-----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, CNr+9bph4jj4FTTQOk15zw2d+n5FE6ly0DglcmvY3RwdvqZE8lMA94aZm6k2I92Z RoNsXWeWpYn1Z8Im4yEjXQ== 0000950123-01-502486.txt : 20010516 0000950123-01-502486.hdr.sgml : 20010516 ACCESSION NUMBER: 0000950123-01-502486 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20010331 FILED AS OF DATE: 20010515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PHARMACIA CORP /DE/ CENTRAL INDEX KEY: 0000067686 STANDARD INDUSTRIAL CLASSIFICATION: CHEMICALS & ALLIED PRODUCTS [2800] IRS NUMBER: 430420020 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-02516 FILM NUMBER: 1635088 BUSINESS ADDRESS: STREET 1: 100 ROUTE 206 NORTH CITY: PEAPACK STATE: NJ ZIP: 07977 BUSINESS PHONE: 9089018000 MAIL ADDRESS: STREET 1: 100 ROUTE 206 NORTH CITY: PEAPACK STATE: NJ ZIP: 07977 FORMER COMPANY: FORMER CONFORMED NAME: MONSANTO CO DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: MONSANTO CHEMICAL CO DATE OF NAME CHANGE: 19711003 10-Q 1 y49010e10-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 March 31, 2001 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 May 11, 2001 was 1,300,973,410. Page 1 of 32 pages The exhibit index is set forth on page 32 2 QUARTERLY REPORT ON FORM 10-Q PHARMACIA CORPORATION QUARTER ENDED MARCH 31, 2001 INDEX OF INFORMATION INCLUDED IN REPORT
Page ---- PART I - FINANCIAL INFORMATION 3 ITEM 1. FINANCIAL STATEMENTS 3 CONSOLIDATED STATEMENTS OF EARNINGS 3 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS 4 CONDENSED CONSOLIDATED BALANCE SHEETS 5 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 16 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 28 PART II - OTHER INFORMATION 29 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 29 ITEM 5. OTHER INFORMATION 30 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 32
2 3 PART I - FINANCIAL INFORMATION Item 1. Financial Statements PHARMACIA CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS
======================================================================== (Dollars in millions, except per-share data) (Unaudited) For the three months ended March 31 2001 2000 - ------------------------------------------------------------------------- Net sales $ 4,516 $ 4,172 Cost of products sold 1,441 1,404 Research and development 747 695 Selling, general and administrative 1,723 1,602 Goodwill amortization 61 57 Merger and restructuring 145 461 Interest income (39) (29) Interest expense 82 97 All other, net 17 (59) - ------------------------------------------------------------------------- Earnings(loss) before income taxes and 339 (56) minority interest Provision (benefit) for income taxes 77 (25) Minority interest in agricultural subsidiaries, net of tax 8 -- - ------------------------------------------------------------------------- Earnings (loss) from continuing operations 254 (31) (Loss) gain on sale of discontinued operations, net of tax (5) 58 - ------------------------------------------------------------------------- Earnings before cumulative effect of accounting change 249 27 Cumulative effect of accounting change, net of tax 1 (198) - ------------------------------------------------------------------------- Net earnings (loss) $ 250 $ (171) ======================================================================== ======================================================================== Net earnings (loss) per common share: Basic Earnings (loss) from continuing operations $ .19 $ (.03) Net earnings .19 (.14) Diluted Earnings (loss) from continuing operations $ .19 $ (.03) Net earnings (loss) .19 (.14) ========================================================================
See accompanying notes. 3 4 PHARMACIA CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
=================================================================================== (Dollars in millions) (Unaudited) For the three months ended March 31 2001 2000 - ----------------------------------------------------------------------------------- Net cash (required) by continuing operations $ (628) $ (764) Net cash provided by discontinued operations -- 21 - ----------------------------------------------------------------------------------- Net cash (required) by operations $ (628) $ (743) - ----------------------------------------------------------------------------------- Cash flows (required) provided by investment activities: Proceeds from sale of subsidiaries -- 64 Purchases of subsidiaries (65) -- Purchases of property, plant & equipment (278) (320) Purchases of other acquisitions & investments (32) (41) Proceeds from sales of investments 31 73 Proceeds from discontinued operations -- 570 Other (17) (20) - ----------------------------------------------------------------------------------- Net cash (required) provided by investment activities (361) 326 - ----------------------------------------------------------------------------------- Cash flows provided by financing activities: Proceeds from issuance of debt -- 7 Repayment of debt (18) (36) Payments of ESOP debt (44) (31) Net increase in short-term borrowings 830 151 Dividend payments (160) (163) Issuance of stock 96 89 - ----------------------------------------------------------------------------------- Net cash provided by financing activities 704 17 - ----------------------------------------------------------------------------------- Effect of exchange rate changes on cash (42) (25) - ----------------------------------------------------------------------------------- Net change in cash and cash equivalents (327) (425) Cash and cash equivalents, beginning of year 2,166 1,600 - ----------------------------------------------------------------------------------- Cash and cash equivalents, end of period $ 1,839 $ 1,175 ===================================================================================
See accompanying notes. 4 5 PHARMACIA CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
================================================================================ (Dollars in millions, except par value) (Unaudited) March 31, December 31, 2001 2000 - -------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 1,839 $ 2,166 Trade accounts receivable, less allowance of $297 (2000: $292) 5,296 5,025 Inventories 2,738 2,772 Other current assets 1,856 1,604 - -------------------------------------------------------------------------------- Total current assets 11,729 11,567 Long-term investments 353 444 Properties, net 7,106 7,171 Goodwill and other intangible assets, net 5,087 5,259 Other noncurrent assets 1,907 2,215 - -------------------------------------------------------------------------------- Total assets $ 26,182 $ 26,656 ================================================================================ ================================================================================ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Short-term debt, including current maturities of long-term debt $ 1,690 $ 833 Accounts payable 995 1,361 Other current liabilities 3,437 3,967 - -------------------------------------------------------------------------------- Total current liabilities 6,122 6,161 Long-term debt and guarantee of ESOP debt 4,497 4,586 Other noncurrent liabilities 2,663 2,904 Minority interest in agricultural subsidiaries 1,065 1,084 - -------------------------------------------------------------------------------- Total liabilities 14,347 14,735 - -------------------------------------------------------------------------------- Shareholders' equity: Preferred stock, one cent par value; at stated value; authorized 10 million shares; issued 6,488 shares (2000: 6,518 shares) 261 263 Common stock, two dollar par value; authorized 3 billion shares; issued 1.468 billion shares 2,937 2,937 Capital in excess of par value 2,727 2,694 Retained earnings 10,860 10,781 ESOP-related accounts (303) (307) Treasury stock (1,972) (2,003) Accumulated other comprehensive loss (2,675) (2,444) - -------------------------------------------------------------------------------- Total shareholders' equity 11,835 11,921 - -------------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 26,182 $ 26,656 ================================================================================
See accompanying notes. 5 6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (ALL U.S. DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER-SHARE DATA) Trademarks are indicated in all upper case letters. In the notes that follow, per-share amounts are presented on a diluted, after-tax basis. The term "the company" is used to refer to Pharmacia Corporation or to Pharmacia Corporation and its subsidiaries, as appropriate to the context. The term "former Monsanto" will be used to refer to pre-merger operations of the former Monsanto Company and "Monsanto" will refer to the agricultural subsidiary. A - INTERIM CONSOLIDATED FINANCIAL STATEMENTS The consolidated financial information presented herein is unaudited, other than the condensed balance sheet at December 31, 2000, which is derived from audited financial statements. The interim financial statements and notes thereto do not include all disclosures required by generally accepted accounting principles and should be read in conjunction with the financial statements and notes thereto included in Pharmacia Corporation's annual report filed on Form 10-K. In the opinion of management, the interim financial statements reflect all adjustments of a normal recurring nature necessary for a fair statement of the results for interim periods. The current period's results of operations are not necessarily indicative of results that ultimately may be achieved for the year. B - NEW ACCOUNTING STANDARDS DERIVATIVE INSTRUMENTS AND HEDGING On January 1, 2001, the company adopted Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (FAS 133) and its amendments. Under these provisions, all derivatives are recognized on the balance sheet at their fair value. On the date that the company enters into a derivative contract, it designates the derivative as (1) a hedge of the fair value of a recognized asset or liability (a "fair value" hedge); (2) a hedge of (a) a forecasted transaction or (b) the variability of cash flows that are to be received or paid in connection with a recognized asset or liability (a "cash flow" hedge); (3) a foreign-currency fair-value or cash flow hedge (a "foreign currency" hedge); (4) a hedge of a net investment in a foreign operation; or (5) an instrument that is not intended to receive hedge accounting treatment. Changes in the fair value of a derivative that is highly effective as and that is designated and qualifies as a fair-value hedge (including foreign currency fair value hedges), along with changes in the fair value of the hedged asset or liability that are attributable to the hedged risk, are recorded in current-period earnings. Changes in the fair value of a derivative that is highly effective as and that is designated and qualifies as a cash flow hedge (including foreign currency cash flow hedges), are recorded in other comprehensive income and released into earnings upon the occurrence of the anticipated transaction. Any hedge ineffectiveness is included in current-period earnings. If a derivative is used as a hedge of a net investment in a foreign operation, the changes in the derivative's fair value, to the extent that the derivative is effective as a hedge, are recorded in the cumulative-translation- adjustment account within other comprehensive income. In certain circumstances, the company enters into derivative contracts and does not designate them as fair value or cash flow hedges. This would be the case where the instrument serves as an economic hedge of an existing asset or liability. Changes in the fair value of instruments that do not receive hedge accounting are reported in current-period earnings. The company does not hold any instruments for trading purposes. 6 7 The company formally documents all relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking various hedge transactions. This process includes linking all derivatives that are designated as fair-value, cash flow, or foreign-currency hedges to (1) specific assets and liabilities on the balance sheet or (2) specific firm commitments or forecasted transactions. The company also formally assesses (both at the hedge's inception and on an ongoing basis) whether the derivatives that are used in hedging transactions have been highly effective in offsetting changes in the fair value or cash flows of hedged items and whether those derivatives may be expected to remain highly effective in future periods. When it is determined that a derivative is not (or has ceased to be) highly effective as a hedge, the company discontinues hedge accounting prospectively. In accordance with the transition provisions of FAS 133, the company recorded a net-of-tax cumulative effect adjustment in earnings as of January 1, 2001 for approximately a $1 gain. This amount is comprised of the excluded component of instruments previously designated in cash flow hedges and other changes in recorded basis to bring derivatives to fair value, both of which were less than $1 on an individual basis. Also included in the $1 gain were offsetting adjustments to the carrying value of a hedged item and the hedging derivative for a fair value hedge each in the amount of $19. A similar cumulative effect adjustment in the amount of $3 (net of tax) has been made on the balance sheet to other comprehensive income. This amount reflects the deferred amount of derivative instruments previously designated in cash flow hedges. Upon adopting FAS 133, the company elected to reclassify $52 of held-to-maturity securities as available-for-sale securities. The unrealized gain associated with the reclassification was not material and is recorded in other comprehensive income. Under the provisions of FAS 133, such a reclassification does not call into question the company's intent to hold current or future debt securities until their maturity. REVENUE RECOGNITION In connection with the fourth quarter 2000 adoption of the interpretations of Securities and Exchange Commission (SEC) Staff Accounting Bulletin 101, "Revenue Recognition in Financial Statements" (SAB 101), the company recorded a cumulative effect of a change in accounting principle, effective January 1, 2000, and has restated the quarterly results of 2000 as if SAB 101 had been applied for each quarter. The company recorded a cumulative effect of a change in accounting principle, effective January 1, 2000, in the after-tax amount of $198 (net of taxes of $108). This amount primarily relates to certain nonrefundable payments received from co-promotion partners that were recognized in earnings in prior years as well as certain agricultural revenues from biotechnology traits sold by third-party seed companies. Payments received in 1996 and 1998 from co-promotion partners comprised the majority of the adjustment. These payments have now been treated as deferred revenue and are being amortized over the terms of the underlying agreements. Quarterly amortization is approximately $5. Also included in the $198 cumulative catch-up adjustment was $26 (net of taxes of $16) recognized by Monsanto related to biotechnology trait sales. C - DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES The company's activities expose it to a variety of market risks, including risks related to the effects of changes in foreign-currency exchange rates, interest rates and commodity prices. These financial exposures are monitored and managed by the company as an integral part of its overall risk-management program. The company's risk-management program focuses on the unpredictability of financial markets and seeks to reduce the potentially adverse effects that the volatility of these markets may have on operating results. 7 8 The company maintains a foreign-currency risk-management strategy that uses derivative instruments to protect cash flows from fluctuations that may arise from volatility in currency exchange rates. The company is exposed to this risk both on an intercompany and third party basis. These movements affect cross-border transactions that involve sales and inventory purchases denominated in foreign currencies. Additionally, the company is exposed to foreign currency exchange risk for recognized assets and liabilities, royalties and net investments in subsidiaries, all of which are denominated in non-functional currencies of the holder. The company primarily uses foreign-currency forward-exchange contracts, swaps and options to hedge these risks. The company maintains an interest rate risk-management strategy that uses derivative instruments to minimize significant, unanticipated earnings fluctuations that may arise from volatility in interest rates. The company's goals are to (1) manage interest rate sensitivity of debt and (2) lower (where possible) the cost of its borrowed funds. The company maintains a commodity-price risk-management strategy that uses derivative instruments to minimize significant, unanticipated earnings fluctuations that may arise from volatility in commodity prices. Price fluctuations in commodities, mainly corn and soybean cause actual cash outlays for the purchase of those commodities to differ from anticipated cash outlays. The company uses futures and option contracts to hedge these risks. By using derivative financial instruments to hedge exposures to changes in exchange rates, interest rates and commodity prices, the company exposes itself to credit risk. Credit risk is the risk that the counter-party might fail to fulfill its performance obligations under the terms of the derivative contract. The company minimizes its credit (or repayment) risk in derivative instruments by entering into transactions with high-quality counter-parties and limiting the amount of exposure to each. FAIR-VALUE HEDGES The company uses interest rate swaps to convert a portion of its fixed-rate debt into variable-rate debt. The resulting cost of funds used may be lower than it would have been if variable-rate debt had been issued directly. Under the interest rate swap contracts, the company agrees with other parties to exchange, at specified intervals, the difference between fixed-rate and floating-rate interest amounts, calculated based on an agreed-upon notional amount. The company uses futures and option contracts to manage price risks associated with its purchase of corn and soybean inventory which the company buys from growers. Generally, the company hedges from 75 to 100 percent of the corn and soybean inventory value, depending on the crop and grower pricing. For the quarter ended March 31, 2001, there was no ineffectiveness or excluded ineffectiveness related to the company's fair-value hedges. CASH FLOW HEDGES The company is exposed to currency exchange rate fluctuations related to certain intercompany and third party transactions. The company purchases foreign-exchange options and forward-exchange contracts as hedges of anticipated sales and purchases denominated in foreign currencies. The company enters into these contracts to protect itself against the risk that the eventual cash flows will be adversely affected by changes in exchange rates. The company enters into contracts with a number of its growers to purchase their output at market prices. As a hedge against possible price fluctuations, the company purchases corn and soybean futures and options contracts. The futures contracts hedge the commodity price paid for these 8 9 commodity purchases while the option contracts limit the unfavorable effect that potential price increases would have on these purchases. For the quarter ended March 31, 2001, the company recognized a net loss of $2 mainly in the All other, net and Cost of products sold sections of the consolidated statement of earnings, which represented the total excluded ineffectiveness of all cash flow hedges. Specifically, this represents the changes in the time-value of option contracts, which the company excluded, from its hedge effectiveness evaluation. As of March 31, 2001, $7 of pretax deferred gains (net of losses) on derivative instruments accumulated in other comprehensive income are expected to be reclassified as earnings during the next twelve months. Transactions and events that (1) are expected to occur over the next twelve months and (2) will necessitate reclassifying the derivative gains as earnings include actual sales and purchases of inventory. At March 31, 2001, the maximum term over which the company has hedged its exposures to the variability of cash flow (for all forecasted transactions, excluding interest payments on variable-rate debt) is eighteen months. HEDGES OF NET INVESTMENTS IN FOREIGN OPERATIONS The company has numerous investments in foreign subsidiaries. The net assets of these subsidiaries are exposed to volatility in currency exchange rates. The company uses both derivative and non-derivative financial instruments to hedge a part of this exposure and measures ineffectiveness of such hedges based upon the change in spot foreign exchange rates. For the quarter ended March 31, 2001, $19 of gains was included in the company's cumulative translation adjustment. For the same period, the net loss recorded in earnings representing the amount of the hedge's excluded ineffectiveness was less than $1. D - INVENTORIES
------------------------------------ March 31, December 31, 2001 2000 ------------------------------------ Estimated replacement cost (FIFO basis): Finished products $ 1,056 $1,042 Raw materials, supplies and work-in-process 1,898 1,941 ------------------------------------ Inventories (FIFO basis) 2,954 2,983 Less reduction to LIFO cost (216) (211) ------------------------------------ $ 2,738 $2,772 ===================================================================================
Inventories valued on the LIFO method had an estimated replacement cost (FIFO basis) of $1,408 at March 31, 2001, and $1,434 at December 31, 2000. E - COMMITMENTS, CONTINGENT LIABILITIES AND LITIGATION The consolidated balance sheets include accruals for estimated product, intellectual property and other litigation and environmental liabilities. The latter includes exposures related to discontinued operations, including the industrial chemical facility referred to below and several sites which, under the Comprehensive Environmental Response, Compensation, and Liability Act, are commonly known 9 10 as Superfund sites. The company's ultimate liability in connection with Superfund sites depends on many factors, including the number of other responsible parties and their financial viability and the remediation methods and technology to be used. Actual costs to be incurred may vary from the estimates, given the inherent uncertainties in evaluating environmental exposures. ENVIRONMENTAL MATTERS With regard to the company's discontinued industrial chemical facility in North Haven, Connecticut, the company will be required to submit a corrective measures study report to the U.S. Environmental Protection Agency (EPA). 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 $175. 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. No provision has been made in the company's consolidated financial statements with respect to this verdict. In April 1999, a jury verdict was returned against DEKALB (which is now a wholly owned subsidiary of Monsanto) in a lawsuit filed in U.S. District Court in North Carolina. The lawsuit was brought by Aventis CropScience S.A. (formerly Rhone Poulenc Agrochimie S.A.) (Aventis), claiming that a 1994 license agreement was induced by fraud stemming from DEKALB's nondisclosure of relevant information and that DEKALB did not have the right to license, make or sell products using Aventis's technology for glyphosate resistance under this agreement. The jury awarded Aventis $15 in actual damages for unjust enrichment and $50 in punitive damages. DEKALB 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. An arbitration has been filed on behalf of Calgene LLC, a wholly-owned subsidiary of Monsanto, claiming that as a former partner of Aventis, Calgene is entitled to at least half of any damages, royalties or other amounts recovered by Aventis from Monsanto or DEKALB pursuant to these proceedings. No provision has been made in the company's consolidated financial statements with respect to the award for punitive damages. 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. 10 11 The Federal District Court for the Northern District of Illinois certified a national class of retail pharmacies in November 1994. 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. Eighteen class action lawsuits seeking damages based on the same alleged conduct were 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. All but one of the state cases have been dismissed or settled. All that remains of the federal cases are those brought by plaintiffs who opted out of the federal class and have Robinson-Patman Act and Sherman Antitrust Act claims. 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, 2000, 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 trial date is tentatively scheduled for September 2002. 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. On February 13, 2001, oral argument was held on the company's motion to dismiss the state court action. On April 12, 2001, the company was sued by CP Kelco in the U.S. District Court in Delaware. CP Kelco is seeking compensatory and punitive damages for alleged breach of contract, common law fraud and securities law violations arising from the sale of the business. Lehman Brothers Merchant Banking Partners II, L.P. purchased the Kelco business from Monsanto for $592 with funded debt to form CP Kelco with a combination of the Kelco assets and a similiar business purchased from Hercules, Inc. According to CP Kelco, the financial projections for the Kelco biogums business were materially lower than the projections provided by Monsanto management before the closing of the transaction, which occurred on September 28, 2000. 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. 11 12 F - COMPREHENSIVE INCOME Quarterly comprehensive income for the three months ended March 31, 2001 and 2000 was $19 and $104, respectively. G - EARNINGS PER SHARE Basic earnings per share is computed by dividing the earnings measure by the weighted average number of shares of common stock outstanding. Diluted earnings per share is computed assuming the exercise of stock options, conversion of preferred stock, and the issuance of stock as incentive compensation to certain employees. Also in the diluted computation, earnings from continuing operations and net earnings are reduced by an incremental contribution to the Employee Stock Ownership Plan (ESOP). This contribution is the after-tax difference between the income that the ESOP would have received in preferred stock dividends and the dividend on the common shares assumed to have been outstanding. The following table reconciles the numerators and denominators of the basic and diluted earnings per share computations:
FOR THE THREE MONTHS ENDED MARCH 31, 2001 2000 BASIC DILUTED BASIC DILUTED ----- ------- ----- ------- EPS numerator: Earnings from continuing operations $ 254 $ 254 $ (31) $ (31) Less: Preferred stock dividends, net of tax (3) -- (3) -- Less: ESOP contribution, net of tax -- (2) -- (1) -------- -------- ------- -------- Earnings from continuing operations available to common shareholders $ 251 $ 252 $ (34) $ (32) ======== ======== ======= ======== EPS denominator: Average common shares outstanding 1,298 1,298 1,257 1,257 Effect of dilutive securities: Stock options and stock warrants -- 18 -- 17 Convertible instruments and incentive compensation -- 12 -- 12 -------- -------- ------- -------- Total shares (in millions) 1,298 1,328 1,257 1,286 ======== ======== ======= ======== Earnings (loss) per share: Continuing operations $ .19 $ .19 $ (.03) $ (.03) Discontinued operations -- -- .04 .04 Cumulative effect of accounting change -- -- (.15) (.15) -------- -------- ------- -------- Net earnings (loss) $ .19 $ .19 $ (.14) $ (.14) ======== ======== ======= ========
H - SEGMENT INFORMATION The company's reportable segments are organized principally by product line. They are: Prescription Pharmaceuticals, Agricultural Productivity, and Seeds and Genomics. The Prescription 12 13 Pharmaceuticals segment includes general therapeutics, ophthalmology and hospital products including oncology, and diversified therapeutics. The Agricultural Productivity segment consists of crop protection products, animal agriculture and environmental technologies business lines. The Seeds and Genomics segment is comprised of global seeds and related trait businesses and genetic technology platforms. The company also operates several business units that do not constitute reportable business segments. These operating units include consumer health care, animal health, diagnostics, plasma, pharmaceutical commercial services and biotechnology. Due to the size of these operating units, they have been included in an "Other Pharmaceuticals" category. Corporate amounts represent general and administrative expenses of Pharmacia corporate support functions, restructuring charges relating to the pharmaceutical and corporate functions and other corporate items such as litigation accruals, merger costs and non-operating income and expense. Corporate support functions and costs are allocated to agricultural segments. Accordingly, these costs are only shown separately in the following table for the non-agricultural segments. Certain goodwill and intangible assets and associated amortization are not allocated to segments. The following table shows revenues and earnings for the company's operating segments and reconciling items necessary to total to the amounts reported in the consolidated financial statements. Information about interest income and expense, and income taxes is not provided on a segment level as the segments are reviewed based on earnings before interest and income taxes (EBIT). There are no inter-segment revenues. Long-lived assets are not allocated to segments and accordingly, depreciation is not available. Historical segment information has been restated to conform to the current presentation.
Sales EBIT* ----- ----- For the three months ended March 31, 2001 2000 2001 2000 ---- ---- ---- ---- Prescription Pharmaceuticals $ 2,729 $ 2,374 $ 437 $ 430 Other Pharmaceuticals 481 477 104 103 Corporate -- -- (266) (652) ------- ------- ------- -------- Total Pharmaceuticals & Corporate 3,210 2,851 275 (119) Productivity 808 833 139 198 Seeds & Genomics 498 488 (32) (67) ------- ------- ------- -------- Total Agricultural 1,306 1,321 107 131 ------- ------- ------- -------- Total Pharmacia $ 4,516 $ 4,172 $ 382 $ 12 ======= ======= Interest expense, net (43) (68) Income tax provision (77) 25 Minority interest in agricultural subsidiaries, net of tax (8) -- ------- -------- Net earnings (loss) from continuing operations $ 254 $ (31) ======= ========
* 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 flows or other measures of financial performance prepared in accordance with generally accepted accounting principles. Determination of EBIT may vary from company to company. I - ACQUISITION 13 14 During March 2001, the company completed the acquisition of Sensus Drug Development Corporation by purchasing the remaining 80.1 percent of its stock. The assets purchased were valued at $117, which includes $67 allocated to in-process research and development. Cash paid in connection with this purchase was $65 and included certain direct closing costs and is net of contractual holdback amounts. J - RESTRUCTURINGS The company recorded an additional $146 of merger and restructuring charges during the first quarter of 2001 in connection with the merger and integration of former Monsanto and Pharmacia & Upjohn companies into Pharmacia Corporation. These charges are part of the comprehensive integration plan approved by the board of directors during 2000. Of the total charges, $145, comprised of $56 of merger costs and $89 of restructuring expenses, was recorded on the merger and restructuring line of the earnings statement and an additional $1 of restructuring expense was recorded in cost of products sold. The $56 of merger costs relates to costs incurred to integrate the former companies into a single organization such as consultant and relocation costs. The $90 of aggregate restructuring costs comprises $60 associated with prescription pharmaceuticals, $6 in connection with corporate and administrative functions, $2 relating to other pharmaceuticals, and $22 associated with the agricultural subsidiary. The $60 relating to prescription pharmaceuticals consists of $46 associated with the involuntary separation of approximately 290 employees, $5 resulting from the termination of contracts such as leases, $3 relating to other exit costs and $6 resulting from the write-down of assets such as duplicate computer systems and leasehold improvements. The $6 associated with corporate and administrative functions is from the involuntary separation of 60 employees and the $2 associated with other pharmaceutical operations is the result of the involuntary separation of 10 employees. The $22 charge in connection with the Monsanto agricultural subsidiary is comprised of workforce reduction costs of $15, asset impairments of $3 and other exit costs of $4. The workforce reduction costs include involuntary employee separation costs for approximately 120 employees worldwide, including positions in administration, manufacturing and research and development. The other exit costs include expenses associated with contract terminations, equipment disposal and other shutdown costs resulting from the exit of certain research programs and non-core activities. During the first quarter of 2000, the company recorded approximately $460 in merger-related costs comprised, in part, of transaction costs including investment bankers, attorneys, registration and regulatory fees and other professional services. In addition, these costs included various employee incentive and change-of-control costs directly associated with the merger. The latter includes a non-cash charge of $232 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. A roll-forward from year-end 2000 of restructuring charges and spending associated with the current restructuring plans relating to the integration of the former Monsanto and Pharmacia & Upjohn companies and the restructuring of the agricultural products and other pharmaceutical operations are 14 15 included in the table below. As of March 31, 2001, the company has paid a total of $317 relating to the separation of approximately 2,170 employees associated with these restructuring plans.
Workforce Other Reductions Exit Costs Total --------------------------------------- December 31, 2000 $ 192 $ 15 $ 207 1Q2001 charges 69 12 81 1Q2001 spending (170) (17) (187) ------------------------------------------------------------------- March 31, 2001 $ 91 $ 10 $ 101 -------------------------------------------------------------------
In addition to the above, the former Pharmacia & Upjohn has $25 of restructuring liabilities remaining related to separation annuity payments associated with its restructuring plans undertaken prior to the merger with the former Monsanto. 15 16 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Trademarks 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. The term "the company" is used to refer to Pharmacia Corporation or to Pharmacia Corporation and its subsidiaries, as appropriate to the context. The term "former Monsanto" will be used to refer to pre-merger operations of the former Monsanto Company and "Monsanto" will refer to the agricultural subsidiary. FINANCIAL REVIEW OVERVIEW The table below provides a comparative overview of consolidated results for the first quarters of 2001 and 2000 in millions of dollars, except per-share data.
- -------------------------------------------------------------------------------------------------- Three Months Ended March 31 --------------------------- Percent 2001 Change 2000 - -------------------------------------------------------------------------------------------------- Net sales $4,516 8% $4,172 Earnings from continuing operations before interest and income taxes* 382 n.m. 12 Earnings (loss) from continuing operations 254 n.m. (31) Discontinued operations (5) n.m. 58 Cumulative effect of an accounting change 1 n.m. (198) Net earnings (loss) 250 n.m. (171) Earnings (loss) per common share: Continuing operations Basic $ .19 n.m. $ (.03) Diluted .19 n.m. (.03) Net earnings Basic $ .19 n.m. $ (.14) Diluted .19 n.m. (.14) - --------------------------------------------------------------------------------------------------
n.m. = not meaningful * 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 flows or other measures of financial performance prepared in accordance with generally accepted accounting principles. Determination of EBIT may vary from company to company. Year-to-year comparisons are complicated by a number of factors including charges incurred during the first quarter of 2001. Specifically, there are merger and restructuring charges totaling $146 million before tax. Of these charges, $145 million is recorded within merger and restructuring ($98 million after tax or $0.08 per share) and $1 million is recorded within cost of products sold. A charge of $67 million before tax was recorded in research and development in association with the acquisition of Sensus ($42 million after tax or $0.03 per share) and an additional $50 million expense in research and development relates to an agreement with Celltech Group plc in connection with the compound CDP 870 ($31 million after tax or $0.02 per share). 16 17 Certain other charges recorded in the first quarter of 2000 also may affect comparability. These are: merger costs approximating $460 million before tax ($320 million after tax or $0.25 per share) and a charitable cash contribution of $100 million ($62 million after tax or $0.05 per share). NET SALES
- ----------------------------------------------------------------------------------- Three months ended March 31 --------------------------- Net Percent (Dollars in millions) 2001 Change 2000 - ----------------------------------------------------------------------------------- Sales: Pharmaceuticals Prescription Pharmaceuticals $2,729 15% $2,374 Other Pharmaceuticals 481 1 477 ------- ------- ------- Total Pharmaceuticals 3,210 13 2,851 Agricultural Productivity 808 (3) 833 Seeds & Genomics 498 2 488 ------- ------- ------- Total Agricultural 1,306 (1) 1,321 - ----------------------------------------------------------------------------------- Total sales $4,516 8% $4,172 - ----------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------
Consolidated net sales for the first quarter rose 8 percent to $4.5 billion as compared to the same quarter of 2000. The increase in sales growth was primarily the result of volume increases of 13 percent partly offset by lower prices and negative effects of currency exchange rates. The impact of currency exchange rates on consolidated sales was 3 percent unfavorable due to weaker currencies in Europe and Japan. PHARMACEUTICAL SALES Pharmaceutical sales rose 13 percent to $3.2 billion in the first quarter of 2001 compared to $2.9 billion in the comparable period of the prior year. Excluding the impact of currency exchange, global pharmaceutical sales increased 17 percent. The pharmaceutical sales growth was driven by a 15 percent growth in prescription pharmaceutical sales to $2.7 billion in the first quarter of 2001. Pharmaceutical sales growth was led by CELEBREX, which had improved sales by $124 million, or 24 percent, compared to the first quarter of 2000. In the company's largest market, the U.S., pharmaceutical sales growth for the quarter was 13 percent. Japan, the company's second largest market, recorded a decline in pharmaceutical sales of 7 percent. Excluding the impact of foreign exchange, Japan had sales growth of 3 percent. Sales performance in the following table is based on location of the customer.
- --------------------------------------------------------------------------------- Three months ended March 31 --------------------------- %Change Net % Excluding (Dollars in millions) 2001 Change Exchange* 2000 - --------------------------------------------------------------------------------- United States $1,671 13% 13% $1,484 Japan 194 (7) 3 209 Italy 142 4 11 137 France 141 57 68 90 Germany 126 16 24 108
17 18 United Kingdom 119 17 26 102 Rest of world 817 14 22 721 - --------------------------------------------------------------------------------- Pharmaceutical net sales $3,210 13% 17% $2,851 =================================================================================
* Underlying growth reflects the percentage change excluding currency exchange effects. 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 March 31 --------------------------- Net Percent (Dollars in millions) 2001 Change 2000 - ------------------------------------------------------------------------------- CELEBREX $ 649 24% $ 525 AMBIEN 215 114 100 XALATAN 200 24 161 CAMPTOSAR 137 72 80 DETROL LA/DETROL 135 35 101 GENOTROPIN 117 4 113 XANAX 76 (10) 84 CLEOCIN/DALACIN 75 (7) 80 MEDROL 72 8 66 NICORETTE LINE 66 20 55 DEPO-PROVERA 65 17 56 PHARMORUBICIN/ELLENCE 60 18 50 FRAGMIN 53 (9) 58 ARTHROTEC 45 (20) 55 ALDACTONE/SPIRO Line 42 (6) 44 MIRAPEX 39 28 30 CABASER/DOSTINEX 37 50 25 ROGAINE 34 8 32 PLETAL 26 184 9 ZYVOX 23 n.m. -- - ------------------------------------------------------------------------------- Total $2,166 26% $1,724 ===============================================================================
n.m. = not meaningful PRESCRIPTION PHARMACEUTICALS SEGMENT
---------------------------------------------------------------------------- (Dollars in millions) For the three months ended March 31 2001 2000 ---------------------------------------------------------------------------- Sales $ 2,729 $ 2,374 Cost of products sold 543 493 Research and development 570 513 Selling, general and administrative 1,134 948 EBIT* 437 430 ----------------------------------------------------------------------------
* 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 flows or other measures of financial performance prepared in accordance with generally accepted accounting principles. Determination of EBIT may vary from company to company. Merger and restructuring charges for the pharmaceutical segments have been included as part of corporate costs in the determination of EBIT. Prescription pharmaceutical sales, which constitute 85 percent of overall pharmaceutical sales, increased by 18 percent in the U.S. and 15 percent on a global basis driving the pharmaceutical 18 19 business. The growth driver products, CELEBREX, XALATAN, CAMPTOSAR, DETROL LA and ZYVOX accounted for 42 percent of prescription pharmaceutical sales in the first quarter of 2001, a 32 percent increase in sales over the same period of 2000. CELEBREX, the company's leading product and the number-one selling prescription arthritis medication worldwide, recorded sales of $649 million in the first quarter. Sales in the U.S. were negatively impacted by trade purchasing in the fourth quarter of 2000 due to a price increase. In Europe, CELEBREX achieved sales of over $100 million as a result of the ongoing successful launch of CELEBREX in the key European markets. During the quarter, the U.S. Food and Drug Administration (FDA) issued an approvable letter for the supplemental New Drug Application (sNDA) submitted by Pharmacia seeking changes in the prescribing information for CELEBREX. The company is seeking to include the safety data from the CELEBREX long-term safety trial in the label. An approvable letter does not constitute formal approval of an application, but indicates the FDA's willingness to approve an application should specific information and/or conditions be met. XALATAN, the top-selling glaucoma medication in the U.S. and worldwide, achieved sales of $200 million, a 24 percent increase over the first quarter of 2000. XALATAN continues to grow rapidly in all key markets as it expands its market leadership position. During the quarter, XALATAN became the number one selling glaucoma medication in Japan after its launch in May of 1999. In March, two new competitors to XALATAN entered the U.S. market. CAMPTOSAR, the leading treatment for colorectal cancer in the U.S., recorded sales of $137 million, an increase of 72 percent. In 2000, the FDA approved CAMPTOSAR for the first-line treatment of colorectal cancer after a CAMPTOSAR-containing regimen prolonged survival in patients with colorectal cancer. Sales in this indication accounted for more than half of CAMPTOSAR sales in the first quarter. Sales of DETROL LA/DETROL, the world's leading treatment for overactive bladder, increased 35 percent to $135 million in the first quarter. Sales in the U.S. were $105 million reflecting strong demand for the new, once-daily DETROL LA which Pharmacia introduced in January. The launch of DETROL LA has increased Pharmacia's share of new prescriptions in the U.S. overactive bladder market from 47 percent at the end of 2000 to 53 percent in the first quarter. During the quarter, DETROL LA also received its first European Union approval in Sweden where it will be marketed as DETRUSITOL SR. ZYVOX, the company's new antibiotic for Gram-positive infections, recorded sales of $23 million in the quarter. ZYVOX is the first antibiotic from a completely new class of antibiotics in over 30 years. ZYVOX is indicated for the treatment of patients with severe Gram-positive infections including pneumonia, skin and skin structure infections, and bacteremia. Following the recent approvals in the United Kingdom and Japan, ZYVOX is now approved in each of the major regions of the world. Sales of AMBIEN, the market leading treatment for short-term insomnia in the U.S., increased 114 percent to $215 million in the first quarter. First quarter sales were positively influenced by wholesale inventory levels that are higher than normal due to purchasing prior to a March price increase. GENOTROPIN, the world's leading growth hormone, recorded sales of $117 million during the first quarter, an increase of 4 percent. In the U.S., sales increased 19 percent to $24 million. Outside the U.S., sales gains were offset by weaker currencies in Europe and Japan. 19 20 Sales of the company's Parkinson's disease drug, MIRAPEX, increased 28 percent in the first quarter to $39 million. Sales of CABASER/DOSTINEX for Parkinson's disease/hyperprolactinemia grew 50 percent in the quarter to $37 million. PLETAL, for the treatment of intermittent claudication, a form of peripheral vascular disease, generated sales of $26 million in the quarter. PLETAL is being co-promoted in the U.S. with Otsuka of America Pharmaceuticals, Inc. Sales of FRAGMIN for the prevention of blood clots after surgery declined 9 percent. Weaker currencies and a price reduction in Japan in the second quarter of 2000 offset a 26 percent increase in U.S. sales. Sales of the company's older prescription products like XANAX, CLEOCIN, and the ALDACTONE/SPIRO Line, declined in the quarter. The MEDROL line, which also faces generic competition, experienced an 8 percent increase reflecting quarterly fluctuations in buying patterns. Sales of ARTHROTEC, the company's older arthritis medication, declined 20 percent in the first quarter as the COX-2 inhibitors, led by CELEBREX, continue to take a larger share of the U.S. market. In other developments related to the pharmaceutical segment, Pharmacia submitted an NDA for valdecoxib, a second-generation COX-2 specific inhibitor, for the treatment of acute pain, dysmenorrhea, osteoarthritis, and rheumatoid arthritis. In March 2001, Pharmacia and Celltech announced an agreement for the co-development and co-promotion of Celltech's CDP 870 for the treatment of rheumatoid arthritis. The company also completed the acquisition of Sensus Drug Development Corporation following the submission of an NDA for SOMAVERT for the treatment of acromegaly. Cost of products sold for the quarter ended March 31, 2001 and 2000 was $543 million and $493 million, respectively. A favorable shift in the product mix resulted in cost of products sold as a percent of sales to drop one percentage point to 20 percent over the corresponding period amount of 21 percent. Research and development (R&D) spending increased by $57 million or 11 percent as compared to the first quarter of 2000. The increase was mainly attributable to two events that occurred during the quarter. During March 2001, the company completed the acquisition of Sensus Drug Development Corp. and accounted for the transaction as a purchase. In conjunction with this accounting, an expense relating to in-process research and development was incurred for $67 million. Also, during the quarter, the company entered into an agreement with Celltech Group plc for the co-development and co-promotion of Celltech's proprietary compound CDP 870. CDP 870 belongs to a new therapeutic class of medicines, which shows promise in certain autoimmune and inflammatory diseases. In connection with this multi-year agreement, the company recorded an R&D expense of $50 million during the quarter. Offsetting these increases were lower development spending related to recent sNDA and NDA filings for the COX-2 projects (CELEBREX, valdecoxib, and parecoxib) and ZYVOX as well as the cancellation of certain other projects. Selling, general and administrative (SG&A) expenses increased $186 million, or 20 percent between the first quarter 2000 and 2001. This rise was driven mainly by increased co-promotion payments related to CELEBREX sales growth plus expansion of the sales force. The sales force increase has been to support CELEBREX, LUNELLE, ACTIVELLA and ZYVOX. Also contributing to the comparative increase in SG&A was a reduction in the amount of partnership payments received during the first quarter of 2001 as compared to 2000. 20 21 OTHER PHARMACEUTICALS
========================================================================= (Dollars in millions) For the three months ended March 31 2001 2000 - ------------------------------------------------------------------------- Sales $ 481 $ 477 Cost of products sold 197 217 Research and development 43 36 Selling, general and administrative 144 139 EBIT* 104 103 =========================================================================
* 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 flows or other measures of financial performance prepared in accordance with generally accepted accounting principles. Determination of EBIT may vary from company to company. Merger and restructuring charges for the pharmaceutical segments have been included as part of corporate costs in the determination of EBIT. Sales in the company's other pharmaceutical businesses are comprised of consumer health care (over-the-counter products), animal health, pharmaceutical commercial services, plasma and diagnostics. Sales increased during the first quarter 2001 versus 2000 by $4 million or 1 percent to $481 million. Increases in consumer health care and animal health products are the main drivers behind the favorable results. In the consumer health care products business, the company's leading products are the NICORETTE line to treat tobacco dependency, and ROGAINE/REGAINE, the treatment for hereditary hair loss. Sales of these products increased 20 percent and 8 percent, respectively, during the first quarter 2001 versus the prior year quarter. Overall consumer health care sales grew 9 percent to $179 million. Sales in the animal health business grew 14 percent during the current quarter to $113 million. Animal health sales were driven by NAXCEL/EXCENEL, which grew 28 percent over the comparable 2000 period to $32 million. AGRICULTURAL SALES
- ------------------------------------------------------------------------- Three months ended March 31 --------------------------- Net Percent (Dollars in millions) 2001 Change 2000 - ------------------------------------------------------------------------- Agricultural Sales: Productivity $ 808 (3)% $ 833 Seeds & Genomics 498 2 488 - ------------------------------------------------------------------------- Agricultural sales $1,306 (1)% $1,321 - ------------------------------------------------------------------------- Agricultural EBIT*: Productivity $ 139 (30) $ 198 Seeds & Genomics (32) 52 (67) - ------------------------------------------------------------------------- Agricultural EBIT* $ 107 (18)% $ 131 - -------------------------------------------------------------------------
* Earnings before interest and taxes (EBIT) is presented herein and the following two tables 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 flows or other measures of financial performance prepared in accordance with generally accepted accounting principles. Determination of EBITmay vary from company to company. 21 22 Net sales for the company's agricultural business decreased 1 percent as global sales of its ROUNDUP family of herbicides, excluding ROUNDUP lawn and garden products, declined 8 percent in the first quarter of 2001 compared with the same period of 2000. Sales of selective chemistries products and worldwide corn sales were lower in the first quarter of 2001 compared with the same period of 2000; however, corn sales in the United States were flat quarter-to-quarter. Higher soybean seed sales and biotechnology trait revenues combined with increased cotton royalty trait revenues largely offset the lower chemical and corn product seed sales. AGRICULTURAL PRODUCTIVITY SEGMENT
=================================================================== (Dollars in millions) For the three months ended March 31 2001 2000 ------------------------------------------------------------------- Net Sales $808 $833 EBIT $139 $198 ===================================================================
Net sales for the Agricultural Productivity segment decreased 3 percent to $808 million in the first quarter of 2001 compared with $833 million in the first quarter of 2000. Worldwide net sales of ROUNDUP herbicide and other glyphosate products, excluding ROUNDUP lawn and garden products, were 8 percent lower as slightly higher sales volumes were more than offset by lower prices. Global price competition combined with unfavorable weed-control weather conditions in Canada and a weakened currency in Japan were primarily responsible for the decline. However, in the United States, a modest price decline, driven primarily by product mix, was more than offset by volume growth of five percent, resulting in a slight increase in U.S. sales. On September 20, 2000, the compound per se patent protection for the active ingredient in ROUNDUP herbicide expired in the U.S. Although the company has not had patent protection on glyphosate outside the U.S. for several years, the company anticipates continued increases in competition from lower-priced generic and other branded glyphosate products. Sales of selective chemistry products were also lower, primarily in the United States and China. ROUNDUP lawn and garden first quarter 2001 net sales increased over the same period last year due primarily to strong performance at home centers and mass merchants, and price increases on certain products. Improvement in economic conditions in the sulfuric acid and fertilizer industries led to an increase in net sales of the environmental technologies business. EBIT for the Agricultural Productivity segment decreased 30 percent to $139 million in the first quarter of 2001 compared with $198 million in the same period of 2000. Lower gross profit was the main reason for the decline in EBIT as operating expenses for this segment remained relatively unchanged quarter to quarter. Lower net sales resulted in reduced gross profit. Excluding costs of $13 million associated with facility closures and employee terminations, EBIT decreased 22 percent from the prior year quarter. SEEDS AND GENOMICS SEGMENT
===================================================================== (Dollars in millions) For the three months ended March 31 2001 2000 --------------------------------------------------------------------- Net Sales $ 498 $ 488
22 23 EBIT $ (32) $ (67) =====================================================================
In the first quarter of 2001, net sales for the Seeds and Genomics segment increased 2 percent to $498 million from $488 million in the same period of 2000. This growth was led by particularly strong results for Monsanto's biotechnology traits. The soybean product line contributed with increased biotechnology trait revenues and higher seed sales. Royalty revenues generated from cotton trait sales increased significantly in the current quarter. Conventional soybean seed sales also increased. Worldwide corn seed sales decreased substantially, partly offsetting soybean and cotton improvements, primarily due to higher than anticipated product returns in Latin America. EBIT for the Seeds and Genomics segment improved from a loss of $67 million in the first quarter of 2000 to a loss of $32 million in the first quarter of 2001. Lower operating expenses and higher gross profit were the reasons for the improvement. Gross profit improved largely as the result of higher biotechnology trait revenues from cotton and soybeans in the first quarter of 2001, offset to some extent by lower corn gross profit. EBIT for the first quarter of 2001 included $9 million of expenses related to facility closures and employee terminations. EBIT, excluding restructuring and one-time items, improved $45 million from the first quarter of 2000 compared to the same period of 2001. CORPORATE AND OTHER Corporate expenses of $266 million in the first quarter 2001 include $56 million of merger costs and $68 million of pharmaceutical and corporate restructuring charges. Restructuring charges associated with the agricultural segments are included in the respective segments. The $652 million of corporate expenses in the first quarter of 2000 include approximately $460 million of merger-related costs and a $100 million charitable contribution. The net interest position improved to $43 million expense compared to $68 million expense in the first quarter of the prior year as the result of significantly reduced net debt levels and increased cash balances. The estimated annual effective tax rate for 2001 is 29 percent, excluding merger and restructuring and certain other costs. This compares with a 30-percent rate for the full year 2000. RESTRUCTURINGS The company recorded an additional $146 million of merger and restructuring charges during the first quarter of 2001 in connection with the merger and integration of former Monsanto and Pharmacia & Upjohn companies into Pharmacia Corporation. These charges are part of the comprehensive integration plan approved by the board of directors during 2000. Of the total charges, $145 million, comprised of $56 million of merger costs and $89 million of restructuring expenses, was recorded on the merger and restructuring line of the earnings statement and an additional $1 million of restructuring expense was recorded in cost of products sold. The $56 million of merger costs relates to costs incurred to integrate the former companies into a single organization such as consultant and relocation costs. The $90 million of aggregate restructuring costs comprises $60 million associated with prescription pharmaceuticals, $6 million in connection with corporate and administrative functions, $2 million relating to other pharmaceuticals, and $22 million associated with the agricultural subsidiary. 23 24 The $60 million relating to prescription pharmaceuticals consists of $46 million associated with the involuntary separation of approximately 290 employees, $5 million resulting from the termination of contracts such as leases, $3 million relating to other exit costs and $6 million resulting from the write-down of assets such as duplicate computer systems and leasehold improvements. The $6 million associated with corporate and administrative functions is from the involuntary separation of 60 employees and the $2 million associated with other pharmaceutical operations is the result of the involuntary separation of 10 employees. The $22 million charge in connection with the Monsanto agricultural subsidiary is comprised of workforce reduction costs of $15 million, asset impairments of $3 million and other exit costs of $4 million. The workforce reduction costs include involuntary employee separation costs for approximately 120 employees worldwide, including positions in administration, manufacturing and research and development. The asset impairments consist of $2 million for intangible assets and $1 million (recorded within cost of products sold) for the write-off of seed inventories. The other exit costs include expenses associated with contract terminations, equipment disposal and other shutdown costs resulting from the exit of certain research programs and non-core activities. During the first quarter of 2000, the company recorded approximately $460 million in merger-related costs comprised, in part, of transaction costs including investment bankers, attorneys, registration and regulatory fees and other professional services. In addition, these costs included various employee incentive and change-of-control costs directly associated with the merger. The latter includes a non-cash charge of $232 million 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. A roll forward from year end 2000 of restructuring charges and spending associated with the current restructuring plans relating to the integration of the former Monsanto and Pharmacia & Upjohn companies and the restructuring of the agricultural products and other pharmaceutical operations are as follows. As of March 31, 2001, the company has paid a total to $317 relating to the separation of approximately 2,170 employees.
======================================================================== Workforce Other (Dollars in millions) Reductions Exit Costs Total ------------------------------------------------------------------------ December 31, 2000 $ 192 $ 15 $ 207 1Q2001 charges 69 12 81 1Q2001 spending (170) (17) (187) ------------------------------------------------------------------------ March 31, 2001 $ 91 $ 10 $ 101 ========================================================================
Due to the comprehensive nature of the restructuring and integration, the company anticipates the restructuring activities to span multiple years with total merger and restructuring costs equaling $2.0 billion to $2.5 billion with annual savings estimated to total $600 million. In addition to the above, the former Pharmacia & Upjohn has $25 million of restructuring liabilities remaining related to separation annuity payments associated with its restructuring plans undertaken prior to the merger with the former Monsanto. COMPREHENSIVE INCOME 24 25 Comprehensive income equals net earnings plus other comprehensive income (OCI). For Pharmacia Corporation, OCI includes currency translation adjustments, deferred amounts for hedging purposes, unrealized gains and losses on available-for-sale securities, and minimum pension liability adjustments. Comprehensive income for the three months ended March 31, 2001, and March 31, 2000, was $19 million and $104 million, respectively. The difference between net earnings and comprehensive income in both years was largely due to fluctuations in the currency translation adjustments reflecting the changes in the strength of the dollar against other currencies at March 31 as compared to the previous December 31. FINANCIAL CONDITION, LIQUIDITY, AND CAPITAL RESOURCES
- -------------------------------------------------------------------------------- March 31, December 31, 2001 2000 - -------------------------------------------------------------------------------- (Dollars in millions) Working capital $ 5,607 $ 5,406 Current ratio 1.92:1 1.88:1 Debt to total capitalization 34.1% 31.1% - --------------------------------------------------------------------------------
Working capital has increased $201 million or four percent over the year-end period ending December 31, 2000. Increases in accounts receivable due to sales volume, program changes for certain selling arrangements and seasonality relating to the agricultural business accounted for the increase in current assets. Offsetting the growth in these assets was the decrease in cash and cash equivalents. This decrease was due to the normal business cycle. Increases in short-term debt had an unfavorable effect on working capital and the debt to total capitalization ratio. Similar to accounts receivables, the increase is due to the seasonal cycles of the agricultural business. Cash outlays for property, plant and equipment of $278 million were reduced as compared to the prior year by $42 million. The reduction is mainly due to the completion of certain glyphosate expansion projects that were underway during 2000. During the quarter, the company acquired Sensus Drug Development Corp. The cash paid in connection with this transaction was approximately $65 million. See additional information regarding this transaction under this item number. The company continues to monitor the economic conditions in certain Latin American countries and the impact that an adverse change could have on working capital, liquidity and profitability. The company's future cash provided by operations and borrowing capacity is expected to cover normal operating cash flow needs, planned capital acquisitions, dividend payments, and stock repurchases as approved by the board of directors for the foreseeable future. CONTINGENT LIABILITIES AND LITIGATION Various suits and claims arising in the ordinary course of business, including suits for personal injury alleged to have been caused by the use of the company's products, are pending against the company and its subsidiaries. The company also is involved in several administrative and judicial proceedings 25 26 relating to environmental concerns, including actions brought by the U.S. Environmental Protection Agency (EPA) and state environmental agencies for remediation. In April 1999, a jury verdict was returned against DEKALB 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 DEKALB 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. DEKALB has appealed this verdict, 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. 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 $175 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. No provision has been made in the company's consolidated financial statements with respect to this verdict. Based on information currently available and the company's experience with lawsuits of the nature of those currently filed or anticipated to be filed which have resulted from business activities to date, the amounts accrued for product and environmental liabilities are considered adequate. Although the company cannot predict and cannot make assurances with respect to the outcome of individual lawsuits, the ultimate liability should not have a material effect on its consolidated financial position. Unless there is a significant deviation from the historical pattern of resolution of such issues, the ultimate liability should not have a material adverse effect on the company's consolidated financial position, its results of operations, or liquidity. The company's estimate of the ultimate cost to be incurred in connection with environmental situations could change due to uncertainties at many sites with respect to potential clean-up remedies, the estimated cost of clean-up, and the company's share of a site's cost. With regard to the company's discontinued industrial chemical facility in North Haven, Connecticut, the company will be required to submit a corrective measures study report to the EPA. As the corrective action process progresses, it may become appropriate to reevaluate the existing reserves designated for remediation in light of changing circumstances. It is reasonably possible that a material increase in accrued liabilities will be required. It is not possible, however, to estimate a range of potential losses. Accordingly, it is not possible to determine what, if any, exposure exists at this time or when the expenditures might be made. EURO CONVERSION 26 27 Effective January 1, 1999, eleven European countries began operating with a new common currency, the euro. This has now increased to twelve with the addition of Greece. The euro will completely replace these countries' national currencies by January 1, 2002. The conversion to the euro requires changes in the company's operations as systems and commercial arrangements are modified to deal with the new currency. Management created a project team to evaluate the impact of the euro conversion on the company's operations and develop and execute action plans, as necessary, to successfully effect the change. As of December 31, 2000, the company's systems were euro compliant, and during 2001 they all will have been converted to euro as their local currency. The cost of this effort through 2000 was approximately $9 million with an additional amount of $3 million expected before January 1, 2002. The conversion to the euro may have competitive implications on pricing and marketing strategies. However, any such impact is not known at this time. The introduction of the euro will not significantly change the currency exposure of the company, but will reduce the number of transactions performed in the market. At this point in its overall assessment, management believes the impact of the euro conversion on the company will not be significant. Still, uncertainty exists as to the effects the euro currency will have on the marketplace and, as a result, there is no guarantee that all problems will be foreseen and corrected, or that no material disruption of the company's business will occur. Three significant European governments (UK, Sweden, Denmark) had not approved measures to convert to the euro as of March 31, 2001. The impact of an abstention from conversion may have on the operations of the company, if any, is not known. NEW ACCOUNTING STANDARD On January 1, 2001, the company adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities (FAS 133)." 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. Management created a project team to evaluate the impact of the new rules on its systems, policies and practices. Under the new rules, the net consolidated income statement effect of adopting SFAS 133 is presented as a cumulative effect adjustment of an accounting change and is less than $1 million (net of tax). This amount is comprised of the excluded component of instruments previously designated in cash flow hedges and other changes in the recorded basis to bring derivatives to fair value, both of which were less than $1 million on an individual basis. There was no net impact to the cumulative effect adjustment required to reflect the fair value of derivatives that are designated as fair value hedges, as the adjustments to recognize the difference between the carrying values and the fair values of hedged items and related derivatives offset. A similar cumulative effect adjustment in the amount of $3 million (net of tax) has been made on the balance sheet to other comprehensive income. This amount reflects the deferred amount of derivative instruments previously designated in cash flow hedges. Upon adopting FAS 133, the company elected in accordance with the rules to reclassify $52 million of held-to-maturity securities as available-for-sale securities. The unrealized gain associated with this reclassification is not material and is recorded in shareholders equity. 27 28 Item 3. Quantitative and Qualitative Disclosures about Market Risk There are no material changes from the disclosures in Pharmacia Corporation's Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 2000. 28 29 PART II - OTHER INFORMATION Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At the company's Annual Meeting of Shareholders on April 17, 2001, six matters were submitted to a vote of shareholders. Pursuant to the company's By-Laws, abstentions and votes withheld by brokers in the absence of instructions from beneficial holders (broker nonvotes) have the same effect as votes cast against a management or shareholder proposal. 1. The following directors were elected, each to hold office until the Annual Meeting to be held in 2004 or until a successor is elected and has qualified or until his or her earlier death, resignation or removal. Votes were cast as follows:
- --------------------------------------------------------------------------------------- Name Votes "For" Votes "Withhold Authority" - --------------------------------------------------------------------------------------- M. Kathryn Eickhoff 1,008,145,184 35,144,275 - --------------------------------------------------------------------------------------- Fred Hassan 1,015,156,510 28,132,949 - --------------------------------------------------------------------------------------- Philip Leder 1,015,235,921 28,053,538 - --------------------------------------------------------------------------------------- Berthold Lindqvist 1,007,828,601 35,460,858 - --------------------------------------------------------------------------------------- William D. Ruckelshaus 1,006,962,287 36,327,172 - ---------------------------------------------------------------------------------------
The following directors have continuing current terms expiring at the 2002 Annual Meeting: Gwendolyn S. King, C. Steven McMillan, William U. Parfet, Jacobus F. M. Peters and Ulla Reinius. The following directors have continuing current terms expiring at the 2003 Annual Meeting: Frank C. Carlucci, Michael Kantor, Olof Lund, John E. Robson and Bengt Samuelsson. 2. A proposal by management relating to approval of the 2001 Long Term Incentive Plan was submitted to a vote of shareholders. The Board recommended a vote for the proposal. A total of 849,920,973 votes were cast in favor of this proposal, a total of 181,056,587 votes were cast against it, 12,311,377 votes were counted as abstentions; and 522 votes were counted as broker non-votes. 3. A proposal by management relating to approval of the Operations Committee Incentive Plan was submitted to a vote of shareholders. The Board recommended a vote for the proposal. A total of 969,327,670 votes were cast in favor of this proposal, a total of 56,579,956 votes were cast against it, 17,381,311 votes were counted as abstentions; and 522 votes were counted as broker non-votes. 4. A proposal by management relating to approval of the Global Employee Stock Purchase Plan was submitted to a vote of shareholders. The Board recommended a vote for the proposal. A total of 928,958,826 votes were cast in favor of this proposal, a total of 104,564,582 votes were cast against it, 9,766,051 votes were counted as abstentions; and 0 votes were counted as broker non-votes. 5. A proposal by certain shareholders relating to price restraints on prescription drugs was submitted to a vote of shareholders. The Board recommended a vote against the proposal. A total of 102,149,320 votes were cast in favor of this proposal, a total of 786,451,328 votes were cast against it, 28,220,502 votes were counted as abstentions, and 126,468,309 votes were counted as broker non-votes. 6. A proposal by a certain shareholder relating to the reduction in the number of directors was submitted to a vote of shareholders. The Board recommended a vote against the proposal. A total of 37,282,819 votes were cast in favor of this proposal, a total of 863,927,011 votes were cast against it, 15,611,843 votes were counted as abstentions, and 126,467,786 votes were counted as broker non-votes. 29 30 Item 5. OTHER INFORMATION CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING INFORMATION Certain statements contained in this Report, as well as in other documents incorporating by reference all or part of this Report, are "forward-looking statements" provided under the "safe harbor" protection of the Private Securities Litigation Reform Act of 1995. These statements are made to enable a better understanding of the Company's business, but because these forward-looking statements are subject to many risks, uncertainties, future developments and changes over time, actual results may differ materially from those expressed or implied by such forward-looking statements. Examples of forward-looking statements are statements about anticipated financial or operating results, financial projections, business prospects, future product performance, future research and development results, anticipated regulatory filings and approvals, and other future matters. These forward-looking statements are based on the information that was currently available to the Company, and the expectations and assumptions that were deemed reasonable by the Company, at the time when the statements were made. The Company does not undertake any obligation to update any forward-looking statements in this Report or in any other communications of the Company, whether as a result of new information, future events, changed assumptions or otherwise, and all such forward-looking statements should be read as of the time when the statements were made, and with the recognition that these forward-looking statements may later prove to be incorrect. Among the many factors that may cause or contribute to actual results or events being materially different from those expressed or implied by such forward-looking statements are acquisitions, divestitures, mergers, restructurings or strategic initiatives that change the Company's structure or business; competitive effects from current and new products, including generic products, sold by other companies; price constraints imposed by managed care groups, institutions and government agencies; governmental actions which result in lower prices for the Company's products; the Company's ability to discover and license new compounds, develop product candidates, obtain regulatory approvals and market new products; the Company's ability to secure and defend its intellectual property rights; the Company's ability to attract and retain management and other key employees; product developments, including adverse reactions or regulatory actions; social, legal, political and governmental developments, especially those relating to health care reform, pharmaceutical pricing and agricultural biotechnology; seasonal and weather conditions affecting agricultural markets; new product, antitrust, intellectual property or environmental liabilities; changes in foreign currency exchange rates or in general economic or business conditions; changes in applicable laws and regulations; changes in accounting standards or practices; and such other factors that may be described elsewhere in this Report or in other Company filings with the U.S. Securities and Exchange Commission ("SEC"). (a)2. EXHIBITS AND REPORTS ON FORM 8-K (a). Exhibits - See the Exhibit Index (b) Reports on Form 8-K during the quarter ended March 31, 2001: Report on Form 8-K dated January 31, 2001 was filed pursuant to Item 5 (Other Events) and Item 7 (Financial Statements and Exhibits). 30 31 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: May 15, 2001 /s/ R. G. Thompson R. G. Thompson Senior Vice President and Corporate Controller 31 32 EXHIBIT INDEX These Exhibits are numbered in accordance with the Exhibit Table of Item 601 of Regulation S-K. EXHIBIT NUMBER DESCRIPTION 2. Omitted - Inapplicable 4. Omitted - Inapplicable (10) (19) 2001 Long Term Incentive Plan (20) The Operations Committee Incentive Plan (21) Employee Stock Purchase Plan (22) Amendment No. 2001-1 to 2001 Long Term Incentive Plan 11. Omitted - Inapplicable; see Note G of Notes to Financial Statements on page 12 15. Omitted - Inapplicable 18. Omitted - Inapplicable 19. Omitted - Inapplicable 22. Omitted - Inapplicable 23. Omitted - Inapplicable 24. Omitted - Inapplicable 99. Omitted - Inapplicable 32 EX-10.19 2 y49010ex10-19.txt EX-10.19 2001 LONG TERM INCENTIVE PLAN 1 Exhibit 10.19 PHARMACIA CORPORATION 2001 LONG-TERM INCENTIVE PLAN The purpose of the Pharmacia Corporation 2001 Long-Term Incentive Plan (the Plan) is to provide (i) designated employees of Pharmacia Corporation (the Company) and its parents, subsidiaries and affiliates, (ii) certain consultants and advisors who perform services for the Company or its parents, subsidiaries or affiliates and (iii) non-employee members of the Board of Directors of the Company (the Board) with the opportunity to receive grants of incentive stock options, nonqualified stock options, stock appreciation rights, stock awards, and other stock-based awards. The Company believes that the Plan will encourage the participants to contribute materially to the growth of the Company, thereby benefiting the Company's stockholders, and will align the economic interests of the participants with those of the stockholders. 1. Administration (a) Committee. The Plan shall be administered and interpreted by a committee appointed by the Board (the Committee), which may consist of two or more persons who are outside directors as defined under section 162(m) of the Internal Revenue Code of 1986, as amended (the Code), and related Treasury regulations and non-employee directors as defined under Rule 16b-3 under the Securities Exchange Act of 1934, as amended (the Exchange Act). However, the Board may ratify or approve any grants as it deems appropriate. The Committee may delegate any or all of its powers under the Plan to an individual or subcommittee, with respect to grants to persons who are not executive officers of the Company. To the extent that the Board or an individual or subcommittee administers the Plan, references in the Plan to the Committee shall be deemed to refer to the Board, individual, or subcommittee. (b) Committee Authority. The Committee shall have the sole authority to (i) determine the individuals to whom grants shall be made under the Plan, (ii) determine the type, size and terms of the grants to be made to each such individual, (iii) determine the time when the grants will be made and the duration of any applicable exercise or restriction period, including the criteria for exercisability and the acceleration of exercisability, (iv) amend the terms of any previously issued grant, and (v) deal with any other matters arising under the Plan. (c) Committee Determinations. The Committee shall have full power and authority to administer and interpret the Plan, to make factual determinations and to adopt or amend such rules, regulations, agreements and instruments for implementing the Plan and for the conduct of its business as it deems necessary or advisable, in its sole discretion. The Committee's interpretations of the Plan and all determinations made by the Committee pursuant to the powers vested in it hereunder shall be conclusive and binding on all persons having any interest in the Plan or in any awards granted hereunder. All powers of the Committee shall be executed in its sole discretion, in the best interest of the Company, not as a fiduciary, and in keeping with the objectives of the Plan and need not be uniform as to similarly situated individuals. 2 2. Grants Awards under the Plan may consist of grants of incentive stock options as described in Section 5 (Incentive Stock Options), nonqualified stock options as described in Section 5 (Nonqualified Stock Options) (Incentive Stock Options and Nonqualified Stock Options are collectively referred to as Options), stock awards as described in Section 6 (Stock Awards), stock appreciation rights as described in Section 7 (SARs) and other stock-based awards as described in Section 8 (all of the foregoing are hereinafter collectively referred to as Grants). All Grants shall be subject to the terms and conditions set forth herein and to such other terms and conditions consistent with this Plan as the Committee deems appropriate and as are specified in writing by the Committee to the individual in a grant instrument or an amendment to the grant instrument (the Grant Instrument). The Committee shall approve the form and provisions of each Grant Instrument. Grants under a particular Section of the Plan need not be uniform as among the grantees. 3. Shares Subject to the Plan (a) Shares Authorized. Subject to adjustment as described below, the aggregate number of shares of common stock of the Company (Company Stock) that may be issued or transferred under the Plan is 55,000,000 shares of which only 1,000,000 shares may be subject to Stock Awards or other stock-based awards. The maximum aggregate number of shares of Company Stock that shall be subject to Grants made under the Plan to any individual during any calendar year shall be 2,500,000 shares, subject to adjustment as described below. The shares may be authorized but unissued shares of Company Stock or reacquired shares of Company Stock, including shares purchased by the Company on the open market for purposes of the Plan. If and to the extent Options or SARs granted under the Plan terminate, expire, or are canceled, forfeited, exchanged or surrendered without having been exercised or if any other Grants are forfeited, the shares subject to such Grants shall again be available for purposes of the Plan. (b) Adjustments. If there is any change in the number or kind of shares of Company Stock outstanding (i) by reason of a stock dividend, spinoff, recapitalization, stock split, or combination or exchange of shares, (ii) by reason of a merger, reorganization or consolidation, (iii) by reason of a reclassification or change in par value, or (iv) by reason of any other extraordinary or unusual event affecting the outstanding Company Stock as a class without the Company's receipt of consideration, or if the value of outstanding shares of Company Stock is substantially reduced as a result of a spinoff or the Company's payment of an extraordinary dividend or distribution, the maximum number of shares of Company Stock available for Grants, the maximum number of shares of Company Stock that any individual participating in the Plan may be granted in any year, the number of shares covered by outstanding Grants, the kind of shares issued under the Plan, and the price per share or the applicable market value of such Grants may be appropriately adjusted by the Committee to reflect any increase or decrease in the number of, or change in the kind or value of, issued shares of Company Stock to preclude, to the extent practicable, the enlargement or dilution of rights and benefits under such Grants; provided, -2- 3 however, that any fractional shares resulting from such adjustment shall be eliminated. Any adjustments determined by the Committee shall be final, binding and conclusive. 4. Eligibility for Participation (a) Eligible Persons. All employees of the Company and its Parents, Subsidiaries and Affiliates (as defined below) (Employees), including Employees who are officers or members of the Board, and members of the Board who are not Employees (Non-Employee Directors) shall be eligible to participate in the Plan. Consultants and advisors who perform services for the Company or any of its Parents, Subsidiaries or Affiliates (Consultants) shall be eligible to participate in the Plan if the Consultants render bona fide services to the Company or its Parents, Subsidiaries or Affiliates, the services are not in connection with the offer and sale of securities in a capital-raising transaction and the Consultants do not directly or indirectly promote or maintain a market for the Company's securities. (b) Selection of Grantees. The Committee shall select the Employees, Non-Employee Directors and Consultants to receive Grants and shall determine the number of shares of Company Stock subject to a particular Grant in such manner as the Committee determines. Employees, Consultants and Non-Employee Directors who receive Grants under this Plan shall hereinafter be referred to as Grantees. (c) Definitions. (i) The term "Parent" means any corporation (or partnership, joint venture, or other enterprise) in an unbroken chain ending with the Company if each of the entities, other than the last entity in the unbroken chain, owns or controls, directly or indirectly, 50% or more of the outstanding shares of stock normally entitled to vote for the election of directors of one or more of the other entities in the chain (or comparable equity participation and voting power). (ii) The term "Subsidiary" means any corporation (or partnership, joint venture, or other enterprise) of which the Company, a Parent or a Subsidiary 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). (iii) The term "Affiliate" means any corporation (or partnership, joint venture, or other enterprise) of which the Company, a Parent or a Subsidiary 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). -3- 4 5. Granting of Options (a) Number of Shares. The Committee shall determine the number of shares of Company Stock that will be subject to each Grant of Options to Employees, Non-Employee Directors and Consultants. (b) Type of Option and Price. (i) The Committee may grant Incentive Stock Options that are intended to qualify as incentive stock options within the meaning of section 422 of the Code or Nonqualified Stock Options that are not intended so to qualify or any combination of Incentive Stock Options and Nonqualified Stock Options, all in accordance with the terms and conditions set forth herein. Incentive Stock Options may be granted only to Employees of the Company or a parent or subsidiary corporation as defined in sections 424(e) and 424(f) of the Code. Nonqualified Stock Options may be granted to any Employees, Non-Employee Directors and Consultants. (ii) The purchase price (the Exercise Price) of Company Stock subject to an Option shall be determined by the Committee; provided, however, that (x) the Exercise Price of an Option shall be equal to, or greater than, the Fair Market Value (as defined below) of a share of Company Stock on the date the Option is granted and (y) an Incentive Stock Option may not be granted to an Employee who, at the time of grant, owns stock possessing more than 10 percent of the total combined voting power of all classes of stock of the Company or any parent or subsidiary of the Company (as defined in sections 424(e) and 424(f) of the Code), unless the Exercise Price per share is not less than 110% of the Fair Market Value of Company Stock on the date of grant. (iii) The Fair Market Value per share of Company Stock shall mean the average of the highest and lowest prices per share of the Company Stock on the New York Stock Exchange (the "NYSE"), or such other national securities exchange as may be designated by the Committee, on the applicable date, or, if there are no sales of Company Stock on the NYSE on such date, then the average of the highest and lowest prices of the Company Stock on the last previous day on which a sale on the NYSE is reported. (c) Option Term. The Committee shall determine the term of each Option. The term of an Option shall not exceed ten years from the date of grant (except as provided in Section 22(c)). An Incentive Stock Option that is granted to an Employee who, at the time of grant, owns stock possessing more than 10 percent of the total combined voting power of all classes of stock of the Company, or any parent or subsidiary of the Company (as defined in sections 424(e) and 424(f) of the Code), may not have a term that exceeds five years from the date of grant. -4- 5 (d) Exercisability of Options. (i) Options shall become exercisable in accordance with such terms and conditions, consistent with the Plan, as may be determined by the Committee and specified in the Grant Instrument. Unless the Committee determines otherwise, no Option may become exercisable before the first anniversary of the date of grant (except as provided in Section 14(a)). The Committee may accelerate the exercisability of any or all outstanding Options at any time for any reason. (ii) The Committee may provide in a Grant Instrument that the Grantee may elect to exercise part or all of an Option before it otherwise has become exercisable. Any shares so purchased shall be restricted shares and shall be subject to a repurchase right in favor of the Company during a specified restriction period, with the repurchase price equal to the Exercise Price, or such other restrictions as the Committee deems appropriate. (e) Grants to Non-Exempt Employees. Notwithstanding the foregoing, Options granted to persons who are non-exempt employees under the Fair Labor Standards Act of 1938, as amended, shall have an Exercise Price not less than 100% of the Fair Market Value of the Company Stock on the date of grant, and may not be exercisable for at least six months after the date of grant (except that such Options may become exercisable, as determined by the Committee, upon the Grantee's death, Disability or Retirement, or upon a Change in Control (in accordance with Section 14(a)) or other circumstances permitted by applicable regulations). (f) Termination of Employment, Retirement, Disability or Death. Notwithstanding the following, in all cases (except as provided in Section 14(a)), upon the termination of a Grantee's employment or service with the Company for any reason, any Option granted to such Grantee less than one year prior to the Grantee's date of termination of employment or service with the Company shall terminate as of such date of termination, unless the Committee determines otherwise. Except as provided below, an Option may only be exercised while the Grantee is employed by, or providing service to, the Company (as defined below) as an Employee, Consultant or member of the Board. (i) In the event that a Grantee ceases to be employed by, or provide service to, the Company on account of an involuntary termination of the Grantee's employment or service by the Company for any reason other than for Cause (as defined below), any Option which is otherwise exercisable by the Grantee shall terminate unless exercised within one year after the date on which the Grantee ceases to be employed by, or provide service to, the Company (or within such other period of time as may be specified by the Committee), but in any event no later than the date of expiration of the Option term. Except as otherwise provided by the Committee, any of the Grantee's Options that are not otherwise exercisable as of the date on which the Grantee ceases to be employed by, or provide service to, the Company shall terminate as of such date. -5- 6 (ii) In the event the Grantee ceases to be employed by, or provide service to, the Company on account of a termination for Cause by the Company, any Option held by the Grantee shall terminate as of the date the Grantee ceases to be employed by, or provide service to, the Company, unless the Committee determines otherwise. In addition, notwithstanding any other provisions of this Section 5, and unless the Committee determines otherwise, if the Committee determines that the Grantee has engaged in conduct that constitutes Cause at any time while the Grantee is employed by, or providing service to, the Company or after the Grantee's termination of employment or service, any Option held by the Grantee shall immediately terminate and the Grantee shall automatically forfeit all shares underlying any exercised portion of an Option for which the Company has not yet delivered the share certificates, upon refund by the Company of the Exercise Price paid by the Grantee for such shares. Upon any exercise of an Option, the Company may withhold delivery of share certificates pending resolution of an inquiry that could lead to a finding resulting in a forfeiture. In addition to the foregoing, the Committee may impose such other conditions and restrictions as it deems appropriate in the event a Grantee engages in conduct that constitute Cause. (iii) In the event the Grantee ceases to be employed by, or provide service to, the Company on account of Retirement, any Option which is otherwise exercisable by the Grantee shall terminate unless exercised within three years after the date on which the Grantee ceases to be employed by, or provide service to, the Company (or within such other period of time as may be specified by the Committee), but in any event no later than the date of expiration of the Option term. Except as otherwise provided by the Committee, any of the Grantee's Options which are not otherwise exercisable as of the date on which the Grantee ceases to be employed by, or provide service to, the Company shall immediately vest and become exercisable as of such date. (iv) In the event the Grantee ceases to be employed by, or provide service to, the Company because the Grantee is Disabled, any Option which is otherwise exercisable by the Grantee shall terminate unless exercised within three years after the date on which the Grantee ceases to be employed by, or provide service to, the Company (or within such other period of time as may be specified by the Committee), but in any event no later than the date of expiration of the Option term. Except as otherwise provided by the Committee, any of the Grantee's Options which are not otherwise exercisable as of the date on which the Grantee ceases to be employed by, or provide service to, the Company shall immediately vest and become exercisable as of such date. (v) If the Grantee dies while employed by, or providing service to, the Company or within 90 days after the date on which the Grantee ceases to be employed or provide service on account of a termination specified in Section 5(f)(i) above (or within such other period of time as may be specified by the Committee), any Option that is otherwise exercisable by the Grantee shall terminate unless exercised within three years after the date on which the Grantee ceases to be employed by, or provide service to, the Company (or within such other period of time as may be specified by the Committee), but in any event no later than the date of expiration of the Option term. Except as otherwise provided by the Committee, any of the Grantee's -6- 7 Options that are not otherwise exercisable as of the date on which the Grantee ceases to be employed by, or provide service to, the Company shall immediately vest and become exercisable as of such date. (vi) In the event the Grantee ceases to be employed by, or provide service to, the Company on account of voluntary termination by the Grantee, any Option which is otherwise exercisable by the Grantee shall terminate unless exercised within 90 days after the date on which the Grantee ceases to be employed by, or provide service to, the Company (or within such other period of time as may be specified by the Committee), but in any event no later than the date of expiration of the Option term. Except as otherwise provided by the Committee, any of the Grantee's Options which are not otherwise exercisable as of the date on which the Grantee ceases to be employed by, or provide service to, the Company shall terminate as of such date. (vi) For purposes of this Section 5(f) and Sections 6, 7, and 8: (A) The term Company shall mean the Company and its Parents, Subsidiaries and Affiliates, except as otherwise determined by the Committee. (B) The term "employed by, or provide service to, the Company" shall mean employment or service with the Company or a Parent, Subsidiary or Affiliate, as described in Section 9. (C) Disability shall mean a Grantee's permanent and total disability within the meaning of section 22(e)(3) of the Code or the Grantee becomes entitled to receive long-term disability benefits under the Company's long-term disability plan applicable to the Grantee, or such other definition of Disability as the Committee shall determine. (D) Cause shall mean, except to the extent specified otherwise by the Committee, a finding by the Committee that the Grantee (i) has breached his or her employment or service contract with the Company, (ii) has engaged in disloyalty to the Company, including, without limitation, fraud, embezzlement, theft, commission of a felony or proven dishonesty, (iii) has disclosed trade secrets or confidential information of the Company to persons not entitled to receive such information, (iv) has breached any written confidentiality, non-competition or non-solicitation agreement between the Grantee and the Company or (v) has engaged in such other behavior detrimental to the interests of the Company as the Committee determines. (E) Retirement shall mean a Grantee's termination of employment or service with the Company after the Grantee attains age 50, or such other definition of Retirement as the Committee shall determine. (g) Exercise of Options. A Grantee may exercise an Option that has become exercisable, in whole or in part, by delivering a notice of exercise to the Company with payment of the Exercise Price. The Grantee shall pay the Exercise Price for an Option as specified by the -7- 8 Committee (w) in cash, (x) with the approval of the Committee, by delivering shares of Company Stock owned by the Grantee (including Company Stock acquired in connection with the exercise of an Option, subject to such restrictions as the Committee deems appropriate) and having a Fair Market Value on the date of exercise equal to the Exercise Price or by attestation (on a form prescribed by the Committee) to ownership of shares of Company Stock having a Fair Market Value on the date of exercise equal to the Exercise Price, (y) payment through a broker in accordance with procedures permitted by Regulation T of the Federal Reserve Board, or (z) by such other method as the Committee may approve. The Committee may authorize loans by the Company to Grantees in connection with the exercise of an Option, upon such terms and conditions as the Committee, in its sole discretion, deems appropriate. Shares of Company Stock used to exercise an Option shall have been held by the Grantee for the requisite period of time to avoid adverse accounting consequences to the Company with respect to the Option. The Grantee shall pay the Exercise Price and the amount of any withholding tax due (pursuant to Section 11) at the time of exercise. (h) Reload Options. The Committee may provide in a Grant Instrument that if the Grantee uses shares of Company Stock to exercise an Option, and the Grantee is then in the employment or service of the Company and is eligible to receive grants under the Plan, the Grantee will receive a Grant of additional Options to purchase a number of shares of Company Stock equal to the number of whole shares used to exercise the Option and, if the Grant Instrument so designates, the number of whole shares, if any, withheld in payment of any taxes. Such additional Options shall be granted with an Exercise Price equal to the Fair Market Value of the Company Stock on the date of grant of such additional Options, or at such other Exercise Price as the Committee may establish, for a term not longer than the unexpired term of the exercised Option and on such other terms as the Committee shall determine. A Grantee may only receive reload Options if the Grant Instrument specifically provides for such Options. (i) Dividend Equivalents. The Committee may grant dividend equivalents in connection with Options granted under the Plan. Dividend equivalents may be paid currently or accrued as contingent cash obligations and may be payable in cash or shares of Company Stock, and upon such terms as the Committee may establish. (j) Limits on Incentive Stock Options. Each Incentive Stock Option shall provide that, if the aggregate Fair Market Value of the stock on the date of the grant with respect to which Incentive Stock Options are exercisable for the first time by a Grantee during any calendar year, under the Plan or any other stock option plan of the Company or a parent or subsidiary, exceeds $100,000, then the Option, as to the excess, shall be treated as a Nonqualified Stock Option. An Incentive Stock Option shall not be granted to any person who is not an Employee of the Company or a parent or subsidiary (within the meaning of sections 424(e) and (f) of the Code). 6. Stock Awards -8- 9 The Committee may issue or transfer shares of Company Stock to an Employee, Non-Employee Director or Consultant under a Stock Award, upon such terms as the Committee deems appropriate. The following provisions are applicable to Stock Awards: (a) General Requirements. Shares of Company Stock issued or transferred pursuant to Stock Awards may be issued or transferred for consideration or for no consideration, and subject to restrictions or no restrictions, as determined by the Committee. The Committee may, but shall not be required to, establish conditions under which restrictions on Stock Awards shall lapse over a period of time or according to such other criteria as the Committee deems appropriate. The period of time during which the Stock Awards will remain subject to restrictions will be designated in the Grant Instrument as the Restriction Period. (b) Number of Shares. The Committee shall determine the number of shares of Company Stock to be issued or transferred pursuant to a Stock Award and the restrictions applicable to such shares. (c) Requirement of Employment or Service. If the Grantee ceases to be employed by, or provide service to, the Company (as defined in Section 5(f)) during a period designated in the Grant Instrument as the Restriction Period, or if other specified conditions are not met, the Stock Award shall terminate as to all shares covered by the Grant as to which the restrictions have not lapsed, and those shares of Company Stock must be immediately returned to the Company. The Committee may, however, provide for complete or partial exceptions to this requirement as it deems appropriate. (d) Restrictions on Transfer. During the Restriction Period, a Grantee may not sell, assign, transfer, pledge or otherwise dispose of the shares of a Stock Award except to a Successor Grantee under Section 12(a). The Committee may hold Stock Awards in escrow until all restrictions on such shares have lapsed. (e) Right to Vote and to Receive Dividends. Unless the Committee determines otherwise, during the Restriction Period, the Grantee shall have the right to vote shares of Stock Awards and to receive any dividends or other distributions paid on such shares, subject to any restrictions deemed appropriate by the Committee. (f) Lapse of Restrictions. All restrictions imposed on Stock Awards shall lapse upon the expiration of the applicable Restriction Period and the satisfaction of all conditions imposed by the Committee. The Committee may determine, as to any or all Stock Awards, that the restrictions shall lapse without regard to any Restriction Period. (g) Stock Award Units. The Committee may also grant Stock Awards that are expressed as units, or hypothetical shares, of Company Stock, on such terms as the Committee deems appropriate. These Stock Award units may be paid in cash or in shares of Company Stock, as the Committee determines. -9- 10 7. Stock Appreciation Rights (a) General Requirements. The Committee may grant stock appreciation rights (SARs) to an Employee, Non-Employee Director or Consultant separately or in tandem with any Option (for all or a portion of the applicable Option). Tandem SARs may be granted either at the time the Option is granted or at any time thereafter while the Option remains outstanding; provided, however, that, in the case of an Incentive Stock Option, SARs may be granted only at the time of the Grant of the Incentive Stock Option. The Committee shall establish the base amount of the SAR at the time the SAR is granted. Unless the Committee determines otherwise, the base amount of each SAR shall be equal to the per share Exercise Price of the related Option or, if there is no related Option, an amount equal to or greater than the Fair Market Value of a share of Company Stock on the date of Grant of the SAR. (b) Tandem SARs. In the case of tandem SARs, the number of SARs granted to a Grantee that shall be exercisable during a specified period shall not exceed the number of shares of Company Stock that the Grantee may purchase upon the exercise of the related Option during such period. Upon the exercise of an Option, the SARs relating to the Company Stock covered by such Option shall terminate. Upon the exercise of SARs, the related Option shall terminate to the extent of an equal number of shares of Company Stock. (c) Exercisability. An SAR shall be exercisable during the period specified by the Committee in the Grant Instrument and shall be subject to such vesting and other restrictions as may be specified in the Grant Instrument. The Committee may accelerate the exercisability of any or all outstanding SARs at any time for any reason. SARs may only be exercised while the Grantee is employed by, or providing service to, the Company or during the applicable period after termination of employment or service as described in Section 5(f). A tandem SAR shall be exercisable only during the period when the Option to which it is related is also exercisable. (d) Grants to Non-Exempt Employees. Notwithstanding the foregoing, SARs granted to persons who are non-exempt employees under the Fair Labor Standards Act of 1938, as amended, shall have a base amount not less than 100% of the Fair Market Value of the Company Stock on the date of grant, and may not be exercisable for at least six months after the date of grant (except that such SARs may become exercisable, as determined by the Committee, upon the Grantee's death, Disability or Retirement, or upon a Change in Control (in accordance with Section 14(a)) or other circumstances permitted by applicable regulations). (e) Value of SARs. When a Grantee exercises SARs, the Grantee shall receive in settlement of such SARs an amount equal to the value of the stock appreciation for the number of SARs exercised, payable in cash, Company Stock or a combination thereof. The stock appreciation for an SAR is the amount by which the Fair Market Value of the underlying Company Stock on the date of exercise of the SAR exceeds the base amount of the SAR as described in Subsection (a), or such other amount as the Committee may determine. -10- 11 (f) Form of Payment. The Committee shall determine whether the appreciation in an SAR shall be paid in the form of cash, shares of Company Stock, or a combination of the two, in such proportion as the Committee deems appropriate. For purposes of calculating the number of shares of Company Stock to be received, shares of Company Stock shall be valued at their Fair Market Value on the date of exercise of the SAR. If shares of Company Stock are to be received upon exercise of an SAR, cash shall be delivered in lieu of any fractional share. 8. Other Stock-Based Awards. The Committee may grant to Employees, Non-Employee Directors and Consultants other awards of Company Stock or awards that are valued in whole or in part by reference to, or are otherwise based on, Company Stock, with such terms and conditions as the Committee deems appropriate. 9. Employment or Service With the Company. For purposes of the Plan, employment or service with the Company shall mean employment or service as an Employee or Consultant of the Company, a Parent, Subsidiary or Affiliate, or service as a member of the Board, unless the Committee determines otherwise. For purposes of exercising Options and SARs and satisfying conditions with respect to other Grants, a transfer of a Grantee among the Company and its Parents, Subsidiaries and Affiliates shall not be considered a termination of employment or service, unless the Committee determines otherwise. Without limiting the foregoing, the Committee shall have the right at any time to determine that a Grantee's transfer of employment or service to an Affiliate will not be considered continued employment or service with the Company for purposes of a particular Grant under the Plan. 10. Deferrals The Committee may permit or require a Grantee to defer receipt of the payment of cash or the delivery of shares that would otherwise be due to such Grantee in connection with any Grant. If any such deferral election is permitted or required, the Committee shall, in its sole discretion, establish rules and procedures for such deferrals. 11. Withholding of Taxes (a) Required Withholding. All Grants under the Plan shall be subject to applicable federal (including FICA), state and local tax withholding requirements. The Company shall have the right to deduct from all Grants paid in cash, or from other wages paid to the Grantee, any federal, state or local taxes required by law to be withheld with respect to such Grants. In the case of Options, Stock Awards and other Grants paid in Company Stock, the Company may require that the Grantee or other person receiving or exercising Grants pay to the Company the amount of any federal, state or local taxes that the Company is required to withhold with respect to such Grants, or the Company may deduct from other wages paid by the Company the amount of any withholding taxes due with respect to such Grants. (b) Election to Withhold Shares. If the Committee so permits, a Grantee may elect to satisfy the Company's income tax withholding obligation with respect to Grants paid in Company -11- 12 Stock by having shares withheld up to an amount that does not exceed the Grantee's minimum applicable withholding tax rate for federal (including FICA), state and local tax liabilities. The election must be in a form and manner prescribed by the Committee and may be subject to the prior approval of the Committee. 12. Transferability of Grants (a) Nontransferability of Grants. Except as provided below, only the Grantee may exercise rights under a Grant during the Grantee's lifetime. A Grantee may not transfer those rights except (i) by will or by the laws of descent and distribution or (ii) with respect to Grants other than Incentive Stock Options, if permitted in any specific case by the Committee, pursuant to a domestic relations order or otherwise as permitted by the Committee. When a Grantee dies, the personal representative or other person entitled to succeed to the rights of the Grantee (Successor Grantee) may exercise such rights. A Successor Grantee must furnish proof satisfactory to the Company of his or her right to receive the Grant under the Grantee's will or under the applicable laws of descent and distribution. (b) Transfer of Nonqualified Stock Options. Notwithstanding the foregoing, the Committee may provide, in a Grant Instrument, that a Grantee may transfer Nonqualified Stock Options to family members, or one or more trusts or other entities for the benefit of or owned by family members, consistent with the applicable securities laws, according to such terms as the Committee may determine; provided that the Grantee receives no consideration for the transfer of an Option and the transferred Option shall continue to be subject to the same terms and conditions as were applicable to the Option immediately before the transfer. 13. Change in Control of the Company A Change in Control shall mean: (a) The acquisition by any individual, entity or group (a "Person"), including any "person" within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act, of beneficial ownership within the meaning of Rule 13d-3 promulgated under the Exchange Act, of 33% or more of either (i) the then outstanding shares of Common Stock of the Company (the "Outstanding Company Common Stock") or (ii) the combined voting power of the then outstanding securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that the following acquisitions of Outstanding Company Common Stock or Outstanding Company Voting Securities shall not constitute a Change in Control: (A) any acquisition by the Company, (B) any acquisition by an employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company, or (C) any acquisition by any corporation pursuant to a reorganization, merger or consolidation involving the Company, if, immediately after such reorganization, merger or consolidation, each of the conditions described in clauses (i), (ii) and (iii) of subsection (c) of this Section shall be satisfied; and provided further that, for purposes of -12- 13 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; (b) Individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of such Board; provided, however, that any individual who becomes a director of the Company subsequent to the date hereof whose election, or nomination for election by the Company's stockholders, was approved by the vote of at least three-quarters of the directors then comprising the Incumbent Board (either by a specific vote or by approval of the proxy statement of the Company in which such person is named as a nominee for director, without objection to such nomination) shall be deemed to have been a member of the Incumbent Board; and provided further, that no individual who was initially elected as a director of the Company as a result of an actual or threatened election contest, as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act, or any other actual or threatened solicitation of proxies or consents by or on behalf of any Person other than the Board shall be deemed to have been a member of the Incumbent Board; (c) Approval by the stockholders of the Company of a reorganization, merger or consolidation involving the Company unless, in any such case, immediately after such reorganization, merger or consolidation, (i) more than 50% of the then outstanding shares of common stock of the corporation resulting from such reorganization, merger or consolidation and more than 50% of the combined voting power of the then outstanding securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals or entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and the Outstanding Company Voting Securities immediately prior to such reorganization, merger or consolidation and in substantially the same proportions relative to each other as their ownership, immediately prior to such reorganization, merger or consolidation, of the Outstanding Company Common Stock and the Outstanding Company Voting Securities, as the case may be, (ii) no Person (other than the Company, any employee benefit plan (or related trust) sponsored or maintained by the Company or the corporation resulting from such reorganization, merger or consolidation (or any corporation controlled by the Company), or any Person which beneficially owned, immediately prior to such reorganization, merger or consolidation, directly or indirectly, 33% or more of the Outstanding Company Common Stock or the Outstanding Company Voting Securities, as the case may be) beneficially owns, directly or indirectly, 33% or more of the then outstanding shares of common stock of such corporation or 33% or more of the combined voting power of the then outstanding securities of such corporation entitled to vote generally in the election of directors and (iii) at least a majority of the members of the board of directors of the -13- 14 corporation resulting from such reorganization, merger or consolidation were members of the Incumbent board at the time of the execution of the initial agreement or action of the Board providing for such reorganization, merger or consolidation; or (d) (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 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). 14. Consequences of a Change in Control (a) Notice and Acceleration. Upon a Change in Control, (i) the Company shall provide each Grantee with outstanding Grants written notice of such Change in Control, (ii) all outstanding Options and SARs shall automatically accelerate and become fully exercisable, and (iii) the restrictions and conditions on all outstanding Stock Awards or other stock-based awards shall immediately lapse. (b) Other Alternatives. Notwithstanding the foregoing, subject to subsection (c) below, in the event of a Change in Control, the Committee may take any of the following actions with respect to any or all outstanding Grants: the Committee may (i) determine that outstanding Options and SARs that are not exercised shall be assumed by, or replaced with comparable options or rights by, the surviving corporation (or a parent or subsidiary of the surviving corporation), and that other outstanding Grants shall be converted to similar grants of the surviving corporation (or a parent or subsidiary of the surviving corporation), (ii) require that Grantees surrender their outstanding Options and SARs in exchange for a payment by the Company, in cash or Company Stock as determined by the Committee, in an amount equal to the -14- 15 amount by which the then Fair Market Value of the shares of Company Stock subject to the Grantee's unexercised Options and SARs exceeds the Exercise Price of the Options or the base amount of the SARs, as applicable, (iii) after giving Grantees an opportunity to exercise their outstanding Options and SARs, terminate any or all unexercised Options and SARs at such time as the Committee deems appropriate, or (iv) determine that Grantees shall receive a payment in settlement of Stock Awards and other stock-based awards, in such amount and form as may be determined by the Committee. Such surrender, termination or settlement shall take place as of the date of the Change in Control or such other date as the Committee may specify. (c) Limitations. Notwithstanding anything in the Plan to the contrary, in the event of a Change in Control, the Committee shall not have the right to take any actions described in the Plan (including without limitation actions described in Subsection (b) above) that would make the Change in Control ineligible for pooling of interests accounting treatment or that would make the Change in Control ineligible for desired tax treatment if, in the absence of such right, the Change in Control would qualify for such treatment and the Company intends to use such treatment with respect to the Change in Control. 15. Requirements for Issuance or Transfer of Shares No Company Stock shall be issued or transferred in connection with any Grant hereunder unless and until all legal requirements applicable to the issuance or transfer of such Company Stock have been complied with to the satisfaction of the Committee. The Committee shall have the right to condition any Grant made to any Grantee hereunder on such Grantee's undertaking in writing to comply with such restrictions on his or her subsequent disposition of such shares of Company Stock as the Committee shall deem necessary or advisable, and certificates representing such shares may be legended to reflect any such restrictions. Certificates representing shares of Company Stock issued or transferred under the Plan will be subject to such stop-transfer orders and other restrictions as may be required by applicable laws, regulations and interpretations, including any requirement that a legend be placed thereon. 16. Amendment and Termination of the Plan (a) Amendment. The Board or its delegate may amend or terminate the Plan at any time; provided, however, that the Board or its delegate shall not amend the Plan without stockholder approval if such approval is required in order to comply with the Code or applicable laws, or to comply with applicable stock exchange requirements. (b) Termination of Plan. The Plan shall terminate on the day immediately preceding the tenth anniversary of its effective date, unless the Plan is terminated earlier by the Board or is extended by the Board with the approval of the stockholders. (c) Termination and Amendment of Outstanding Grants. A termination or amendment of the Plan that occurs after a Grant is made shall not materially impair the rights of -15- 16 a Grantee unless the Grantee consents or unless the Committee acts under Section 22(b) or otherwise as specifically permitted by the Plan or Grant Instrument. The termination of the Plan shall not impair the power and authority of the Committee with respect to an outstanding Grant. Whether or not the Plan has terminated, an outstanding Grant may be terminated or amended under Section 22(b) or may be amended by agreement of the Company and the Grantee consistent with the Plan. (d) Governing Document. The Plan shall be the controlling document. No other statements, representations, explanatory materials or examples, oral or written, may amend the Plan in any manner. The Plan shall be binding upon and enforceable against the Company and its successors and assigns. 17. Funding of the Plan This Plan shall be unfunded. The Company shall not be required to establish any special or separate fund or to make any other segregation of assets to assure the payment of any Grants under this Plan. In no event shall interest be paid or accrued on any Grant, including unpaid installments of Grants. 18. Rights of Participants Nothing in this Plan shall entitle any Employee, Consultant, Non-Employee Director or other person to any claim or right to be granted a Grant under this Plan. Neither this Plan nor any action taken hereunder shall be construed as giving any individual any rights to be retained by or in the employ of the Company or any other employment rights. 19. No Fractional Shares No fractional shares of Company Stock shall be issued or delivered pursuant to the Plan or any Grant. The Committee shall determine whether cash, other awards or other property shall be issued or paid in lieu of such fractional shares or whether such fractional shares or any rights thereto shall be forfeited or otherwise eliminated. 20. Headings Section headings are for reference only. In the event of a conflict between a title and the content of a Section, the content of the Section shall control. 21. Effective Date of the Plan. Subject to approval by the Company's stockholders, the Plan shall be effective on April 18, 2001. -16- 17 22. Miscellaneous (a) Grants in Connection with Corporate Transactions and Otherwise. Nothing contained in this Plan shall be construed to (i) limit the right of the Committee to make Grants under this Plan in connection with the acquisition, by purchase, lease, merger, consolidation or otherwise, of the business or assets of any corporation, firm or association, including Grants to employees thereof who become Employees of the Company, or for other proper corporate purposes, or (ii) limit the right of the Company to grant stock options or make other awards outside of this Plan. Without limiting the foregoing, the Committee may make a Grant to an employee of another corporation who becomes an Employee by reason of a corporate merger, consolidation, acquisition of stock or property, reorganization or liquidation involving the Company or any Parent, Subsidiary or Affiliate in substitution for a stock option or stock awards grant made by such corporation. The terms and conditions of the substitute grants may vary from the terms and conditions required by the Plan and from those of the substituted stock incentives. The Committee shall prescribe the provisions of the substitute grants. (b) Compliance with Law. The Plan, the exercise of Options and SARs and the obligations of the Company to issue or transfer shares of Company Stock under Grants shall be subject to all applicable laws and to approvals by any governmental or regulatory agency as may be required. With respect to persons subject to section 16 of the Exchange Act, it is the intent of the Company that the Plan and all transactions under the Plan comply with all applicable provisions of Rule 16b-3 or its successors under the Exchange Act. In addition, it is the intent of the Company that the Plan and applicable Grants under the Plan comply with the applicable provisions of section 162(m) of the Code and section 422 of the Code. To the extent that any legal requirement of section 16 of the Exchange Act or section 162(m) or 422 of the Code as set forth in the Plan ceases to be required under section 16 of the Exchange Act or section 162(m) or 422 of the Code, as applicable, that Plan provision shall cease to apply. The Committee may revoke any Grant if it is contrary to law or modify a Grant to bring it into compliance with any valid and mandatory government regulation. The Committee may also adopt rules regarding the withholding of taxes on payments to Grantees. The Committee may, in its sole discretion, agree to limit its authority under this Section. (c) Employees Subject to Taxation Outside the United States. With respect to Grantees who are subject to taxation in countries other than the United States, the Committee may make Grants on such terms and conditions different from those specified in this Plan (including without limitation granting 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 and amendments, and establish such procedures and subplans, as may be necessary or advisable to comply with provisions of laws in other countries in which the Company or its Parent, Subsidiaries or Affiliates operate or have employees; provided, however, that, except as described above, any such modification, amendment, procedure or subplan shall not be inconsistent with the terms of the Plan. -17- 18 (d) Governing Law. The validity, construction, interpretation and effect of the Plan and Grant Instruments issued under the Plan shall be governed and construed by and determined in accordance with the laws of the State of Delaware, without giving effect to the conflict of laws provisions thereof. -18- EX-10.20 3 y49010ex10-20.txt EX-10.20 THE OPERATIONS COMMITEE INCENTIVE PLAN 1 Exhibit 10.20 PHARMACIA CORPORATION OPERATIONS COMMITTEE INCENTIVE PLAN 1. PLAN OBJECTIVE The Pharmacia Corporation Operations Committee Incentive Plan (alternatively referred to as the "OCIP" or the "Plan") is designed to encourage results-oriented actions on the part of members of the Operations Committee ("OC") of Pharmacia Corporation (the "Company"). The Plan is intended to align closely financial rewards with the achievement of specific performance objectives. 2. ELIGIBILITY All management employees of the Company and its subsidiaries who are "Pharma" members of the OC are eligible to participate in the Plan. The Administrator (as defined in Section 3 below) shall select the management employees who shall participate in the Plan (the "Participants"). 3. ADMINISTRATION (A) The Plan shall be administered by the Compensation Committee of the Board of Directors (the "Committee") with respect to employees who are elected officers of the Company ("Elected Officers"), and the Plan shall be administered by the Chief Executive Officer of the Company ("CEO") with respect to all other employees. The CEO may delegate his authority to administer the Plan to an individual or other committee. The term "Administrator" shall mean the Committee, as applied to Elected Officers, and the CEO or an individual or committee to which authority has been delegated, as applied to all other employees. (B) The Administrator shall have full power and authority to establish the rules and regulations relating to the Plan, to interpret the Plan and those rules and regulations, to select Participants for the Plan, to determine each Participant's target award, performance goals and final award, to make all factual and other determinations in connection with the Plan, and to take all other actions necessary or appropriate for the proper administration of the Plan, including the delegation of such authority or power, where appropriate. Only the Committee shall take the foregoing actions with respect to Elected Officers. (C) All powers of the Administrator shall be executed in its sole discretion, in the best interest of the Company, not as a fiduciary, and in keeping with the objectives of the Plan and need not be uniform as to similarly situated individuals. The Administrator's administration of the Plan, including all such rules and regulations, interpretations, selections, determinations, approvals, decisions, delegations, amendments, terminations and other actions, shall be final and binding on the Company and all employees of the Company, including the Participants and their respective beneficiaries. 4. TARGET AWARDS AND PERFORMANCE GOALS (A) At the beginning of each plan year designated by the Administrator (a "Plan Year"), the Administrator shall establish for each Participant a target incentive award, which shall be expressed as a dollar amount, a percentage of salary or otherwise. The Administrator shall establish for each Elected Officer a maximum award that may be paid for the Plan Year. The maximum award amount for Elected Officers will remain fixed for the entire Plan Year and may not be increased based on an increase in salary during the Plan Year or otherwise. The target awards will be based on a number of factors, including but not limited to: - - Market competitiveness of the position 2 - - Job level - - Base salary level - - Past individual performance - - Expected contribution to future Company performance and business impact (B) At the beginning of each Plan Year, the Administrator shall establish for each Participant performance goals that must be met in order for an award to be payable for the Plan Year. The Administrator shall establish in writing (i) the performance goals that must be met, (ii) the threshold, target and maximum amounts that may be paid if the performance goals are met, and (iii) any other conditions that the Administrator deems appropriate and consistent with the Plan and, in the case of Elected Officers, Section 162(m) of the Code. The Administrator shall establish objective performance goals for each Participant related to the Participant's business unit or the performance of the Company and its parents, subsidiaries and affiliates as a whole, or any combination of the foregoing. The Administrator may also establish subjective performance goals for Participants; provided that, for Elected Officers, the subjective performance goals may only be used to reduce, and not increase, the award otherwise payable under the Plan. The Company shall notify each Participant of his or her target award and the performance goals for the Plan Year. (C) The objectively determinable performance goals shall be based on one or more of the following criteria related to the Participant's business unit or the performance of the Company and its parents, subsidiaries and affiliates as a whole, or any combination of the foregoing: stock price, earnings per share, net earnings, operating or other earnings, profits, revenues, net cash flow, financial return ratios, return on assets, stockholder return, return on equity, growth in assets, unit volume, sales, market share, drug discovery or other scientific goals, pre-clinical or clinical goals, regulatory approvals, or strategic business criteria consisting of one or more objectives based on meeting specified revenue goals, market penetration goals, geographic business expansion goals, cost targets, goals relating to acquisitions or divestitures, or strategic partnerships. (D) For Elected Officers, the Administrator must establish the target awards and performance goals no later than the earlier of (i) 90 days after the beginning of the Plan Year or (ii) the date on which 25% of the Plan Year has been completed, or such other date as may be required or permitted under applicable regulations under section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"). The performance goals for each Elected Officer for each Plan Year are intended to satisfy the requirements for "qualified performance-based compensation" under section 162(m) of the Code, including the requirement that the achievement of the performance goals be substantially uncertain at the time they are established and that the performance goals be established in such a way that a third party with knowledge of the relevant facts could determine whether and to what extent the performance goals have been met. (E) Each Participant will earn an award for a Plan Year based on the achievement of the performance goals established by the Administrator. The Administrator may adjust, upward or downward, the award for each Participant who is not an Elected Officer, based on the Administrator's determination of the Participant's achievement of personal and other performance goals established by the Administrator and other factors as the Administrator determines. The Administrator may reduce (but not increase) the award for each Elected Officer based on the Administrator's determination of the Participant's achievement of personal and other performance goals established by the Administrator and other factors as the Administrator determines. The Administrator shall not be authorized to increase the amount of any award of an Elected Officer that would otherwise be payable pursuant to the terms of the Plan. (F) The maximum award that a Participant may receive for any Plan Year is $12,000,000. 1 3 5. PAYMENT OF INCENTIVE AWARDS (A) The Administrator shall certify and announce to the Participants the awards that will be paid by the Company as soon as practicable following the final determination of the Company's financial results for the Plan Year. Payment of the awards certified by the Administrator shall be made in a single lump sum cash payment as soon as practicable following the close of the Plan Year, but in any event within 120 days after the close of the Plan Year. (B) Participants must be employed on the last day of the Plan Year to be eligible for an award from the Plan, except as described in subsections (c) and (d) below. (C) Participants who terminate employment prior to the last day of the Plan Year will not be eligible for any award payment for that Plan Year, except as the Administrator may otherwise determine. Unless the Administrator determines otherwise: (I) Participants who die or who retire under a Company-sponsored retirement program during the Plan Year will be eligible for a prorated award based on the achievement of the performance goals for the Plan Year and appropriate adjustment as described in Section 4. The prorated award will be calculated from the date when they became eligible for the Plan to the date of death or retirement. Payment will be made in a single payment at the same time as all other incentive awards for the Plan Year are distributed. In the case of the death of a Participant, any award payable to the Participant shall be paid to his or her beneficiary. For this purpose, the Company will use the beneficiary named under the Company-sponsored life insurance plan. If no life insurance beneficiary is designated, the beneficiary will be the decedent's estate. (II) Participants who leave the Company under a Company-sponsored disability program, separation program (other than in the case of termination for cause) or other program approved by the Management Committee will be eligible for a prorated award based on achievement of the performance goals for the year and appropriate adjustment as described in Section 4. The awards will be calculated from the date when they became eligible for the Plan to the effective date of separation. Payment will be made in a single payment at the same time as all other incentive awards for the Plan Year are distributed. (D) The Administrator may establish appropriate terms and conditions to accommodate newly hired and transferred employees, consistent, in the case of Elected Officers, with Section 162(m) of the Code. 6. CHANGES TO PERFORMANCE GOALS AND TARGET AWARDS At any time prior to the final determination of awards, for Participants other than Elected Officers, the Administrator may adjust the performance goals and target awards to reflect a change in corporate capitalization (such as a stock split or stock dividend), or a corporate transaction (such as a merger, consolidation, separation, reorganization or partial or complete liquidation), or to reflect equitably the occurrence of any extraordinary event, any change in applicable accounting rules or principles, any change in the Company's method of accounting, any change in applicable law, any change due to any merger, consolidation, acquisition, reorganization, stock split, stock dividend, combination of shares or other changes in the Company's corporate structure or shares, or any other change of a similar nature. The Administrator may make the foregoing adjustments with respect to Elected Officers' awards to the extent the Administrator deems appropriate, considering the requirements of Section 162(m) of the Code. 2 4 7. AMENDMENTS AND TERMINATION (A) The Company may at any time amend or terminate the Plan by action of the Committee; provided, however, that the Committee shall not amend the Plan without stockholder approval if such approval is required by Section 162(m) of the Code. Without limiting the foregoing, the Company, by action of the Administrator, shall have the right to modify the terms of the Plan as may be necessary or desirable to comply with the laws or local customs of countries in which the Company operates or has employees. (B) The Plan must be reapproved by the stockholders no later than the first stockholders meeting that occurs in the fifth year following the year in which the stockholders previously approved the Plan, if required by Section 162(m) of the Code or the regulations thereunder. 8. MISCELLANEOUS PROVISIONS (A) This Plan is not a contract between the Company and the Participants. Neither the establishment of this Plan, nor any action taken hereunder, shall be construed as giving any Participant any right to be retained in the employ of the Company or any of its subsidiaries. Nothing in the Plan, and no action taken pursuant to the Plan, shall affect the right of the Company to terminate a Participant's employment at any time and for any or no reason. The Company is under no obligation to continue the Plan. (B) A Participant's right and interest under the Plan may not be assigned or transferred, except as provided in Section 5(c) of the Plan upon death, and any attempted assignment or transfer shall be null and void and shall extinguish, in the Company's sole discretion, the Company's obligation under the Plan to pay awards with respect to the Participant. The Company's obligations under the Plan may be assigned to any corporation which acquires all or substantially all of the Company's assets or any corporation into which the Company may be merged or consolidated. (C) The Plan shall be unfunded. The Company shall not be required to establish any special or separate fund, or to make any other segregation of assets, to assure payment of awards. The Company's obligations hereunder shall constitute a general, unsecured obligation, awards shall be paid solely out of the Company's general assets, and no Participant shall have any right to any specific assets of the Company. (D) The Company shall have the right to deduct from awards any and all federal, state and local taxes or other amounts required by law to be withheld. (E) It is the intent of the Company that the Plan and awards under the Plan for Elected Officers comply with the applicable provisions of sections 162(m) of the Code. To the extent that any legal requirement of Section 162(m) of the Code as set forth in the Plan ceases to be required under Section 162(m) of the Code, that Plan provision shall cease to apply. (F) The Company's obligation to pay compensation as herein provided is subject to any applicable orders, rules or regulations of any government agency or office having authority to regulate the payment of wages, salaries, and other forms of compensation. (G) The validity, construction, interpretation and effect of the Plan shall exclusively be governed by and determined in accordance with the laws of the State of Delaware. 3 EX-10.21 4 y49010ex10-21.txt EX-10.21 GLOBAL STOCK PURCHASE PLAN 1 Exhibit 10.21 PHARMACIA CORPORATION EMPLOYEE STOCK PURCHASE PLAN SECTION 1. PURPOSE. The Plan is designed to encourage employee stock ownership in the Company by providing Employees of the Company and Eligible Subsidiaries with an opportunity to purchase Common Stock through voluntary systematic payroll deductions. It is the purpose and policy of the Plan to foster ownership interest among Employees, thus aligning the interests of Employees with the interests of stockholders. The Company intends that the Plan qualify as an "Employee Stock Purchase Plan" under Section 423 of the Internal Revenue Code of 1986, as amended and the Plan shall be construed in accordance with such intent. SECTION 2. DEFINITIONS. The following terms, when used in the Plan, shall have the following meanings: a. "Administrator" means the Compensation Committee of the Board and any individual or individuals (including without limitation, another subcommittee of the Board) to whom the Compensation Committee has delegated any or all of its administrative powers and duties under the Plan. b. "Board" means the Board of Directors of the Company. c. "Business Day" means mean a day on which the New York Stock Exchange is open for trading. d. "Common Stock" means the common stock of the Company. e. "Company" means Pharmacia Corporation. f. "Compensation" means annualized base salary paid by the Company or an Eligible Subsidiary. g. "Eligible Subsidiary" means a Subsidiary that has been designated by the Administrator to participate in an Offering. h. "Employee" means any individual who is treated on the Enrollment Date as an employee of the Company or an Eligible Subsidiary for tax purposes. i. "Enrollment Date" means the first Business Day of an Offering Period. j. "Enrollment Form" means a subscription agreement for an Offering, on a form prescribed by the Administrator, authorizing the Company to make payroll deductions for purposes of the Plan and designating the beneficiary who will receive payments due to the participant in the event of the participant's death. 2 k. "Enrollment Period" means the period prior to the Enrollment Date during which Employees may enroll in an Offering. l. "Offering" means the grant of an option to purchase Common Stock under the Plan, as described in Section 6(a). m. "Offering Period" means the period during which an option granted pursuant to an Offering may be exercised via voluntary payroll deductions. n. "Plan" means this Pharmacia Corporation Employee Stock Purchase Plan, as may be amended from time to time. o. "Purchase Date" means the date or dates that Common Stock is purchased under an Offering, which date(s) shall be the last Business Day of each Purchase Period. p. "Purchase Period" means the period between Purchase Dates, except that the first Purchase Period of any Offering Period shall be the period between the Enrollment Date and the first Purchase Date of the Offering Period. q. "Purchase Price" means the purchase price per share of Common Stock under an Offering, as fixed by the Administrator in accordance with Section 6(e) of the Plan. r. "Subsidiary" means a corporation (other than the Company), whether domestic or foreign, in an unbroken chain of corporations beginning with the Company, of which not less than 50% of the total combined voting power of all classes of stock in such corporation is held by the Company or another corporation (other than the last corporation) in such chain. For purposes of determining which entities are Subsidiaries, a partnership that has elected to be taxed as a corporation shall be treated as a corporation during the period for which such election applies. SECTION 3. COMMON STOCK SUBJECT TO THE PLAN. The shares that may be offered under the Plan shall be issued and outstanding shares of Common Stock that are acquired by the Company from time to time in open market transactions. The number of shares of Common Stock that may be purchased by participants under the Plan may not exceed 70,000,000 shares, except as such number may be adjusted pursuant to Section 11. All shares offered under the Plan that are not purchased, and any previously unoffered shares, will be available for subsequent Offerings. SECTION 4. ADMINISTRATION OF THE PLAN. The Plan shall be administered by the Administrator. The Administrator shall serve at the pleasure of the Board and shall have such powers, duties and discretions as set out in the Plan and as the Board may from time to time confer upon it. The Administrator shall have sole and absolute discretion to interpret the Plan, to make determinations as to the eligibility of Employees to participate in the Plan and to adopt rules and regulations for administering the Plan. Any decision or action by the Board or the Administrator arising out of or in connection with the construction, administration, interpretation 2 3 and effect of the Plan shall be conclusive and binding upon all Employees participating in the Plan and any person claiming under or through any such Employee. SECTION 5. ELIGIBILITY. Only eligible Employees of the Company or an Eligible Subsidiary may participate in an Offering. a. Eligible Subsidiaries. Prior to the commencement of the Enrollment Period, the Administrator shall designate the Subsidiaries that shall be the Eligible Subsidiaries for the Offering. b. Eligible Employees. All Employees of the Company or any Eligible Subsidiary shall be eligible to participate in an Offering; except, however, that the Administrator may, in its discretion and on a uniform basis, exclude from any Offering or Offerings Employees who, as of the Enrollment Date for the Offering: (i) Have not completed a minimum period of employment that may be fixed from time to time by the Administrator, in its discretion and on a uniform basis; provided, however, that in no event may such minimum employment period exceed twenty-four (24) months in length; (ii) Are customarily employed for less than twenty (20) hours per week; (iii) Are customarily employed for not more than five (5) months in any calendar year; or (iv) Are "highly compensated employees," within the meaning of Section 414(q) of the Internal Revenue Code of 1986, as amended. All Employees participating in an Offering shall have the same rights and privileges to purchase Common Stock under the Plan; except that the amount of Common Stock that may be purchased by any Employee under an Offering may bear a uniform relationship to the total Compensation of Employees. c. Limitations on Participation. Notwithstanding the foregoing, no Employee shall be eligible to participate in an Offering to the extent that: (i) Such Employee owns, or would own immediately after such Offering, stock possessing five percent (5%) or more of the combined voting power or value of all classes of stock of the Company or any Subsidiary; or (ii) Such Employee's rights to purchase stock under all employee stock purchase plans (within the meaning of Section 423 of the Code) of the Company and its Subsidiaries accrues at a rate that exceeds $25,000 worth of stock (determined at the fair market value of the shares at the time such rights are granted) for each calendar year during which the rights to purchase such stock are outstanding at any time. 3 4 SECTION 6. OFFERINGS UNDER THE PLAN. The terms and conditions of each Offering shall be determined by the Administrator prior to the commencement of the Enrollment Period for the Offering in accordance with this Section 6. a. Grant and Exercise of Options. On the Enrollment Date of each Offering, each eligible Employee shall be granted an option to purchase during the Offering Period (at the applicable Purchase Price) up to the number of shares of Common Stock determined by dividing such Employee's payroll deductions accumulated during each Purchase Period in the Offering Period by the applicable Purchase Price. Unless a participant withdraws from the Offering in accordance with Section 8(c) prior to the Purchase Date, the option will be automatically exercised on each Purchase Date with respect to the number of shares subject to the option that can be purchased with payroll deductions accumulated during the applicable Purchase Period in accordance with Section 9. b. Enrollment Date. The Enrollment Date for each Offering shall be fixed by the Administrator prior to the announcement of the Offering. c. Offering Period. Unless the Administrator, in its discretion, determines that a different Offering Period shall apply to an Offering, the Offering Period shall be the twenty-four (24) month period commencing on the Enrollment Date. In no event shall any Offering Period under the Plan exceed twenty-seven (27) months. Offering Periods under the Plan may overlap. d. Purchase Periods. Each Offering Period shall consist of one or more Purchase Periods. Unless the Administrator, in its discretion, determines otherwise with respect to an Offering, each 24-month Offering Period shall be divided into four 6-month Purchase Periods. e. Purchase Price. The per share Purchase Price of the Common Stock available for purchase under an Offering shall be fixed by the Administrator prior to the Enrollment Date. In no event shall the Purchase Price applicable to an Offering be fixed at a price lower than the lesser of: (i) 85% of the fair market value of a share of Common Stock on the Enrollment Date; and (ii) 85% of the fair market value of a share of Common Stock on the applicable Purchase Date. The Purchase Price fixed for an Offering shall be subject to adjustment pursuant to Section 11 of the Plan. 4 5 SECTION 7. ENROLLMENT AND PARTICIPATION. a. Enrollment. An eligible Employee shall become a participant in an Offering by filing a properly completed Enrollment Form with the designated Plan representative before the end of the applicable Enrollment Period. b. Enrollment Period. Unless the Administrator determines otherwise with respect to an Offering, the Enrollment Period for each Offering shall be the forty-five (45) day period commencing sixty (60) days prior to the Enrollment Date of the Offering. Although the Administrator may, in its discretion, determine that a longer or shorter Enrollment Period may apply to an Offering, in no event shall any Enrollment Period extend past a date that is less than fifteen (15) days prior to the Enrollment Date of the Offering. SECTION 8. PAYROLL DEDUCTION ELECTIONS, WITHDRAWAL RIGHTS, BENEFICIARY DESIGNATIONS. a. Deduction Election. An eligible Employee who desires to participate in an Offering shall elect on the Enrollment Form to a have a portion of his or her Compensation, not exceeding in the aggregate $25,000 for any calendar year, deducted from his or her pay for each pay period during the Offering Period. At the discretion of the Administrator, the Enrollment Form may provide that the portion of Compensation deducted be expressed as either (i) a percentage of Compensation only, (ii) a flat dollar amount only or (iii) either a percentage of Compensation or a flat dollar amount, as elected by the participant. All amounts deducted from a participant's pay shall be credited to a recordkeeping account established under the Plan on behalf of the participant for the Offering. Payroll deductions shall commence on the first pay period after the Enrollment Date and shall continue until the last pay period in the Offering Period, unless deductions are suspended by the participant as provided in Section 8(b) or the participant withdraws from the Offering as provided in Section 8(c). b. Change in Elections. The Committee may, in its discretion, permit participants in an Offering to increase (subject to the maximum annual dollar limitation) or decrease the percentage of Compensation deducted from pay, or suspend payroll deductions entirely, by completing and filing with the designated Plan representative a new Enrollment Form authorizing a change in payroll deduction rate. The Committee may, in its discretion, limit the number of deduction rate changes that participants may make during an Offering Period and may designate specific times during an Offering Period when such rate changes may be made. At the discretion of the Committee, a participant who suspends payroll deductions, but does not withdraw from the Offering, may be permitted to reinstate payroll deductions by completing and filing a new Enrollment Form. Any change in deduction rate or suspension of deductions made pursuant to this Section 4(c) shall have prospective effect only. Any determination of the 5 6 Committee to permit changes in the deduction rates elected by participants shall apply to all participants on a uniform basis. c. Withdrawal From Offering. Each participant in an Offering shall have the absolute right to withdraw from the Offering at any time during the Offering Period by completing and filing with the designated Plan representative a withdrawal notice on a form prescribed by the Administrator. In the event that a participant withdraws from an Offering, all payroll deductions shall cease and any amounts credited to the participant's recordkeeping account that have not already been applied to the purchase of Common Stock shall be returned to the participant in cash, without interest, as soon as practicable after receipt of the withdrawal notice. A participant who withdraws from an Offering shall not be permitted to participate again in such Offering, but may be permitted to participate in any subsequent Offerings under the Plan. d. Termination of Employment or Death. Upon a participant's termination of employment for any reason (including death) during an Offering Period, the participant shall be deemed to have elected to withdraw from the Offering in accordance with Section 8(c) and the payroll deductions credited to such participant's account during the Offering Period, but not yet used to purchase Common Stock, shall be returned to the participant, without interest, or in the case of the participant's death, to the participant's beneficiary designated in accordance with Section 8(e). Notwithstanding the foregoing, in the event of a termination of employment that occurs within thirty (30) days prior to a Purchase Date, the Committee may (in its discretion, but on a uniform basis) treat the termination of employment as an election to suspend deductions under Section 8(b) and the payroll deductions credited to the participant's account as of the date of employment termination will be used to purchase Common Stock on the Purchase Date in accordance with Section 9. In such case, if the termination of employment was due to the participant's death, any Common Stock purchased under this Section 8(d) shall be issued and delivered to the beneficiary designated by the participant under Section 8(e). e. Designation of Beneficiary. A participant may designate on the Enrollment Form a beneficiary who is to receive any cash or shares of Common Stock from the participant's account in the event of the participant's death. Such designation may be changed by the participant at any time by filing a new Enrollment Form. In the event that a valid beneficiary designation is not on file at the time of a participant's death, or if the participant's designated beneficiary predeceases the participant, the participant's designated beneficiary shall be deemed to be the participant's estate. SECTION 9. PURCHASE AND DELIVERY OF COMMON STOCK. On each Purchase Date during an Offering Period, the payroll deductions that have accumulated in a participant's account during the applicable Purchase Period shall automatically be applied toward the purchase of Common Stock on behalf of the participant in accordance with this Section 9. 6 7 a. Number of Shares Purchased. The number of whole shares of Common Stock that will be purchased on behalf of a participant on any given Purchase Date shall be determined by dividing the amount of such participant's accumulated payroll deductions that have been credited to the participant's account during the applicable Purchase Period by the applicable Purchase Price. No fractional shares shall be purchased; any payroll deductions credited to a participant's account that are not sufficient to purchase a full share of Common Stock shall be retained in the account and applied to the subsequent Purchase Period. If there is no subsequent Purchase Period, amounts remaining in a participant's account after the Purchase Date shall be returned to the participant, without interest. b. Issuance of Shares. Unless otherwise requested by a participant, shares purchased under the Plan shall be issued and held on behalf of a participant in street name by a nationally recognized securities firm chosen by the Administrator. c. Conditions Upon Issuance of Shares. No shares shall be issued under the Plan unless the purchase of such shares and the delivery and issuance of the shares complies with all applicable provisions of law, domestic or foreign, including without limitation, the Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as amended, the rules and regulations promulgated thereunder, and the requirements of any stock exchange upon which the shares may be listed, and shall be further subject to the approval of counsel to the Company with respect to such compliance. d. Stockholder Rights. No participant shall have any rights as a stockholder with respect to shares of Common Stock unless and until such shares are issued on behalf of the participant in accordance with this Section 9. SECTION 10. TRANSFERABILITY. The rights of a participant under the Plan shall not be transferable by the participant other than by will, the laws of descent and distribution or to a participant's designated beneficiary as provided in Section 8(e). Any attempt at transfer will be without effect, except that the Committee may treat any such attempted transfer as an election to withdraw from an Offering under Section 8(c). SECTION 11. ADJUSTMENT OF SHARES AND PURCHASE PRICE. If at any time the Company takes any action, whether by stock dividend, stock spilt, combination of shares or otherwise, which results in a proportionate increase or decrease in the number of shares of Common Stock theretofore issued and outstanding, then (i) the number of shares subject to the Plan shall be increased or decreased proportionately, (ii) the Purchase Price fixed by the Administrator pursuant to Section 6(e) shall be adjusted accordingly and (iii) such other adjustments may be made that the Administrator deems equitable. SECTION 12. AMENDMENT AND DISCONTINUANCE. The Compensation Committee of the Board may amend or discontinue the Plan at any time. No such amendment, however, may increase the maximum number of shares that may be offered under the Plan, decrease the 7 8 minimum Purchase Price under Section 6(e) or change the class of eligible Employees under the Plan (other than to designate additional Eligible Subsidiaries) without the approval of a majority of the holders of Common Stock. SECTION 13. EFFECTIVE DATE; SHAREHOLDER APPROVAL. The Plan shall become effective as of January 1, 2002 or such later date as the Administrator may determine, subject to the approval of a majority of the holders of the shares of Common Stock present and represented at any special or annual meeting of the Company's shareholders duly held within twelve (12) months after adoption of the Plan. If the Plan is not so approved, the Plan shall not become effective. SECTION 14. NO EMPLOYMENT RIGHTS. The Plan does not, directly or indirectly, create in any person any right with respect to continuation of employment by the Company or any Subsidiary, and it shall not be deemed to interfere in any way with the right of the Company or any Subsidiary to terminate, or otherwise modify, any Employee's employment at any time. SECTION 15. GOVERNING LAWS. The laws of the State of Delaware shall govern all matters relating to the Plan, except to the extent such laws are superceded by the federal laws of the United States. 8 EX-10.22 5 y49010ex10-22.txt EX-10.22 AMENDMENT NO. 1 TO 2001 LONG TERM PLAN 1 EXHIBIT B AMENDMENT NO. 2001-1 TO THE PHARMACIA CORPORATION 2001 LONG-TERM INCENTIVE PLAN WHEREAS, the Compensation Committee of the Board of Directors of Pharmacia Corporation (the "Committee") adopted the Pharmacia Corporation 2001 Long-Term Incentive Plan (the "Plan") subject to shareholder approval, substantially in the form presented to the Committee at its meeting on December 7, 2000; WHEREAS, the plan was approved by the Company's shareholders at the Company's annual meeting held on April 17, 2001, in the form attached hereto as Exhibit A, with a commitment from the Company to amend the Plan to prohibit the repricing, replacement or regranting through cancellation or by lowering the option exercise price, of any options granted under the Plan without prior shareholder approval; WHEREAS, the Committee authorized the Senior Vice President Human Resources to approve the specific terms of the Plan and to take all other actions and execute all documents necessary to effectuate the adoption of the Plan; NOW, THEREFORE, effective April 18, 2001, the Plan is hereby amended by adding the following sentence to the end of paragraph 1 (b): "Notwithstanding anything herein to the contrary, no grant issued under the Plan shall permit the repricing, replacement or regranting through cancellation or by lowering the Option exercise price, of any Option granted under the Plan without prior shareholder approval." The Plan is further hereby amended by adding the following sentence to the end of paragraph 16(a): "Notwithstanding anything herein to the contrary, neither the Plan, nor the terms of any previously issued grant under the Plan, may be amended to permit the repricing, replacement or regranting through cancellation or by lowering the Option exercise price, of any Option granted under the Plan without prior shareholder approval." -----END PRIVACY-ENHANCED MESSAGE-----