii) above. (C) DEATH OR DISABILITY ON OR AFTER DECEMBER 31, 2004. If Executive's employment terminates as a result of death or disability on or after December 31, 2004, then: 6 7 (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 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; and (iv) 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. (d) INVOLUNTARY TERMINATION FOR CAUSE, OR VOLUNTARY TERMINATION OTHER THAN FOR GOOD REASON ON OR AFTER DECEMBER 31, 2004. If Executive is involuntarily terminated by the Company for Cause at any time, or if, on or after December 31, 2004, 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. (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. 7 8 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 of Directors of the Company ("Board"). (b) For purposes of this Agreement, "Good Reason" means: (i) Executive's rate of annual base salary or the target amount of Executive's annual cash incentive bonus 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 a Senior Executive Vice President of the Company; (iii) the Company fails to retain Executive as the Company's Chief Scientific Officer and Chairman of Research and Development or another substantially equivalent position for which the Executive is qualified by education, training and experience; or (iv) a successor to the Company fails to assume this Agreement. 14. DIRECTORSHIPS, OTHER OFFICES. In the event of termination of employment, Executive will immediately, unless otherwise requested by the Company's Board of Directors, resign from all directorships, trusteeships, other offices and employment held at that time with the Company or any of its 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 8 9 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 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. (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. 9 10 (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 hire, 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 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 10 11 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 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 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. 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. 21. GROSS-UP PAYMENT. (a) In the event that any amount or benefits made or provided to Executive above and under all other plans and programs of the Company or its Affiliates (the "Covered Payments") is determined to constitute a Parachute Payment, as such term is defined in Section 280G(b)(2) of the Internal Revenue Code, the Company shall pay to Executive, prior to the time any Internal Revenue Code Section 4999 excise tax ("Excise Tax") is payable with respect to any such Covered Payment, an additional amount which is equal to the Excise Tax on the Covered 11 12 Payment (the "Initial Gross-Up"), plus the amount of income tax and Excise Tax payable by Executive with respect to the Initial Gross-Up (the "Second Gross-Up"), the amount of income tax and Excise Tax payable by Executive with respect to the Second Gross-Up (the "Third Gross-Up"), the amount of income tax and Excise Tax payable by Executive with respect to the Third Gross-Up (the "Fourth Gross-Up"), and the amount of income tax and Excise Tax payable by Executive with respect to the Fourth Gross-Up. (b) The determination of whether the Covered Payment constitutes a Parachute Payment and, if so, the amount to be paid to Executive and the time of payment pursuant to this paragraph 20 shall be made by an independent auditor (the "Auditor") jointly selected by the Company and Executive and paid by the Company. The Auditor shall be a nationally recognized United States public accounting firm which has not, during the two years preceding the date of its selection, acted in any way on behalf of the Company or any of its Affiliates. If Executive and the Company cannot agree on the firm to serve as the Auditor, then Executive and the Company shall each select one accounting firm and those two firms shall jointly select the accounting firm to serve as the Auditor. (c) In the even that upon any audit by the Internal Revenue Service, or by a state or local taxing authority, of the Covered Payment or the Gross-Up payments, a change is finally determined to be required in the amount of taxes paid by the Executive, appropriate adjustments will be made under this Agreement such that the net amount which is payable to Executive after taking into account the provisions of section 4999 of the Code will reflect the intent of the parties as expressed in subparagraph (a) above, in the manner determined by the Auditor. 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. 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. 12 13 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. 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. 13 14 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. PHARMACIA CORPORATION - ------------------------------ ------------------------------- Philip Needleman, Ph.D. By: Fred Hassan Title: Chief Executive Officer - ------------------------------ -------------------------------- Date Date 14 EX-10.8 9 y42526ex10-8.txt PHANTOM SHARE AGREEMENT 1 Exhibit 10.8 PHANTOM SHARE AGREEMENT PHANTOM SHARE AGREEMENT by and among Monsanto Company, a Delaware corporation (the "Company"), Pharmacia Corporation, a Delaware corporation formerly known as Monsanto Company ("Pharmacia"), which is the sole shareholder of the Company, and Hendrick A. Verfaillie (the "Executive"), dated as of the 1st day of September, 2000. WHEREAS, the Executive is an executive employee of Pharmacia; and WHEREAS, Pharmacia and the Executive are parties to an Employment Agreement dated as of April 25, 1997 (the "Current Employment Agreement"); and WHEREAS, in connection with the separation of the agricultural and pharmaceutical businesses of Pharmacia and its subsidiaries, the Executive has agreed to become an employee of the Company; and WHEREAS, in that connection, the Company, Pharmacia and the Executive wish to replace the Current Employment Agreement with the new arrangement provided for in this Phantom Share Agreement; NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS: 1. Effect on Current Employment Agreement. (a) Effective as of the date of the initial public offering of the Shares (the "Effective Date"), the Current Employment Agreement shall be null and void and of no further force or effect. If the initial public offering of the Shares does not occur on or before March 31, 2001, or if the Company publicly announces before that date that it is no longer contemplating making an initial public offering of the Shares, then this Agreement shall be null and void and of no further force or effect, and the Current Employment Agreement shall remain in effect. (b) Effective no later than the Effective Date, the Executive shall become the Chief Executive Officer of the Company and shall have the authority, duties and responsibilities set forth in Exhibit A to this Agreement and the By-Laws of the Company. 2. Grant of Phantom Shares. Effective as of the Effective Date, the Company shall establish a bookkeeping account for the Executive (the "Account"), to which it shall from time to time credit hypothetical shares (the "Phantom Shares") of the common stock of the Company (the "Shares"). The initial number of Phantom Shares (which may include a fraction) credited to the Account shall equal the number of shares and fractions thereof determined by dividing (x) $7,231,000 (the "Initial Value") by (y) the initial public offering price of the Shares. 2 3. Adjustments to Account. Whenever a dividend or distribution is declared with respect to the common stock of the Company with a record date after the Effective Date and at a time when Phantom Shares remain in the Account, an additional number of Phantom Shares shall be credited to the Account equal to the number of shares and having a Share Value as of the payment date for such dividend or distribution equal to the fair market value (as determined by the Committee) of such dividend. In the event of any change in corporate capitalization such as a stock split, any corporate transaction such as a merger, consolidation, separation, spin-off, or other distribution of stock or property of the Company, any reorganization (whether or not such reorganization comes within the definition of reorganization in Section 368 of the Code), or any partial or complete liquidation of the Company, then notwithstanding any other provision of this Agreement, the Committee shall make such substitution or adjustments in the aggregate number and kind of shares represented by the Phantom Shares, if any, as it may determine to be appropriate or necessary to preserve the value thereof. 4. Vesting, Forfeiture and Payment of Account. (a) Performance Goal. As soon as reasonably practicable after December 31, 2001, the Committee shall determine and certify whether or not the Performance Goal has been met, and if it has not been met, then the Executive shall forfeit all rights to the Account unless it has previously vested and been paid as provided below in this Section 4. (b) Vesting On October 1, 2002. If the Executive remains an employee of the Company or any member of the Affiliated Group that includes the Company as of October 1, 2002, and the Committee has certified that the Performance Goal has been met, then the balance in the Account shall vest as of October 1, 2002. (c) Termination of Employment. (i) The balance in the Account shall vest as of the date of the termination of the Executive's employment with the Company and the other members of the Affiliated Group that includes the Company, if such termination is the result of the Executive's death, Disability, Termination without Cause or Termination for Good Reason, and (A) such termination occurs before December 31, 2001; or (B) such termination occurs on or after December 31, 2001 but before October 1, 2002, and the Committee certifies that the Performance Goal has been met. (ii) The balance in the Account shall not vest if the termination of the Executive's employment with the Company and the other members of the Affiliated Group that includes the Company, -2- 3 (A) occurs before December 31, 2001 for any other reason than death, Disability, Termination without Cause, or Termination for Good Reason; or (B) occurs on or after December 31, 2001 but before October 1, 2002, and the Committee fails to certify that the Performance Goal has been met, and then in either case the Executive shall forfeit all rights to the Account unless it has previously vested and been paid as provided below in this Section 4. (d) Change of Control. If there occurs a Monsanto Change of Control before December 31, 2001 and the Executive remains an employee of the Company or any member of the Affiliated Group that includes the Company as of the date of the Monsanto Change of Control, the balance in the Account shall vest on the date of the Monsanto Change of Control. If there occurs a Pharmacia Change of Control before December 31, 2001 followed by a Second Trigger, and the Executive remains an employee of the Company or any member of the Affiliated Group that includes the Company as of the date of the Second Trigger, the balance in the Account shall vest on the date of the Second Trigger. (e) Payment of Account. Whenever the balance in the Account vests as provided above, the Company shall pay to the Executive, in a single lump sum cash payment, an amount equal to the number of Phantom Shares credited to the Account times the Share Value, each determined as of the date of vesting; provided, that if the Account has vested pursuant to Section 4(c), the amount of such payment shall in no event be less than the Initial Value. Such payment shall be made as soon as reasonably practicable, but in any event within 30 days, after the last to occur of (i) the date on which such vesting occurs, (ii) the date on which the Committee certifies that the Performance Goal has been met, if such certification is a condition to such vesting, and (iii) the date on which the Company obtains the shareholder approval required by Section 5, unless such vesting occurs as a result of a Change of Control before the First Annual Meeting. 5. Shareholder Approval. Notwithstanding any other provision of this Agreement, the Executive shall have no right to any payments pursuant to Section 4 of this Agreement or otherwise with respect to the Phantom Shares and the Account, unless and until the shareholders of the Company have approved the material terms and conditions hereof in a manner satisfying the requirements of Section 162(m)(4)(C) for performance-based compensation; provided, that such shareholder approval shall not be required if a Change of Control occurs before the First Annual Meeting. The Company shall seek such approval at the First Annual Meeting. By its signature below, Pharmacia hereby approves such terms and conditions and agrees to vote its shares of the Company for such approval at the First Annual Meeting. -3- 4 6. Definitions. For purposes of this Agreement, the following terms shall have the meanings set forth below: Account: defined in Section 2. Affiliated Group: a group of corporations (domestic and foreign), partnership(s), joint venture(s), and other entities that would constitute an affiliated group of corporations within the meaning of Section 1504 of the Code, if each such entity were a domestic corporation, and for purposes of this agreement, substituting 30% ownership in Section 1504(a)(2)(A) for 80% ownership. Agreement: this Phantom Share Agreement. Board: the Board of Directors of the Company. Change of Control: a Monsanto Change of Control or a Pharmacia Change of Control. Code: the Internal Revenue Code of 1986, as amended. Company: defined in the first paragraph of this Agreement. Committee: the Company's Board People Committee or such other committee as may be designated by the Board; provided, that the Committee must consist solely of two or more members of the Board, each of whom qualifies as an "outside director" for purposes of Section 162(m) of the Code. Current Employment Agreement: defined in the second "WHEREAS" clause of this Agreement. Disability: Before a Change of Control, "Disability" shall mean the Executive's long-term disability for purposes of any reasonable occupation as determined under the Company's disability plan that is applicable to the Executive. After a Change of Control, "Disability" shall be as defined in the Executive's Change-of-Control Employment Security Agreement. Effective Date: defined in Section 1. Exchange Act: The Securities Exchange Act of 1934, as amended. Executive: defined in the first paragraph of this Agreement. -4- 5 First Annual Meeting: the first annual meeting of the Company's shareholders that occurs after the Effective Date. Initial Value: defined in Section 2. Monsanto Change of Control: the happening of any of the events described in subsections (a) through (d) below, if immediately following such event, Pharmacia does not beneficially own a majority of the then-outstanding Shares: (a) the acquisition by any Person of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of either (i) the Requisite Common Percentage of the then-outstanding Shares (the "Outstanding Company Common Stock") or (ii) the Requisite Voting Percentage of the combined voting power of the then-outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, that for purposes of this subsection (a), the following acquisitions shall not constitute a Change of Control: (A) any acquisition directly from the Company; (B) any acquisition by the Company or a Subsidiary of the Company; (C) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company, or a Subsidiary of the Company; or (D) any acquisition by any corporation pursuant to a transaction that complies with clauses (i), (ii) and (iii) of subsection (c) of this definition; (b) individuals who, as of the date of the initial public offering of the Shares, constitute the Board (the "Incumbent Board"), cease for any reason to constitute at least a majority of the Board; provided, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's stockholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; (c) consummation by the Company of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company or the acquisition of assets or stock of another corporation (a "Business Combination"), in each case, unless, following such Business Combination, (i) all or -5- 6 substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 60% of, respectively, the then-outstanding shares of common stock and the combined voting power of the then-outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including without limitation a corporation that as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their owner-ship, immediately prior to such Business Combination of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (ii) no Person (excluding the Company, a Subsidiary of the Company, any corporation resulting from a Business Combination or any employee benefit plan (or related trust) thereof) beneficially owns, directly or indirectly, the Requisite Common Percentage of the then-outstanding shares of common stock of the corporation resulting from such Business Combination or the Requisite Voting Percentage of the combined voting power of the then-outstanding voting securities entitled to vote generally in the election of directors of such corporation, except to the extent that such ownership existed prior to the Business Combination and (iii) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; (d) approval by the stockholders of the Company of a complete liquidation or dissolution of the Company. Monsanto Leadership Team: those individuals who are, immediately before a Pharmacia Change of Control, members of the Monsanto Leadership Team or any successor group thereto. Performance Goal: the Performance Goal is for the Company's net income, as reported in the Company's audited U.S. financial statements, but excluding (a) any items that are identified in the Company's reports filed with the Securities and Exchange Commission as unusual in nature or nonrecurring (such as restructuring costs, items related to resolution of litigation, and items related to mergers, acquisitions and divestitures) and (b) the cumulative effects of changes -6- 7 in accounting methodology made after September 20, 2000, to exceed zero for the period January 1, 2001 through December 31, 2001. Person: An individual, entity or group within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act. Phantom Shares: defined in Section 2. Pharmacia: defined in the first paragraph of this Agreement. Pharmacia Change of Control: the happening of any of the events described in subsections (a) through (d) below, if immediately following such event, Pharmacia beneficially owns a majority of the then-outstanding Shares: (a) the acquisition by any Person of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20 percent or more of either (1) the then-outstanding shares of common stock of Pharmacia (the "Outstanding Pharmacia Common Stock") or (2) the combined voting power of the then-outstanding voting securities of Pharmacia entitled to vote generally in the election of directors (the "Outstanding Pharmacia Voting Securities"); provided, that for purposes of this subsection (a), the following acquisitions shall not constitute a Change of Control: (A) any acquisition directly from Pharmacia; (B) any acquisition by the Company, Pharmacia, or a Subsidiary of either of them; (C) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company, Pharmacia, or a Subsidiary of either of them; or (D) any acquisition by any corporation pursuant to a transaction that complies with clauses (1), (2) and (3) of subsection (c) of this definition; (b) individuals who, as of the date of the initial public offering of the Shares, constitute the Board of Directors of Pharmacia (the "Incumbent Pharmacia Board"), cease for any reason to constitute at least a majority of the Pharmacia Board; provided, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by Pharmacia's stockholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Pharmacia Board shall be considered as though such individual were a member of the Incumbent Pharmacia Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board of Directors of Pharmacia; -7- 8 (c) consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of Pharmacia or the acquisition of assets or stock of another corporation (a "Pharmacia Business Combination"), in each case, unless, following such Pharmacia Business Combination, (i) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Pharmacia Common Stock and Outstanding Pharmacia Voting Securities immediately prior to such Pharmacia Business Combination beneficially own, directly or indirectly, more than 60% of, respectively, the then-outstanding shares of common stock and the combined voting power of the then-outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Pharmacia Business Combination (including without limitation a corporation that as a result of such transaction owns Pharmacia or all or substantially all of Pharmacia's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Pharmacia Business Combination of the Outstanding Pharmacia Common Stock and Outstanding Pharmacia Voting Securities, as the case may be, (ii) no Person (excluding the Company, Pharmacia, a Subsidiary of either of them, any corporation resulting from such Pharmacia Business Combination or any employee benefit plan (or related trust) thereof) beneficially owns, directly or indirectly, 20% or more of, respectively, the then-outstanding shares of common stock of the corporation resulting from such Pharmacia Business Combination or the combined voting power of the then-outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Pharmacia Business Combination and (iii) at least a majority of the members of the board of directors of the corporation resulting from such Pharmacia Business Combination were members of the Incumbent Pharmacia Board at the time of the execution of the initial agreement, or of the action of the Board of Directors of Pharmacia, providing for such Pharmacia Business Combination; (d) approval by the stockholders of Pharmacia of a complete liquidation or dissolution of Pharmacia; Requisite Common Percentage: as of any given time, a percentage equal to or greater than the higher of (a) 20 percent and (b) the percentage of the then-outstanding Shares then beneficially owned by Pharmacia. -8- 9 Requisite Voting Percentage: as of any given time, a percentage equal to or greater than the higher of (a) 20 percent and (b) the percentage of the voting power of the then-outstanding voting securities of the Company entitled to vote generally in the election of directors then beneficially owned by Pharmacia. Second Trigger: the occurrence, during the one-year period immediately following a Pharmacia Change of Control, of one of the following: (a) more than half of the members of the Monsanto Leadership Team are terminated by the Company without Cause or terminate their own employment for Good Reason, as those terms are defined in their respective Change-of-Control Employment Security Agreements; (b) the headquarters of the Company is relocated by more than 35 miles from its location immediately before the Pharmacia Change of Control, or a plan to effect such a relocation is publicly announced; (c) it is publicly announced that Pharmacia intends to take steps that will result in its ceasing to beneficially own a majority of the then-outstanding Shares or that would otherwise result in a Monsanto Change of Control, and such steps have not previously been approved by a majority of the members of the Monsanto Leadership Team. Share Value: with respect to any given date, the average of the daily highest and lowest per-share sales prices for the Shares during normal business hours on the New York Stock Exchange for each of the ten consecutive trading days ending with the immediately preceding date, or if the Shares were not traded on the New York Stock Exchange on such date, then ending with the next preceding date on which the Shares were traded, all as reported by such source as the Committee may select. Shares: defined in Section 2. Subsidiary: with respect to any entity, any corporation, partnership, joint venture, limited liability company, or other entity or enterprise of which the first entity owns or controls, directly or indirectly, 50% or more of the outstanding shares of stock normally entitled to vote for the election of directors, or of comparable equity participation and voting power. Termination for Good Reason: Before a Change of Control, "Termination for Good Reason" shall mean a termination of employment by the Executive as a result of, and within 90 days after the occurrence of, any of the following events: (a) the assignment to the Executive of any duties that are materially inconsistent in any respect with the Executive's position as Chief Executive Officer and his -9- 10 duties and responsibilities as set forth in Exhibit A and the By-Laws of the Company, unless such assignment is remedied by the Company within 30 days after receipt of notice thereof given by the Executive; (b) any reduction in the amount of, or failure to pay, the Executive's current annual base salary or any reduction in the amount of, or failure to pay, the Executive's other long-term aggregate incentive compensation opportunities, perquisites or other benefits, unless such reduction or failure is remedied by the Company within 30 days after receipt of notice thereof given by the Executive, or occurs as a result of a reduction that affects all senior executives of the Company similarly; (c) the Company's requiring the Executive to be based at any office or location more than 35 miles from the office where the executive is employed on the Effective Date or to be based at a location other than the principal executive offices of the Company. After a Change of Control, "Termination for Good Reason" shall mean a termination of employment by the Executive for Good Reason, as that term is defined in the Executive's Change-of-Control Employment Security Agreement. Termination Without Cause: Before a Change of Control, "Termination Without Cause" shall mean termination of the Executive's employment by the Company other than as a result of: (a) the willful and continued failure of the Executive to perform substantially the Executive's duties with the Company or one of its affiliates (other than any such failure resulting from incapacity due to physical or mental illness), after a written demand for substantial performance is delivered to the Executive by the Board which specifically identifies the manner in which the Board believes that the Executive has not substantially performed the Executive's duties; (b) the willful engaging by the Executive in illegal conduct or gross misconduct which is materially and demonstrably injurious to the Company; or (c) the Executive's Disability. For purposes of this definition, no act or failure to act, on the part of the Executive, shall be considered "willful" unless it is done, or omitted to be done, by the Executive in bad faith or without reasonable belief that the Executive's action or omission was in the best interests of the Company. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board or based upon the advice of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by the Executive in good faith and in the best interests of the Company. Notwithstanding the foregoing, termination as a result of an event described in clause (a) or (b) above shall be deemed to be a "Termination Without Cause" unless and until (i) the Executive has been given the opportunity, on reasonable advance notice, to be heard -10- 11 before the Board, together with counsel to the Executive and (ii) there shall have been delivered to the Executive a copy of a resolution thereafter duly adopted by the affirmative vote of not less than three-quarters of the entire membership of the Board (excluding the Executive, if the Executive is a member of the Board), finding that, in the good faith opinion of the Board, the Executive is guilty of conduct described in either (a) or (b) above, and specifying the particulars thereof in detail. After a Change of Control, "Termination Without Cause" shall mean a termination of the Executive's employment by the Company other than for Cause or Disability, as those terms are defined in the Executive's Change-of-Control Employment Security Agreement. 7. Miscellaneous. (a) This Agreement is personal to the Executive and without the prior written consent of the Company shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives. (a) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. (c) The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. (d) This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware, without reference to principles of conflict of laws. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives (e) 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: 800 North Lindbergh Boulevard -11- 12 St. Louis, Missouri 63167 If to the Company: 800 North Lindbergh Boulevard St. Louis, Missouri 63167 Attention: General Counsel 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. (f) The Company may withhold from any amounts payable under this Agreement such federal, state, local or foreign taxes as shall be required to be withheld pursuant to any applicable law or regulation. -12- 13 IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand and, pursuant to due authorization, the Company and Pharmacia have each caused these presents to be executed in its name on its behalf, all as of the day and year first above written. -------------------------------------- Hendrick A. Verfaillie MONSANTO COMPANY By ----------------------------------- John M. Murabito, Senior Vice President-Human Resources PHARMACIA CORPORATION By ----------------------------------- Paul L. Matson, Senior Vice President-Human Resources -13- 14 EXHIBIT A In addition to any other authority granted to the Chief Executive Officer pursuant to the By-Laws of the Company, the Executive shall have such duties, authority and responsibilities as are customarily associated with the position of Chief Executive Officer and such other duties and responsibilities as the Board of Directors of the Company has assigned to him as of the Effective Date of this Phantom Share Agreement. -14- EX-27 10 y42526ex27.txt FINANCIAL DATA SCHEDULE
5 9-MOS DEC-31-2000 SEP-30-2000 1,508 0 5,552 266 2,777 11,531 12,045 5,129 26,496 5,952 5,003 0 263 2,937 8,996 26,496 13,608 13,608 4,210 4,210 2,090 0 303 1,091 340 751 (27) 0 0 724 0.56 0.55 Includes guarantee of ESOP dept. Only includes R&D expense.
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