-----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, Sh6KPTy8nEIRvsU1tQGpfGEJxgnMlq+ykR2t5J0755DffuE777hU6QQZO4yWCYeU p8xghzbvParOUyoBWNS/9Q== 0000950124-01-001608.txt : 20010327 0000950124-01-001608.hdr.sgml : 20010327 ACCESSION NUMBER: 0000950124-01-001608 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010326 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-K SEC ACT: SEC FILE NUMBER: 001-02516 FILM NUMBER: 1579432 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-K 1 k59836e10-k.txt FORM 10-K 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE --- SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2000 OR --- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to __________ Commission file number 1-2516 PHARMACIA CORPORATION (Exact name of Registrant as specified in its charter)
Delaware 43-0420020 -------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.)
100 Route 206 North, Peapack, New Jersey 07977 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code 888/768-5501
Securities registered pursuant to Section 12(b) of the Act: Common Stock (par value $2.00) New York Stock Exchange Rights to Purchase Preferred Stock New York Stock Exchange (Title of class) (Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act: None. Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The registrant estimates the aggregate market value of the voting stock held by non-affiliates of the registrant (based upon the NYSE -- Composite Transactions closing price on March 5, 2001 as reported in The Wall Street Journal and treating all executive officers and directors of the Company and all beneficial owners of 5% or more of the Registrant's voting stock as affiliates) was approximately $70 billion. The number of shares of Common Stock, $2.00 par value, outstanding as of March 5, 2001 is 1,299,799,632 shares. DOCUMENTS INCORPORATED BY REFERENCE Portions of the 2001 Proxy Statement are incorporated into Parts I and III of this Report. Portions of the 2000 Annual Report to shareholders are incorporated in Parts I, II and IV of this Report. 2 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; -2- 3 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"). -3- 4 PART I ITEM 1. BUSINESS CORPORATE HISTORY Pharmacia Corporation (the "Company" or "Pharmacia"), a Delaware corporation, was created through the merger (the "Merger") of Monsanto Company ("former Monsanto") and Pharmacia & Upjohn, Inc. ("P&U") on March 31, 2000. In the Merger, former Monsanto was renamed Pharmacia Corporation and is the public company, while P&U became a subsidiary of Pharmacia. However, the corporate structure has no material effect on operation of the Company's business. References to the Company or Pharmacia prior to March 31, 2000 refer to former Monsanto. After the Merger, the agricultural operations of former Monsanto were transferred to a newly created subsidiary of Pharmacia. The subsidiary was named Monsanto Company ("new Monsanto") in order to facilitate recognition of the continuing business by the Company's agricultural customers. On October 23, 2000, 14.74% of the shares of new Monsanto were sold to the public in an initial public offering. SEGMENT DESCRIPTIONS For SEC reporting purposes, the Company's business is divided into three business segments: Prescription Pharmaceuticals, Agricultural Productivity, and Seeds and Genomics. The Company also operates several business units that do not constitute reportable business segments. Further information on the Agricultural Productivity and the Seeds and Genomics segments is included in the Monsanto Company Form 10-K for the fiscal year ended December 31, 2000. PRESCRIPTION PHARMACEUTICALS -4- 5 The Company's Prescription Pharmaceuticals segment involves the business and activities engaged in, supporting or related to the research, development, registration, manufacture and sale of prescription pharmaceutical products, including general therapeutics, opthalmology, and hospital products, which include oncology products and diversified therapeutics. The Company's leading prescription products, including Celebrex, Ambien, Xalatan, Genotropin, Camptosar and Detrol, are all market leaders in their respective categories. Celebrex, the first selective cyclooxygenase-2 ("COX-2") nonsteroidal anti-inflammatory drug, is the world's top selling prescription arthritis medication. Celebrex is used for the treatment of both osteoarthritis and rheumatoid arthritis. During the second half of 2000, Celebrex was launched in the European Union and is now available in over 70 countries. Celebrex is co-promoted (or, where required by law, co-marketed) by Pfizer, Inc. in the U.S. and Europe and by Yamanouchi in Japan. The principal competitor to Celebrex is VIOXX, another selective COX-2 inhibitor, sold by Merck & Co., which competes by claiming faster onset and an indication for acute pain, for which Celebrex is not indicated. In the second half of 2000, the Company filed a New Drug Application ("NDA") with the United States Food and Drug Administration ("FDA") for parecoxib, the first injectable selective COX-2 inhibitor, which is being reviewed for the treatment of acute pain. In March 2001, the Company filed an NDA with the FDA for valdecoxib, an oral, second-generation selective COX-2 inhibitor, which is being reviewed for the treatment of osteoarthritis, rheumatoid arthritis and acute pain. Ambien, the leading short-term treatment for insomnia in the U.S., was in-licensed from Sanofi-Synthelabo under terms which allow Sanofi-Synthelabo to reacquire all rights to Ambien by making a significant final payment to the Company. -5- 6 Xalatan, the world's top selling branded glaucoma product, treats glaucoma by lowering intraocular pressure through a novel mechanism of action. During 2000, Xalcom, a fixed combination of the Company's Xalatan and timolol, was approved in Sweden and received a second approvable letter from the FDA. Xalcom provides a stronger reduction in intraocular pressure. Genotropin, the world's leading recombinant human growth hormone, is used for treating children and adults with growth hormone deficiency. Genotropin is also used for other minor indications. Adding to the Company's endocrine treatment business, in early 2001, the Company completed its acquisition of Sensus Drug Development Corporation, which has filed an NDA with the FDA for pegvisomant, a growth hormone receptor antagonist, which is being reviewed for the treatment of acromegaly, a life-threatening disorder caused by overproduction of growth hormone. This product has been granted orphan drug status by the FDA and designated for priority review. Camptosar, for first-line therapy in metastatic colorectal cancer, is the leading treatment for colorectal cancer in the U.S. The product was in-licensed from Yakult Honsha Co. for marketing in the U.S. In addition to Camptosar, the Company markets several other oncology drugs. Pharmorubicin is one of the most commonly used treatments for breast cancer in Europe, and is marketed under the tradename Ellence in the U.S. for the adjuvant treatment of patients with breast cancer. Aromasin, an oral hormonal drug that blocks the production of estrogen, was launched during 2000 in the U.S. and in key markets in Europe and Latin America as a second-line breast cancer treatment. The Company's subsidiary, Sugen, Inc., has developed proprietary technology platforms to identify small molecule drugs which target specific cellular signal transduction pathways and may have oncological or other therapeutic uses. -6- 7 Detrol/Detrusitol is the world's leading branded therapy for overactive bladder. Detrol LA, a once-daily therapy for the treatment of overactive bladder, was launched in the U.S. in January 2001, and received initial European Union approval in Sweden, where it will be marketed as Detrusitol SR. Zyvox, launched in the U.S. in 2000 and in the U.K. in early 2001, with launch throughout Europe later in 2001, is indicated for the treatment of patients with severe gram-positive infections. Zyvox is the lead compound in the oxazolidinone class of antibiotics, the first of a completely new class of antibiotics to be introduced in more than 30 years. Zyvox augments the Company's existing line of antibiotics, including the Cleocin/Dalacin line. OTHER PHARMACEUTICALS The Company operates several business units that do not constitute reportable business segments for SEC purposes. These businesses include consumer health care, animal health, diagnostics, pharmaceutical commercial services, biotechnology investments and plasma products. The consumer health care business consists of self-medication products that are available to consumers over-the-counter without a prescription, including the Nicorette line of products to treat tobacco dependency, and Rogaine (Regaine outside the U.S.) products for the treatment of hereditary hair loss. The animal health business produces and markets both pharmaceuticals and feed additives for livestock and pets, including Naxcel/Excenel, an antibiotic used to treat a variety of infections, and Lincomix/Linco-Spectin, an antibiotic used to treat swine and poultry infections. The diagnostics business is the world leader in the sale of in vitro allergy diagnostic equipment. The pharmaceutical commercial services business develops, manufactures and markets certain bulk pharmaceutical chemicals and selected specialty chemicals to third parties. The -7- 8 Company's biotechnology investments include the Company's 45% ownership of Amersham Pharmacia Biotech, Ltd., one of the world's leading suppliers of biotechnology equipment and supplies for life science research, and the Company's 41% ownership of Biacore International AB, which develops, manufactures and markets advanced scientific instruments employing affinity-based biosensor technology. The Sweden-based plasma products business prepares and markets products derived from blood plasma. The Company is considering the transfer of its plasma products business, together with its metabolic diseases research unit, also located in Sweden, to a new company to be financed by external investors, with the Company maintaining a minority interest. In 2000, the Company sold its artificial sweetener business (bulk aspartame and tabletop sweeteners) and its biogums business. AGRICULTURAL PRODUCTIVITY The Agricultural Productivity segment consists of crop protection products, animal agriculture and the environmental technologies business lines. The Company's leading crop protection product is the Roundup brand family of herbicides. The U.S. patent on glyphosate, the active ingredient in Roundup herbicide, expired in September of 2000. To meet increased competition from generic and other branded glyphosate products, the Company selectively reduced prices for glyphosate products to encourage new uses and increase sales volumes. Sales of glyphosate products will be affected by the extent conservation tillage is used and the number of acres planted with products with Roundup Ready traits. The Company also markets selective chemistry products, including HarnessXtra, a corn herbicide, and a new wheat herbicide. Animal agriculture includes the Posilac brand of bovine somatotropin, which is an injectable protein-based productivity enhancer for lactating dairy cows, and DEKALB Swine, which supplies premium genetics to the pork industry. The environmental technologies business designs and builds chemical plants and plant process systems, including sulfuric acid plants, cogeneration facilities and air pollution control systems. -8- 9 SEEDS AND GENOMICS The Seeds and Genomics segment is comprised of the global seeds and related trait businesses and genetic technology platforms. The Company breeds, grows and sells both conventional seeds, particularly corn, soybeans, wheat, canola and sunflowers, and seeds with biotechnology traits, including Roundup Ready soybeans, cotton, canola and corn; YieldGard insect-protected corn; and Bollgard and Roundup Ready traits in cotton. RESEARCH AND DEVELOPMENT The Company's pharmaceutical R&D efforts focus on discovering or licensing and developing new innovative pharmaceuticals offering high therapeutic benefits in areas where the Company believes it can establish a leading global position. R&D in the Agricultural Productivity segment focuses on developing proprietary Roundup formulations and more powerful glyphosate-based solutions. R&D in the Seeds and Genomics segment focuses on seed breeding and developing proprietary biotechnology-based traits. The Company's total expenses for research and development in all businesses were: $2.8 billion in 2000; $2.8 billion in 1999; and $2.2 billion in 1998. Expenses for research and development related to Agricultural Productivity and Seeds and Genomics were: $558 million in 2000; $695 million in 1999; and $536 million in 1998. -9- 10 COMPETITION The pharmaceutical industry is highly competitive. The Company's principal pharmaceutical competitors consist of major international corporations with substantial resources. A drug may be subject to competition from alternative therapies during the period of patent protection and thereafter it will be subject to further competition from generic products. The Company's competitive position depends, in part, upon its continuing ability to discover, acquire and develop innovative, cost-effective new products, as well as new indications and product improvements protected by patents and other intellectual property rights. The Company also competes on the basis of price and product differentiation. The global markets for agricultural products are highly competitive. Competition is expected to intensify as the result of continuing industry consolidation, patent expiration for Roundup herbicide in the United States and increased expenditures on the development and commercialization of biotechnology traits. Competitive success in crop protection products is dependent upon price, product performance, the quality of solutions offered to growers, and the quality of service to distributors and growers. There are between five and ten major global competitors in agricultural chemical markets. Significant competition for Roundup herbicide also comes from glyphosate producers in China, that sell to both local and export markets. Within the seeds business there are relatively few global competitors; however, the Company competes with hundreds of local and regional companies. In certain countries the Company also competes with government-owned seed companies, and may also compete with saved seed practices of growers. Product performance (in particular, crop yield), customer service, intellectual property and price are important determinants of market success. In addition, strong distributor and grower relationships have been have been important in the United States and other countries. The Company's traits compete directly with traits developed by other companies as well as with agricultural chemicals. Other agrichemical marketers produce chemical products that compete with Roundup and Roundup Ready systems. Competition for the discovery of new agricultural traits based on biotechnology and/or genomics is likely to come from major global agrichemical companies, and also from academic researchers, biotechnology boutiques and numerous firms that are investigating gene function with principal focus on human applications. The primary factors underlying the competitive success of traits are public acceptance, governmental approvals, performance, timeliness of introduction, value and environmental impact. -10- 11 EMPLOYEES The Company has approximately 59,000 employees worldwide, with approximately 14,700 supporting the agricultural business. The number of employees is continually changing based on realignment of operations and workforce needs. The Company believes that it has good relations with its employees. Employees at several non-U.S. locations are represented either by freely elected unions or by legally mandated workers' councils or similar organizations. CUSTOMERS AND DISTRIBUTION OF PRODUCTS The Company's pharmaceutical products are sold worldwide to distributors and wholesalers, health care providers, veterinarians, drug stores, food stores and mass merchandisors. The Company markets its products through its own marketing companies, through co-marketing or co-promotion partners, and through local distributors and licensees. The Company's agricultural business sells to a variety of customers in the agricultural industry, including individual growers, seed companies, distributors, independent retailers and agricultural cooperatives, we well as other major agricultural chemical producers. The Company has a worldwide distribution and sales and marketing organization that consolidates the sales forces of its crop protection and seeds and traits operations. -11- 12 SEASONALITY AND WORKING CAPITAL Sales of the Company's agricultural products fluctuate based on the local planting and growing seasons. North America, the largest market, records substantially all of its sales in the first half of the year, while South America, a much smaller market, records substantially all of its sales in the second half of the year. Consistent with industry practice, the Company regularly extends credit to customers to enable them to acquire agricultural chemicals and seeds at the beginning of the growing season, which requires the Company to borrow funds to finance accounts receivable and inventories. Short-term debt is the primary source to fund the Company's agricultural working capital. Sales of pharmaceutical products are not materially affected by seasonality or working capital issues. RAW MATERIALS AND ENERGY RESOURCES The Company is a significant purchaser of a variety of basic and intermediate raw materials. The Company is not dependent on any one supplier for its raw materials or energy requirements, but certain important raw materials are obtained from a few major suppliers. However, additional capacity exists for all major raw materials either from different suppliers or from alternate manufacturing locations. The Company purchases all of its North American supply of elemental phosphorus from a joint venture owned 99% by new Monsanto. Alternate sources of elemental phosphorus are available from other suppliers based in the United States, the Netherlands and China. -12- 13 PATENTS AND TRADEMARKS All product names, indicated in italics throughout this document, are trademarks owned by, or licensed to, the Company, except that Ambien is a registered trademark of Sanofi-Synthelabo, Inc.; and Camptosar is a registered trademark of Yakult Honsha Co., Ltd. VIOXX is a registered trademark of Merck & Co. -13- 14 The Company believes that the patents, trademarks and other intellectual property owned or licensed by the Company, taken as a whole, are material to its business. The Company's major pharmaceutical products are protected by patents with substantial remaining life. Celebrex is protected by a U.S. patent until 2013; Xalatan until 2011; Camptosar until 2007; Detrol until 2012; and Zyvox until 2014. The U.S. patent on Ambien expires in 2006, but the Company will lose marketing rights to the product in April 2002. Genotropin is no longer protected by a compound patent, but the Company has patented proprietary delivery devices. The Company's insect resistant seed traits (including YieldGard trait in corn seed and Bollgard trait in cotton seed) are protected by U.S. patents until 2013. The Company's herbicide resistant seed traits (Roundup Ready traits in cotton seed, corn seed, canola seed and soybean seed) are protected by U.S. patents until 2014. The gene transformation technology used for Roundup Ready soybean, corn, canola and cotton products is protected by U.S. patents until 2007. See "Legal Proceedings" below for a description of litigation relating to the patents for the Company's products. INTERNATIONAL OPERATIONS The Company's operations outside the United States are conducted primarily through subsidiaries. International sales in 2000 amounted to 45% of the Company's total worldwide sales. -14- 15 The Company's international operations are subject to a number of risks and uncertainties, such as: local economic and business conditions; fluctuations in currency values and foreign exchange rates; exchange control regulations; import and trade restrictions, including embargoes; governmental instability; legislative and regulatory controls on pricing of products; and other potentially detrimental domestic and foreign governmental practices or policies affecting U.S. companies doing business abroad. See "Note 20: Segment Information" on page 71 appearing in Exhibit 13 of this Report and incorporated herein by reference. ENVIRONMENTAL MATTERS The Company is subject to extensive environmental legislation and regulation, requiring substantial environmental compliance costs, including capital expenditures related to future production. Projects related to the prevention, mitigation and elimination of environmental effects are implemented worldwide. Since several capital projects are undertaken for both environmental control and other business purposes, such as production process improvements, it is difficult to estimate the specific capital expenditures for environmental control. However, estimated capital expenditures for environmental protection in 2000 were $60 million and are estimated to be approximately $90 million in 2001. Operating expenses for compliance with environmental protection laws and regulations in 2000 are estimated to have been in excess of $110 million. Management estimates that such operating expenses will be in excess of $130 million in each of years 2001 and 2002. With regard to the Company's discontinued industrial chemical facility in North Haven, Connecticut, the Company may soon be required to submit a corrective measures study report to the U.S. Environmental Protection Agency ("EPA"). As the corrective action progresses, it may become -15- 16 appropriate to reevaluate the Company's 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 at this time. Accordingly, it is not possible to determine what, if any, additional exposure exists at this time. Under the terms of the Separation Agreement with new Monsanto, new Monsanto is responsible for remediation liabilities at existing and former manufacturing locations and certain off-site disposal and formulation facilities used by the agricultural business. -16- 17 ITEM 2. PROPERTIES The Company's pharmaceutical businesses operate through a number of offices, research laboratories and production facilities throughout the world with principal locations in Kalamazoo, Michigan; Skokie, Illinois; St. Louis, Missouri; South San Francisco, California; Stockholm and Helsingborg, Sweden; Milan, Italy; Puurs, Belgium; Japan and Puerto Rico. The agricultural businesses operate through a number of offices, research laboratories and production facilities throughout the world with principal locations in St. Louis County, Missouri; Alvin, Texas, Antwerp, Belgium; Augusta, Georgia; Fayetteville, North Carolina; Luling, Louisiana; Muscatine, Iowa; Rock Springs, Wyoming; Sao dos Campos, Brazil; Soda Springs, Idaho; Texas City, Texas and Zarate, Argentina. Another significant chemicals manufacturing facility is under construction in Camacari, Brazil. The Company's pharmaceutical headquarters are located in Peapack, New Jersey and the headquarters for the agricultural business are located in St. Louis, Missouri. The Company believes its properties to be adequately maintained and suitable for their intended use. The facilities generally have sufficient capacity for existing needs and expected near-term growth and expansion projects are undertaken as necessary to meet future needs. ITEM 3. LEGAL PROCEEDINGS 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 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 has been tentatively scheduled for September 2002. -17- 18 On May 19, 1995, Mycogen Plant Sciences, Inc. filed suit against former Monsanto in the U.S. District Court in California alleging infringement of its patent involving synthetic Bt genes, and seeking unspecified damages and injunctive relief. On November 10, 1999, the court granted summary judgment in the Company's favor and dismissed all of Mycogen's patent claims, finding Mycogen's patent invalid on the basis of the Company's prior invention, as determined in the Delaware Bt action described below. Previously, the court had also held that products containing Bt genes made prior to January 1995 did not infringe Mycogen's patent. Mycogen has filed an appeal with the Court of Appeals for the Federal Circuit seeking to overturn the dismissal. 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 former Monsanto 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 approximately $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 accepted on October 25, 2000, and their appeal of the reversal of judgment is continuing. The Company believes that its position is correct and that the decision of the appellate court should be upheld, and will continue to vigorously defend its position. In the event that Mycogen were to prevail in the California Supreme -18- 19 Court, further proceedings would be required to consider issues not yet addressed in the lower court, including the speculative nature of the damages for future lost profits. Former Monsanto is also a party in interference proceedings against Mycogen in the U.S. Patent and Trademark Office to determine the first party to invent certain inventions related to Bt technology, and has requested a stay of the interference proceeding pending determination of Mycogen's appeal. Under U.S. law, patents issue to the first to invent, not the first to file for a patent on, a subject invention. If two or more parties seek patent protection on the same invention, as is the case with the new Monsanto's Bt technology, the U.S. Patent and Trademark Office must hold interference proceedings to identify the party who first invented the particular invention in dispute. This interference proceeding is directly impacted by the outcome of the Delaware Bt Action described below. On October 22, 1996, Mycogen Corporation filed suit against former Monsanto, DEKALB Genetics (subsequently acquired by former Monsanto) and Delta and Pine Land in the U.S. District Court in Delaware alleging infringement of two Bt-related patents (the "Delaware Bt Action"). The jury trial concluded on February 3, 1998, with a verdict in favor of all defendants. Mycogen's patents were invalidated on the basis that it was a prior inventor. On September 8, 1999, the district court issued a revised order that upheld the jury verdict and ruled that Mycogen's patents were invalid due to their prior invention and lack of enablement. On March 12, 2001, the Court of Appeals for the Federal Circuit affirmed the verdict that had invalidated Mycogen's patents on the basis of prior invention. On November 20, 1997, Aventis CropScience S.A. (formerly Rhone Poulenc Agrochimie S.A. ("Aventis") filed suit in the U.S. District Court in North Carolina against the former Monsanto and DEKALB Genetics alleging that because DEKALB Genetics failed to disclose a -19- 20 research report involving the testing of plants to determine glyphosate tolerance, Aventis was induced by fraud to enter into a 1994 license agreement relating to technology incorporated into a specific type of herbicide-tolerant corn. Aventis also alleged that DEKALB Genetics did not have a right to license, make or sell products using Aventis' technology for glyphosate resistance under the terms of the 1994 agreement. On April 5, 1999, the trial court rejected Aventis' claim that the contract language did not convey a license. Jury trial of the fraud claims ended April 22, 1999, with a verdict for Aventis and against DEKALB Genetics. The jury awarded Aventis $15 million in actual damages and $50 million in punitive damages. The trial was bifurcated to allow claims for patent infringement and misappropriation of trade secrets to be tried before a different jury. Jury trial on these claims ended June 3, 1999, with a verdict for Aventis and against DEKALB Genetics. The district court had dismissed the former Monsanto from both phases of the trial prior to verdict on the legal basis that it was a bona fide licensee of the corn technology. On or about February 8, 2000, the district court affirmed both jury verdicts against DEKALB Genetics, and enjoined DEKALB Genetics from future sales of the specific type of herbicide-tolerant corn involved in the agreement (other than materials held in DEKALB's inventory on June 2, 1999). Judgment was entered March 10, 2000. DEKALB has filed an appeal of the jury verdict to the Court of Appeals for the Federal Circuit. On March 8, 2000, Aventis filed with the Court of Appeals for the Federal Circuit its notice to appeal certain district court rulings that denied claims for further equitable relief against the Company, including the court's ruling that former Monsanto was a bona fide licensee. If the Company loses, new Monsanto could be precluded from marketing its current product. However, new Monsanto and DEKALB Genetics expect to replace this specific type of herbicide-tolerant corn with new technology not associated with Aventis' claims in this litigation. The new technology has been approved in the United States and Canada, and if approval to import into Japan is received as anticipated, new Monsanto expects to make this new technology available in the United States for the Spring, 2001 planting season. Pending the conclusion of this litigation, new Monsanto, its licensees -20- 21 and DEKALB Genetics (to the extent permitted under the district court's order and an agreement with Aventis) continue to sell the specific type of herbicide-tolerant corn pursuant to a royalty-bearing agreement with Aventis. The district court held an advisory jury trial which ended with a verdict in favor of Aventis on September 1, 2000, regarding claims that certain employees of Aventis should be named as "co-inventor" on two patents issued to DEKALB Genetics. No monetary relief was sought. DEKALB Genetics continues to deny that Aventis employees should be named as "co-inventor" on the two patents since those individuals made no inventive contribution. The parties have submitted proposed findings of fact and conclusions of law on the verdict. An arbitration was filed on May 27, 1999, in the name of Calgene LLC, new Monsanto's wholly-owned subsidiary, claiming that as a former partner of Aventis, Calgene LLC is entitled to at least half of any damages, royalties or other amounts recovered by Aventis from the Company or DEKALB pursuant to these proceedings. On December 14, 1999, a class action lawsuit claiming unspecified damages was filed against former Monsanto in the U.S. District Court for the District of Columbia by six farmers purporting to represent a class composed of purchasers of genetically modified soybean and corn seed and growers of non-genetically modified soybean and corn seed. The complaint alleges that the Company violated various antitrust laws and unspecified international laws through the Company's patent license agreements, breached an implied warranty of merchantability and violated unspecified consumer fraud and deceptive business practices laws in connection with the sale of genetically modified seed. The plaintiffs seek declaratory and injunctive relief in addition to antitrust, treble, compensatory and punitive damages and attorneys' fees. On February 14, 2000, a class action lawsuit claiming unspecified damages was filed against former Monsanto in the U.S. District Court for the Southern District of Illinois by five -21- 22 farmers purporting to represent various classes of farmers. The complaint alleges claims virtually identical to those in the preceding case. In December 2000, on former Monsanto's motion, both of these lawsuits were ordered transferred to the United States District Court for the Eastern District of Missouri. Plaintiffs have requested reconsideration of this ruling. On March 27, 2000, DuPont filed a suit against former Monsanto in the U.S. District Court for the District of South Carolina, seeking unspecified damages and injunctive relief for alleged violations of federal antitrust acts and state law in connection with glyphosate-related business matters. The complaint asserts that a DuPont herbicide product has not been successfully introduced into the marketplace due to alleged anti-competitive practices that have enhanced new Monsanto sales of Roundup herbicide and Roundup Ready cotton. DuPont has sought leave to amend its complaint to add a cause of action based upon an alleged violation of the Lanham Act relating to some of former Monsanto's advertising campaigns. Former Monsanto entered into a glyphosate supply agreement with DuPont in December 1999. A jury trial is scheduled to commence in October 2001. The Company denies that it has engaged in any anti-competitive activities. On March 30, 2000, DuPont filed a suit against former Monsanto and Asgrow in the U.S. District Court for Delaware, seeking damages and equitable relief including the divestiture of Asgrow by former Monsanto for alleged violations of federal antitrust acts and state law in connection with glyphosate tolerant soybean business matters. The complaint asserts that Asgrow breached certain contract obligations and that former Monsanto tortiously interfered with those obligations, and as a consequence DuPont is asserting previously resolved claims that Asgrow misappropriated intellectual property of DuPont. The complaint also alleges that Asgrow's actions -22- 23 improperly accelerated former Monsanto's development of glyphosate tolerant soybeans. DuPont has sought leave to amend its complaint to add a cause of action based upon an alleged violation of the Lanham Act relating to some of former Monsanto's advertising campaigns. Former Monsanto has filed to dismiss the lawsuit based on statute of limitations and estoppel. The Company denies that it has engaged in any anti-competitive activities. On December 30, 1999, following former Monsanto's announcement that it had withdrawn its filing for U.S. antitrust clearance of the proposed merger with Delta and Pine Land in light of the Department of Justice's unwillingness to approve the transaction on commercially reasonable terms, two alleged holders of Delta and Pine Land common stock filed a derivative and class action lawsuit against former Monsanto, Delta and Pine Land and members of the Delta and Pine Land board of directors in the Delaware Court of Chancery. Plaintiffs allege that Delta and Pine Land has been harmed by the termination of the effort to complete the merger and that the individual defendants have a continuing duty to seek a value-maximizing transaction for the stockholders, and requested unspecified compensatory damages, costs, disbursements and fees. On July 28, 2000, this proceeding was dismissed. On January 18, 2000, Delta and Pine Land reinstituted a suit against former Monsanto in the Circuit Court of the First Judicial District of Bolivar County, Mississippi, seeking unspecified compensatory damages for lost stock market value of not less than $1 billion, as well as punitive damages, resulting from former Monsanto's alleged failure to exercise reasonable efforts to complete the merger. The parties have agreed that following the dismissal of certain shareholder litigation initiated against Delta and Pine Land and former Monsanto in Delaware, all remaining litigation between the companies will proceed in Mississippi. On December 19, 2000, Delta and Pine Land moved for leave to file an amended complaint, to add an allegation that former Monsanto -23- 24 tortiously interfered with Delta and Pine Land's prospective business relations by feigning interest in the merger so as to keep Delta and Pine Land from pursuing transactions with other entities. Delta and Pine Land also filed a new lawsuit against former Monsanto in Bolivar County, Mississippi, on that same date, asserting only the tortious interference claim. Since the 1984 termination of the class action litigation against various manufacturers, including former Monsanto, of the herbicide Agent Orange used in the Vietnam war, former Monsanto has successfully defended against various lawsuits associated with the herbicide's use. A few matters remain pending, including three separate actions, now consolidated, filed against former Monsanto and The Dow Chemical Company in Seoul, Korea in October 1999. Approximately 13,760 Korean veterans of the Vietnam war allege they were exposed to, and suffered injuries from, herbicides manufactured by the defendants. The complaints fail to assert any specific causes of action, but seek damages of 300 million won (approximately $250,000) per plaintiff. The Company is also subject to ancillary actions in Korea, including a request for provisional relief pending resolution of the main lawsuit. On December 2, 1999, plaintiffs filed a class action lawsuit against former Monsanto and five other herbicide manufacturers in the U.S. District Court for the Eastern District of Pennsylvania. The plaintiffs purport to represent a class of over 9,000 Korean and 1,000 U.S. service persons allegedly exposed to the herbicide Agent Orange and other herbicides sprayed from 1967 to 1970 in or near the demilitarized zone separating North Korea from South Korea. The complaint does not assert any specific causes of action or demand a specified amount in damages. The Judicial Panel on Multidistrict Litigation has granted transfer of the case to the U.S. District Court for the Eastern District of New York for coordinated pretrial proceedings as part of In re "Agent Orange" Product Liability Litigation, which is the multidistrict litigation proceeding established in 1977 to coordinate Agent Orange-related litigation in the United States. -24- 25 On March 7, 2000, the U.S. Department of Justice filed suit on behalf of the EPA in U.S. District Court for the District of Wyoming against former Monsanto, Solutia (the former Monsanto's chemical business spun-off in 1997) and P4 Production, seeking civil penalties for alleged violations of Wyoming's environmental laws and regulations, and of an air permit issued in 1994 by the Wyoming Department of Environmental Quality. The permit had been issued for a coal coking facility in Rock Springs, Wyoming that is currently owned by P4 Production. The United States sought civil penalties of up to $25,000 per day (or $27,500 per day for violations occurring after January 30, 1997) for the air violations, and immediate compliance with the air permit. In light of the government's lawsuit, the companies have voluntarily dismissed a declaratory judgement action that they had previously brought, and have raised the same issues as an affirmative defense to this action, arguing that it is precluded by the doctrine of res judicata because the companies have already paid a $200,000 fine covering the same Clean Air Act violations pursuant to a consent decree entered in the First Judicial District Court in Laramie County, Wyoming on June 25, 1999. On April 12, 2000, the Department of Justice revised its settlement demand, from $2.5 million to $1.9 million plus injunctive relief to ensure P4 Production's compliance with the Clean Air Act. On April 21, 2000, the companies filed a motion for dismissal or summary judgement on the grounds of claim preclusion, including the doctrines of res judicata and release. Pursuant to the Separation Agreement, new Monsanto assumed responsibility for legal proceedings primarily related to the agricultural business. As a result, although the Company may remain the named defendant or plaintiff in these cases, new Monsanto will manage the litigation. In addition, in the proceedings where the Company is the defendant, new Monsanto will indemnify the Company for costs, expenses and any judgments or settlements; and in the proceedings where the Company is the plaintiff, new Monsanto will pay the fees and costs of, and receive any benefits from, this litigation. -25- 26 The Company is involved in other legal proceedings arising in the ordinary course of its business. While the results of litigation cannot be predicted with certainty, the Company does not believe that the resolution of these proceedings, either individually or taken as a whole, will have a material adverse effect on its financial position, profitability or liquidity. Please see the section captioned "environmental matters" for information concerning the Company's discontinued industrial chemical facility in North Haven, Connecticut. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the quarter ended December 31, 2000. EXECUTIVE OFFICERS OF THE REGISTRANT Information regarding executive officers is contained in Item 10 of Part III of this report (General Instruction G) and is incorporated herein by reference. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Common Stock is listed and traded on the New York Stock Exchange under the symbol PHA. As of March 5, 2001, there were 76,355 holders of record of the Common Stock. Information regarding dividends and related shareholder matters appearing in Note 16 "Shareholders' Equity" on page 67 and market prices for the Company's Common Stock appearing under the caption "Quarterly Data" on page 74 of the 2000 Annual Report are incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA Incorporated herein by reference to the Registrant's Annual Report to Shareholders filed as Exhibit 13 hereto. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Incorporated herein by reference to the Registrant's Annual Report to Shareholders filed as Exhibit 13 hereto. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS. Incorporated herein by reference to the Registrant's Annual Report to Shareholders filed as Exhibit 13 hereto. -26- 27 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Incorporated herein by reference to the Registrant's Annual Report to Shareholders filed as Exhibit 13 hereto. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Background information for the Board of Directors, including Fred Hassan, the Company's Chairman and Chief Executive Officer, is incorporated herein by reference from the Company's 2001 Proxy Statement on pages 3 through 7. In addition to Fred Hassan, the following are the Company's executive officers: Goran A. Ando, M.D., age 51, Executive Vice President and President, Research and Development since March 2000; and Executive Vice President and President, Research & Development of P&U from November 1995 to March 2000. Hakan Astrom, age 53, Senior Vice President, Strategy and Corporate Affairs since March 2000; and Senior Vice President, Corporate Strategy and Investor Relations of P&U from November 1995 to March 2000. He is also a director of new Monsanto. Richard T. Collier, age 47, Senior Vice President and General Counsel since March 2000; Senior Vice President and General Counsel of P&U from December 1997 to March 2000; and Senior Vice President and General Counsel of Rhone-Poulenc Rorer from December 1994 to December 1997. Christopher J. Coughlin, age 48, Executive Vice President and Chief Financial Officer since March 2000; Executive Vice President and Chief Financial Officer of P&U from March 1998 to March 2000; President, Nabisco International from 1997 to March 1998; and Executive Vice President and Chief Financial Officer of Nabisco from 1996 to 1997. He is also a director of new Monsanto. Carrie Smith Cox, age 43, Executive Vice President and President, Global Prescription Business since February 2001; Executive Vice President and President, Global Business Management from March 2000 to February 2001; Senior Vice President and Head, Global Business Management of P&U from 1997 to March 2000; Vice President, Women's Health Care at Wyeth-Ayerst Laboratories, a division of American Home Products, since before 1996. Stephen P. MacMillan, age 37, Sector Vice President, Global Specialty Operations since March 2000; Sector Vice President, Global Specialty Operations of P&U from December 1999 to March 2000; President of Johnson & Johnson-Merck Consumer Pharmaceuticals from December 1998 to December 1999, Vice President of Marketing and Professional Sales at McNeil Consumer Products, a division of Johnson & Johnson, from March 1997 to December 1998; and other positions at Johnson & Johnson before that. -27- 28 Philip Needleman, age 62, Senior Executive Vice President, Chief Scientific Officer, and Chairman, Research & Development since March 2000; and Senior Vice President, Research and Development and Chief Scientist of former Monsanto and Co-President of G. D. Searle & Co. from 1996 to March 2000. Timothy G. Rothwell, age 50, Executive Vice President, and President, Global Prescription Business since February 2001; Executive Vice President, and President, Global Pharmaceutical Operations from March 2000 to February 2001; Executive Vice President and President, Global Pharmaceutical Operations of P&U from 1998 to March 2000; President of Rhone-Poulenc Rorer; and Executive Vice President and President, Pharmaceutical Operations of Rhone-Poulenc Rorer from 1995 to 1997. Hendrik A. Verfaillie, age 55, Executive Vice President and Chief Executive Officer, Monsanto Agricultural Operations of Pharmacia since March 2000 and President and Chief Executive Officer of new Monsanto since October 2000; President of former Monsanto from 1997 to 1999; and Vice President, former Monsanto from 1995 to 1997. He is also a director of new Monsanto. ITEM 11. EXECUTIVE COMPENSATION The following information from the Company's 2001 Proxy Statement is incorporated herein by reference: "Directors' Fees and Other Arrangements" on page 12; "Executive Compensation" on pages 13 through 25; "Approval of the 2001 Long-Term Incentive Plan (Proxy Item 2)" on pages 26 through 30; and "Approval of The Operations Committee Incentive Plan (Proxy Item 3)" on pages 31 through 33. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information appearing under "Stock Ownership of Management and Certain Beneficial Owners" on pages 8 and 9 of the Company's 2001 Proxy Statement are incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The following information from the Company's 2001 Proxy Statement is incorporated herein by reference: Transactions and Relationships with Directors" on page 12; and "Other Information Regarding Management -- Indebtedness" on page 26. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Documents filed as part of this Report 1. FINANCIAL STATEMENTS -28- 29 The following are included in the 2000 Annual Report to Shareholders (Exhibit 13) and are incorporated by reference into this Form 10-K pursuant to Item 8. Report of Independent Accountants -- PricewaterhouseCoopers LLP. Consolidated Statements of Earnings, Years ended December 31, 2000, 1999 and 1998. Consolidated Balance Sheets, December 31, 2000 and 1999. Consolidated Statements of Shareholders' Equity, Years ended December 31, 2000, 1999 and 1998. Consolidated Statements of Cash Flows, Years ended December 31, 2000, 1999 and 1998. Notes to Consolidated Financial Statements. The Reports of Independent Auditors, Deloitte & Touche LLP, regarding the audits of former Monsanto Company as of and for the two-year period ended December 31, 1999 and of new Monsanto Company as of and for the year ended December 31, 2000. Refer to Exhibit 99. (a)2. FINANCIAL STATEMENT SCHEDULES NONE REQUIRED (1) Schedules are omitted because they are either not required, are not applicable or because equivalent information has been included in the financial statements, the notes thereto or elsewhere herein. (2) Financial statements of 50 percent-or-less-owned affiliated persons are omitted because such persons, in the aggregate, do not constitute a significant subsidiary. (3). Exhibits -- See the Exhibit Index beginning on page 33 of this Report. For a listing of all management contracts and compensatory plans or arrangements to be filed as exhibits to this Form 10-K, see the Exhibits listed under Exhibit No. 10, items 1 through 18 on pages 33 through 36 of the Exhibit Index. The following Exhibits listed in the Exhibit Index are filed with this Report: (15) Employment Agreement with Goran Ando dated September 7, 2000 (16) Executive Life Insurance Plan of the Registrant (17) Amendment No. 1 dated January 25, 2001 to Agreement with Robert B. Shapiro dated December 19, 1999 (18) 2001 Annual Incentive Plan Summary, as approved by the Monsanto Company Board of Directors on December 7, 2000 -29- 30 (11) Omitted -- Inapplicable; see "Note 8 of Notes to Financial Statements" (13) 2000 Annual Report to Shareholders (21) Subsidiaries of the Registrant (23) (1) Consent of Independent Accountants -- PricewaterhouseCoopers LLP (2) Consent of Independent Accountants -- Deloitte & Touche LLP (24) Certified copy of Board resolution authorizing Form 10-K filing (99) Reports of Independent Accountants -- Deloitte & Touche LLP (b) Reports on Form 8-K during the quarter ended December 31, 2000: Report on Form 8-K dated November 1, 2000 was filed pursuant to Item 5 (Other Events) and Item 7 (Financial Statements and Exhibits). -30- 31 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. PHARMACIA CORPORATION By: /s/ Fred Hassan ---------------------------- Fred Hassan Chairman and Chief Executive Officer and Director Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed by the following persons on behalf of the Registrant in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- /s/ Fred Hassan Chairman and Chief Executive Officer February 21, 2001 - ---------------------------------- and Director Fred Hassan /s/ Christopher J. Coughlin Executive Vice President February 21, 2001 - ---------------------------------- (Chief Financial Officer) Christopher J. Coughlin /s/ Robert G. Thompson Senior Vice President February 21, 2001 - ---------------------------------- (Chief Accounting Officer) Robert G. Thompson /s/ Frank C. Carlucci Director February 21, 2001 - ---------------------------------- Frank C. Carlucci /s/ M. Kathryn Eickhoff Director February 21, 2001 - ---------------------------------- M. Kathryn Eickhoff /s/ Michael Kantor Director February 21, 2001 - ---------------------------------- Michael Kantor February 21, 2001 /s/ Gwendolyn S. King Director - ---------------------------------- Gwendolyn S. King /s/ Philip Leder Director February 21, 2001 - ---------------------------------- Philip Leder - ---------------------------------- Director Berthold Lindqvist /s/ Olof Lund Director February 21, 2001 - ---------------------------------- Olof Lund Director - ---------------------------------- C. Steven McMillan February 21, 2001 /s/ William U. Parfet Director - ---------------------------------- William U. Parfet February 21, 2001 /s/ Jacobus F. M. Peters Director - ---------------------------------- Jacobus F. M. Peters
-31- 32
Signature Title Date --------- ----- ---- /s/ Ulla B. Reinius Director February 21, 2001 - ---------------------------------- Ulla B. Reinius Director - ---------------------------------- John E. Robson Director - ---------------------------------- William D. Ruckelshaus /s/ Bengt Samuelsson Director February 21, 2001 - ---------------------------------- Bengt Samuelsson
-32- 33 EXHIBIT INDEX These Exhibits are numbered in accordance with the Exhibit Table of Item 601 of Regulation S-K.
Exhibit No. Description - ----------- ----------- (2) (1) Agreement and Plan of Merger, dated as of December 19, 1999, as amended by Amendment No. 1 dated as of February 18, 2000, among Monsanto Company, MP Sub, Incorporated and Pharmacia & Upjohn, Inc. (incorporated herein by reference to Exhibit 2.1 of the Registrant's Form S-4 filed on February 22, 2000, File No. 333-30824) (2) Stock Option Agreement, dated as of December 19, 1999, by and between Monsanto Company, as Issuer, and Pharmacia & Upjohn, Inc., as Grantee (incorporated herein by reference to Exhibit 2.2 of the Registrant's Form S-4 filed on February 22, 2000, File No. 333-30824) (3) Stock Option Agreement, dated as of December 19, 1999, by and between Pharmacia & Upjohn, Inc. and Monsanto Company, as Grantee (incorporated herein by reference to Exhibit 2.3 of the Registrant's Form S-4 filed on February 22, 2000, File No. 333-30824) (4) Separation Agreement by and between Pharmacia Corporation and Monsanto Company dated as of September 1, 2000 (incorporated herein by reference to Exhibit 2.1 of Monsanto Company's Form S-1 filed on September 22, 2000, File No. 333-36956). (3) (1) Restated Certificate of Incorporation of the Company as of October 28, 1997 (incorporated herein by reference to Exhibit 3(i) of the Registrant's Form 10-Q for the quarter ended September 30, 1997) (2) Certificate of Amendment to Restated Certificate of Incorporation of the Registrant, effective March 31, 2000 (incorporated herein by reference to Exhibit 4.2 of the Registrant's Form S-8 filed on April 5, 2000) (3) By-Laws of the Registrant, as amended and restated effective March 31, 2000 (incorporated herein by reference to Exhibit 3.2 of the Registrant's Form 10-Q for the quarter ended March 31, 2000) (4) (1) Form of Rights Agreement, amended and restated as of February 20, 2001, between the Company and Mellon Investor Services LLC (incorporated herein by reference to Exhibit 4 of the Registrant's Form 8-A/A filed on March 21, 2001) (2) Master Unit Agreement, dated as of November 30, 1998, by and between the Company and The First National Bank of Chicago, as Unit Agent (incorporated herein by reference to Exhibit 4.2 of the Registrant's Form 8-K filed on December 14, 1998) (3) Call Option Agreement, dated as of November 30, 1998, by and between
-33- 34
Exhibit No. Description - ----------- ----------- Goldman, Sachs & Co., as Call Option Holder, and The First National Bank of Chicago, as Unit Agent and as Attorney- In-Fact (incorporated herein by reference to Exhibit 4.3 of the Registrant's Form 8-K filed on December 14, 1998) (4) Pledge Agreement, dated as of November 30, 1998, by and among the Company, Goldman, Sachs & Co., as Call Option Holder, First Union National Bank, as Collateral Agent and Securities Intermediary, and The First National Bank of Chicago, as Unit Agent and as Attorney-In-Fact (incorporated herein by reference to Exhibit 4.4 of the Registrant's Form 8-K filed on December 14, 1998) (5) Indenture dated as of February 1, 1990, with respect to debt securities issued by the Upjohn Employee Stock Ownership Trust and 9.79% Amortizing Notes, Series A, Due February 1, 2004, issued by the Upjohn Employee Stock Ownership Trust and guaranteed by the Registrant (not filed pursuant to Regulation S-K, Item 601(b)(4)(iii)(A); the Registrant agrees to furnish a copy of these documents to the Securities and Exchange Commission upon request) (6) Indenture dated as of August 1, 1991 between Pharmacia & Upjohn, Inc. and The Bank of New York, as trustee, with respect to Debt Securities issued thereunder from time to time (not filed pursuant to Regulation S-K, Item 601(b)(4)(iii)(A); the Registrant agrees to furnish a copy of these documents to the Securities and Exchange Commission upon request) (10) (1) The Pharmacia & Upjohn, Inc. Long-Term Incentive Plan (as Amended and Restated as of June 1, 2000) (incorporated herein by reference to Exhibit (10)(1) to the Registrant's Form 10-Q for the year ended September 30, 2000) (2) Pharmacia Corporation Management Incentive Plan (as Amended and Restated as of June 1, 2000) (incorporated herein by reference to Exhibit (10)(2) to the Registrant's Form 10-Q for the year ended September 30, 2000) (3) 2000 Operations Committee Incentive Plan (as amended November 2000) (incorporated herein by reference to Exhibit (10)(3) to the Registrant's Form 10-Q for the year ended September 30, 2000) (4) Employment Agreement with Fred Hassan dated November 15, 1999 (incorporated herein by reference to Exhibit (10)(e) to Pharmacia & Upjohn's Form 10-K for the year ended December 31, 1999)
-34- 35
Exhibit No. Description - ----------- ----------- (5) Employment Agreement with Timothy G. Rothwell dated July 31, 2000 (incorporated herein by reference to Exhibit (10)(6) to the Registrant's Form 10-Q for the year ended September 30, 2000) (6) Employment Agreement with Philip Needleman, Ph.D. dated October 29, 2000 (incorporated herein by reference to Exhibit (10)(7) to the Registrant's Form 10-Q for the year ended September 30, 2000) (7) Phantom Share Agreement with Hendrik Verfaillie dated September 1, 2000 (incorporated herein by reference to Exhibit (10)(8) to the Registrant's Form 10-Q for the year ended September 30, 2000) (8) Tax Sharing Agreement by and between Pharmacia Corporation and Monsanto Company dated as of September 1, 2000 (incorporated herein by reference to Exhibit 10.5 of Monsanto Company's Form S-1 filed on September 22, 2000, File No. 333-36956). (9) Employee Benefits and Compensation Allocation Agreement between by and between Pharmacia Corporation and Monsanto Company dated as of September 1, 2000 (incorporated herein by reference to Exhibit 10.6 of Monsanto Company's Form S-1 filed on September 22, 2000, File No. 333-36956). (10) Intellectual Property Transfer Agreement by and between Pharmacia Corporation and Monsanto Company dated as of September 1, 2000 (incorporated herein by reference to Exhibit 10.7 of Monsanto Company's Form S-1 filed on September 22, 2000, File No. 333-36956). (11) Services Agreement by and between Pharmacia Corporation and Monsanto Company dated as of September 1, 2000 (incorporated herein by reference to Exhibit 10.8 of Monsanto Company's Form S-1 filed on September 22, 2000, File No. 333-36956). (12) Corporate Agreement by and between Pharmacia Corporation and Monsanto Company dated as of September 1, 2000 (incorporated herein by reference to Exhibit 10.9 of Monsanto Company's Form S-1 filed on September 22, 2000, File No. 333-36956). (13) Agreement with Robert B. Shapiro dated December 19, 1999 (incorporated herein by reference to Exhibit (10)(1) to the Registrant's Form S-4 filed on February 22, 2000, File No. 333-30824 (14) Annual Incentive Program for certain executive officers (incorporated herein by reference to the description appearing under "Annual Incentive Program" on pages 10 through 11 of the Monsanto Company Notice of Annual Meeting and Proxy Statement dated March 16, 2001) (15) Employment Agreement with Goran Ando dated September 7, 2000 (16) Executive Life Insurance Plan of the Registrant
-35- 36
Exhibit No. Description - ----------- ----------- (17) Amendment No. 1 dated January 25, 2001 to Agreement with Robert B. Shapiro dated December 19, 1999 (18) 2001 Annual Incentive Plan Summary, as approved by the Monsanto Company Board of Directors on December 7, 2000 (11) Omitted -- Inapplicable; see "Note 8 of Notes to Financial Statements" (13) 2000 Annual Report to Shareholders (21) Subsidiaries of the Registrant (23) (1) Consent of Independent Accountants -- PricewaterhouseCoopers LLP (2) Consent of Independent Accountants -- Deloitte & Touche LLP (24) Certified copy of Board resolution authorizing Form 10-K filing (99) Reports of Independent Accountants -- Deloitte & Touche LLP
-36- EX-10.15 2 k59836ex10-15.txt EMPLOYMENT AGREEMENT 1 EXHIBIT (10)(15) EMPLOYMENT AGREEMENT This Agreement is made by and between Pharmacia Corporation, a Delaware Corporation (the "Company"), and Goran Ando, M.D. (the "Executive"). 1. DUTIES AND SCOPE OF EMPLOYMENT. (a) POSITION; DUTIES. During the Employment Term (as defined in paragraph 2), the Company will employ Executive as Executive Vice President and President, Research and Development of the Company or in such other substantially equivalent position requested by the Company's Chief Executive Officer ("CEO") for which the Executive is qualified by education, training, and experience. Initially, Executive will also have responsibility for Global Supply, Information Technology, Licensing, and Business Development. Executive will serve as an Officer of the Company, and will initially report to the Chief Scientific Officer with respect to Research and Development and to the CEO with respect to other designated responsibilities. (b) OBLIGATIONS. During the Employment Term, Executive will devote substantially all of his business efforts and time to the Company. Executive agrees, during the Employment Term, not to actively engage in any other employment, occupation or consulting activity for any direct or indirect remuneration without the prior approval of the CEO; provided, however, that Executive may (i) serve on the board of directors of other companies (subject to the reasonable approval of the CEO) and boards of trade associations or charitable organizations; (ii) engage in charitable activities and community affairs; or (iii) manage Executive's personal investments and affairs, as long as such activities do not materially interfere with Executive's duties and responsibilities with the Company. 2. EMPLOYMENT TERM. The Company hereby agrees to employ Executive and Executive hereby accepts employment, in accordance with the terms and conditions of this Agreement, commencing on June 1, 2000 (the "Employment Commencement Date"). The period of Executive's employment under this Agreement will be referred to as the "Employment Term." Subject to the Company's obligation to provide severance benefits as may be specified in this Agreement, Executive and the Company acknowledge that this employment relationship may be terminated at any time and for any or no cause or reason, at the option of either the Company or Executive. 3. CASH COMPENSATION. During the Employment Term, the Company will pay Executive the following as cash compensation for services to the Company: (a) BASE SALARY. As of the Employment Commencement Date, Executive's annualized base salary will be $733,430 and will be subject to annual review pursuant to the Company's normal review policy for other similarly situated senior executives of the Company. (b) VARIABLE COMPENSATION. Executive will also be eligible to participate in the Company's annual incentive plan ("Incentive Plan") at a level determined by the Compensation Committee of the Board of Directors ("Compensation Committee") to be appropriate based on Executive's position, job performance and Company policy. For the Year 2000, Executive's target under the Incentive Plan will be 70% of Executive's base salary. Payment of incentive compensation, if the performance criteria determined by the Compensation Committee are met, will generally be made in March of the year following the incentive plan year, unless Executive elects to defer payment pursuant to an applicable plan of the Company. 1 2 4. EQUITY COMPENSATION. During the Employment Term, Executive will be eligible to participate in the Company's equity compensation plans, in accordance with the terms of such plans and any applicable grants (except as provided herein), at a level determined by the Compensation Committee to be appropriate based on the Company's equity compensation policy. Executive will receive a grant of 125,000 stock options to purchase shares of the Company's common stock pursuant to the Company's long-term incentive plan. The date of the stock option grant will be June 1, 2000. Executive will receive a grant of 100,000 restricted shares or share units under the Company's Founders Performance Contingent Shares Program, which shall vest according to the terms of the Program based on the Company's total shareholder return ranking as compared to a designated peer group and the Company's targeted five year compounded shareholder return. Except as otherwise provided in the Founders Performance Contingent Shares Program, Executive must be employed by the Company on December 31, 2004 in order for the restricted shares or share units to vest. Notwithstanding the terms of any specific grant, stock options not yet vested or exercisable will nevertheless be fully vested and exercisable immediately upon Executive's death, disability, involuntarily termination of employment by the Company other than for Cause (as defined below), or voluntary termination of employment for Good Reason within six months after learning of the event constituting Good Reason (as defined below), provided, in the case of employment termination, Executive does not enter into Competition (as defined below) with the Company within two years after Executive's employment is terminated. Notwithstanding the foregoing, in no event will this provision cause any stock options to become vested or exercisable prior to the first anniversary of the stock option grant date. 5. EMPLOYEE BENEFITS. During the Employment Term, Executive will, to the extent eligible, be entitled to participate in all employee welfare and retirement benefit plans and programs provided by the Company to its senior executives in accordance with the terms of those plans or programs as they may be modified from time to time. Executive will be entitled to post-retirement welfare benefits as are made available by the Company to its senior executive officers at the time of Executive's retirement, provided that for this purpose Executive's period of employment shall be deemed to be the period necessary to obtain the maximum level of such benefits. In the event that adverse tax consequences may result if medical benefits are provided to Executive directly, the Company will pay Executive the amount necessary to purchase the coverage, adjusted for taxes, on an after-tax basis. 6. FINANCIAL PLANNING ASSISTANCE. During the Employment Term, Executive will be eligible to participate in the Company's Financial Planning Assistance program for senior executives. Executive will be entitled to up to $10,000 for the first year of financial planning assistance, and $7,000 each year thereafter, except that if Executive participated in this program at the time it was provided by Pharmacia & Upjohn, Executive will receive $7,000 for each year of participation. 7. BUSINESS EXPENSES. During the Employment Term, and upon submission of appropriate documentation in accordance with its policies in effect from time to time, the Company will pay or reimburse Executive for all reasonable business expenses that Executive incurs in performing Executive's duties under this Agreement, including, but not limited to, travel, entertainment, professional dues and subscriptions. 8. RELOCATION. Executive acknowledges that the Company may at any time relocate his place of employment to such location as may at that time constitute the Company's principal offices. 2 3 During the Employment Term, Executive will be entitled to relocation benefits pursuant to the Company's relocation benefit program. 9. SUPPLEMENTAL RETIREMENT BENEFIT. During the Employment Term, Executive will be eligible to participate in the Key Executive Pension Plan. 10. RELEASE. (a) In consideration of the agreements and undertakings of the Company set forth herein, and intending to be legally bound hereby, Executive, on behalf of himself, his spouse and his dependents, heirs, executors, administrators and assigns, past and present, and each of them (hereinafter collectively referred to as "Releasors"), agrees to release and forever discharge the Company, together with its Affiliates, and its or their officers, directors, employees, agents, predecessors, partners, successors, assigns, heirs, executors, insurers and administrators (hereinafter "Company Releasees") from any and all rights, claims, actions and causes of action of any nature whatsoever, cognizable at law or equity, which Releasors now have or claim, or might hereafter have or claim, against the Company Releasees up to the date of this Agreement relating to Executive's employment by the Company and its Affiliates, including, without limitation, claims arising under the Age Discrimination in Employment Act, 29 U.S.C.ss.621 et seq.; the Older Workers Benefit Protection Act, 29 U.S.C.ss.621 et seq.; Title VII of the Civil Rights Act of 1964, as amended, 42 U.S.C.ss.2000e et seq.; the Employee Retirement Income Security Act of 1974, 29 U.S.C.ss.1001 et seq.; the Americans With Disabilities Act, 42 U.S.C.ss.12101 et seq.; the Family and Medical Leave Act, 29 U.S.C.ss.2601 et seq.; any anti-discrimination statutes; any claims for breach of express or implied contract; any claims for wrongful discharge or violation of public policy; any claims under any federal, state or local laws of any jurisdiction; and any common law claims now or hereafter recognized; as well as all claims for counsel fees and costs. (b) Nothing herein shall be construed to negate the provisions of this Agreement or Executive's right to enforce the provisions of this Agreement. 11. REVIEW AND CONSIDERATION OF RELEASE. Executive certifies and acknowledges: (a) that he has read the terms of this Agreement, and he understands its terms and effects, including the fact that he has agreed to RELEASE AND FOREVER DISCHARGE Company Releasees from any legal or administrative action arising out of his employment with the Company, and the terms and conditions of that employment relationship, up to the date of this Agreement; (b) that he has signed this Agreement voluntarily and knowingly in exchange for the consideration provided to him and described herein. He acknowledges that he would not otherwise be entitled to the consideration provided and that the consideration provided as a result of signing this Agreement is adequate and satisfactory; (c) that he has been advised through this document that the signing of this Agreement does not waive rights or claims that may arise after the date it is executed; (d) that he has been advised through this writing to consult with an attorney concerning this Agreement prior to signing this Agreement; 3 4 (e) that he has been advised that he has the right to consider this Agreement for a period of 21 days from receipt, and that he has signed on the date indicated below after concluding that this Agreement is satisfactory to him; (f) that neither the Company, nor any of its agents, representatives, employees, or attorneys has made any representations to him concerning the terms or effects of this Agreement other than those contained herein; and (g) that he understands that he has the right to revoke this Agreement within 7 days after its execution by giving written notice to the Company, and that this Agreement will not become effective or enforceable until the revocation period has expired. 12. TERMINATION OF EMPLOYMENT. (a) DEATH OR DISABILITY. Executive's employment will terminate automatically upon Executive's death. The Company may terminate Executive's employment for disability in the event Executive has been unable, due to physical or mental incapacity, to perform Executive's material duties under this Agreement for six consecutive months (or such longer period that may be required by applicable law). In the event Executive's employment terminates as a result of death or disability, then: (i) Subject to subsection 12(e) below, all unvested or unexercisable equity compensation will become fully vested and exercisable, and any stock options may be exercised after Executive's termination of employment in accordance with the terms and conditions of the applicable grant documentation; (ii) Except as otherwise provided herein, Executive will forfeit Executive's right to receive any salary, incentive compensation, equity compensation, or other compensation that has not been fully earned at the time Executive's employment terminates; provided, however, Executive will be entitled to receive any benefits or amounts accrued but not yet paid as of the date of termination; (iii) Executive will receive any other amounts earned, accrued or owing to Executive under the plans and programs of the Company. (b) INVOLUNTARY TERMINATION FOR CAUSE OR VOLUNTARY TERMINATION OTHER THAN FOR GOOD REASON. If Executive is involuntarily terminated by the Company for Cause or Executive voluntarily terminates his employment other than for Good Reason within six months after learning of the event constituting Good Reason, then: (i) All unvested or unexercisable equity compensation will be cancelled upon Executive's termination of employment; (ii) Executive will forfeit Executive's right to receive any salary, incentive compensation, equity compensation, or other compensation that has not been fully earned at the time Executive's employment terminates; provided, however, Executive will be entitled to receive any benefits or amounts accrued but not yet paid as of the date of termination; and (iii) Executive will receive any other amounts earned, accrued or owing to Executive under the plans and programs of the Company. 4 5 (c) INVOLUNTARY TERMINATION OTHER THAN FOR CAUSE OR VOLUNTARY TERMINATION FOR GOOD REASON. If Executive is involuntarily terminated by the Company other than for Cause or Executive voluntarily terminates his employment for Good Reason within six months after learning of the event constituting Good Reason; then, as liquidated damages and in lieu of any other damages or compensation under this Agreement or otherwise, Executive will receive the payments or other benefits described in this paragraph; provided (A) Executive does not enter into Competition (as defined below) with the Company for a period of two years following the termination of Executive's employment, and (B) Executive executes, and does not revoke, a written waiver and release, in a form prescribed by the Company, of all claims against the Company and related parties arising out of the Executive's employment or the termination of that employment: (i) Executive will receive a lump sum severance payment, payable within 60 days after termination of Executive's employment, equal to three years' base salary and annual target incentive compensation (calculated using the amount of Executive's highest annual base salary and highest annual target incentive compensation received by Executive within three years prior to Executive's date of termination); (ii) Executive will have Executive's period of employment service used to calculate retirement extended as if Executive had worked an additional three years, and the compensation used to calculate Executive's retirement benefits will be determined as if Executive had continued to receive for an additional three years salary and incentive compensation equal to the highest annual base salary and highest annual incentive compensation Executive received within three years prior to Executive's date of termination (such amounts to be payable from a non-qualified, supplemental retirement plan); (iii) Subject to subsection 12(e) below, Executive will be entitled to exercise, in accordance with their terms, any remaining stock options that had been granted prior to Executive's termination (all of which will become vested under such circumstances) for the maximum period permitted under the terms of the grant; (iv) Executive will receive a pro-rated portion of his target annual incentive compensation award in or around March of the year following Executive's termination based on the number of months (rounded to the next highest number for a partial month) of the year elapsed prior to Executive's termination; (v) Executive and Executive's dependents will continue to participate (with the same level of coverage) for three years in all medical, dental, hospitalization, accident, disability, life insurance and any other benefit plans of the Company on the same terms as in effect immediately prior to Executive's termination unless changed for senior executives generally; provided, however, that such benefits will be offset to the extent that Executive or Executive's dependents receive benefits from another source (in such event, Executive agrees to provide reasonable notice of the receipt of benefits from another source); and, provided that in the event adverse tax consequences may result if medical benefits are provided to Executive directly, the Company will pay Executive the amount necessary to purchase the coverage, adjusted for taxes, on an after-tax basis. (vi) Executive will be entitled to outplacement services, at the expense of the Company, from a provider selected by Executive, subject to a maximum expense of $25,000; and (vii) Executive will receive any other amounts earned, accrued or owing to Executive under the plans and programs of the Company. 5 6 (d) VOLUNTARY TERMINATION FOR ANY REASON PRIOR TO JUNE 1, 2002. If Executive voluntarily terminates his employment for any reason (other than Good Reason within six months after learning of the event constituting Good Reason); then, as liquidated damages and in lieu of any other damages or compensation under this Agreement or otherwise, Executive will receive the payments or other benefits described in this paragraph; provided (A) Executive does not enter into Competition (as defined below) with the Company for a period of two years following the termination of Executive's employment, and (B) Executive executes, and does not revoke, a written waiver and release, in a form prescribed by the Company, of all claims against the Company and related parties arising out of the Executive's employment or the termination of that employment: (i) within sixty (60) days following the date of Executive's termination, a lump-sum cash amount equal to the sum of Executive's unpaid base salary through the date of termination, plus any unpaid bonus payments which have been earned or become payable; (ii) within sixty (60) days following the date of Executive's termination, a lump-sum cash amount equal to two (2) times the sum of: (A) Executive's annual rate of base salary as of June 1, 2000, plus (B) Executive's target annual incentive bonus for the year 2000, provided, that any such amount shall be offset by the present value (based upon the Applicable Federal Rate as defined in the United States Internal Revenue Code of 1986, as amended) as of the date of Executive's termination of any other amount of severance relating to salary or bonus continuation to which Executive might be entitled upon termination of employment under any other plan, policy, employment agreement or arrangement of the Company or as otherwise required by applicable law, except to the extent, if any, provided in any change-of-control severance plan or agreement adopted by the Company hereafter under which Executive is entitled to benefits; (iii) for a period terminating on the earlier of (A) twenty-four (24) months following the date of Executive's termination, or (B) the commencement date of equivalent benefits from a new employer, the Company shall continue to keep in full force and effect (or otherwise provide) all policies of medical, accident, disability and life insurance with respect to Executive and his dependents with the same level of coverage, upon the same terms and otherwise to the same extent, as such policies shall have been in effect immediately prior to the date of Executive's termination, and the Company and the Executive shall share the costs of such continuation of coverage in the same proportion as such costs were shared immediately prior to the date of termination. (e) Notwithstanding the foregoing, in no event will this paragraph cause any stock options to become vested or exercisable prior to the first anniversary of the stock option grant. 13. CAUSE; GOOD REASON. (a) For purposes of this Agreement, "Cause" means: (i) a material breach by Executive of Executive's duties and responsibilities (other than as a result of incapacity due to physical or mental illness) which is demonstrably willful and deliberate on the part of Executive, which is committed in bad faith or without reasonable belief that such breach is in the best interests of the Company, and which is not remedied within 30 days after receipt of written notice from the Company specifying such breach; or 6 7 (ii) Executive's conviction of a felony which is materially and demonstrably injurious to the Company as determined in the sole discretion of the Board of Directors of the Company ("Board"). (b) For purposes of this Agreement, "Good Reason" means: (i) Executive's rate of annual base salary or the target amount of Executive's annual cash incentive bonus is reduced in a manner that is not applied proportionately to all other senior executive officers of the Company, including the Chief Executive Officer; (ii) the Company fails to retain Executive as an Executive Vice President of the Company; (iii) the Company fails to retain Executive as President, Research and Development or another substantially equivalent position for which the Executive is qualified by education, training and experience; or (iv) a successor to the Company fails to assume this Agreement. 14. DIRECTORSHIPS, OTHER OFFICES. In the event of termination of employment, Executive will immediately, unless otherwise requested by the Company's Board of Directors, resign from all directorships, trusteeships, other offices and employment held at that time with the Company or any of its Affiliates. 15. CONFIDENTIALITY. Executive recognizes and acknowledges that by reason of Executive's employment by and service to the Company, Executive will have access to proprietary or confidential information, technical data, trade secrets or know-how relating to the Company, which may include, but is not limited to, market and product research and plans, markets, products, services, customer lists and customers, advertising, software, developments, inventions, processes, formulas, technology, designs, drawings, engineering, marketing and sales techniques, strategies and programs, distribution methods and systems, sales and profit figures, pricing and discount plans, financial and other business information (hereafter, "Confidential Information"). Executive acknowledges that such Confidential Information is a valuable and unique asset of the Company and covenants that Executive will not, either during employment or after the termination of employment, disclose any such Confidential Information to any person for any reason whatsoever (except as Executive's duties as an employee of the Company may require) without the prior written authorization of the CEO, unless such information is in the public domain through no fault of Executive or except as may be required by law or in a judicial or administrative proceeding, in which case Executive will promptly inform the Company in writing of such required disclosure, but in any event at least two business days prior to the disclosure. All written Confidential Information (including, without limitation, in any computer or other electronic format) which comes into Executive's possession during the course of Executive's employment will remain the property of the Company. Unless expressly authorized in writing by the CEO, Executive will not remove any written Confidential Information from the Company's premises, except in connection with the performance of Executive's duties for the Company and in a manner consistent with the Company's policies regarding Confidential Information. Upon termination of employment, Executive agrees immediately to return to the Company all written Confidential Information in Executive's possession. 7 8 For the purposes of this paragraph, the term "Company" will be deemed to include the Company and its Affiliates. For purposes of this Agreement, "Affiliate" will mean an "affiliate" as defined in Rule 12b-2 of the General Rules and Regulations under the Exchange Act. 16. NON-COMPETE; NON-SOLICIT. (a) The Company hereby agrees to pay Executive the amounts described under this Agreement as being expressly conditioned on Executive's undertakings under this paragraph as well as under paragraph 15 above. In exchange for the consideration provided in the preceding sentence, Executive agrees that during the term of Executive's employment with the Company and for a period of two years after Executive's termination of employment for any reason, Executive will not, except with the prior written consent of the CEO, directly or indirectly, engage in Competition. For purposes of this Agreement, Competition means that Executive commences employment with, or provides substantial consulting services to, any pharmaceutical company (except companies where sales from pharmaceutical products constitute less than 20% of total sales). Notwithstanding anything to the contrary herein, Executive's service solely as a member of the board of directors of a company whose annual sales are less than $100 million shall not be deemed to be Competition for purposes of this Agreement. For purposes of the preceding sentence, if a company is a subsidiary of another company, the sales of both companies shall be taken into account. (b) The foregoing restrictions will not be construed to prohibit Executive's ownership of less than five percent of any class of securities of any corporation which is engaged in any business having a class of securities registered pursuant to the Securities Exchange Act of 1934 (the "Exchange Act"), provided that such ownership represents a passive investment and that neither Executive nor any group of persons including Executive in any way, either directly or indirectly, manage or exercise control of any such corporation, guarantee any of its financial obligations, otherwise take any part in its business, other than exercising Executive's rights as a shareholder, or seek to do any of the foregoing. (c) Executive further covenants and agrees that during Executive's employment by the Company and for the period of two years thereafter, Executive will not, except with the prior written consent of the CEO, directly or indirectly, solicit or hire, or encourage the solicitation or hiring of, any person who was an employee of the Company at any time during the term of this Agreement by any employer other than the Company for any position as an employee, independent contractor, consultant or otherwise. This covenant will not prevent Executive from giving references and will not preclude the solicitation or hiring of any individual after 12 months have elapsed subsequent to the date on which such individual's employment or engagement by the Company has terminated. (d) For the purposes of this paragraph 16, the term "Company" will be deemed to include the Company and its Affiliates. 17. REMEDIES; INJUNCTION. (a) Executive acknowledges and agrees that the restrictions contained in paragraphs 15 and 16 are reasonable and necessary to protect and preserve the legitimate interests, properties, goodwill and business of the Company, that the Company would not have entered into this Agreement in the absence of such restrictions and that irreparable injury will be suffered by the Company should Executive breach any of the provisions of those paragraphs. Executive represents and acknowledges that (i) Executive has been advised by the Company to consult legal counsel with respect to this 8 9 Agreement, and (ii) that Executive has had full opportunity, prior to execution of this Agreement, to review thoroughly this Agreement with counsel. (b) Executive further acknowledges and agrees that a breach of any of the restrictions in paragraphs 15 and 16 cannot be adequately compensated by monetary damages. Executive agrees that the Company will be entitled to a return of the cash consideration set forth in this Agreement as being conditioned on the covenants contained in paragraph 16 and that all remaining stock options will be forfeited if Executive breaches the provisions of that paragraph and that, in any event, the Company will be entitled to preliminary and permanent injunctive relief, without the necessity of proving actual damages, as well as provable damages and an equitable accounting of all earnings, profits and other benefits arising from any violation of paragraphs 15 or 16, which rights will be cumulative and in addition to any other rights or remedies to which the Company may be entitled. In the event that any of the provisions of paragraphs 15 or 16 should ever be adjudicated to exceed the time, geographic, service, or other limitations permitted by applicable law in any jurisdiction, it is the intention of the parties that the provision will be amended to the extent of the maximum time, geographic, service, or other limitations permitted by applicable law, that such amendment will apply only within the jurisdiction of the court that made such adjudication and that the provision otherwise be enforced to the maximum extent permitted by law. (c) Executive irrevocably and unconditionally (i) agrees that any suit, action or other legal proceeding arising out of paragraphs 15 or 16, including without limitation, any action commenced by the Company for preliminary and permanent injunctive relief and other equitable relief, may be brought in the United States District Court for the District of New Jersey, or if such court does not have jurisdiction or will not accept jurisdiction, in any court of general jurisdiction in Somerset County, New Jersey, (ii) consents to the non-exclusive jurisdiction of any such court in any such suit, action or proceeding, and (iii) waives any objection which Executive may have to the laying of venue of any such suit, action or proceeding in any such court. (d) For the purposes of this paragraph 17, the term "Company" will be deemed to include the Company and its Affiliates. 18. INTELLECTUAL PROPERTY. To the fullest extent permitted by applicable law, all intellectual property (including patents, trademarks, and copyrights) which are made, developed or acquired by Executive in the course of Executive's employment with the Company will be and remain the absolute property of the Company, and Executive shall assist the Company in perfecting and defending its rights to such intellectual property. 19. INDEMNIFICATION. To the fullest extent permitted by applicable law, the Company will, during and after termination of employment, indemnify Executive (including providing advancement of expenses) for any judgments, fines, amounts paid in settlement and reasonable expenses, including attorneys' fees, incurred by Executive in connection with the defense of any lawsuit or other claim or investigation to which Executive is made, or threatened to be made, a party or witness by reason of being or having been an officer, director or employee of the Company or any of its subsidiaries or affiliates. In addition, Executive will be covered under any directors and officers' liability insurance policy for his acts (or non-acts) as an officer or director of the Company or any of its subsidiaries or affiliates to the extent the Company provides such coverage for its senior executive officers. 20. ARBITRATION. Unless other arrangements are agreed to by Executive and the Company, any disputes arising under or in connection with this Agreement, other than a dispute in which the primary relief sought is an equitable remedy such as an injunction, will be resolved by binding 9 10 arbitration to be conducted pursuant to the National Rules for the Resolution of Employment Disputes of the American Arbitration Association. Costs of the arbitration, including (but not by way of limitation) reasonable attorney's fees of both parties, will be borne by the party which does not prevail in the proceedings. In the event that each party prevails as to certain aspects of the proceedings, the arbitrator(s) or the court will determine an appropriate allocation of costs between the parties. 21. GROSS-UP PAYMENT. (a) In the event that any amount or benefits made or provided to Executive above and under all other plans and programs of the Company (the "Covered Payments") is determined to constitute a Parachute Payment, as such term is defined in Section 280G(b)(2) of the Internal Revenue Code, the Company shall pay to Executive, prior to the time any Internal Revenue Code Section 4999 excise tax ("Excise Tax") is payable with respect to any such Covered Payment, an additional amount which is equal to the Excise Tax on the Covered Payment (the "Initial Gross-Up"), plus the amount of income tax and Excise Tax payable by Executive with respect to the Initial Gross-Up (the "Second Gross-Up"), the amount of income tax and Excise Tax payable by Executive with respect to the Second Gross-Up (the "Third Gross-Up"), the amount of income tax and Excise Tax payable by Executive with respect to the Third Gross-Up (the "Fourth Gross-Up"), and the amount of income tax and Excise Tax payable by Executive with respect to the Fourth Gross-Up. (b) The determination of whether the Covered Payment constitutes a Parachute Payment and, if so, the amount to be paid to Executive and the time of payment pursuant to this paragraph 20 shall be made by an independent auditor (the "Auditor") jointly selected by the Company and Executive and paid by the Company. The Auditor shall be a nationally recognized United States public accounting firm which has not, during the two years preceding the date of its selection, acted in any way on behalf of the Company or any of its Affiliates. If Executive and the Company cannot agree on the firm to serve as the Auditor, then Executive and the Company shall each select one accounting firm and those two firms shall jointly select the accounting firm to serve as the Auditor. (c) In the event that upon any audit by the Internal Revenue Service, or by a state or local taxing authority, of the Covered Payment or the Gross-Up payments, a change is finally determined to be required in the amount of taxes paid by the Executive, appropriate adjustments will be made under this Agreement such that the net amount which is payable to Executive after taking into account the provisions of section 4999 of the Code will reflect the intent of the parties as expressed in subparagraph (a) above, in the manner determined by the Auditor. 22. NO SET-OFF; NO MITIGATION REQUIRED. The obligation of the Company to make any payments provided for hereunder and otherwise to perform its obligations hereunder will not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against Executive or others. In no event will Executive be obligated to seek other employment or take other action by way of mitigation of the amounts payable to Executive under any of the provisions of this Agreement, and such amounts will not be reduced (except as otherwise specifically provided herein) whether or not Executive obtain other employment. 23. PAYMENT OF LEGAL FEES. The Company will pay Executive's reasonable legal and financial consulting fees and costs associated with entering into this Agreement up to a maximum of $10,000. 24. CORPORATE TRANSACTIONS, IMPACT ON EQUITY COMPENSATION. In the event of any change in the outstanding shares of the Company's Common Stock (including any increase or decrease in such 10 11 shares) by reason of any stock dividend or split, recapitalization, merger, consolidation, spinoff, combination or exchange of shares or other similar corporate change, or any distributions to common stockholders other than regular cash dividends, the Compensation Committee of the Board may make such substitution or adjustment, if any, as it deems to be equitable, as to the number or kind of shares of Common Stock provided for in this Agreement. 25. GOVERNING LAW. This Agreement will be governed by and construed in accordance with the laws of the State of New Jersey. 26. ASSIGNMENTS; TRANSFERS; EFFECT OF MERGER. (a) No rights or obligations of the Company under this Agreement may be assigned or transferred by the Company except that such rights or obligations may be assigned or transferred pursuant to a merger or consolidation in which the Company is not the continuing entity, or pursuant to the sale or transfer of all or substantially all of the assets of the Company, provided that the assignee or transferee is the successor to all or substantially all of the assets of the Company. (b) This Agreement will not be terminated by any merger, consolidation or transfer of assets of the Company referred to above. In the event of any such merger, consolidation or transfer of assets, the provisions of this Agreement will be binding upon the surviving or resulting corporation or the person or entity to which such assets are transferred. (c) The Company agrees that concurrently with any merger, consolidation or transfer of assets referred to above, it will cause any successor or transferee unconditionally to assume, either contractually or as a matter of law, all of the obligations of the Company hereunder. (d) This Agreement will inure to the benefit of, and be enforceable by or against, Executive or Executive's personal or legal representatives, executors, administrators, successors, heirs, distributes, designees and legatees. None of Executive's rights or obligations under this Agreement may be assigned or transferred by Executive other than Executive's rights to compensation and benefits, which may be transferred only by will or operation of law. If Executive should die while any amounts or benefits have been accrued by Executive but not yet paid as of the date of Executive's death and which would be payable to Executive hereunder had Executive continued to live, all such amounts and benefits unless otherwise provided herein will be paid or provided in accordance with the terms of this Agreement to such person or persons appointed in writing by Executive to receive such amounts or, if no such person is so appointed, to Executive's estate. 27. MODIFICATION. No provisions of this Agreement may be waived, modified or discharged unless such waiver, modification or discharge is agreed to in writing signed by both Executive and the CEO. No waiver by any party hereto at any time of any breach by any other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party will be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. 28. ENTIRE AGREEMENT. This Agreement sets forth the entire agreement of the parties hereto in respect of the subject matter contained herein and supersedes all prior agreements, promises, covenants, arrangements, communications, representations or warranties, whether oral or written, by any officer, employee or representative of any party hereto in respect of the subject matter contained herein. 11 12 PHARMACIA CORPORATION - -------------------------------- ----------------------------------- Goran Ando By: Fred Hassan Title: Chief Executive Officer September 7, 2000 September 29, 2000
12 EX-10.16 3 k59836ex10-16.txt LIFE INSURANCE PROGRAM 1 EXHIBIT (10)(16) EXECUTIVE LIFE INSURANCE PLAN INTRODUCTION The following describes the Monsanto Executive (Split Dollar) Life Insurance Program, which becomes effective January 1, 1988. There are four sections: o OVERVIEW -- explains the benefits of the split dollar program, and how it works. o ELIGIBILITY -- lists evidence of insurability requirements. o ENROLLMENT -- explains the enrollment procedure. o TAX CONSIDERATIONS -- reviews current insurance industry understanding of tax implications. BY WAY OF REVIEW . . . Before describing the new Split Dollar program, let's quickly review the normal life insurance coverage provided to salaried employees and retirees: ACTIVE EMPLOYEES o Group Term coverage providing a death benefit of two and one-half times annual base pay. o Accidental Death and Dismemberment (AD&D) coverage of one times annual base pay. o Business Travel Accident coverage of one and one-half times annual base pay. RETIRED EMPLOYEES o A death benefit equal to 62 1/2% of final base pay if you retire with 20 or more years of service, 37 1/2% with 10 to 20 years. Monsanto provides this protection at no cost to employees and retirees. However, each year the individual pays income tax on the "value" of the Group Term coverage in excess of $50,000, since this is an economic benefit resulting in "imputed income" to the individual, according to tax regulations. The "value" is determined from a government table and is based on age and coverage amount. PLAN OVERVIEW By enrolling in the Monsanto Executive Life Insurance plan, you will own a universal life insurance policy issued by Connecticut General Life Insurance Company. This policy will replace most of your existing Group Term coverage and will provide you with o HIGHER DEATH BENEFITS (both before and after you retire) and o INCREASED FINANCIAL FLEXIBILITY by giving you access to the cash value of the policy in excess of Monsanto's contributions. o The program is called "split dollar" because both you and Monsanto share the cost and the ownership of the policy. 1 2 PLAN OVERVIEW SPLIT DOLLAR PLAN BENEFITS (continued) As an active employee, you will have o A DEATH BENEFIT EQUAL TO FOUR TIMES YOUR ANNUAL BASE PAY PLUS ALL PREMIUMS YOU HAVE PAID, and o regular AD&D and Business Travel Accident coverage, and o the ability to make withdrawals or borrow against the cash value of the policy in excess of Monsanto's contribution. (This will reduce the death benefit by a like amount, in exchange for your use of the money before death.) If you retire at or after age 62, you will have o A DEATH BENEFIT EQUAL TO TWO TIMES YOUR FINAL BASE PAY PLUS ALL PREMIUMS YOU HAVE PAID -- which can be sustained long after premium payments have ended (to approximately age 90), and o the same ability to make withdrawals or borrow against the cash value of the policy, or o you can cash in -- "surrender" -- the policy. In this case, Monsanto will be reimbursed for its premiums, but you keep the remainder of the cash value (less a small surrender charge). At that time, you'll have to pay taxes on the excess over your contributions. Interest credits will accumulate on a tax-deferred basis. Connecticut General will provide illustrations of the cash value buildup to you at your enrollment session. Making withdrawals, borrowing against the cash value of your policy, or surrendering the policy can have tax implications. See the "Tax Considerations" section, page 7. Monsanto's share of the policy ownership is a collateral assignment of the case value and/or death benefits of the policy equal to the premiums it has paid. Thus, the policy provides sufficient death benefits to reimburse Monsanto for the premiums it has paid (but this does not affect any of your benefits as described above). You can enroll for a lesser amount of coverage. However, if you later decide you want to increase the coverage, the agreement of Monsanto and Connecticut General will be required. Connecticut General will require additional evidence of insurability. Note that for overview purposes, the death benefits described above are referred to as being provided by the Split Dollar policy. In actuality, the first $50,000 of the death benefit will continue to be provided under the Group Term policy (because there's no imputed income tax to you on that amount). You will not have to pay any premiums for this coverage. The normal AD&D and Business Travel Accident coverage will also continue to be provided under the existing 2 3 PLAN OVERVIEW policies. The remainder of your coverage will be (continued) provided by the Split Dollar policy. PREMIUM PAYMENTS . . . YOURS AND MONSANTO'S During the premium payment period, both you and Monsanto pay premiums. You pay a portion of the premium equal to the "term" cost of the coverage provided by the policy for your beneficiaries. As with term insurance policies, this cost will increase with age. At the time of enrollment, you will be provided with illustrative charts showing your projected premium payments, based on your age. Here's a sampling of the cost per year per $1,000 of death benefit:
Your Annual Premium/ Age $1,000 Insurance --- -------------------- 40 $ .60 45 .80 50 1.13 55 1.58 60 2.87 65 4.60
Monsanto pays the premiums in excess of the "term" cost. Premiums are payable until you reach age 65 (or until 10 years of program participation if later). After deductions for administrative fees and for risk charges, the remainder of the premiums is credited to the cash value of the policy which accumulates interest on a tax-deferred basis. The premium amount is set so that payments will end at age 65 (or after 10 payment years if later), and there will be sufficient cash value to sustain the policy to age 90 (assuming interest credits of 8 1/4% per year). As a normal death benefit, your beneficiaries will receive all the premiums you have paid - in addition to the four times annual base pay as an active employee or two times final base pay as a retiree. COMPARING YOUR COSTS UNDER SPLIT DOLLAR AND REGULAR MONSANTO COVERAGE . . . Under the Split Dollar plan, you are paying premiums with after-tax dollars for coverage over $50,000. Under the regular Monsanto coverage, you pay income tax on the "value" of the Group Term coverage in excess of $50,000. Typically, the cost per year per $1,000 coverage will be less to you under the Split Dollar plan than the imputed income tax under the regular Monsanto program. (Of course, coverage under the Split Dollar plan is 3 4 PLAN OVERVIEW higher, so your total cost will be determined by the (continued) cost per $1,000 times your coverage.) Finally the Split Dollar plan is not term insurance. In addition to providing a death benefit, your policy will also build cash value. This gives you additional financial flexibility. The policy becomes self sustaining at age 65 (or after 10 years of participation if later) and you pay no more premiums. COVERAGE AMOUNTS TIED TO BASE PAY As an active employee, your death benefits are based on your annual base pay, and increase automatically as your base pay increases. As a retiree, your benefits are based on final base pay at retirement. DETERMINING YOUR POLICY'S CASH VALUE The cash value of your policy equals YOUR CONTRIBUTIONS, plus MONSANTO'S CONTRIBUTIONS, minus A 5% (OF PREMIUMS) FRONT-END ADMINISTRATIVE CHARGE minus A MORTALITY CHARGE (the cost charged by the insurance company to insure that portion of the death benefit in excess of the policy's cash value) plus INTEREST CREDITS on the balance. If you cash in ("surrender") the policy, you receive its current cash value minus the company's contributions and minus a small surrender charge (which ends in the tenth policy year). MAKING ADDITIONAL CONTRIBUTIONS . . . Within legal limits, you can also invest additional money in the policy and receive interest credits on a tax-deferred basis. This will build up cash value, but this is not a primary purpose of the program. You will probably find it financially attractive to make additional contributions only if you expect to leave the money in for an extended period of time and surrender the policy after termination or retirement. OPTIONS AT RETIREMENT You have considerable financial flexibility after you retire. IF YOU RETIRE AT OR AFTER AGE 62 AND WISH TO MAINTAIN YOUR POLICY, you and Monsanto continue to pay premiums until you reach 65 (or for the balance of 10 payment years if later). Then, the policy becomes self-sustaining to age 90 (assuming annual interest credits of at least 8 1/4%). In other words, when premiums end, risk charges are paid out of the cash value of the policy. You will then have to pay imputed income tax on the 4 5 PLAN OVERVIEW "term" cost of the insurance, but you will be able to (continued) make withdrawals from the cash value to pay these taxes. If interest is credited at a different rate, the policy's self-sustainment will end at a different age. The rate currently being credited by Connecticut General is 9%. IN ADDITION, YOU WILL HAVE THESE OTHER OPTIONS AFTER YOU RETIRE: o CONTINUE THE POLICY, BUT WITH REDUCED COVERAGE. This will also reduce the risk charges paid out of the policy's cash value and also your imputed income tax. o MAKE ADDITIONAL WITHDRAWALS OR BORROW AGAINST THE CASH VALUE OF THE POLICY, OR o SURRENDER YOUR POLICY. IF YOU RETIRE BEFORE AGE 62, MONSANTO WILL GENERALLY DISCONTINUE PAYMENT OF PREMIUMS AND RECOVER ITS PREMIUMS AT THAT TIME. You will have the option of continuing the policy on your own or surrendering the policy and taking the cash value in excess of Monsanto's contributions. Also, if you have at least 10 years of Benefit Service, sufficient funding will be provided to fund coverage at least equal to regular Group Term coverage for salaried employees. This assumes you make no withdrawals and continue to pay the "term" cost of the reduced coverage until you reach age 65 (or 10 years of participation if later). WHAT HAPPENS IF . . . WHAT HAPPENS IF YOU TERMINATE BEFORE AGE 62? If you terminate, the company will discontinue payment of premiums and will recover its premiums at the time of your termination or retirement (unless the company elects to exercise its discretion to continue the payment of premiums and/or delay recovery of its premiums to a later time). You can maintain the policy by reimbursing Monsanto for the premiums it has paid and continuing future premium payments personally. The cash to repay Monsanto can be borrowed or withdrawn from the policy or paid from personal funds. This repayment to Monsanto would terminate the split dollar agreement and Monsanto would have no future ownership rights in the policy cash values or death benefits. Alternatively, you can surrender the policy. Monsanto would recoup its premiums at that time and the remaining cash value would be yours to use as you choose. WHAT HAPPENS IF YOU BECOME DISABLED? If you become totally and permanently disabled under the Disability Income Plan, Monsanto will pay the entire premium. You will not be required to contribute. You will have to pay taxes on the "term" costs, which will be imputed to you as additional income. 5 6 PLAN OVERVIEW OTHER CONSIDERATIONS (continued) In the event that the mortality or any other charges to the contract reduce the policy's cash value so that the company's interest in the policy may be impaired, the company will be allowed to recover its costs or to make arrangements with the insured so that the company's interests remain intact. ANNUAL STATEMENT You will receive an annual statement which will provide current, personalized information about your policy. This will inform you of your current death benefits, cash value, interest credits and mortality charges. FOR MORE INFORMATION The broker: BMF Compensation Strategies 613 Northwest Loop, Suite 500 San Antonio, TX 78216 (512) 366-0618 Mr. Norm Bevan -- President Ms. Colette Wagh -- Vice President Monsanto: Robert N. Abercrombie -- Director, Corporate Benefits -- 4-2775 Insurance Connecticut General (for information about company: Hartford, CT 06152 the status of your policy, (203) 726-7764 amounts available for loans or withdrawals, etc.) Mr. Louis Sumsky -- Assistant Vice President SPLIT DOLLAR Here is a summary of the Monsanto Executive (Split Dollar) SUMMARY Life Insurance plan: AS AN ACTIVE EMPLOYEE . . .
NORMAL INCOME TAXES DEATH BENEFIT FLEXIBILITY ON IMPUTED INCOME ------------- ----------- ----------------- Four times annual base You have no imputed income pay, plus all You can make because YOU ARE YOUR paying your contributions withdrawals or borrow premiums equal to the "term" against the cost of the coverage. Policy's cash value.
6 7 SPLIT DOLLAR AS A RETIREE (AT OR AFTER AGE 62) . . . SUMMARY (continued)
NORMAL INCOME TAXES DEATH BENEFIT FLEXIBILITY ON IMPUTED INCOME ------------- ----------- ----------------- Two times final base pay, You can While you pay premiums, you plus all your contributions. o continue full coverage own no imputed income tax. o continue reduced When your premiums end, you coverage pay imputed taxes on the o make withdrawals or "term" cost of the coverage. borrow against the policy's cash value in excess of company contributions, o surrender the policy, and receive cash value in excess of company contributions.
ELIGIBILITY The Monsanto Executive (Split Dollar) Life Insurance plan is available to designated members of the Monsanto Management Council as of January 1, 1988. New members will become eligible when so designated by the Director of Corporate Personnel. For eligible current members, coverage is guaranteed if you are actively at work on October 1, 1987, and have not missed work more than three days due to illness or injury during the preceding 90-day period. If you are age 61 or over on June 30, 1988, or if your initial coverage substantially exceeds one million dollars, medical information will be required by Connecticut General to establish the gross premium -- in other words, the total premium you and Monsanto pay. Your premiums will not be higher than the normal "term" cost for a person your age. Medical information will also be required, and Connecticut General reserves the right to establish a different gross premium, in the following circumstances: o you have been absent for more than three days due to illness or injury during the 90-day period ending October 1, 1987, or you are not actively at work on that day, o you elect not to enroll for full coverage during this initial offering, but later request additional coverage, o your cumulative salary increases exceed 8% compounded annually. o In the above three circumstances, if the medical information indicates that you have a life-threatening illness, the insurance company also reserves the right to deny coverage. 7 8 ELIGIBILITY Similar underwriting requirements will apply to (continued) employees who become eligible for the program after October 1, 1987. ENROLLMENT To enroll, you will need to meet with a representative of the insurance brokerage firm, BMF Compensation Strategies. You are invited to have your personal advisor and your spouse at that meeting. You will receive personalized information to illustrate premiums, death benefits and cash values in the future. Any medical information requirements applicable in your situation will be reviewed with you at that meeting. When you enroll, you will designate a beneficiary for your share of the death benefit from your policy, or you can assign ownership of your policy to another person or to a trust. Whatever your decision, you will also execute a collateral assignment and split dollar agreement in favor of Monsanto permitting it to recover the premiums it has paid from the cash value or death benefit of the policy. Since the split dollar program significantly increases your life insurance benefits, it will likely have an impact on your estate, financial and tax planning. Before enrolling, you are encouraged to review this program with your advisors in these areas to determine the most favorable strategy for the ownership of the policy and the beneficiary(ies) to be designated for the proceeds. The forms to be completed at enrollment will require precise wording in these areas. TAX CONSIDERATIONS The tax information contained below and elsewhere in this program summary is based on current insurance industry interpretations and practice for similar policies. But there are no specific regulations or tax rulings on this program, so you may want to review the subject with your tax advisor. According to general insurance industry practice under current tax law: o Death benefits are not subject to federal income tax unless the policy is transferred for valuable considerations. o Like all life insurance, death benefits are subject to federal estate taxes unless excluded from your estate through a timely, irrevocable transfer of ownership. Irrevocable assignment may have give tax considerations. o The buildup of cash value in the policy is not considered taxable as it accrues. o Withdrawals of cash value may or may not be taxable, depending on the timing and amount of withdrawal. o Loans against cash value are not considered taxable unless the policy is later surrendered or the loan is defaulted. 8 9 TAX CONSIDERATIONS (continued) o Interest on loans is deductible according to the phase-out schedule for consumer loans. o You have no imputed income from the policy as long as you are paying the "term" cost of coverage. When premium payments end, you have imputed income equal to the "term" cost of coverage. Because of the absence of definitive regulations and recent changes in the tax code, be sure to consult your tax advisor about gift and estate tax consequences, and before making a withdrawal or loan. The company reserves the right to amend or end this program, based on any changes in the tax laws. 9 EX-10.17 4 k59836ex10-17.txt AMENDMENT #1 TO AGREEMENT 1 EXHIBIT 10 (17) AMENDMENT NO. 1 TO AGREEMENT BETWEEN PHARMACIA CORPORATION (FORMERLY NAMED MONSANTO COMPANY) AND ROBERT B. SHAPIRO DATED DECEMBER 19, 1999 This Amendment No. 1 dated as of January 25, 2001 to the Agreement between Pharmacia Corporation (formerly named Monsanto Company and referred to herein as the "Company"), and Robert B. Shapiro (the "Executive") dated as of December 19, 1999 (the "Agreement") hereby amends the Agreement as follows: WHEREAS, the Company and the Executive entered into the Agreement for the purpose, among other things, of providing for the Executive's performance of certain services and for certain compensation and benefits to be provided to Executive; and WHEREAS, the Agreement provides that the Company shall use its best efforts to cause the Executive to be named Chairman of its Board of Directors for a period of 18 months after the Effective Time (as defined in the Agreement), and the Executive and the Company desire to terminate this provision at the end of the Company's Board of Directors meeting on February 21, 2001; and WHEREAS, the Executive and the Company desire and intend that all other provisions of the Agreement remain unchanged and in full force and effect for the duration of the Agreement notwithstanding the fact that Executive will cease being Chairman of the Board after February 21, 2001; and WHEREAS, the Board of Directors of the Company at a meeting duly called and held on January 25, 2001 approved the proposed change in the Agreement and otherwise confirmed the Agreement as the continuing agreement of the Company notwithstanding the fact that Executive will cease being its Chairman of the Board after February 21, 2001, and authorized and directed the Company's Chief Executive Officer to execute such an amendment on behalf of the Company; NOW, THEREFORE, it is hereby agreed as follows: 1. The first sentence of paragraph 1(a) of the Agreement is hereby amended in its entirety to read as follows: The Company shall use its best efforts to cause the Executive to be named Chairman of its Board of Directors (the "Board") for the period beginning at the Effective Time and ending immediately after the meeting of the Board on February 21, 2001. 2. All other provisions of the Agreement shall remain in full force and effect without change notwithstanding the fact that Executive will cease being Chairman of the Board of the Company after February 21, 2001. IN WITNESS WHEREOF, the Executive and the Company have executed this Amendment No. 1 as of the day and year first above written. -------------------------------- Robert B. Shapiro Pharmacia Corporation By: -------------------------------- Fred Hassan Chief Executive Officer EX-10.18 5 k59836ex10-18.txt 2001 ANNUAL INCENTIVE PLAN 1 Exhibit (10)(18) 2001 ANNUAL INCENTIVE PLAN SUMMARY GENERAL: o 2001 Plan will cover the performance period January 1 - December 31, 2001 (March 2002 payout) o Eligibility includes regular employees who do not participate in a local sales or manufacturing plan o A Target incentive opportunity level will be established for each participant, expressed as percentage of base pay. o Target awards range from 7.5% of pay for entry level roles to 70% of pay for the CEO o Various performance levels are approved by the Board Committee with a payout level associated with each level of performance:
----------------------------------------------------------------------------- POTENTIAL PAYOUT AS A PERCENT OF TARGET OPPORTUNITY ---------------------------------- PERFORMANCE LEVEL OFFICERS NON-OFFICERS ----------------------------------------------------------------------------- Threshold 50% 50% Target 75% 100% Above Target 100% 150% Outstanding 200% 200% -----------------------------------------------------------------------------
FINANCIAL GOALS: o The Board People Committee approves Threshold, Target, Above Target and Outstanding levels of performance for 2001 relating to: o Sales Growth (25% weighting) o Earnings per Share (50% weighting) o Cash Flow (25% weighting) 1 2 o Following the end of the performance year, the Board People Committee evaluates attainment of pre-established goals relative to Target o Funding and Payout of Awards o The Board People Committee will determine the funding for the plan based on performance against the financial goals. The Committee may, in its judgment, adjust this amount o The available funding is then allocated within Monsanto based on Goal achievement o Individual awards are based on team and individual performance o People Managers: 50% of award based on development of people, team and personal development; 50% based on business results o Non-managers: 75% of award based on business results; 25% on personal development INCENTIVE AWARD POOL AVAILABLE FOR AWARDS o A "Target incentive award pool" equal to the sum of base salaries of all plan participants multiplied by their Target annual incentive opportunities is established o The amount of money available for awards is determined by multiplying the Target pool by the percent of Target performance achieved. If performance exceeds outstanding, the pool may exceed outstanding o The Internal People Committee allocates the available funding among the different business areas based on their annual results. The total amount of awards cannot exceed the amount of the annual incentive award pool EVENTS AFFECTING PAYOUT OF INDIVIDUAL ANNUAL INCENTIVES o If an employee commences employment during the performance year, he/she is eligible for an award reflecting actual months of participation to the nearest whole month o If a participant's incentive opportunity changes during the performance year, he/she is eligible for an award reflecting the incentive opportunity at year-end 2 3 o If a participant's pay increases during the performance year as a result of change in position or increase in responsibilities, any incentive award received is based on base pay at year-end o If a participant transfers within the company, his/her award will come from the unit in which he/she is working at year-end, but performance for the whole year will be considered o A participant who: o voluntarily resigns may be considered for an award only if the resignation occurs after the end of the year o involuntarily separates without cause, is eligible for an award reflecting participation to the nearest whole month if he/she has already worked more than three months in the year o retires, dies, or becomes permanently disabled, is eligible for an award reflecting actual participation to the nearest whole month. (Retirement is defined as termination at or after age 50.) o terminates for cause, forfeits all rights to any award Any award will be paid in March following the participant's separation 3 EX-13 6 k59836ex13.txt 2000 ANNUAL REPORTS 1 EXHIBIT 13 FINANCIAL REVIEW Overview On March 31, 2000, a subsidiary of the former Monsanto Company and Pharmacia & Upjohn (P&U) merged and the combined company was renamed Pharmacia Corporation ("Pharmacia" or "the company"). The merger was accounted for as a pooling of interests. As such, all data presented herein reflect the combined results of operations of the two predecessor companies, their statements of financial position and their cash flows as though they had always been combined, by applying consistent disclosures and classification practices. The former Monsanto Company was made up principally of a pharmaceutical business and an agricultural products business. As more fully discussed below, subsequent to the merger forming Pharmacia Corporation, the agricultural operations of the former Monsanto Company were placed into a subsidiary of Pharmacia with the name Monsanto Company (Monsanto). On October 23, 2000, Monsanto completed a partial initial public offering (IPO) of 14.74 percent of its common stock. To avoid confusion throughout this document, "former Monsanto" will be used to refer to the pre-merger operations of the former Monsanto Company and "Monsanto" will refer to the agricultural subsidiary. Trademarks are indicated in italics within this discussion. Pharmacia recorded sales for 2000 that showed significant growth over the prior years. Sales of $18.1 billion in 2000 reflected a 10 percent increase over 1999 sales of $16.4 billion which reflected a 20 percent increase over 1998 sales of $13.7 billion. Adjusting for the divestitures of the Stoneville Pedigreed Seed Company (Stoneville) in 1999, the former Monsanto's nutritional therapies business in 1998, and the effects of adopting Staff Accounting Bulletin No. 101 (SAB 101), the sales growth rates become more reflective of underlying business performance. On this basis, sales rose 11 percent during 2000 and 22 percent in 1999. Net earnings for 2000 were $717 million compared with $1.4 billion in 1999 and $362 million in 1998.
==================================================================================================================================== % % Consolidated Results 2000 Change 1999 Change 1998 - ------------------------------------------------------------------------------------------------------------------------------------ Dollars in millions, except per share data Sales $18,144 10% $16,425 20% $13,737 Earnings before income taxes 1,373 (28) 1,898 113 892 Earnings from continuing operations 984 (25) 1,306 171 481 Net earnings 717 (48) 1,378 281 362 Net earnings per common share (EPS): --Basic $ .55 (50) $ 1.10 279 $ .29 --Diluted $ .54 (50) $ 1.07 282 $ .28 ====================================================================================================================================
The fluctuations in earnings before income taxes and in net earnings over the past three years are affected by a number of events and transactions that, because of their magnitude and relative infrequency of occurrence, warrant special reference. Throughout the discussion that follows, the company has identified such items that management believes had a noteworthy effect on the comparability of year-to-year performance measures. This was done to facilitate a better understanding of the company's reported earnings growth trends. Significant among these events and transactions were the following which are discussed more fully below: merger and restructuring charges in each of the past three years; the divestitures referred to above; a realignment of certain research and development (R&D) projects; settlement of certain lawsuits. In 2000, the company recorded aggregate merger and restructuring charges of approximately $1.2 billion. Of these charges, $1.1 billion is recorded on the merger and restructuring line, $60 million related to the write-off of obsolete inventory appears in cost of sales and $88 million related to the write-off of goodwill is recorded as amortization and adjustments of goodwill. The $1.1 billion includes $601 million of merger costs comprised of consultant fees, contract termination costs and relocation costs related to the integration of the former Monsanto and P&U organizations, as well as transaction costs including investment bankers, attorneys, registration, regulatory and other professional fees. Additionally, these costs include 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 a change of control provision. The remaining $477 million of restructuring charges were comprised of severance costs, contract and lease termination fees, asset impairment charges and other exit costs. In the second quarter of 1999, management committed to a plan to sell the company's artificial sweeteners and biogums businesses, the dispositions of which were approved by the company's board of directors in 1998. The results of operations, financial position, and cash flows of these businesses, and of the alginates and ORTHO lawn and garden products businesses, have been reclassified as discontinued operations. During the third quarter of 1999, the company merged with SUGEN, Inc. (Sugen), a leader in target-driven drug discovery and development, to strengthen its R&D efforts in cell signaling and oncology. The merger was completed on August 31, 1999 and called for the exchange of approximately 12 million shares of Pharmacia stock for all the outstanding common stock 33 Pharmacia Corporation Annual Report 2000 2 of Sugen. Also during the third quarter, Pharmacia acquired 20 percent of Sensus Drug Development Corporation (Sensus), a privately held company focused on developing drugs to treat endocrine disorders. The Sensus investment, accounted for using the equity method, is expected to expand Pharmacia's leadership position in endocrinology. Sugen and Sensus together represented incremental costs of approximately $162 million in 1999 compared to 1998. R&D expense comprised the majority of these costs totaling $104 million in 1999 for the two operations whereas Sugen spending in 1998 was $32 million. In connection with the merger with Sugen, the company recorded approximately $70 million in merger and restructuring expenses. The remaining incremental cost was principally interest expense. In 1999, the company recorded a pretax charge of $64 million in income from continuing operations for items principally associated with costs related to the failed merger between the company and Delta & Pine Land Company (D&PL), combined with expenses to accelerate the integration of the company's agricultural chemical and seed operations. These net charges included the reversal of restructuring liabilities established in 1998 of $54 million and a gain of $35 million on the divestiture of Stoneville, a cottonseed business. The company recorded a pretax charge of $85 million for a termination fee and other expenses associated with the failed merger and a $68 million charge to continuing operations principally associated with actions related to the company's continued focus on improving operating efficiency through accelerated integration of the agricultural chemical and seed operations. In 1998, the company made strategic acquisitions of several seed companies. In July 1998, the company acquired Plant Breeding International Cambridge (PBIC) for approximately $525 million and in October 1998 the company announced the acquisition of certain international seed operations of Cargill, Inc. in Asia, Africa, Central and South America, and Europe, excluding certain operations in the United Kingdom, for approximately $1.4 billion. In December 1998, the company completed its acquisition of DEKALB Genetics Corporation (DEKALB) for approximately $2.3 billion. The company recorded the following pretax charges in 1998 for the write-off of acquired in-process R&D related to these acquisitions: approximately $60 million for PBIC, approximately $150 million for DEKALB and approximately $190 million for certain Cargill, Inc. seed operations. At the time of and in connection with the 1998 seed company acquisitions, the company established a plan to integrate the acquired businesses by closing or rationalizing (consolidating, shutting down or moving facilities to achieve more efficient operations) certain assets or facilities and eliminating manufacturing and administrative functions, resulting in a pretax charge of $78 million in 1998. During 1999, the original reserve was adjusted to reflect the actual costs of integrating these acquisitions. In 1998, the company recorded net restructuring and other items of $340 million as part of the former Monsanto's overall strategy to reduce costs and continue the commitment to its core businesses. The former P&U recognized restructuring charges of $92 million in 1998. These restructuring efforts were associated with P&U's global turnaround program. This program was undertaken to achieve a simplified infrastructure, improved efficiency, and a global focus on the core pharmaceutical business. Also affecting earnings comparability, in 1998 P&U reached a settlement of $103 million in a federal class-action lawsuit originally filed in 1993 on behalf of retail pharmacies. As a consequence of the settlement, the company increased its litigation reserves by $61 million, a charge reported in selling, general and administrative (SG&A) expense in the second quarter of 1998. As a result of the recent merger involving the former Monsanto Company and Pharmacia & Upjohn, management's reporting methodologies and definition of operating segments have changed. The company's reportable segments are organized principally by product line, and include Prescription Pharmaceuticals, Agricultural Productivity, and Seeds and Genomics. The Prescription Pharmaceutical 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 segments, they have been included in an "Other Pharmaceuticals" category. 34 Pharmacia Corporation Annual Report 2000 3 Net Sales
==================================================================================================================================== % % Sales by Segment 2000 change 1999 change 1998 - ------------------------------------------------------------------------------------------------------------------------------------ Dollars in millions Prescription Pharmaceuticals $10,824 17.0% $ 9,255 28.4% $ 7,209 Other Pharmaceuticals 1,827 (4.9) 1,922 (7.6) 2,080 Agricultural Productivity 3,885 8.3 3,586 2.5 3,500 Seeds and Genomics 1,608 (3.3) 1,662 75.3 948 Total Consolidated Sales $18,144 10.4% $16,425 19.6% $13,737 ====================================================================================================================================
Sales growth in 2000 of 10 percent was primarily the result of volume increases of over 13 percent partly offset by impacts from lower prices and negative effects of currency exchange rates. Sales in the U.S. continue to represent an increasingly significant percentage of worldwide sales, increasing to 55 percent in 2000 from 52 percent in 1999 and 45 percent in 1998. Despite increasing growth in the U.S. relative to non-U.S. markets, the company's geographic composition of sales will continue to result in significant exposure to the fluctuations of exchange rates in both translation of financial results and the underlying transactions that comprise the results. Pharmaceutical Sales Pharmaceutical sales increased 13 percent in 2000 due largely to new U.S. prescription product growth. Strong sales growth in Europe was offset in part by a negative currency impact. Excluding the impact of currency exchange, global pharmaceutical sales increased 17 percent. The increase in pharmaceutical sales continued to be led by the company's growth driver products including arthritis treatment Celebrex, glaucoma medication Xalatan, Camptosar for colorectal cancer, Detrol for overactive bladder, and the recently launched antibiotic Zyvox. Pharmaceutical growth of 20 percent in 1999 was led by Celebrex, which was first introduced in January 1999. Celebrex achieved sales of $1.5 billion during 1999. Pharmaceutical sales in 1998 grew by 4 percent with the introduction of Detrol and continued growth from Xalatan and Camptosar offsetting declines in several older products. A year-to-year consolidated net sales comparison of the company's top 21 pharmaceutical products (including generic equivalents where applicable) is provided below:
==================================================================================================================================== % % Sales of Top Products 2000 Change 1999 Change 1998 - ------------------------------------------------------------------------------------------------------------------------------------ Dollars in millions Celebrex $2,614 78% $1,471 --% $ -- Ambien 705 35 523 17 449 Xalatan 693 37 507 53 332 Genotropin 467 1 461 17 395 Camptosar 441 50 293 51 194 Detrol/Detrusitol 432 31 329 163 125 Cleocin/Dalacin 340 (1) 343 9 314 Xanax 327 2 320 -- 321 Medrol 284 (5) 297 13 264 Depo-Provera 272 8 252 11 227 Arthrotec 251 (26) 340 (1) 342 Nicorette 218 (7) 234 10 213 Fragmin 211 (1) 213 18 181 Pharmorubicin/Ellence 199 (3) 206 16 177 Aldactone/spiro line 187 (17) 224 12 199 Covera/Calan/verapamil 153 (5) 161 -- 160 Daypro 145 (34) 222 (26) 301 Rogaine/Regaine 134 (4) 139 4 133 Healon 127 (7) 136 (3) 140 Cabaser/Dostinex 124 49 83 57 53 Mirapex 113 39 81 65 49 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL $8,437 23% $6,835 50% $4,569 ====================================================================================================================================
35 Pharmacia Corporation Annual Report 2000 4 Prescription Pharmaceuticals Segment
================================================================================ 2000 1999 1998 - -------------------------------------------------------------------------------- Sales $10,824 $ 9,255 $ 7,209 Cost of products sold 2,113 1,906 1,794 Research and development 2,001 1,975 1,518 Selling, general and administrative 4,524 3,691 2,719 EBIT* 2,087 1,771 1,290 ================================================================================
* Earnings before interest, taxes and restructuring 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. Prescription pharmaceutical sales, which constitute over 85 percent of overall pharmaceutical sales, increased 26 percent in the U.S. and 17 percent on a global basis driving the pharmaceutical business. The growth driver products, Celebrex, Xalatan, Camptosar, Detrol, and Zyvox, now account for nearly 40 percent of total prescription pharmaceutical sales. In addition, higher sales of central nervous system (CNS) drugs Ambien, Mirapex and Cabaser/Dostinex contributed to the strong sales performance. Celebrex continues to be the world's top selling arthritis treatment with sales of $2.6 billion in 2000, an increase of 78 percent versus prior year sales. The U.S., which contributed over $2.2 billion in Celebrex sales, grew by 63 percent, while international sales increased by over 200 percent as the product was launched in the European Union during the second half of 2000. Celebrex is now available in over 70 countries worldwide. In the U.S. and Europe, Celebrex was co-promoted (or, where required by law, co-marketed) by Pfizer, Inc. (Pfizer). In the second half of 2000, Pharmacia submitted a New Drug Application (NDA) to the U.S. Food and Drug Administration (FDA) for parecoxib, an injectable COX-2 inhibitor for acute pain. Xalatan, the top-selling agent for glaucoma in the U.S. and worldwide, generated sales of $693 million on robust growth in major markets. International markets now account for more than half of worldwide sales. Sales in Japan exceeded $100 million in 2000 after its May 1999 introduction. In October, the company received a second approvable letter from the FDA for Xalcom, a fixed-dose combination formulation containing Xalatan and timolol. Meanwhile in December, the Swedish Health Authorities approved Xalcom for patients who require more aggressive therapy to reduce intraocular pressure. European launches of Xalcom are expected to begin in the fall of 2001 upon completion of the Mutual Recognition Process. Sales of Camptosar, the company's leading oncology agent, increased 50 percent to $441 million. In April, a Camptosar-containing regimen was approved by the FDA as a first-line therapy for the treatment of colorectal cancer, and this regimen is now considered to be the standard of care for patients with metastatic colorectal cancer. The significant increase in sales during 2000 reflects the earlier use of Camptosar. Prior to this recent approval, Camptosar was approved for the second-line treatment of patients with colorectal cancer. In addition to Camptosar, the company also marketed several other oncology drugs, including Pharmorubicin (Ellence in the U.S.) and Aromasin. Pharmorubicin, one of the most commonly used treatments for breast cancer in Europe, was launched in the U.S. in the fall of 1999 under the trade name Ellence for the adjuvant treatment of patients with breast cancer following surgery or radiation therapy. Aromasin, an oral hormonal drug that blocks the production of estrogen, was launched during 2000 in the U.S. and key markets in Europe and Latin America as a second-line breast cancer treatment. Detrol (Detrusitol outside the U.S.), the leading branded treatment for overactive bladder worldwide, reduces the symptoms of increased frequency and urge to urinate, as well as urge incontinence episodes. Detrol generated 2000 sales of $432 million, an increase of 31 percent. U.S. sales were $324 million as Detrol prescriptions continued to outpace the overall overactive bladder market. In December, the FDA approved Detrol LA, a once-daily version of Detrol, which should contribute to growth of the Detrol franchise. In April 2000, Pharmacia launched Zyvox, in the U.S. for the treatment of hospitalized patients with severe Gram-positive infections. Zyvox is the lead compound in the oxazolidinone class of antibiotics, the first new class of antibiotics to reach the market in over thirty years. Sales of Zyvox in 2000 were $48 million. Zyvox was approved in the United Kingdom during early 2001, and the European launch is scheduled for later in 2001. Zyvox augments Pharmacia's existing line of antibiotics, including the Cleocin/Dalacin line, which declined by 1 percent in 2000. In addition to the growth driver products listed above, several other prescription pharmaceutical products were noteworthy in 2000. Ambien, the leading short-term treatment for insomnia in the U.S., was the company's second largest selling drug in 2000, as it was in 1999. Full-year sales increased 35 percent to $705 million, primarily based on U.S. sales. In April 2002, Sanofi-Synthelabo will reacquire full rights to Ambien by making a significant final payment to Pharmacia. The company also markets several other CNS products, including Mirapex, Cabaser and Xanax. Sales of Mirapex for Parkinson's Disease grew 39 percent in 2000 to $113 million. In addition to Mirapex, Pharmacia also markets Cabaser for Parkinson's Disease in Europe and Japan. The active ingredient in Cabaser is marketed in the U.S. and abroad under the trade name Dostinex for the treatment of patients with hyperprolactinemia. Combined sales of Cabaser/Dostinex reached $124 million, an increase of 49 percent over prior year levels. Sales of Xanax for anxiety increased 2 percent to $327 million despite continued intense generic competition. Genotropin, the world's leading recombinant human growth hormone, recorded sales of $467 million in 2000. Genotropin promotes growth in children and adults with growth hormone deficiency. During 2000, Genotropin was approved for the 36 Pharmacia Corporation Annual Report 2000 5 additional indication of Prader Willi Syndrome in the U.S. and Europe. Outside the U.S., Genotropin is also used in the treatment of growth disturbances associated with Turner's Syndrome and chronic renal insufficiency. In the U.S., Genotropin sales increased by 27 percent as the product was used by more than one-third of all new patients using growth hormone therapy. European sales of Genotropin, which accounted for approximately one-half of global sales of the product, were negatively impacted by foreign exchange. In addition, sales in Japan during 2000 were adversely affected by government imposed price reductions. The company produces various forms of steroids under the trade names Medrol, Solu-Medrol, and Depo-Medrol, which are used to treat a variety of inflammatory conditions. In 2000, sales of the Medrol family of products declined 5 percent to $284 million, due to continued generic competition. Pharmacia markets several hormonal products for women. Depo-Provera Contraceptive Injection was the company's largest selling hormonal product with 2000 sales of $272 million. It is approved in over one hundred countries. Although the patents protecting Depo-Provera have expired, no generic equivalents have been approved in the U.S. Lunelle, the company's new monthly contraceptive injection, was approved in October 2000. Because of its shorter duration of action and different drug profile, Lunelle is targeted to a different patient population than Depo-Provera and is not expected to cannibalize sales of Depo-Provera. Sales of Fragmin, a low-molecular-weight heparin product for the prevention of thrombosis, declined one percent to $211 million in 2000 due to a negative currency impact in Europe. Meanwhile, sales in the U.S. increased 54 percent to $37 million. During 2000, the FDA approved Fragmin for pre-operative administration in patients undergoing hip replacement surgery, an indication unique to Fragmin. Several products experienced declining sales in 2000. Notably, sales of Arthrotec and Daypro, the company's older arthritis medications, experienced significant declines in 2000 as the COX-2 inhibitors, led by Celebrex, continued to take a larger share of the U.S. and worldwide market for arthritis medications. In addition, the product exclusivity for Daypro expired in April. Sales of Aldactone/spiro line declined due to generic competition. EARNINGS BEFORE INTEREST AND TAXES (EBIT)* in 2000 improved to $2.1 billion, an increase of 18 percent over 1999. Higher sales volumes coupled with lower relative spending accounts for the growth. Similarly, 1999 improved to $1.8 billion, a 37 percent increase over the 1998 EBIT of $1.3 billion. Increased sales volumes and production gains were mainly accountable for the favorable change. Merger and restructuring charges have been excluded from this analysis. Refer to Merger and Restructuring Charges below. Prescription pharmaceutical segment operating expenses, stated as a percentage of net prescription pharmaceutical sales, are provided in the table below.
================================================================================ 2000 1999 1998 - -------------------------------------------------------------------------------- Cost of products sold 19.5% 20.6% 24.9% Research and development 18.5 21.3 21.1 Selling, general and administrative 41.8 39.9 37.7 Amortization of goodwill .3 .4 .6 All other, net .6 (1.3) (2.2) EBIT* 19.3 19.1 17.9 ================================================================================
* Earnings before interest, taxes and restructuring (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. COST OF PRODUCTS SOLD continued to improve as a per cent of sales during 2000 as compared to 1999. Similar to the prior year, product mix shifted toward higher margin items due to increases in sales volumes of these products. As a percent of sales, cost of products sold improved significantly in 1999 compared to 1998 as a combined result of a number of favorable influences. There was an increasing percentage of the company's sales made up of higher margin products as compared with prior periods. The company also experienced production efficiencies and cost reductions. Finally, currency exchange had a modest favorable effect. RESEARCH AND DEVELOPMENT EXPENSE declined as a percent of sales to 19 percent although total dollars expended on these activities increased by $26 million. Spending reductions in certain development projects that are near completion offset increased headcount spending related to the Sugen unit as well as other specific areas and technology acquisitions. Celebrex and Zyvox were two of these projects that required less spending during the current year. Also during the year, the company filed an NDA for parecoxib sodium, an injectable COX-2 specific analgesic agent. Similarly, an NDA was also filed with the FDA for the company's once-a-day formulation of Detrol, which treats incontinence. In 1999, R&D expenses increased as a percentage of sales to 21 percent surpassing the level experienced in the preceding year. In addition to strong commitments to the development of new products such as Zyvox and a combination dosage form of Xalatan, significant investments were made in technology acquisitions and research alliances. Also, the Sugen merger and Sensus investment contributed to higher R&D expense. Sugen spending in 1999, combined with the Sensus investment and termination of certain other projects resulted in charges of $104 million, a $72 million increase over 1998. Spending during 1998 supported the product filings of Celebrex arthritis treatment, anticancer therapies Aromasin (exemestane) and epirubicin as well as the development activities related to filing an NDA for Edronax with the FDA for depression. Research spending was reduced in 1998 by milestone payments from a co-promotion partner. 37 Pharmacia Corporation Annual Report 2000 6 SELLING, GENERAL AND ADMINISTRATIVE grew as a percent of sales by 2 percentage points to 42 percent. This is largely attributable to higher sales costs associated with the increase in Celebrex sales volume. Additionally, headcount increases to support key products including Celebrex, Xalatan, Camptosar and Zyvox contributed to the increased spending. The sales force expansion is intended to increase market penetration. There also were premarketing spending activities for new launches in excess of the prior year. The 1999 SG&A expenses increased as a percent of sales due primarily to sales and promotional efforts in the U.S. The U.S. sales force was expanded to accommodate new product launches. Products such as Celebrex, Camptosar, Pletal, Detrol, Fragmin and Glyset were the focus of such marketing efforts. Spending related to Celebrex included co-promotion costs associated with the Pfizer agreement. During 1999, Xalatan was launched in Japan. Likewise, there was upward pressure in 1998 due primarily to sales force expansions and increased product promotion in the U.S., Europe and Japan, particularly for the following brands: Detrol, Edronax, Mirapex, Genotropin and Xalatan. The comparative spending increase was somewhat mitigated by the favorable effects of exchange and a decrease in general and administrative expense. Other Pharmaceuticals 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 over the period 1998 to 2000 decreased by $253 million or 12 percent, due largely to the phase-out of the divested nutrition business of P&U and generic competition in the consumer health care business in key products. 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 both brands declined in 2000 due to new generic competition. A generic version of Nicorette gum was introduced in the U.S. in the first half of 2000, and a generic version of Rogaine 5% solution entered the market in the second half of the year. Sales of Nicorette and Rogaine in 2000 were $218 million and $134 million down from $234 million and $139 million, respectively. Overall, 2000 sales in the consumer health care business were down 6 percent from 1999 to $644 million. From 1998 to 1999, sales were flat. Sales in the animal health business grew 5 percent during the current year to $442 million. Animal health sales were driven by Naxcel/Excenel, which grew 16 percent over 1999 on sales of $123 million. Several new launches were added to the product portfolio during 2000. Excenel, an antibiotic used to treat a variety of infections in animals, won European approval in August. Premarket authorization was received for Enviracor, the first vaccine against E. coli mastitis. Other notable events include the introduction of Pirsue and Lincocin to treat mastitis in dairy cattle. From 1998 to 1999, sales rose 3 percent. Agricultural Sales Record net sales of $5.5 billion in 2000 for the company's agricultural business represented a 5 percent increase over the prior year net sales of $5.2 billion and a 23 percent increase over net sales of $4.4 billion in 1998. Sales growth in 2000 was led by a 6 percent increase in glyphosate product sales, increased sales of selective chemistries and higher technology royalty revenues. Net sales in 1999 increased significantly over 1998 because 1999 was the first year that the seed company acquisitions were included for a full year. Excluding those acquisitions, 1999 net sales increased 3 percent compared with 1998 net sales. Contributing to the previous net sales record in 1999 were increased sales of the Roundup family of herbicides and higher demand for crops developed through biotechnology. Agricultural Productivity Segment
================================================================================ 2000 1999 1998 - -------------------------------------------------------------------------------- Revenues $3,885 $3,586 $3,500 ================================================================================ EBIT $1,099 $ 897 $ 869 Add: restructuring and special items 22 27 45 - -------------------------------------------------------------------------------- EBIT (excluding special items) $1,121 $ 924 $ 914 ================================================================================
Net sales of the Agricultural Productivity segment increased 8 percent in 2000 over 1999, following a 2 percent increase in 1999 over 1998. Net sales for glyphosate products in 2000 increased 6 percent primarily because of an 18 percent increase in volume partly offset by lower selling prices. The increase in volume was consistent with the company's strategy of selectively reducing prices to encourage new uses and increase sales volumes. Sales of glyphosate increased primarily in the U.S., Argentina, and Europe because of the continued adoption of conservation tillage, an increase in acreage planted with products with Roundup Ready traits and the development of uses for Roundup in new applications. On September 20, 2000, the compound per se patent protection for the active ingredient in Roundup herbicide expired in the U.S. The company has not had glyphosate patent protection outside the U.S. for several years, but anticipates increased competition in the U.S. from lower-priced generic and other branded glyphosate products following the patent expiration. The Roundup family of herbicide volume growth in 1999 was slightly above 20 percent as operations in the U.S., Canada, Brazil, Argentina, and Australia posted record sales volumes of Roundup. Lower selling prices, principally in the U.S., made Roundup more cost effective in a wide range of crop and industrial uses; however, the effect of lower selling prices was more than offset by the higher sales volumes. Net sales for the Agricultural Productivity segment also benefited from a 14 percent increase in sales in the selective chemistries and Roundup lawn and garden businesses. Selective chemistry sales included higher corn herbicide sales of Harness Xtra and sales from the company's new wheat herbicide. Roundup lawn and garden sales increased 47 percent over 38 Pharmacia Corporation Annual Report 2000 7 the prior year when sales dropped 37 percent, reflecting a change in the distribution method, causing distribution channel inventories to decline from 1998. EBIT (excluding special items) in 2000 increased 21 percent to $1.1 billion compared with $924 million in 1999 when EBIT (excluding special items) increased 1 percent from $914 million in 1998. Increased sales and lower operating expenses can be attributed to the improvement in 2000. Sales increased for the Roundup family of herbicides, selective chemistries, and Roundup lawn and garden products. The gross profit on glyphosate products declined 2 percentage points, however, because of an overall decline in the net selling price of the glyphosate family of products as a result of the continued strategy to selectively reduce glyphosate prices to encourage increased uses. Operating expenses in 2000 decreased approximately 6 percent for this segment largely due to cost reductions in R&D. In 1999, gross profit improved slightly over the prior year on higher overall volumes and lower unit cost in the family of Roundup herbicides. The gross profit increase combined with lower operating expenses led to an overall increase in EBIT (excluding special items) in 1999 compared with 1998. Seeds and Genomics Segment
================================================================================ 2000 1999 1998 - -------------------------------------------------------------------------------- Revenues $ 1,608 $ 1,662 $ 948 ================================================================================ EBIT $ (581) $ (391) $(835) Add: restructuring and special items 239 74 559 - -------------------------------------------------------------------------------- EBIT (excluding special items) $ (342) $ (317) $(276) ================================================================================
Seed and Genomics segment net sales declined slightly in 2000 due to lower conventional seed sales and the absence of sales from Stoneville, sold late in 1999. The decrease in conventional seed sales was partially offset by a 14 percent increase in sales of seeds that included biotechnology traits, as the company continues to strategically shift more of its seed offerings to seeds with biotechnology traits. In 2000, worldwide acreage planted with crops developed through biotechnology (at Monsanto) increased 15 percent to approximately 103 million acres compared with 1999 when acreage planted with similar crops was 89 million, a 41 percent increase over 1998 planted acres. Over that same three-year period, acres planted with Roundup Ready traits increased nearly 68 percent with Roundup Ready soybean acres increasing 60 percent from 1998 to 2000. The increase in net sales in 1999 to nearly $1.7 billion from $948 million in 1998 reflected the inclusion of the 1998 seed company acquisitions for a full year, and to a lesser extent, an increase in demand for crops developed through biotechnology, especially Roundup Ready soybeans, corn and cotton, Yieldgard insect-protected corn, and Bollgard with Roundup Ready cotton. Increased sales of these products generated significantly higher technology royalty fees in 1999 compared with 1998. The number of acres planted to Roundup Ready soybeans increased 46 percent in 1999, the product's fourth year in the marketplace. EBIT for each of the years was significantly impacted by one-time charges. Pretax restructuring and special items in 2000 for the Seeds and Genomics segment totaled $239 million and included $85 million of restructuring charges primarily associated with employee separations, asset write-offs, and contract terminations. In addition, the company wrote off $88 million of goodwill primarily associated with the nutrition program, $60 million of obsolete seed inventory, and $5 million of other miscellaneous costs. In 1999, the segment results included charges of $74 million composed of an $85 million charge associated with the failed merger between the company and D&PL and a $61 million charge for the accelerated integration of the company's agricultural chemical and seed operations, partly offset by a $35 million gain on the divestiture of the Stoneville cotton seed business and an $11 million reversal of restructuring liabilities established in 1998. In 1998, continuing operations included charges of $559 million, including $402 million for the write-off of in-process R&D, $137 million of restructuring costs as part of an overall strategy to integrate the acquired seed businesses by closing certain facilities and reducing the work force, and a $20 million charge for the cancellation of stock options in exchange for cash related to the acquisition of DEKALB. The in-process R&D charges were primarily associated with the acquisitions of DEKALB, PBIC, and certain international seed operations of Cargill, Inc. In-process R&D charges for the seed companies acquired in 1998 covered numerous seed breeding projects, no single one of which was significant, as is typical in the seed industry. These projects consisted of conventional breeding programs for corn, wheat and other hybrids; conventional breeding for soybean varieties; and the development of crops modified through biotechnology. The in-process R&D projects were valued by a discounted cash flow method with risk-adjusted discount rates, generally from 12 percent to 20 percent, which took into account the stage of development of each in-process R&D category. Successful commercialization of products developed through these projects is expected to occur five to nine years after program initiation. Although there are risks associated with the ultimate completion and commercialization of these research projects, the failure of any one project would not materially affect the total value of the research programs. The in-process projects were at various stages of completion at the dates of acquisition. In 2000, the company had expenses of approximately $45 million for biotechnology-related activities and approximately $40 million for conventional breeding activities related to completing these in-process R&D projects. During the next six years, management expects to spend approximately $110 million on biotechnology-related activities and approximately $130 million on conventional breeding activities to complete these in-process R&D projects; approximately $75 million in 2001, $60 million in 2002, $50 million in 2003, $35 million in 2004, and $20 million thereafter. The 39 Pharmacia Corporation Annual Report 2000 8 company intends to fund these costs, consisting primarily of salary and benefit expense for R&D employees, with cash generated form existing businesses. Revenues from the in-process R&D projects related to the 1998 acquisitions began in 1999. EBIT (excluding special items) for the Seed and Genomics segment in 2000 decreased $25 million compared with 1999. EBIT (excluding special items) was a loss of $342 million in 2000 compared with a loss of $317 million in 1999 and a loss of $276 million in 1998. Results in 2000 were lower primarily because of lower gross margins from seed sales. Operating expenses were 8 percent lower with R&D spending down 7 percent as the company focused on certain key crops. The increased loss in 1999 compared with 1998 was primarily due to higher amortization expense after the seed company acquisitions combined with higher overall operating expenses, partly offset by higher gross margin. The commercial success of agricultural and food products developed through biotechnology will depend in part on public acceptance and government regulations. The company continues to address the concerns of consumers, public interest groups, and regulatory agencies regarding agricultural and food products developed through biotechnology and will invest significant amounts in 2001 to address these concerns, including participating in an integrated, industry-wide initiative to provide improved information to consumers. Business results of the Agricultural Productivity and Seeds and Genomics segments are affected by changes in foreign economies and foreign currency exchange rates, as well as by climatic conditions around the world. Sales growth was adversely impacted by weak economic conditions in certain world areas, which lessened the demand for herbicides, especially in Eastern Europe and the Commonwealth of Independent States in 2000 and 1999 and in Southeast Asia in 2000 and 1998. Unfavorable climate conditions in key areas of Latin America and Canada during late 1999 (the 2000 planting season) decreased demand for herbicides and limited sales volume growth of Roundup in the 2000 crop year. Although these two segments operate in virtually every region of the world, business is principally conducted in the U.S., Argentina, Brazil, Canada, Australia, France and Japan. Accordingly, changes in economic conditions, foreign exchange rates and climate conditions in those parts of the world generally have a more significant impact on operations than similar changes in other places. Corporate/General Due to large restructuring charges in 2000 and 1998, corporate and other expenses, including restructuring costs, were comparatively lower in 1999. In 2000, the company recorded $1.2 billion in total merger and restructuring charges. In 1999, these costs totaled $55 million and in 1998 the combined companies recorded $432 million of total restructuring expenses. Also during 2000, the company made a $100 million charitable contribution. Excluding these costs, corporate expenses primarily relate to administrative costs not associated with the business operations. Merger and Restructuring Charges Merger and restructuring charges recorded during 2000 totaled $1.2 billion which consist of $1.1 billion recorded as merger and restructuring; $60 million relating to the write-off of obsolete inventory in cost of sales; and $88 million relating to the write-off of goodwill is recorded as amortization and adjustment of goodwill. During 2000, the former Monsanto Company and Pharmacia & Upjohn merged to form Pharmacia Corporation. As a result of that merger, there were many duplicate functions and locations, particularly in the prescription pharmaceutical segment and corporate functions. The company began a restructuring in order to integrate the two companies, eliminate duplicate positions and facilities, and create a consolidated headquarters in New Jersey. The businesses in the agricultural segment and other pharmaceutical operations are simultaneously restructuring their businesses based on new strategic directions of the combined company. The board of directors approved a comprehensive integration and restructuring plan in the spring of 2000. The restructuring charges of this plan will be taken in several phases based upon the finalization and management approval of the various components of the plan. Due to the comprehensive nature of the restructuring, the timelines for the various components of the restructuring will occur over multiple years. The company anticipates aggregate merger and restructuring charges related to the Pharmacia merger to total between $2.0 billion and $2.5 billion. The restructuring plan is expected to yield annual savings of approximately $600 million that will be reinvested in the company's operations. The $1.1 billion recorded as merger and restructuring in 2000 was comprised as follows: - - $601 million to integrate the former Monsanto and Pharmacia & Upjohn organizations such as consultant fees, contract termination costs, moving and relocation costs as well as transaction costs such as investment bankers, attorneys, registration and regulatory fees and other professional services. Additionally, these costs include various employee incentive and change-of-control costs directly associated with the merger. The latter includes a non-cash charge of $232 million during the first quarter that was related to certain employee stock options that were repriced in conjunction with the merger pursuant to change of control provisions. Pursuant to the terms of these "premium options," at consummation of the merger, the original above-market exercise price was reduced to equal the fair market value on the date of grant. - - $231 million associated with restructuring the prescription pharmaceutical segment as a result of merging G.D. Searle and Pharmacia & Upjohn operations worldwide. These actions resulted in duplicate facilities, computer systems and positions around the world. The charges consist of $155 million relating to 40 Pharmacia Corporation Annual Report 2000 9 the separation of approximately 1,320 employees worldwide in R&D, manufacturing, marketing and administrative functions; $51 million relating to asset write-downs resulting from duplicate computer systems and facilities; $22 million relating to contract and lease terminations and $3 million for other exit costs. - - $150 million relating to consolidating corporate and administrative functions in New Jersey and eliminating duplicate administrative positions. This charge is comprised of $113 million relating to the separation of approximately 210 employees in corporate and administrative positions and $37 million relating to asset write-downs (duplicate computer systems and leasehold improvements in duplicate facilities) and lease termination fees and other exit costs. - - $10 million related to the separation of approximately 40 employees mainly in sales and R&D in other pharmaceutical operations. - - $15 million relating to the reversals of prior P&U restructuring reserves that resulted from higher than anticipated proceeds on asset sales and lower than anticipated separation payments. - - $101 million recorded by Monsanto primarily associated with the business decision to focus in four key crops and realign commercial and administrative operations in Western Europe and the Commonwealth of Independent States. An additional $2 million recorded by Monsanto is associated with merger activities and is included as part of the $601 million of merger costs. In addition to the $103 million recorded as net merger and restructuring charges by Monsanto, an additional $148 million of charges was recorded as $60 million of cost of goods sold and $88 million of amortization and adjustment of goodwill. The net pretax charge of $251 million was comprised of asset impairments of $185 million, workforce reduction costs of $61 million, contract terminations of $5 million and other shutdown costs of $4 million. This charge was partially offset by the reversal of $4 million of the 1998 restructuring liability, largely as a result of lower actual severance expense than originally estimated. The asset impairments consisted of $60 million for inventories, $91 million for intangible assets, $12 million for accounts receivables and $22 million for equipment write-offs. The workforce reduction charge reflected involuntary employee separation costs for 695 employees worldwide and included charges of $31 million for positions in administration, $27 million for positions in R&D and $3 million for positions in manufacturing. The company expects the employee reductions to be completed by June 2001. The other exit costs included expenses associated with contract terminations and other shutdown costs, of which $3 million were paid in 2000. Additional charges are expected to be incurred in 2001 as Monsanto plans to continue to stringently focus the R&D programs and streamline operations. Total pretax charges from this plan are expected to be $425 million to $475 million. The company expects to implement these actions by the end of 2001. As of December 31, 2000, cash payments totaling $119 million relating to the separation of approximately 1,350 employees from the pharmaceutical segments and corporate functions have been paid and charged against the liability. Additionally 460 of the planned employee terminations in the agricultural segments were completed; 358 of these employees received cash severance payments totaling $28 million during 2000 and 102 employees elected deferred payments of $9 million which will be paid during the first quarter of 2001. Total restructuring charges and spending associated with the current restructuring plans relating to the integration of the former Monsanto and P&U companies and the restructuring of the agricultural products and other pharmaceutical operations are as follows:
================================================================================ Workforce Other Exit (Dollars in millions) Reductions Costs - -------------------------------------------------------------------------------- 2000 Charges $339 $34 2000 Spending 147 19 - -------------------------------------------------------------------------------- Remaining balance $192 $15 ================================================================================
Former Pharmacia & Upjohn Restructuring Plans During 1999, the company recorded $54 million in restructuring expenses including an adjustment of $3 million to the 1998 turnaround restructuring. The charge included costs pertaining to reorganizations that will result in the elimination of certain R&D projects as well as the elimination of 375 employee positions, mainly impacting the pharmaceutical segments and corporate and administrative functions. The objective of the restructuring is to eliminate duplicate functions and investments in R&D as well as reorganize the sales force based on anticipated future requirements of the company. The adjustment to the prior restructuring liabilities of $3 million was attributable to lower than anticipated employee separation costs. Employee separation benefits included in the 1999 charge are for elimination of positions in R&D of $26 million, corporate and administration of $18 million and sales of $6 million. Project termination costs totaled $4 million and asset write-downs totaled $3 million. As of December 31, 2000, $27 million has been paid out and charged to the liability relating to the separation of approximately 280 employees. An additional $4 million has been reversed due to lower than expected severance costs. The remaining liability is less than $19 million and relates primarily to remaining separation annuity payments. The company anticipates all activities and payments associated with this restructuring to be substantially complete during 2001. In connection with the merger with Sugen, the company recorded $16 million in merger transaction costs such as fees for investment bankers, attorneys, accountants, and other costs to effect the merger with Sugen, all of which were paid during 1999. These charges were recorded in merger and restructuring on the consolidated statement of earnings. In 1997 and 1998, former Pharmacia & Upjohn undertook a comprehensive turnaround program to significantly rationalize 41 Pharmacia Corporation Annual Report 2000 10 infrastructure, eliminate duplicate resources in manufacturing, administration and R&D. The total restructuring charges for 1998 and 1997 included involuntary employee separation costs for 580 and 1,320 employees worldwide, respectively. The 1998 charge included elimination of positions in marketing and administration of $55 million, R&D of $9 million, and manufacturing of $4 million. These amounts included an adjustment of $16 million of the 1997 accruals, mainly attributable to lower employee separation costs and, to a lesser extent, changes in plan estimates. The 1997 charge included elimination of positions in marketing and administration of $81 million, R&D of $22 million, and manufacturing of $31 million. As of December 31, 2000, the company had paid $186 million in severance costs relating to approximately 1,900 employee separations in connection with the 1998 and 1997 charges. The remaining balance for employee separation costs related to the turnaround program was $13 million at December 31, 2000, comprised mainly of remaining annuity separation payments. The 1998 restructuring charge included asset write-downs for excess manufacturing, administration, and R&D facilities totaling $8 million. The 1998 amount included an adjustment of $15 million of the 1997 accruals, mainly attributable to changes in plan estimates, favorable outcomes on sales of facilities, and actual facility closure costs below the original estimates. Other costs included in the 1998 restructuring charge of $16 million were primarily comprised of canceled contractual lease obligations and other costs. Offsetting 1998 charges in this grouping was an adjustment of $6 million related to all restructuring charges prior to 1997. During 2000, the company adjusted the turnaround restructuring by $11 million to reflect the sale of a facility at a price more favorable than anticipated and to reverse residual accruals. The company expects all activities and annuity payments associated with the turnaround program to be substantially complete during 2001. The following table displays a rollforward of the remaining liability balances associated with the restructuring plans of the former Pharmacia & Upjohn through December 31, 2000:
================================================================================ Employee Separation (Dollars in millions) Costs Other Total - -------------------------------------------------------------------------------- Balance January 1, 1998 $ 153 $ 20 $ 173 Additions 68 16 84 Deductions (113) (12) (125) - -------------------------------------------------------------------------------- Balance December 31, 1998 108 24 132 - -------------------------------------------------------------------------------- Additions 50 4 54 Deductions (67) (17) (84) - -------------------------------------------------------------------------------- Balance December 31, 1999 91 11 102 - -------------------------------------------------------------------------------- Deductions (59) (11) (70) - -------------------------------------------------------------------------------- Balance December 31, 2000 $ 32 $-- $ 32 ================================================================================
Former Monsanto Restructuring Plans In 1998, the company recorded net restructuring charges of $340 million as part of former Monsanto's overall strategy to reduce costs and continue the commitment to its core businesses. Total 1998 restructuring charges of $428 million were partially offset by $68 million from reversals of prior year restructuring reserves no longer needed and a $20 million gain from the sale of the Orcolite business, resulting in a net charge to earnings of $340 million. The 1998 net restructuring charges were recorded in the consolidated statement of earnings in the following categories:
==================================================================================================================================== Workforce Facility Asset Reductions Closures Impairments Other Total - ------------------------------------------------------------------------------------------------------------------------------------ Cost of goods sold $ 6 $ 8 $ 84 $ -- $ 98 Amortization and adjustment of goodwill -- 3 63 -- 66 Merger and Restructuring 103 64 -- (14) 153 All other, net -- -- 43 (20) 23 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL $109 $75 $190 $(34) $340 ====================================================================================================================================
The activities the company planned to exit in connection with this restructuring plan principally comprised a tomato business and a business involved in the operation of membership-based health and wellness centers. This plan also contemplated exiting several small business activities, none of which had a significant effect on the restructuring reserve. The company recorded net restructuring charges of $327 million to cover the costs associated with these actions in 1998 and the reversal of prior restructuring reserves. The charges reflected $103 million for the elimination of approximately 1,400 jobs, primarily in manufacturing and administrative functions. Included in these actions were approximately 190 positions that had been part of a restructuring plan approved in 1996. The charges also reflect pretax amounts for asset impairments, primarily for property, plant and equipment; intangible assets; and certain investments, totaling $130 million. The asset impairments were recorded primarily because of the company's decision to sell certain nonstrategic businesses. Other impairment charges totaling $40 million were recorded in December 1998 because of management's decision to exit certain long-term investments. Fair values of the impaired assets and the businesses held for sale were recorded at their current market values or on estimated sale proceeds, based on either discounted cashflows or sales contracts. 42 Pharmacia Corporation Annual Report 2000 11 The December 1998 restructuring amounts also included pretax charges of $99 million for the shutdown or other rationalization of certain production and administrative facilities. Rationalization entails the consolidation, shutdown or movement of facilities to achieve more efficient operations. Approximately 80 facilities, located primarily in the U.S., Europe and Latin America, were affected by these actions. Charges for these shutdowns included $21 million for property, plant and equipment, $15 million for intangible assets, $26 million for miscellaneous investments, and $6 million for inventories. Leasehold termination costs of $13 million and various facility closure costs of $18 million, principally for facilities shutdown costs and contract cancellation payments, were also included in the shutdown charges. The closure or rationalization of these facilities was completed by December 31, 1999. In May 1998, the former Monsanto board of directors approved a plan to exit the company's optical products business, which included the Orcolite and Diamonex optical products business and the Diamonex performance products business (both reported in the other pharmaceuticals category). As a result, the company recorded net pretax charges of $13 million which are comprised of $68 million for the rationalization of the Diamonex business, $20 million pretax gain on the sale of the Orcolite business and $35 million pretax gain primarily related to the reversal of a prior restructuring reserve based on a decision not to rationalize a European pharmaceutical production facility. All of the actions relating to the May plan, including workforce reductions and payment of severance, were complete by December 31, 1999. In 1999, the company recorded a pretax gain of $54 million from the reversal of restructuring liabilities established in 1998. The restructuring liability reversals were required as a result of lower actual severance and facility shut-down costs than originally estimated. In October 1999, the company completed the sale of the alginates business, which resulted in the recording of discontinued operations. Included in the accounting for the discontinued operations are the reversals of restructuring liabilities established in 1998 of $27 million aftertax which were no longer required as a result of the sale of the alginates business on terms more favorable than originally anticipated. As of December 31, 2000 all activities relating to the restructuring plans associated with the former Monsanto Company have been substantially completed. Cash payments of $117 million were made to eliminate approximately 1,300 positions. Approximately another 100 positions in the original plan were eliminated through attrition, which resulted in a reversal of $4 million during 2000. These totals include workforce reductions from an earlier plan that were transferred into the 1998 plan. Interest Expense and Income Interest expense declined to $381 million during 2000, which was a change in trend from the previous two years. The decrease in expense during 2000 was due to reduced levels of debt as compared to prior periods. Proceeds received from the partial agricultural IPO that occurred in October and certain business divestitures were used to reduce corporate debt levels. Interest expense increased significantly in 1999 as the company made strategic investments in seed businesses and financed the acquisitions with long-term debt of various maturities. Interest expense rose to $408 million in 1999 as compared to $236 million in 1998. Similarly, the company realized increased interest income during 2000 due to increased average cash balances and increasing interest rates. The decline in interest income during 1999 as compared to 1998 was due to a change in investment composition and a decline in longer-term instruments. Interest income in 2000, 1999 and 1998 was $139 million, $110 million and $125 million, respectively. Income Taxes The annual effective tax rate in 2000 was 29 percent compared to 31 percent in 1999 and 46 percent in 1998. The elevated 1998 rate was largely due to nondeductible charges for acquired in-process R&D and goodwill from seed company acquisitions. The reduction in the rate in 2000 was attributable to income in lower rate tax jurisdictions offset in part by nondeductible merger-related costs. Comprehensive Income Comprehensive income is defined as all non-owner changes inequity and equals net earnings plus other comprehensive income (OCI). For Pharmacia, OCI consists of currency translation adjustments (CTA), unrealized gains and losses on available-for-sale securities, and minimum pension liability adjustments. Comprehensive income in millions for 2000, 1999 and 1998 was $288, $760 and $351, respectively. Unfavorable currency movements in 2000 were due to the continuing strength of the dollar against other currencies and reduced comprehensive income to an amount less than net earnings. Unrealized investment gains, particularly in equities, partially offset the unfavorable translation adjustment. Unfavorable currency movements in 1999 reduced comprehensive income resulting in an amount less than net earnings. Movements in the other components of OCI substantially off-set each other resulting in a minimal unfavorable impact on comprehensive income. Comprehensive income was less than net earnings in 1998 because unrealized losses on available-for-sale securities, coupled with the minimum pension liability adjustments, more than offset favorable CTA. Favorable CTA reflected the weaker U.S. dollar at December 31, 1998, relative to its general strength at the prior year end. Additional information regarding OCI is provided in notes to the consolidated financial statements. 43 Pharmacia Corporation Annual Report 2000 12 Financial Condition, Liquidity, and Capital Resources
================================================================================ As of December 31, 2000 1999 1998 - -------------------------------------------------------------------------------- Dollars in millions Working capital $ 5,406 $ 3,508 $ 3,069 Current ratio 1.88:1 1.49:1 1.46:1 Debt to total capitalization 31.1% 42.8% 43.5% ================================================================================
Favorable growth in working capital and the current ratio, which occurred during the current year are mainly attributable to increases in cash and cash equivalents and accounts receivable as well as decreases in short-term debt. The accounts receivable increases are due to sales volume and program changes for certain selling arrangements. Also, a reduction in commercial paper borrowings was the main factor in the reduced short-term debt balance. Working capital and the current ratio for 1999 improved in comparison to 1998 due largely to an increase in cash and trade receivables offset partly by higher short-term borrowings. The increase in short-term debt was due to larger current maturities and commercial paper positions at year end. The debt-to-total-capitalization ratio improved over 1999 due largely to the company's focus on debt reduction. During 2000, the company repurchased $362 million in long-term debt issues. This repurchase, in conjunction with reduced short-term debt levels favorably affected the measurement. The increase in shareholders' equity was due mainly to current year net income and the effects of the partial IPO of the agricultural business offset by negative currency translation adjustments. The debt-to-total-capitalization ratio from 1998 to 1999 decreased slightly due mainly to increased net income during 1999. The overall endpoint reflects the effect of higher long-term borrowing levels required to finance the seed company acquisitions in 1998. Significant merger and restructuring charges in 1998 combined with negative currency translation adjustments in both years also contributed to the higher percentage. During 2000, Monsanto Company, Pharmacia's agricultural subsidiary, completed a partial IPO of its shares that resulted in proceeds of approximately $700 million. Another significant source of funds during 2000 was the sales of certain discontinued businesses. Proceeds received in connection with these sales were $1.7 billion. See notes to the consolidated financial statements for a further description of these events. Net cash provided by continuing operations is a major source of funds to finance working capital, shareholder dividends, and capital expenditures. Cash from operations totaled $1.8 billion in 2000, $1.6 billion in 1999 and $1.2 billion in 1998. In addition to net cash flows provided by operations, other major sources of cash in 1999 and 1998 were the proceeds from the sale of investments and properties of $1.1 billion in 1999 and $1.6 billion in 1998. Over the three-year period from 1998 to 2000, significant uses of cash included acquisitions of seed companies for $4.1 billion in 1998, expenditures for property, plant, and equipment and the company's quarterly dividend payment to shareholders. Capital expenditures were $1.4 billion in 2000, $1.7 billion in 1999 and $1.6 billion in 1998. Committed capital spending for 2001 of approximately $580 million includes expansion and improvements to research and manufacturing facilities in the U.S. and Puerto Rico as well as continued investment in information technology. The company's future cash provided by operations and borrowing capacity is expected to cover normal operating cash flow needs, planned capital spending, and dividends for the foreseeable future. As of December 31, 2000, lines of credit available for company use totaled approximately $3.0 billion, of which $2.5 billion were committed. The company had A-1+ and P-1 ratings for its commercial paper and AA- and A1 general bond ratings from Standard & Poor's and Moody's, respectively, as of December 31, 2000. Market Risk Market risk represents the risk of a change in the value of a financial instrument, derivative or nonderivative, caused by fluctuations in interest rates, currency exchange rates, and commodity and equity prices. The company handles market risk in accordance with established policies and thereby enters into various derivative transactions. No such transactions are entered into for trading purposes. Because the company's short and long-term debt exceeds cash and investments, the exposure to interest-rate risk relates primarily to the debt portfolio. The company is actively managing all portfolios to reduce its cost and increase its return on investment. To ensure liquidity, the company will only invest in instruments with high credit quality where a secondary market exists. The company is in a position to keep all investments until final maturity and maintains the majority of long-term debt at fixed rates. The following sensitivity analysis presents the hypothetical change in fair value of those financial instruments held by the company at December 31, 2000, which are sensitive to changes in interest rates. Market risk is estimated as the potential change in fair value resulting from an immediate hypothetical one-percentage point parallel shift in the yield curve. The fair values of the company's investments and loans are based on quoted market prices or discounted future cash flows. As the carrying amounts on short-term loans and investments maturing in less than 180 days approximate the fair value, these are not included in the sensitivity analysis. The fair value of debt included in the analysis is $4.3 billion and excludes Employee Stock Ownership Plan (ESOP) guaranteed debt. A one-percentage point change in the interest rates would change the fair value of debt by $252 million. The company's management of currency exposure is primarily focused on reducing the negative impact of currency fluctuations on consolidated cash flows and earnings. The company 44 Pharmacia Corporation Annual Report 2000 13 uses forward contracts, cross-currency swaps, and currency options to actively manage the net exposure in accordance with established hedging policies. The company hedges intercompany receivables, payables and loans and deposits as well as a portion of certain third party firm commitments and anticipated transactions. For these contracts, unfavorable currency movements of ten percent would negatively impact the fair market values of the related derivatives by $210 million. The company uses futures contracts to protect against commodity price increases mainly in the seeds business. The majority of these contracts hedge the purchases of soybeans and corn. A ten percent decrease in soybean and corn prices would have a negative impact on the fair value of those futures by $10 million and $3 million, respectively. The company also has investments in equity securities. All such investments are classified as long-term investments. The fair market value of these investments is $390 million. The majority of these investments are listed on a stock exchange or quoted in an over-the-counter market. If the market price of the traded securities were to decrease by ten percent, the fair value of the equities would decrease by $38 million. The company issued publicly traded instruments called Adjustable Conversion-rate Equity Securities (ACES). These instruments are classified as debt on the company's balance sheet although their fair value is impacted by the market price of the company's stock as well as interest rates. The fair market value of the ACES based on the traded price at December 29, 2000, is $907 million. A ten percent change in the company's stock price would affect fair value by $91 million. Litigation and Contingent Liabilities 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 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. On March 20, 1998, a jury verdict was returned against the company in a lawsuit filed in the California Superior Court. The lawsuit claims that the company delayed providing access to certain gene technology under a 1989 agreement. The jury awarded $175 million in future damages. On June 28, 2000, the California Court of Appeals reversed 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 established 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 may soon 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. Partial Agricultural Business Initial Public Offering On October 23, 2000, Monsanto sold 38,033,000 shares of its common stock at $20 per share in the IPO, including 3,033,000 shares of common stock with respect to which the underwriters exercised their over-allotment option. Subsequent to the offering, Pharmacia continues to own 220,000,000 shares of common stock, representing 85.3 percent ownership of Monsanto. The total net proceeds to the company were approximately $700 million. Euro Conversion 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 45 Pharmacia Corporation Annual Report 2000 14 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 (United Kingdom, Sweden, Denmark) had not approved measures to convert to the euro as of December 31, 2000. The impact that an abstention from conversion may have on the operations of the company, if any, is not known. New Accounting Standards In December 1999, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin 101, "Revenue Recognition in Financial Statements" (SAB 101). SAB 101 provides guidance related to revenue recognition and allows companies to report any changes in revenue recognition related to adopting its provisions as an accounting change at the time of implementation in accordance with Accounting Principles Board Opinion (APB) No. 20, "Accounting Changes." In connection with SAB 101, the company recorded a cumulative effect of a change in accounting principle, effective January 1, 2000, in the after-tax amount of $198 million (net of taxes of $108 million). 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 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. Also included in the $198 million cumulative catch-up adjustment was $26 million (net of taxes of $16 million) recognized by Monsanto related to biotechnolgy traits sales. The adoption of SAB 101 affected the company's method of recognition of traits sold through competitor seed companies. Monsanto now recognizes this license revenue when a grower purchases seed as compared with the previous practice of recognizing the licensee revenue when the third-party seed company sold the seed into the distribution system. As a result, no licensee revenues from biotechnology traits sold by third-party seed companies were recognized in the fourth quarter of 2000, whereas the fourth quarter of 1999 included $42 million of such revenues. The company recorded a cumulative effect of a change in accounting principle, effective January 1, 1999, for revenue recognized in 1998 related to the sales of marketing rights. The effect on earnings in 1999 was an after-tax loss of $20 million, net of taxes of $12 million. In 1998 the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement requires companies to record derivatives on the balance sheet as assets and liabilities measured at fair value. The accounting treatment of gains and losses resulting from changes in the value of derivatives depends on the use of the derivative and whether it qualifies for hedge accounting. Management created a project team to evaluate the impact of the new rules on its systems, policies and practices. Changes, where necessary, will be implemented in accordance with the adoption date, January 1, 2001. The net consolidated income statement effect of adopting SFAS 133 has been estimated to be less than one million dollars and consists of the recognition of instruments not previously required to be recorded in the financial statements and changes in existing balances due to the new rules. Additionally, certain reclassifications will be made to the consolidated balance sheet in accordance with the rules. Forward-Looking Information Certain statements contained in this Report are "forward-looking statements" provided under the "safe harbor" protection of the Private Securities Litigation Reform Act of 1995. Examples of forward-looking statements are anticipated financial results, financial projections, business prospects, future product performance, future research and development results, anticipated regulatory filings and approvals and other matters that are not historical facts. These forward-looking statements are based on the information available, and the expectations and assumptions deemed reasonable by the company, at the time when the statements are made. However, because these forward-looking statements are subject to many risks, uncertainties and changes over time, actual results may differ materially from those expressed or implied by such forward-looking statements. Among the many factors that may cause or contribute to actual results being materially different from those expressed or 46 Pharmacia Corporation Annual Report 2000 15 implied by such forward-looking statements are acquisitions, divestitures, mergers, licenses 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 to provide lower cost pharmaceutical products; the company's ability to continue 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; unexpected product developments, including adverse reactions or regulatory actions; social, legal and political developments, especially those relating to health care reform, pharmaceutical pricing and governmental and public acceptance of biotechnology; unusual seasonal conditions in agricultural markets; new product, antitrust, intellectual property or environmental liabilities; unexpected changes in foreign currency exchange rates or 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. Selected Financial Data On March 31, 2000, the company completed a merger accounted for as a pooling of interests, whereby a wholly owned subsidiary of the former Monsanto Company merged with and into Pharmacia & Upjohn, Inc. In connection with this, the former Monsanto Company changed its name to Pharmacia Corporation. All data prior to this date, except dividends, have been restated to reflect the combined operations of the two companies as if they had been merged during all prior periods.
==================================================================================================================================== Years Ended December 31 2000 1999 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------------------------ Dollar amounts in millions, except per-share data Net sales $18,144 $16,425 $13,737 $12,580 $12,066 Earnings from continuing operations 984 1,306 481 390 838 Pro forma(1) earnings from continuing operations 984 1,294 321 392 817 Total assets 26,656 27,194 26,705 20,970 19,891 Long-term debt 4,586 6,236 6,772 2,630 2,431 Diluted earnings per share from continuing operations .75 1.01 .37 .31 .68 Pro forma(1) diluted earnings per share from continuing operations .75 1.00 .25 .31 .66 Dividends declared per share(2) -- -- -- -- -- ====================================================================================================================================
(1) Pro forma amounts include the effects of Staff Accounting Bulletin 101 "Revenue Recognition" (See Note 2 on page 55). (2) Dividends declared has not been presented because the information would not be meaningful. The year ended December 31, 2000, included a combination of dividends declared by post-merger Pharmacia Corp., and former Monsanto Company and Pharmacia & Upjohn, Inc. Years prior to 2000 included amounts declared by former Monsanto Company and Pharmacia & Upjohn, Inc. (See Note 16 on page 67). 47 Pharmacia Corporation Annual Report 2000 16 REPORTS OF MANAGEMENT AND INDEPENDENT ACCOUNTANTS Report of Management Management is responsible for the consolidated financial statements and the other financial information included in this Annual Report. The Board of Directors, acting through its Audit and Finance Committee which is composed solely of directors who are not employees of the company, oversees the financial reporting process. The financial statements have been prepared in accordance with U.S. generally accepted accounting principles and include amounts based on judgments and estimates made by management. Actual results could differ from amounts estimated. Management has established systems of internal controls over financial reporting designed to provide reasonable assurance that the financial records used for preparing financial statements are reliable and that assets are safeguarded from unauthorized use or disposition. Internal auditors review accounting and control systems. The systems also are reviewed by the independent accountants to the extent deemed necessary to express the opinion set forth in their report. Management takes corrective actions to improve reporting and control systems in response to recommendations by the internal auditors and independent accountants. The appointment of the independent accountants is recommended by the Audit and Finance Committee to the Board of Directors. Fred Hassan, Chairman and Chief Executive Officer Christopher J. Coughlin, Executive Vice President and Chief Financial Officer Report of Independent Accountants To the Shareholders and Board of Directors of Pharmacia Corporation In our opinion, based on our audits and the reports of other auditors, the accompanying consolidated balance sheets and the related consolidated statements of earnings, shareholders' equity and cash flows present fairly, in all material respects, the financial position of Pharmacia Corporation and its subsidiaries at December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the company's management; our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements of Monsanto Company and the former Monsanto Company, which statements reflect total assets of $11,726,000 and $16,535,000 as of December 31, 2000 and 1999 and total revenues of $5,493,000, $9,172,000 and $6,979,000 for each of the three years in the period ended December 31, 2000. Those statements were audited by other auditors whose reports thereon included an explanatory paragraph that described the change in recognizing revenue discussed in Note 2 to the financial statements, and our opinion expressed herein, insofar as it relates to the amounts included for Monsanto Company and the former Monsanto Company, is based solely on the reports of the other auditors. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits and the reports of other auditors provide a reasonable basis for our opinion. As discussed in Note 2 to the consolidated financial statements, in 2000 the company changed its method of recognizing revenue to conform to the Securities and Exchange Commission's Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements. PricewaterhouseCoopers LLP Florham Park, New Jersey February 12, 2001 48 Pharmacia Corporation Annual Report 2000 17 CONSOLIDATED STATEMENTS OF EARNINGS
Dollar Amounts in Millions, Except Per-Share Data For the Years Ended December 31 2000 1999 1998 ==================================================================================================================================== Net sales $ 18,144 $ 16,425 $ 13,737 Cost of products sold 5,656 5,319 5,004 Research and development 2,753 2,815 2,176 Selling, general and administrative 6,739 5,874 4,875 Amortization and adjustment of goodwill 327 248 233 Merger and restructuring charges 1,078 55 245 Interest income (139) (110) (125) Interest expense 381 408 236 Acquired in-process research and development -- -- 402 All other, net (24) (82) (201) - ------------------------------------------------------------------------------------------------------------------------------------ Earnings before income taxes and minority interest 1,373 1,898 892 Provision for income taxes 395 592 411 Minority interest in agricultural subsidiaries, net of tax (6) -- -- - ------------------------------------------------------------------------------------------------------------------------------------ Earnings from continuing operations 984 1,306 481 Income (loss) from discontinued operations, net of tax -- 57 (119) (Loss) gain on sale of discontinued operations, net of tax (37) 35 -- - ------------------------------------------------------------------------------------------------------------------------------------ Earnings before extraordinary item and cumulative effect of accounting change for revenue recognition 947 1,398 362 Extraordinary item, net of tax (32) -- -- Cumulative effect of accounting change, net of tax (198) (20) -- - ------------------------------------------------------------------------------------------------------------------------------------ NET EARNINGS $ 717 $ 1,378 $ 362 ==================================================================================================================================== EARNINGS PER COMMON SHARE: Basic Earnings from continuing operations $ .76 $ 1.04 $ .39 Net earnings .55 1.10 .29 Diluted Earnings from continuing operations .75 1.01 .37 Net earnings .54 1.07 .28 ==================================================================================================================================== PRO FORMA AMOUNTS ASSUMING ACCOUNTING CHANGE WAS MADE RETROACTIVELY (NOTE 2): EARNINGS FROM CONTINUING OPERATIONS $ 984 $ 1,294 $ 321 NET EARNINGS 915 1,386 202 PRO FORMA EARNINGS PER COMMON SHARE: Basic Earnings from continuing operations $ .76 $ 1.03 $ .25 Net earnings .71 1.10 .16 Diluted Earnings from continuing operations .75 1.00 .25 Net earnings .69 1.08 .16 ====================================================================================================================================
The accompanying notes are an integral part of the consolidated financial statements. 49 Pharmacia Corporation Annual Report 2000 18 CONSOLIDATED BALANCE SHEETS
Dollar Amounts in Millions, Except Par Value December 31 2000 1999 ==================================================================================================================================== CURRENT ASSETS: Cash and cash equivalents $ 2,166 $ 1,600 Short-term investments 35 138 Trade accounts receivable, less allowance of $292 (1999: $271) 5,025 4,131 Inventories 2,772 2,905 Deferred income taxes 774 842 Other 795 1,066 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL CURRENT ASSETS 11,567 10,682 Long-term investments 444 476 Properties, net 7,171 6,825 Goodwill, net of accumulated amortization of $739 (1999: $505) 4,106 4,402 Other intangible assets, net of accumulated amortization of $819 (1999: $641) 1,153 1,394 Other noncurrent assets 2,215 1,858 Net assets of discontinued operations -- 1,557 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL ASSETS $ 26,656 $ 27,194 ==================================================================================================================================== CURRENT LIABILITIES: Short-term debt $ 833 $ 1,992 Trade accounts payable 1,361 1,272 Compensation and compensated absences 674 677 Dividends payable 159 145 Income taxes payable 357 255 Other 2,777 2,833 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL CURRENT LIABILITIES 6,161 7,174 Long-term debt 4,362 5,966 Guarantee of ESOP debt 224 270 Postretirement benefit cost 1,511 1,578 Deferred income taxes 255 364 Other noncurrent liabilities 1,138 931 Minority interest in agricultural subsidiaries 1,084 -- - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL LIABILITIES 14,735 16,283 - ------------------------------------------------------------------------------------------------------------------------------------ SHAREHOLDERS' EQUITY: Preferred stock, $0.01 par value; at stated rate authorized 10,000,000 shares, issued 6,518 (1999: 6,692 shares) 263 270 Common stock, $2 par value; authorized 3,000,000,000 shares, issued 1,468,342,000 shares (1999: 1,465,381,000 shares) 2,937 2,931 Capital in excess of par value 2,694 1,791 Retained earnings 10,781 10,696 ESOP-related accounts (307) (330) Treasury stock (2,003) (2,432) Accumulated other comprehensive loss: Currency translation adjustments (2,488) (1,979) Unrealized investment gains, net 101 30 Minimum pension liability adjustment (57) (66) - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL SHAREHOLDERS' EQUITY 11,921 10,911 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 26,656 $ 27,194 ====================================================================================================================================
The accompanying notes are an integral part of the consolidated financial statements. 50 Pharmacia Corporation Annual Report 2000 19 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Dollar Amounts in Millions For the Years Ended December 31 2000 1999 1998 ================================================================================================================= PREFERRED STOCK: Balance at beginning of year $ 270 $ 277 $ 282 Redemptions and conversions (7) (7) (5) - ----------------------------------------------------------------------------------------------------------------- Balance at end of year 263 270 277 - ----------------------------------------------------------------------------------------------------------------- COMMON STOCK: Balance at beginning of year 2,931 2,929 2,877 Issuance of shares 6 2 52 - ----------------------------------------------------------------------------------------------------------------- Balance at end of year 2,937 2,931 2,929 - ----------------------------------------------------------------------------------------------------------------- CAPITAL IN EXCESS OF PAR VALUE: Balance at beginning of year 1,791 1,690 672 Stock option, incentive and dividend reinvestment plans 1,278 106 118 Agricultural subsidiary stock offering (380) -- -- Other public offering -- -- 894 Retirements, conversions and other 5 (5) 6 - ----------------------------------------------------------------------------------------------------------------- Balance at end of year 2,694 1,791 1,690 - ----------------------------------------------------------------------------------------------------------------- RETAINED EARNINGS: Balance at beginning of year 10,696 9,963 10,234 Net earnings 717 1,378 362 Dividends declared (619) (632) (620) Dividends on preferred stock (net of tax) (13) (13) (13) - ----------------------------------------------------------------------------------------------------------------- Balance at end of year 10,781 10,696 9,963 - ----------------------------------------------------------------------------------------------------------------- ESOP-RELATED ACCOUNTS: Balance at beginning of year (330) (360) (383) Third-party debt repayment 39 39 35 Other (16) (9) (12) - ----------------------------------------------------------------------------------------------------------------- Balance at end of year (307) (330) (360) - ----------------------------------------------------------------------------------------------------------------- TREASURY STOCK: Balance at beginning of year (2,432) (2,543) (2,618) Stock options and incentive plans 429 234 192 Purchases of treasury stock -- (170) (117) Sales of treasury stock -- 47 -- - ----------------------------------------------------------------------------------------------------------------- Balance at end of year (2,003) (2,432) (2,543) - ----------------------------------------------------------------------------------------------------------------- ACCUMULATED OTHER COMPREHENSIVE LOSS: Balance at beginning of year (2,015) (1,397) (1,386) Other comprehensive loss (429) (618) (11) - ----------------------------------------------------------------------------------------------------------------- Balance at end of year (2,444) (2,015) (1,397) - ----------------------------------------------------------------------------------------------------------------- TOTAL SHAREHOLDERS' EQUITY $ 11,921 $ 10,911 $ 10,559 ================================================================================================================= COMPREHENSIVE INCOME (NET OF TAX): Currency translation adjustments $ (509) $ (617) $ 64 Unrealized investment gains (losses) 71 11 (37) Minimum pension liability adjustments 9 (12) (38) - ----------------------------------------------------------------------------------------------------------------- Other comprehensive loss (429) (618) (11) Net earnings 717 1,378 362 - ----------------------------------------------------------------------------------------------------------------- TOTAL COMPREHENSIVE INCOME $ 288 $ 760 $ 351 =================================================================================================================
The accompanying notes are an integral part of the consolidated financial statements. 51 Pharmacia Corporation Annual Report 2000 20 CONSOLIDATED STATEMENTS OF CASH FLOWS
Dollar Amounts in Millions For the Years Ended December 31 2000 1999 1998 ============================================================================================================== CASH FLOWS FROM OPERATIONS: Net earnings $ 717 $ 1,378 $ 362 Adjustments to net earnings: Discontinued operations 37 (92) 119 Extraordinary item 32 -- -- Cumulative effect of accounting change 198 20 -- Depreciation 728 666 609 Amortization 539 479 398 Deferred income taxes (384) (22) (390) Acquired in-process R&D expenses -- -- 402 Stock compensation 232 -- -- Other 388 125 351 Changes in: Accounts receivable (979) (655) (765) Inventories 44 (221) (314) Accounts payable and accrued liabilities 117 135 (118) Other non-trade receivables -- (109) 180 Other liabilities (246) 9 53 Other items 362 (67) 336 - -------------------------------------------------------------------------------------------------------------- Cash provided by continuing operations 1,785 1,646 1,223 Cash (required) provided by discontinued operations (112) 171 198 - -------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY OPERATIONS 1,673 1,817 1,421 - -------------------------------------------------------------------------------------------------------------- CASH FLOWS PROVIDED (REQUIRED) BY INVESTMENT ACTIVITIES: Purchases of property, plant & equipment (1,356) (1,678) (1,595) Seed company acquisitions and investments -- (86) (4,061) Other acquisitions and investments (149) (217) (922) Investment and property disposal proceeds 249 1,013 1,219 Proceeds from sale of subsidiaries 76 125 332 Other (5) (145) (3) Discontinued operations 1,669 288 (143) - -------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED (REQUIRED) BY INVESTMENT ACTIVITIES 484 (700) (5,173) - -------------------------------------------------------------------------------------------------------------- CASH FLOWS (REQUIRED) PROVIDED BY FINANCING ACTIVITIES: Proceeds from issuance of long-term debt 500 135 3,938 Repayment of long-term debt (1,906) (526) (328) Net (decrease) increase in short-term borrowings (1,401) 434 (285) Issuance of stock 1,991 202 1,090 Treasury stock purchases -- (170) (117) Dividend payments (622) (641) (639) Other financing activities (46) 123 177 - -------------------------------------------------------------------------------------------------------------- NET CASH (REQUIRED) PROVIDED BY FINANCING ACTIVITY (1,484) (443) 3,836 - -------------------------------------------------------------------------------------------------------------- Effect of exchange rate changes on cash (107) (44) (47) - -------------------------------------------------------------------------------------------------------------- Increase in cash and cash equivalents 566 630 37 - -------------------------------------------------------------------------------------------------------------- Cash and cash equivalents, beginning of year 1,600 970 933 - -------------------------------------------------------------------------------------------------------------- Cash and cash equivalents, end of year $ 2,166 $ 1,600 $ 970 ============================================================================================================== Cash paid during the year for: Interest (net of amounts capitalized) $ 379 $ 386 $ 353 Income taxes $ 724 $ 494 $ 398 Noncash investing activity: Assets disposed of in exchange for equity securities $ -- $ -- $ 54 ==============================================================================================================
The accompanying notes are an integral part of the consolidated financial statements. 52 Pharmacia Corporation Annual Report 2000 21 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Dollars in Millions, Except Per-Share Data On March 31, 2000, a subsidiary of the former Monsanto Company and Pharmacia & Upjohn (P&U) merged and the combined company was renamed Pharmacia Corporation ("Pharmacia" or "the company"). The merger was accounted for as a pooling of interests. As such, all data presented herein reflect the combined results of operations of the two predecessor companies, their statements of financial position and their cash flows as though they had always been combined, by applying consistent disclosures and classification practices. The former Monsanto Company was made up principally of a pharmaceutical business and an agricultural products business. As more fully discussed below, subsequent to the merger forming Pharmacia Corporation, the agricultural operations of the former Monsanto Company were placed into a subsidiary of Pharmacia with the name Monsanto Company (Monsanto). On October 23, 2000, Monsanto completed a partial initial public offering of 14.74 percent of its common stock. To avoid confusion throughout this document, "former Monsanto" will be used to refer to the pre-merger operations of the former Monsanto Company and "Monsanto" will refer to the agricultural subsidiary. In the notes that follow, all dollar amounts are stated in millions except per-share data. Per-share amounts are presented on a diluted, after-tax basis. Trademarks are indicated in italics. 1 SIGNIFICANT ACCOUNTING POLICIES AND OTHER Basis of Presentation The consolidated financial statements are presented on the basis of accounting principles that are generally accepted in the U.S. All professional accounting standards that are effective as of December 31, 2000 have been taken into consideration in preparing the financial statements. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions that affect the reported earnings, financial position and various disclosures. Actual results could differ from those estimates. Principles of Consolidation The consolidated financial statements include the accounts of the company and all majority-owned subsidiaries. All material intercompany transactions and balances have been eliminated in consolidation. Investments in affiliates which are not majority owned are reported using the equity method and are recorded in other noncurrent assets. Gains and losses resulting from the issuance of subsidiaries' stock are recognized in shareholders' equity. Minority Interest Minority interest represents the minority shareholders' proportionate share of equity and net income or loss of the company's consolidated Monsanto agricultural subsidiaries. Currency Translation The results of operations for non-U.S. subsidiaries, other than those located in highly inflationary countries, are translated into U.S. dollars using the average exchange rates during the year, while assets and liabilities are translated using period-end rates. Resulting translation adjustments are recorded as currency translation adjustments in shareholders' equity. For subsidiaries in highly inflationary countries, currency gains and losses resulting from translation and transactions are determined using a combination of current and historical rates and are reported directly in the consolidated statements of earnings. Revenue Recognition Revenues are recognized when title to products and risk of loss are transferred to customers. Where right of return exists, revenues are reduced at the time of sale to reflect expected returns that are estimated based on historical experience. License revenues and revenues from the sale of product rights are recognized when the rights have been contractually conferred to the licensee or purchaser. Additional conditions for recognition of revenue are that collection of sales proceeds is reasonably assured and the company has no further performance obligations under the sale or license agreement (see Note 2). Cash Equivalents The company considers all highly liquid debt instruments with an original maturity of 91 days or less to be cash equivalents. Investments The company has investments in debt securities that are classified in the consolidated balance sheet as short-term (restricted bank deposits and securities that mature in more than 91 days but not more than one year and securities with maturities beyond one year which management intends to sell within one year) or long-term (maturities beyond one year). The company also has investments in equity securities, all of which are classified as long-term investments. Investments are further categorized as being available-for-sale or expected to be held-to-maturity. Investments categorized as available-for-sale are marked to market based on quoted market values of the securities, with the resulting adjustments, net of deferred taxes, reported as a component of other comprehensive income in shareholders' equity until realized (see Note 4). Investments categorized as held-to-maturity are carried at amortized cost, without recognition of gains or losses that are deemed to be temporary, because the company has both the intent and the ability to hold these investments until they mature. When a decline in market value is deemed to be 53 Pharmacia Corporation Annual Report 2000 22 other than temporary, the reduction to the investment in a security is charged to expense. Inventories Inventories are valued at the lower of cost or market. Cost is determined by the last-in, first-out (LIFO) method for most U.S. inventories and the first-in, first-out (FIFO) method for substantially all non-U.S. inventories. Properties Property, plant and equipment, including renewals and improvements, are recorded at acquisition cost. Depreciation is principally computed on the straight-line method for financial reporting purposes using weighted average asset lives for each classification, while accelerated methods are used for income tax purposes where permitted. Purchased and internally-developed computer software is capitalized and amortized over the software's useful life. Maintenance and repair costs are charged to earnings as incurred. Upon retirement or other disposition of property, any gain or loss is included in earnings. Impairment tests of long-lived assets are made when conditions indicate a possible loss. Such impairment tests are based on a comparison of undiscounted cash flows to the recorded value of the asset. If an impairment is indicated, the asset value is written down to its fair market value or expected cash flows at an appropriate discount rate, if fair market value is not readily determinable. Goodwill and Other Intangibles Goodwill represents the excess of the purchase cost over the fair value of net assets acquired and is presented net of accumulated amortization. Amortization of goodwill is recorded on a straight-line basis over various periods not exceeding 40 years. The company assesses the recoverability of goodwill and other intangibles when events or changes in circumstances indicate that the carrying amount may be impaired. If an impairment indicator exists, an estimate of future cash flows is developed and compared to the carrying amount of the goodwill. If the expected undiscounted cash flows are less than the carrying amount of the goodwill, an impairment loss is recognized for the difference between the carrying amount of the goodwill and discounted cash flows. Rights acquired under patent are reported at acquisition cost. Amortization is calculated on a straight-line basis over the remaining legal lives of the patents. Other intangible assets are amortized over the useful lives of those assets. Product Liability The company is self-insured for product liability exposures up to reasonable risk retention levels where excess coverages have been obtained. Liability calculations take into account such factors as specific claim amounts, past experience with such claims, number of claims reported and estimates of claims incurred but not yet reported. In addition to this base level of reserves, individually significant contingent losses are accrued for in compliance with applicable guidance. Product liability accruals are not reduced for expected insurance recoveries. Income Taxes The company applies an asset and liability approach to accounting for income taxes. Deferred tax liabilities and assets are recognized for the expected future tax consequences of temporary differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the years in which the differences are expected to reverse. The company records deferred income taxes on subsidiaries' earnings that are not considered to be permanently invested in those subsidiaries. Derivative Contracts Forward currency exchange contracts, cross-currency interest-rate swaps, currency options and commodity futures (hereafter referred to as contracts) are held for purposes other than trading. The company holds certain contracts to hedge anticipated transactions and others to hedge recorded foreign currency denominated assets and liabilities. These contracts are marked to market each period. Certain of these contracts qualify for special hedge accounting and the periodic gains and losses for these instruments are deferred until the underlying transaction is realized. For the remainder, the resulting gains and losses are recognized in earnings. In all cases, the gains and losses realized are offset against the exposures of the underlying transactions. Generally, any premium or discount is amortized over the life of the contract. The carrying values of all contracts are generally reported with other current assets or other current liabilities. Gains or losses from currency transactions that are designated and effective as hedges of net investments are classified as currency translation adjustments in shareholders' equity. Environmental Remediation Liabilities The company accrues for environmental remediation liabilities when they are probable and reasonably estimable based on current law and existing technologies. The accruals are adjusted as further information develops or circumstances change. Costs of future expenditures do not reflect any claims for recoveries and are not discounted to their present value. Accruals for environmental liabilities are classified in the consolidated balance sheets primarily as other noncurrent liabilities. Stock Based Compensation Employee stock options are accounted for pursuant to Accounting Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to Employees" (see Note 18). Reclassifications Certain reclassifications have been made to conform prior periods' data to the current presentation. 54 Pharmacia Corporation Annual Report 2000 23 2 CHANGE IN ACCOUNTING PRINCIPLE In December 1999, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin 101, "Revenue Recognition in Financial Statements" (SAB 101). SAB 101 provides guidance related to revenue recognition. SAB 101 allows companies to report any changes in revenue recognition related to adopting its provisions as an accounting change at the time of implementation in accordance with APB Opinion No. 20, "Accounting Changes." In connection with SAB 101, 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. Also included in the $198 cumulative catch-up adjustment was $26 (net of taxes of $16) recognized by Monsanto related to biotechnology traits sales. The adoption of SAB 101 affected the company's method of recognition of traits sold through competitor seed companies. Monsanto now recognizes this licensee revenue when a grower purchases seed as compared with the previous practice of recognizing the licensee revenue when the third-party seed company sold the seed into the distribution system. As a result, no licensee revenues from biotechnology traits sold by third-party seed companies were recognized in the fourth quarter of 2000 whereas the fourth quarter of 1999 included $42 of such revenues. Amortization of the deferred pharmaceutical revenue during 2000 was $22 and recognition of the fourth-quarter 1999 traits sales in 2000 resulted in recognition of $64 of pretax earnings. The company recorded a cumulative effect of a change in accounting principle, effective January 1, 1999, for revenue recognized in 1998 related to the sales of marketing rights. The effect on earnings in 1999 was an after-tax loss of $20, net of taxes of $12. 3 MERGER OF FORMER MONSANTO AND PHARMACIA & Upjohn On March 31, 2000, the company completed a merger accounted for as a pooling of interests whereby a wholly owned subsidiary of the former Monsanto Company merged with and into Pharmacia & Upjohn, Inc. and the combined company changed its name to Pharmacia Corporation. Each share of common stock of Pharmacia & Upjohn issued and outstanding was converted into 1.19 shares of common stock of Pharmacia Corporation and each share of Series A Convertible Perpetual Preferred Stock of Pharmacia & Upjohn issued and outstanding was converted into one share of a new series of convertible preferred stock of Pharmacia Corporation designated as Series B Convertible Perpetual Preferred Stock. The Series B preferred shares have a conversion ratio into common shares of 1,725.5:1. Approximately 620 million shares of common stock were issued and approximately 6,640 shares of preferred stock were issued. All prior-period consolidated financial statements presented have been restated to include the combined results of operations, financial position, and cash flows of both companies as if they had always been a combined organization. There were no material transactions between former Monsanto Company and Pharmacia & Upjohn, Inc. prior to the combination. Certain reclassifications have been made to conform the respective financial statement presentations. The results of operations for the separate companies and the combined amounts presented in the consolidated financial statements for the periods prior to the merger follow. The reclassifications of sales represent certain types of revenue and income transactions reclassified to conform the presentation of the two combining companies. The adjustments to net income from continuing operations represent adjustments to income tax expense as a result of assuming the companies had always been combined.
================================================================================ For the Three Months Ended Years Ended March 31,2000 December 31 (Unaudited) 1999 1998 - -------------------------------------------------------------------------------- Net sales: Former Monsanto $ 2,486 $ 9,146 $ 7,237 Pharmacia & Upjohn 1,807 7,253 6,758 Reclassifications -- 26 (258) - -------------------------------------------------------------------------------- Combined $ 4,293 $16,425 $ 13,737 ================================================================================ Net earnings (loss): Former Monsanto $ (88) $ 575 $ (250) Pharmacia & Upjohn 186 803 631 Adjustments -- -- (19) - -------------------------------------------------------------------------------- Combined $ 98 $ 1,378 $ 362 ================================================================================
4 OTHER COMPREHENSIVE INCOME Other comprehensive income (OCI) for the company includes three components: changes in currency translation adjustments, unrealized gains and losses on available-for-sale securities, and minimum pension liability adjustments. The following table shows the changes in each OCI component. Reclassification adjustments represent items that are included in net earnings in the current period but previously were reported in OCI. To avoid double counting these items in comprehensive income, gains are subtracted from OCI, while losses are added. 55 Pharmacia Corporation Annual Report 2000 24
================================================================================================== Tax For the year ended Before Expense Net of December 31, 2000 Tax or (Benefit) Tax - -------------------------------------------------------------------------------------------------- Currency translation adjustments $(509) $ -- $(509) - -------------------------------------------------------------------------------------------------- Unrealized investment gains 154 61 93 Less: reclassification adjustments for gains realized in net earnings 33 11 22 - -------------------------------------------------------------------------------------------------- Net unrealized investment gains 121 50 71 - -------------------------------------------------------------------------------------------------- Minimum pension liability adjustments 21 12 9 - -------------------------------------------------------------------------------------------------- Other comprehensive (loss) $(367) $ 62 $(429) ================================================================================================== For the year ended December 31, 1999 - -------------------------------------------------------------------------------------------------- Currency translation adjustments $(617) $ -- $(617) - -------------------------------------------------------------------------------------------------- Unrealized investment gains 32 7 25 Less: reclassification adjustments for gains realized in net earnings 21 7 14 - -------------------------------------------------------------------------------------------------- Net unrealized investment gains 11 -- 11 - -------------------------------------------------------------------------------------------------- Minimum pension liability adjustments (28) (16) (12) - -------------------------------------------------------------------------------------------------- Other comprehensive (loss) $(634) $(16) $(618) ================================================================================================== For the year ended December 31, 1998 - -------------------------------------------------------------------------------------------------- Currency translation adjustments $ 63 $ (1) $ 64 - -------------------------------------------------------------------------------------------------- Unrealized investment (losses) (53) (22) (31) Less: reclassification adjustments for gains realized in net earnings 8 2 6 - -------------------------------------------------------------------------------------------------- Net unrealized investment (losses) (61) (24) (37) - -------------------------------------------------------------------------------------------------- Minimum pension liability adjustments (57) (19) (38) - -------------------------------------------------------------------------------------------------- Other comprehensive (loss) $ (55) $(44) $ (11) ==================================================================================================
5 MERGER AND RESTRUCTURING CHARGES The company recorded merger and restructuring charges of $1,078, $55 [$70 P&U and $(15) former Monsanto], and $245 [$92 P&U and $153 former Monsanto] during 2000, 1999 and 1998, respectively. In addition to these charges on the merger and restructuring line, the company recorded additional charges throughout the consolidated statement of earnings relating to restructuring plans. These charges are discussed below. During 2000, the former Monsanto Company and Pharmacia & Upjohn merged to form Pharmacia Corporation. As a result of that merger, there were many duplicate functions and locations, particularly in the prescription pharmaceutical segment and corporate functions. The company began a restructuring in order to integrate the two companies, eliminate duplicate positions and facilities, and create a consolidated headquarters in New Jersey. The businesses in the agricultural and pharmaceutical segments are simultaneously restructuring their businesses based on new strategic directions of the combined company. The board of directors approved a comprehensive integration and restructuring plan in the spring of 2000. The restructuring charges of this plan will be taken in several phases based upon the finalization and management approval of the various components of the plan. Due to the comprehensive nature of the restructuring, the timelines for the various components of the restructuring will occur over multiple years. The company recorded aggregate merger and restructuring charges of $1,226 during 2000. Of these charges $1,078 is recorded on the merger and restructuring line of the consolidated statement of earnings; $60 relating to the write-off of obsolete inventory appears in cost of sales; $88 relating to the write-off of goodwill is recorded as amortization and adjustment of goodwill. The $1,078 recorded in 2000 was comprised as follows: - - $601 to integrate the former Monsanto and P&U organizations such as consultant fees, contract termination costs and relocation costs as well as transaction costs such as investment bankers, attorneys, registration and regulatory fees and other professional services. Additionally, these costs include various employee incentive and change-of-control costs directly associated with the merger. The latter includes a non-cash charge of $232 during the first quarter that was related to certain employee stock options that were repriced in conjunction with the merger pursuant to change of control provisions. Pursuant to the terms of these "premium options," at consummation of the merger, the original above-market exercise price was reduced to equal the fair market value on the date of grant. - - $231 associated with restructuring the prescription pharmaceutical segment as a result of merging G.D. Searle, the pharmaceutical business of the former Monsanto Company, and Pharmacia & Upjohn operations worldwide. These actions resulted in duplicate facilities, computer systems and positions around the world. The charges consist of $155 relating to the separation of approximately 1,320 employees worldwide in research and development (R&D), manufacturing, marketing and administrative functions; $51 relating to asset write-downs resulting from duplicate computer systems and facilities; $22 relating to contract and lease terminations and $3 other exit costs. - - $150 relating to consolidating corporate and administrative functions in New Jersey and eliminating duplicate administrative positions. This charge is comprised of $113 relating to the separation of approximately 210 employees in corporate and administrative functions and $37 relating to asset write-downs (duplicate computer systems and leasehold improvements in duplicate facilities) and lease termination fees and other exit costs. - - $10 related to the separation of approximately 40 employees mainly in sales and R&D in other pharmaceutical operations. - - $15 relating to the reversals of prior P&U restructuring reserves that resulted from higher than anticipated proceeds on asset sales and lower than anticipated separation payments. 56 Pharmacia Corporation Annual Report 2000 25 - - $101 recorded by Monsanto primarily associated with the business decision to focus in four key crops and realign commercial and administrative operations in Western Europe and the Commonwealth of Independent States. An additional $2 recorded by Monsanto is associated with merger activities and is included as part of the $601 of merger costs. In addition to the amount recorded as merger and restructuring by Monsanto, an additional $148 of charges were recorded as outlined below:
================================================================================ Unusual Restructuring Items Reversals Total - -------------------------------------------------------------------------------- Cost of goods sold $ (60) $- $ (60) Amortization and adjustment of goodwill (88) - (88) - -------------------------------------------------------------------------------- Subtotal (148) - -------------------------------------------------------------------------------- Merger and restructuring (107) 4 (103) - -------------------------------------------------------------------------------- Aggregate merger & restructuring $(251) ================================================================================
The net pretax charge of $251 was comprised of asset impairments of $185, workforce reduction costs of $61, contract terminations of $5 and other shutdown costs of $4. This charge was partially offset by the reversal of $4 of the 1998 restructuring liability, largely as a result of lower actual severance expense than originally estimated. The asset impairments consisted of $60 for inventories, $91 for intangible assets, $12 for accounts receivables and $22 for equipment write-offs. The workforce reduction charge reflected involuntary employee separation costs for 695 employees worldwide and included charges of $31 for positions in administration, $27 for positions in R&D and $3 for positions in manufacturing. The company expects the employee reductions to be completed by June 2001. The other exit costs included expenses associated with contract terminations and other shutdown costs. As of December 31, 2000, cash payments totaling $119 relating to the separation of approximately 1,350 employees from the pharmaceutical segments and corporate functions have been paid and charged against the liability. Additionally, 460 of the planned employee terminations in the agricultural segments were completed; 358 of these employees received cash severance payments totaling $28 during 2000 and 102 employees elected deferred payments of $9 which will be paid during the first quarter of 2001. Total restructuring charges and spending associated with the current restructuring plans relating to the integration of the former Pharmacia & Upjohn and Monsanto companies and the restructuring of the agricultural products and other pharmaceutical operations are as follows:
=================================================== Workforce Other Exit Reductions Costs - --------------------------------------------------- 2000 Charges $339 $34 2000 Spending 147 19 - --------------------------------------------------- Remaining balance $192 $15 ===================================================
Former Pharmacia & Upjohn Restructuring Plans During 1999, the company recorded $54 in restructuring expenses including an adjustment of $3 to the 1998 turnaround restructuring. The charge included costs pertaining to reorganizations that will result in the elimination of certain R&D projects as well as the elimination of 375 employee positions, mainly impacting the pharmaceutical segments and corporate and administrative functions. The objective of the restructuring is to eliminate duplicate functions and investments in R&D as well as reorganize the sales force based on anticipated future requirements of the company. The adjustment to the prior restructuring liabilities of $3 was attributable to lower than anticipated employee separation costs. Employee separation benefits included in the 1999 charge are for elimination of positions in R&D of $26, corporate and administration of $18 and sales of $6. Project termination costs totaled $4 and asset write-downs totaled $3. As of December 31, 2000, $27 has been paid out and charged to the liability relating to the separation of approximately 280 employees. An additional $4 has been reversed due to lower than expected severance costs. The remaining liability is less than $19 and relates primarily to remaining separation annuity payments. The company anticipates all activities and payments associated with this restructuring to be substantially complete during 2001. In connection with the merger with Sugen, the company recorded $16 in merger transaction costs such as fees for investment bankers, attorneys, accountants, and other costs to effect the merger with Sugen, all of which were paid during 1999. These charges were recorded in merger and restructuring on the consolidated statement of earnings. In 1997 and 1998, former Pharmacia & Upjohn undertook a comprehensive turnaround program to significantly rationalize infrastructure, eliminate duplicate resources in manufacturing, administration and R&D. The total restructuring charges for 1998 and 1997 included involuntary employee separation costs for 580 and 1,320 employees worldwide, respectively. The 1998 charge included elimination of positions in marketing and administration of $55, R&D of $9, and manufacturing of $4. These amounts included an adjustment of $16 of the phase one accruals, mainly attributable to lower employee separation costs and, to a lesser extent, changes in plan estimates. The 1997 charge included elimination of positions in marketing and administration of $81, R&D of $22, and manufacturing of $31. As of December 31, 2000, the company had paid $186 in severance costs relating to approximately 1,900 employee separations in connection with the 1998 and 1997 charges. The remaining 57 Pharmacia Corporation Annual Report 2000 26 balance for employee separation costs related to the turn-around program was $13 at December 31, 2000, comprised mainly of remaining annuity separation payments. The 1998 restructuring charge included asset write-downs for excess manufacturing, administration, and R&D facilities totaling $8. The 1998 amount included an adjustment of $15 of the phase one accruals, mainly attributable to changes in plan estimates, favorable outcomes on sales of facilities, and actual facility closure costs below the original estimates. Other costs included in the 1998 restructuring charge of $16 were primarily comprised of canceled contractual lease obligations and other costs. Offsetting 1998 charges in this grouping was an adjustment of $6 related to all restructuring charges prior to 1997. During 2000, the company adjusted the turnaround restructuring by $11 to reflect the sales of a facility at a price more favorable than anticipated and to reverse residual accruals. The company expects all activities and annuity payments associated with the turnaround program to be substantially complete during 2001. The following table displays a rollforward of the remaining liability balances associated with the restructuring plans of the former Pharmacia & Upjohn through December 31, 2000.
================================================================================ Employee Separation Costs Other Total - -------------------------------------------------------------------------------- Balance January 1, 1998 $ 153 $ 20 $ 173 Additions 68 16 84 Deductions (113) (12) (125) - -------------------------------------------------------------------------------- Balance December 31, 1998 108 24 132 - -------------------------------------------------------------------------------- Additions 50 4 54 Deductions (67) (17) (84) - -------------------------------------------------------------------------------- Balance December 31, 1999 91 11 102 - -------------------------------------------------------------------------------- Deductions (59) (11) (70) - -------------------------------------------------------------------------------- Balance December 31, 2000 $ 32 $ -- $ 32 ================================================================================
Former Monsanto Restructuring Plans In 1998, the company recorded net restructuring charges of $340 as part of former Monsanto's overall strategy to reduce costs and continue the commitment to its core businesses. Total 1998 restructuring charges of $428 were partially offset by $68 from reversals of prior year restructuring reserves no longer needed and $20 gain from the sale of the Orcolite business, resulting in a net charge to earnings of $340. The 1998 net restructuring charges were recorded in the consolidated statement of earnings in the following categories:
================================================================================================================= Workforce Facility Asset Reductions Closures Impairments Other Total - ----------------------------------------------------------------------------------------------------------------- Cost of goods sold $ 6 $ 8 $ 84 $-- $ 98 Amortization and adjustment of goodwill -- 3 63 -- 66 Merger and restructuring 103 64 -- (14) 153 All other, net -- -- 43 (20) 23 - ----------------------------------------------------------------------------------------------------------------- TOTAL $109 $75 $190 $(34) $340 =================================================================================================================
The activities the company planned to exit in connection with this restructuring plan principally comprised a tomato business and a business involved in the operation of membership-based health and wellness centers. This plan also contemplated exiting several small business activities, none of which had a significant effect on the restructuring reserve. The company recorded net restructuring charges of $327 to cover the costs associated with these actions in 1998 and the reversal of prior restructuring reserves. The charges reflected $103 for the elimination of approximately 1,400 jobs, primarily in manufacturing and administrative functions. Included in these actions were approximately 190 positions that had been part of a restructuring plan approved in 1996. The charges also reflect pretax amounts for asset impairments, primarily for property, plant and equipment; intangible assets; and certain investments, totaling $130. The asset impairments were recorded primarily because of the company's decision to sell certain nonstrategic businesses. Other impairment charges totaling $40 were recorded in December 1998 because of management's decision to exit certain long-term investments. Fair values of the impaired assets and the businesses held for sale were recorded at their current market values or on estimated sale proceeds, based on either discounted cashflows or sales contracts. The December 1998 restructuring amounts also included pretax charges of $99 for the shutdown or other rationalization of certain production and administrative facilities. Rationalization entails the consolidation, shutdown or movement of facilities to achieve more efficient operations. Approximately 80 facilities, located primarily in the United States, Europe and Latin America, were affected by these actions. Charges for these shutdowns included $21 for property, plant and equipment, $15 for intangible assets, $26 for miscellaneous investments, and $6 for inventories. Leasehold termination costs of $13 and various facility closure costs of $18, principally for facilities shutdown costs, and contract cancellation payments, were also included in the shutdown charges. The closure or rationalization of these facilities was completed by December 31, 1999. 58 Pharmacia Corporation Annual Report 2000 27 In May 1998, the former Monsanto board of directors approved a plan to exit the company's optical products business, which included the Orcolite and Diamonex optical products business and the Diamonex performance products business (both reported in other pharmaceuticals). As a result, the company recorded net pretax charges of $13 which are comprised of $68 for the rationalization of the Diamonex business, $20 pretax gain on the sale of the Orcolite business and $35 pretax gain primarily related to the reversal of a prior restructuring reserve based on a decision not to rationalize a European pharmaceutical production facility. All of the actions relating to the May plan, including workforce reductions and payment of severance, were complete by December 31, 1999. In 1999, the company recorded a pretax gain of $54 from the reversal of restructuring liabilities established in 1998. The restructuring liability reversals were required as a result of lower actual severance and facility shut-down costs than originally estimated. In October 1999, the company completed the sale of the alginates business, which resulted in the recording of discontinued operations. Included in the accounting for the discontinued operations are the reversals of restructuring liabilities established in 1998 of $27 after tax which were no longer required as a result of the sale of the alginates business on terms more favorable than originally anticipated. As of December 31, 2000 all activities relating to the restructuring plans associated with the former Monsanto Company have been substantially completed. Cash payments of $117 were made to eliminate approximately 1,300 positions. Approximately another 100 positions in the original plan were eliminated through attrition, which resulted in a reversal of $4 during 2000. These totals include workforce reductions from an earlier plan that were transferred to the 1998 plan. 6 INCOME TAXES The components of earnings before income taxes were:
================================================================================ Years Ended December 31 2000 1999 1998 - -------------------------------------------------------------------------------- U.S. $ 110 $ 768 $ (37) Non-U.S. 1,263 1,130 929 - -------------------------------------------------------------------------------- Earnings before income taxes $1,373 $1,898 $ 892 ================================================================================
The provision for income taxes included in the consolidated statements of earnings consisted of:
================================================================================ Years Ended December 31 2000 1999 1998 - -------------------------------------------------------------------------------- CURRENTLY PAYABLE: U.S. $ 435 $ 215 $ 380 Non-U.S. 357 394 422 - -------------------------------------------------------------------------------- Total currently payable 792 609 802 - -------------------------------------------------------------------------------- DEFERRED: U.S. (391) 48 (276) Non-U.S. (6) (65) (115) - -------------------------------------------------------------------------------- Total deferred (397) (17) (391) - -------------------------------------------------------------------------------- Provision For Income Taxes $ 395 $ 592 $ 411 ================================================================================
Differences between the company's effective tax rate and the U.S. statutory tax rate were as follows:
================================================================================ Percent of Pretax Income 2000 1999 1998 - -------------------------------------------------------------------------------- Statutory tax rate 35.0% 35.0% 35.0% Lower rates in other jurisdictions, net (7.7) (4.0) (6.2) U.S. R&D tax credit (4.2) (2.1) (3.8) Non-deductible goodwill 4.6 4.1 6.7 Acquired in-process R&D -- -- 8.0 Valuation allowances (0.2) -- 5.5 Merger related costs 3.4 -- -- All other, net (2.1) (1.9) 0.9 - -------------------------------------------------------------------------------- Effective tax rate 28.8% 31.1% 46.1% ================================================================================
The lower rates in other jurisdictions are principally attributable to operations in jurisdictions subject to more favorable tax rates. Excluding restructuring and other special items, the annual effective tax rate was 30 percent, 30 percent, and 34 percent for 2000, 1999 and 1998, respectively. 59 Pharmacia Corporation Annual Report 2000 28 Deferred income taxes are in the consolidated balance sheets as follows:
========================================================================================== 2000 2000 1999 1999 December 31 Assets Liabilities Assets Liabilities - ------------------------------------------------------------------------------------------ Components of deferred taxes were: Property, plant and equipment $ -- $ 560 $ -- $594 Inventory 307 -- 404 -- Compensation and retirement plans 909 244 501 45 Swedish tax deferrals -- 41 -- 49 Tax loss and tax credit carryforwards 878 -- 801 -- Environmental and product liabilities 46 -- 46 -- Tax on unremitted earnings -- 82 -- 106 Intangibles 93 -- 120 -- All other 825 201 638 169 - ------------------------------------------------------------------------------------------ Subtotal 3,058 1,128 2,510 963 Valuation allowances (226) (240) - ------------------------------------------------------------------------------------------ Total deferred taxes $ 2,832 $ 1,128 $2,270 $963 - ------------------------------------------------------------------------------------------ Net deferred tax assets $ 1,704 $1,307 ==========================================================================================
As of December 31, 2000, Pharmacia had net operating loss carryforwards of approximately $647, of which $240 have various expiration dates through 2017, and tax credit carryforwards of $621, of which $604 have various expiration dates through 2019. As of December 31, 2000, Pharmacia has recorded valuation allowances of $226 against these carryforwards in jurisdictions where recovery of these carryforwards is uncertain. At December 31, 2000, undistributed earnings of subsidiaries considered permanently invested, for which deferred income taxes have not been provided, were approximately $5,500. 7 MERGERS, ACQUISITIONS AND DIVESTITURES In December 1999, the company withdrew its filing for U.S. antitrust clearance of its proposed merger with Delta and Pine Land Company (D&PL) in light of the U.S. Department of Justice's unwillingness to approve the transaction on commercially reasonable terms. On January 3, 2000, the company paid D&PL $80 in cash, equal to the amount of a termination fee set forth in the merger agreement. Other related expenses amounted to an additional $5. On August 31, 1999, the company completed its merger with Sugen by exchanging approximately 12 million shares of its common stock for all of the common stock of Sugen. Each share of Sugen common stock was exchanged for .7248 of one share of Pharmacia common stock. In addition, terms of outstanding Sugen stock options, stock warrants, convertible debt, and warrants on convertible debt were changed to convert Sugen securities to Pharmacia securities using the same exchange ratio. Acquisitions On October 20, 1999, the former Monsanto and Cargill, Inc. (Cargill) reached an agreement that resolved outstanding issues related to Pharmacia's purchase of certain international seed operations of Cargill. Under terms of the agreement, Cargill made a cash payment of $335 to Pharmacia for the lost use of certain germplasm and damages caused by the delay in integrating certain international seed operations and legal expenses. Additionally, Pharmacia and Pioneer Hi-Bred International, Inc. (Pioneer) announced a resolution of the litigation between them stemming from Pharmacia's purchase of Cargill's international seed operations. Under terms of this agreement, Pharmacia was required to destroy genetic material derived from Pioneer's seed lines and pay damages of $42 to Pioneer. As a result, the purchase price for certain international seed operations of Cargill was reduced by $307 and a liability of $42 was recorded. The net balance of $28 from the Cargill and Pioneer settlements was recorded in the 1999 statement of consolidated earnings as reimbursement of incremental cost incurred. In 1998, the former Monsanto made strategic acquisitions of several seed companies. In July 1998, the company acquired Plant Breeding International Cambridge (PBIC) for approximately $525. In October 1998, the former Monsanto announced the acquisition of certain international seed operations in the United Kingdom, for approximately $1,400. In December 1998, the company completed its acquisition of DEKALB Genetics Corporation (DEKALB) for approximately $2,300. The company accounted for these acquisitions as purchases. The company's final purchase price allocations for the principal acquisitions made during 1998 were to goodwill, $2,648; germplasm and core technology, $324; trademarks, $222; in-process R&D, $402; exit costs and employee termination liabilities, ($54); inventories and other individually insignificant tangible assets and liabilities, $421. The final purchase price allocations were based on final valuation studies. The following pretax charges were recorded in 1998 for the write-off of acquired in-process R&D related to these acquisitions; approximately $60 for PBIC, approximately $150 for DEKALB and approximately $190 for certain Cargill international seed operations. Management believed that the technological feasibility of the acquired in-process R&D had not been established and that it had no alternative future uses. Accordingly, the amounts allocated to in-process R&D were required to be expensed immediately under accounting principles generally accepted in the U.S. At the time of and in connection with the 1998 seed company acquisitions, the former Monsanto established a plan to integrate the acquired businesses. This plan involved closing or rationalizing (consolidating, shutting down or moving facilities to achieve more efficient operations) certain assets or facilities and eliminating approximately 1,400 jobs, primarily in 60 Pharmacia Corporation Annual Report 2000 29 manufacturing and administrative functions, as part of this integration plan. Approximately 300 of these positions related to the former Monsanto's existing seed operations and were therefore included in the December 1998 restructuring plan discussed in Note 5--Merger and Restructuring Charges. The costs related to approximately 1,000 positions and the other actions were originally estimated to be $78, and were recognized as liabilities in 1998. As of December 31, 1999, over 900 positions had been eliminated at a cost of approximately $50 and the original liability was reduced during 1999 by $14 as a result of lower actual severance costs resulting in an adjustment to the final purchase price allocations to goodwill. The remaining 200 positions (including an estimated 100 additional positions identified in 1999) were eliminated during 2000 at a cost of approximately $4 and the original liability was reduced by an additional $10 to zero. The in-process R&D charges for the 1998 seed company acquisitions covered numerous seed breeding projects, no single one of which was significant, as is typical in the seed industry. These projects consisted of conventional breeding programs for corn, wheat and other hybrids; conventional breeding for soybean varieties; and the development of transgenic crops. Successful commercialization of products developed through these projects is expected to occur five to nine years after program initiation. The in-process R&D projects were valued using a discounted cash flow method with risk-adjusted discount rates generally ranging from 12 percent to 20 percent, which took into account the stage of completion and the appropriate development cycle of each in-process R&D category. The in-process projects were at various stages of completion at the dates of acquisition. Revenues from the in-process R&D projects related to the 1998 acquisitions began in 1999. On average, a new seed technology is in the research process or developmental stage for approximately eight years before it is launched in a commercial product. Additionally, based on historical experience, Monsanto assumed that approximately one eighth of the products in the in-process pipeline would be released or launched each year for the next eight years. From this information, a weighted-average percent complete was computed. The present value of future cash flows was then multiplied by the estimated percentage complete as of the valuation date to determine the value of the acquired in-process R&D. Divestitures On July 1, 1999, the company announced its intention to sell the artificial sweetener and biogum businesses. In addition, Pharmacia has transferred the remaining Roundup lawn-and-garden and nutrition research operations to the agricultural segments. In 1998, the company committed to a plan to sell the alginates and ORTHO lawn-and-garden businesses. The financial results of these businesses have been reclassified as discontinued operations and, for all periods presented, the consolidated financial statements and notes have been reclassified to conform to this presentation. Previously reported amounts have also been reclassified to make them consistent with the current presentation. See Note 21--Discontinued Operations. In 1999, the company completed the sale of Stoneville Pedigreed Seed Company (Stoneville). Proceeds were $92, resulting in a pretax gain of $35. Proceeds from the sale were used to reduce debt. In April 1999, Pharmacia completed the sale of NSC Technologies Company to Great Lakes Chemical Corporation for proceeds of $125. Proceeds from the sale were primarily used to reduce debt and resulted in a pretax gain of approximately $40. In December 1998, the company sold substantially all of P&U's nutritional therapies business to Fresenius AG for a loss of $52. To comply with antitrust regulations in Germany, operations there were not sold to Fresenius. In the third quarter of 1999, the company completed the sale of the nutrition business in Germany to Baxter Deutschland GmbH for a gain. The consummation of the disposal of the final component of the business, the China operations, was concluded in the first quarter of 2000 at a gain of $29. The earnings statement effects of these events and activities are reported in "All other, net." 8 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 the ESOP would have received in 61 Pharmacia Corporation Annual Report 2000 30 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:
==================================================================================================================================== Years Ended December 31 2000 2000 1999 1999 1998 1998 Basic Diluted Basic Diluted Basic Diluted - ------------------------------------------------------------------------------------------------------------------------------------ EPS numerator: Earnings from continuing operations $ 984 $ 984 $1,306 $1,306 $ 481 $ 481 Less: Preferred stock dividends, net of tax (13) -- (13) -- (13) -- Less: ESOP contribution, net of tax -- (8) -- (5) -- (5) Interest effects--convertible instruments -- -- -- -- -- 1 - ------------------------------------------------------------------------------------------------------------------------------------ Earnings from continuing operations available to common shareholders $ 971 $ 976 $1,293 $1,301 $ 468 $ 477 - ------------------------------------------------------------------------------------------------------------------------------------ EPS denominator: Average common shares outstanding 1,274 1,274 1,249 1,249 1,219 1,219 Effect of dilutive securities: Stock options and stock warrants -- 21 -- 23 -- 34 Convertible instruments and incentive compensation -- 12 -- 12 -- 13 - ------------------------------------------------------------------------------------------------------------------------------------ Total shares 1,274 1,307 1,249 1,284 1,219 1,266 - ------------------------------------------------------------------------------------------------------------------------------------ Earnings (loss) per share: Continuing operations $ .76 $ .75 $ 1.04 $ 1.01 $ .39 $ .37 Discontinued operations -- -- .05 .05 (.10) (.09) (Loss)/gain on sale of discontinued operation (.03) (.03) .03 .03 -- -- Extraordinary item (.03) (.03) -- -- -- -- Cumulative effect of accounting change (.15) (.15) (.02) (.02) -- -- - ------------------------------------------------------------------------------------------------------------------------------------ Net earnings $ .55 $ .54 $ 1.10 $ 1.07 $ .29 $ .28 ====================================================================================================================================
9 ACCOUNTS RECEIVABLE AND INVENTORIES The following table displays a roll-forward of allowances for doubtful trade accounts receivable for the three years ended December 31, 2000:
================================================================= - ----------------------------------------------------------------- Balance January 1, 1998 $142 Additions--charged to expense 77 Deductions (29) - ----------------------------------------------------------------- Balance December 31, 1998 190 Additions--charged to expense 110 Deductions (29) - ----------------------------------------------------------------- Balance December 31, 1999 271 Additions--charged to expense 78 Deductions (57) - ----------------------------------------------------------------- Balance December 31, 2000 $292 =================================================================
Inventories valued on the LIFO method had an estimated replacement cost (FIFO basis) of $1,434 at December 31, 2000, and $1,038 at December 31, 1999.
================================================================================ December 31 2000 1999 - -------------------------------------------------------------------------------- Estimated replacement cost (FIFO basis): Finished products $ 1,042 $ 1,281 Raw materials, supplies and work in process 1,941 1,794 - -------------------------------------------------------------------------------- Inventories (FIFO basis) 2,983 3,075 Less reduction to LIFO cost (211) (170) - -------------------------------------------------------------------------------- Inventories $ 2,772 $ 2,905 ================================================================================
62 Pharmacia Corporation Annual Report 2000 31 10 INVESTMENTS
========================================================= December 31 2000 1999 - --------------------------------------------------------- Short-term investments: Available-for-sale: Certificates of deposit $12 $ 38 Kingdom of Sweden debt instruments -- 23 Corporate notes -- 15 U.S. Treasury securities and other U.S. Government obligations 1 14 Other 6 2 - --------------------------------------------------------- Total available-for-sale 19 92 Held-to-maturity 16 46 - --------------------------------------------------------- Total short-term investments $35 $138 =========================================================
Amortized cost of short-term investments classified as available-for-sale approximates fair market value. Short-term investments classified as held-to-maturity consist primarily of bank certificates of deposit with amortized cost approximating fair market value.
================================================================================ Unrealized ------------------ Carrying Long-Term Investments Cost Gains (Losses) Value - -------------------------------------------------------------------------------- December 31, 2000 Available-for-sale: Equity securities $226 $ 169 $ (5) $390 Other 2 -- -- 2 - -------------------------------------------------------------------------------- Total available-for-sale $228 $ 169 $ (5) 392 Held-to-maturity =========================== 52 ---- Total long-term investments $444 ================================================================================ December 31, 1999 Available-for-sale: Equity securities $221 $ 53 $ (13) $261 Mortgage-backed securities-- guaranteed by the U.S. Government 114 -- (1) 113 Other 16 -- -- 16 - -------------------------------------------------------------------------------- Total available-for-sale $351 $ 53 $ (14) 390 Held-to-maturity =========================== 86 ---- Total long-term investments $476 ================================================================================
The total of net unrealized gains (net of deferred taxes) included in shareholders' equity amounted to $101 at December 31, 2000, compared to $30 and $19 at December 31, 1999 and 1998, respectively. The proceeds realized from the sale of available-for-sale debt securities were $227, $349 and $254 for 2000, 1999 and 1998, respectively. Profits realized on these sales are recorded as interest income. During 2000, 1999 and 1998, the proceeds realized from the sale of available-for-sale equity securities amounted to $50, $48 and $53. Profits realized on these sales are recorded in "All other, net." Based on original cost, gains and losses of $34, $25 and $(16) were realized on all sales of available-for-sale securities in 2000, 1999 and 1998, respectively. Long-term investments held-to-maturity are summarized as follows:
================================================================================ 2000 2000 1999 1999 Fair Amortized Fair Amortized December 31 Value Cost Value Cost - -------------------------------------------------------------------------------- Guaranteed by the U.S. Government $34 $34 $51 $51 Corporate notes 15 15 30 30 Commonwealth of Puerto Rico debt instruments 3 3 5 5 - -------------------------------------------------------------------------------- Long-term investments held to maturity $52 $52 $86 $86 ================================================================================
Scheduled maturities of long-term securities to be held to maturity were from 2001 to 2022. 11 PROPERTIES, NET
================================================================================ December 31 2000 1999 - -------------------------------------------------------------------------------- Land $ 190 $ 195 Buildings and improvements 3,223 3,189 Equipment 7,362 6,670 Construction in process 1,599 1,704 Less allowance for depreciation (5,203) (4,933) - -------------------------------------------------------------------------------- Properties, net $ 7,171 $ 6,825 ================================================================================
12 LINES OF CREDIT AND DEBT The company has committed borrowing facilities amounting to $2,500 that were unused as of December 31, 2000. Expiration periods occur as follows: $1,500 in 2001, $500 in 2004 and $500 in 2005. The facilities exist largely to support commercial paper borrowings. While there are no related compensating balances, the facilities are subject to various fees. The company also has uncommitted lines of credit amounting to $500 available with various U.S. and international banks, of which $27 were used at December 31, 2000.
================================================================================ Short Term Debt December 31 2000 1999 - -------------------------------------------------------------------------------- Current maturities of long-term debt $631 $ 442 Notes payable to banks 103 177 Commercial paper 50 1,253 Bank overdrafts 49 120 - -------------------------------------------------------------------------------- Total short-term debt $833 $1,992 ================================================================================
63 Pharmacia Corporation Annual Report 2000 32 The weighted-average interest rate on short-term debt (excluding current maturities of long-term debt) for 2000, 1999 and 1998 was 10.29 percent, 6.79 percent and 6.79 percent, respectively. The increase in rates between 1999 and 2000 was attributable to the reduction in commercial paper borrowings, which carried traditionally lower rates as compared to the overall debt mix. Principal balances on which the weighted average interest rates are calculated exclude current maturities of long-term debt and were $202 and $1,550 for 2000 and 1999, respectively.
================================================================================ Long-Term Debt December 31 2000 1999 - -------------------------------------------------------------------------------- 6 1/2% Adjustable conversion-rate equity security units due 2003 $ 700 $ 700 6.6% debentures due 2028 697 697 5 3/4% notes due 2005 599 599 Commercial paper 500 1,000 6 1/2% debentures due 2018 498 498 Variable--rate notes due 2003 422 480 5 7/8% notes due 2008 199 199 6 3/4% debentures due 2027 199 199 Industrial revenue bond obligations, 7.2% average rate at December 31, 2000, due 2001 to 2028 164 324 Medium-term notes, 6.0% average rate at December 31, 2000, due 2001 to 2018 121 165 5.6% yen note due 2016 87 99 8 7/8% debentures due 2009 25 99 8.2% debentures due 2025 5 150 8.7% debentures due 2021 3 100 5 3/8% notes due 2001 -- 500 Other 143 157 - -------------------------------------------------------------------------------- Total long-term debt $4,362 $5,966 ================================================================================
Annual aggregate maturities of long-term debt during the next five years are: 2002--$80; 2003--$1,140; 2004--$14; 2005--$660 and 2006 and beyond--$2,468. The commercial paper balance of $500 is the obligation of the company's agricultural subsidiary and was classified as long term due to their intention to renew these issues beyond 2001. The company has guaranteed two ESOP related notes for original principal amounts of $275 (9.79%) and $80 (8.13%) with maturities ranging between 2001 and 2006. At December 31, 2000, the balance of the guarantees was $270 of which $46 was classified as current. Principal payments cause the recognition of compensation expense. Annual aggregate maturities of guaranteed debt through expiration are: 2002--$57; 2003--$65; 2004--$73; 2005--$15; 2006--$14. In December 2000, the company repurchased certain long-term debt issues with a total principal amount of $362. The cost of this action was $52, $32 net of taxes, and is classified as extraordinary on the consolidated statement of earnings. The costs related to the tender are comprised of normal inducement premiums and professional and administrative fees. Information regarding interest expense follows:
================================================================================ Years Ended December 31 2000 1999 1998 - -------------------------------------------------------------------------------- Interest cost incurred $ 444 $ 463 $ 286 Less: Capitalized on construction (63) (55) (50) - -------------------------------------------------------------------------------- Interest expense $ 381 $ 408 $ 236 ================================================================================
13 COMMITMENTS, CONTINGENT LIABILITIES AND LITIGATION Future minimum payments under noncancellable operating leases, and unconditional purchase obligations at December 31, 2000 (approximately 74 percent real estate, 4 percent R&D alliances and 22 percent equipment and inventory purchases) are as follows: 2001--$193; 2002--$168; 2003--$132; 2004-- $107; 2005--$207 and later years--$234. Capital asset spending committed for construction and equipment but unexpended at December 31, 2000, was approximately $580. Pharmacia was contingently liable as a guarantor for bank loans and for discounted customers' receivables totaling approximately $33 as of December 31, 2000, and $77 as of December 31, 1999. 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 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 may soon 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 64 Pharmacia Corporation Annual Report 2000 33 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. The Federal District Court for the Northern District of Illinois certified a national class of retail pharmacies in November 1994. The former Pharmacia & Upjohn Company announced in 1998 that it reached a settlement with the plaintiffs in the federal class action cases for $103; and Searle received a favorable verdict in 1999. Eighteen class action lawsuits seeking damages based on the same alleged conduct have been filed in 14 states and the District of Columbia. The plaintiffs claim to represent consumers who purchased prescription drugs in those jurisdictions and four other states. A few of the state cases have been dismissed and a further number of them have settled. On April 11, 2000, the University of Rochester filed suit in U.S. District Court for the Western District of New York, asserting patent infringement against the company and certain of its subsidiaries as well as Pfizer, Inc. The University asserts that its U.S. patent granted on April 11 is infringed by the sale and use of Celebrex. The patent has claims directed to a method of treating human patients by administering a selective COX-2 inhibitor. The University has sought injunctive relief, as well as monetary compensation for infringement of the patent. The 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. 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. 65 Pharmacia Corporation Annual Report 2000 34 14 FINANCIAL INSTRUMENTS Financial Instrument Fair Values The carrying amounts and estimated fair values of the company's financial instruments were as follows:
================================================================================ 2000 2000 1999 1999 Carrying Fair Carrying Fair December 31 Amount Value Amount Value - -------------------------------------------------------------------------------- Financial assets: Short-term investments $ 35 $ 35 $ 138 $ 138 Long-term investments 444 444 476 476 Forward/Option currency exchange contracts (42) (42) (21) (20) Currency/Interest swaps hedges of loans and deposits (1) (1) (3) (3) Commodity futures 5 5 (3) (3) Interest rate swaps -- -- -- (2) Financial liabilities: Short-term debt 833 833 1,992 1,992 Long-term debt 4,362 4,397 5,966 5,678 Guaranteed ESOP debt 224 278 270 283 ================================================================================
Because maturities are short-term, fair value approximates carrying amount for cash and cash equivalents, short-term investments, accounts receivable, short-term debt, and accounts payable. Fair values of derivative contracts, long-term investments, long-term debt, and guaranteed ESOP debt were estimated based on quoted market prices for the same or similar instruments or on discounted cash flows. Because the contract amounts on derivative instruments are stated as notional amounts, the amounts disclosed above are not a direct measure of the exposure of the company through its use of derivatives. These contracts generally have maturities that do not exceed twelve months and require the company to exchange currencies at agreed-upon rates at maturity. The counterparties to the contracts consist of a limited number of major international financial institutions. The company does not expect any losses from credit exposure related to these instruments. Foreign Currency Risk Management The company is exposed to currency exchange rate fluctuations related to certain intercompany and third party transactions. The exposures and related hedging programs are managed centrally using forward currency contracts, cross- currency swaps and currency options to hedge a portion of both net recorded currency transaction exposures on the balance sheet as well as net anticipated currency transactions. During 2000, certain European countries began using the euro. This reduces the number of currencies in which contracts are denominated although increasing the company's concentration in a particular currency. Financial instruments for trading purposes are neither held nor issued by the company. Gains and losses on hedges held by the company offset the currency exchange gains and losses of the underlying instruments. The company's program to hedge net currency transaction exposures is designed to protect cash flows from potentially adverse effects of exchange rate fluctuations. At December 31, 2000, the contract amount of the company's outstanding contracts used to hedge net transaction exposure was $2,610. The aggregate net transaction losses included in net earnings for the years ended December 31, 2000, 1999 and 1998 were $43, $33 and $7, respectively. Interest Rate Management Interest-rate swap agreements are used to reduce interest rate risks and to manage interest expense. By entering into these agreements, the company changes the fixed/variable interest-rate mix of its debt portfolio. Commodity Risk Management Commodity futures and options contracts are used to hedge the price volatility of certain commodities, primarily soybeans and corn. This hedging activity is intended to manage the price paid to production growers for corn and soybean seeds. The notional amount of futures contracts outstanding for soybeans, corn and lean hogs as of December 31, 2000 was $95, $31 and $8, respectively. As of December 31, 1999, the company had futures contracts of $78, $28, $9 for soybeans, corn and lean hogs, respectively. Credit Risk Management The company invests excess cash in deposits with major banks throughout the world and in high quality short-term liquid debt instruments. Such investments are made only in instruments issued or enhanced by high quality institutions. At December 31, 2000, the company had no financial instruments that represented a significant concentration of credit risk. The amounts invested in any single institution are limited to minimize risk. The company has not incurred credit risk losses related to these investments. The company sells a broad range of pharmaceutical and agricultural products to a diverse group of customers operating throughout the world. In the U.S., Latin America and Japan, the company makes substantial sales to relatively few large wholesale customers. Of these, there is a specific concentration of trade receivables in Latin America for agricultural product sales of approximately $1,100 at December 31, 2000. The company's agricultural products business is highly seasonal. It is subject to weather conditions and natural disasters that affect commodity prices and seed yields. Credit limits, ongoing credit evaluation, and account-monitoring procedures are utilized to minimize the risk of loss. Collateral is generally not 66 Pharmacia Corporation Annual Report 2000 35 required, but may be used under certain circumstances or in certain markets. 15 MINORITY INTEREST On October 23, 2000, the company's wholly owned subsidiary, Monsanto, whose principal operations involve the manufacture and sale of commercial agricultural products, sold to the public 38,033,000 shares of its common stock at $20 per share. This resulted in net proceeds to the company of approximately $700. Subsequent to the offering, the company continues to own 220,000,000 shares of common stock, representing 85.3 percent ownership of Monsanto. The company recorded a loss on the sale of Monsanto's stock of approximately $380. This amount is reflected as an adjustment to stockholders' equity. The minority stockholders' proportionate share of the equity and net loss in Monsanto of $1,084 and $(6) are included as minority interest in agricultural subsidiaries in the accompanying consolidated balance sheets and consolidated statements of earnings, respectively. 16 SHAREHOLDERS' EQUITY Preferred Stock The Series B Convertible Perpetual Preferred Stock is held by the Employee Stock Ownership Trust (ESOP Trust). The per-share stated value is $40,300.00 and the preferred stock ranks senior to the company's common stock as to dividends and liquidation rights. Each share is convertible, at the holder's option, into 1,725.5 shares of the company's common stock and has voting rights equal to 1,725.5 shares of common stock. The company may redeem the preferred stock at any time or upon termination of the ESOP at a minimum price of $40,300.00 per share. Dividends, if declared and at the rate of 6.25 percent, are cumulative, paid quarterly, and charged against retained earnings. Common Stock The number of common shares outstanding at December 31, 2000, 1999, and 1998 was 1,296,300,000; 1,254,637,000 and 1,245,858,000, respectively. For the year ended December 31, 2000, Pharmacia declared dividends of $0.36 and individually, the former Monsanto Company and Pharmacia & Upjohn, Inc. declared dividends of $0.015 and $0.25, respectively. Individually, the former Monsanto Company and Pharmacia & Upjohn, Inc. declared dividends at a rate of $0.12 and $1.08, and $0.12 and $1.08, for the years 1999, and 1998, respectively. Common stock dividends payable were $155, and $141 at December 31, 2000 and 1999, respectively. Capital in Excess of Par Value Amounts of paid-in capital that exceed the par value ($2.00 per share) of the company's common stock are recorded in this account. The tax benefit related to the exercise of certain stock options reduces income taxes payable and is reflected as capital in excess of par. Offsetting this is the difference between the cost of treasury shares and cash received for them, if any, when used to satisfy stock option exercises and other employee stock awards. Gains and losses related to the sale of stock by subsidiaries are also included in paid-in-capital. ESOP-Related Accounts Upon recognition of the company's guarantee of the debt of the ESOP trusts, offsetting amounts were recorded in shareholders' equity. As guaranteed debt is repaid, this amount diminishes correspondingly (see Notes 12 and 17). In addition, the company has extended various loans to the ESOP trusts. The guarantees and the company loans constitute charges to shareholders' equity. Finally, to the extent the company recognizes expense more rapidly than the corresponding cash contributions are made to the preferred stock ESOP, this shareholders' equity balance is reduced. Treasury Stock The balance at December 31, 2000 and 1999 was $2,003 and $2,432, respectively, carried at cost. Accumulated Other Comprehensive Income Accumulated other comprehensive income reflects the cumulative balance of currency translation adjustments, the adjustments of translating the financial statements of non-U.S. subsidiaries from local currencies into U.S. dollars (see Note 1); unrealized gains and losses on investments categorized as available-for-sale, net of deferred taxes and reclassifications (see Note 4); and minimum pension liability adjustments, net of deferred tax. Shareholder Rights Plan Pursuant to the company's Shareholder Rights Plan dated December 19, 1999, as amended and restated as of February 20, 2001, if a person or group acquires beneficial ownership of 20 percent or more, or announces a tender offer that would result in beneficial ownership of 20 percent or more of the company's outstanding common stock, the rights become exercisable. And, for every right held, the owner will be entitled to purchase one one-thousandth of a share of a Series A preferred stock for $250.00. If Pharmacia is acquired in a business combination transaction while the rights are outstanding, for every right held, the holder will be entitled to purchase, for $250.00, common shares of the acquiring company having a market value of $500.00. In addition, if a person or group acquires beneficial ownership of 20 percent or more of the company's outstanding common stock, for every right held, the holder (other than such person or members of such group) will be entitled to purchase, for $250.00, a number of shares of the company's common stock having a market value of $500.00. At any time prior to the acquisition of such a 20 percent position, the company can redeem each right for $0.001. The board of directors also is 67 Pharmacia Corporation Annual Report 2000 36 authorized to reduce the aforementioned 20 percent thresholds to not less than 10 percent. The rights expire in the year 2010. Adjustable Conversion-Rate Equity Securities In November 1998, the company issued 17,500,000 units of 6.50 percent Adjustable Conversion-rate Equity Security Units (ACES) at a stated value of $40.00 per unit. Each unit consists of a purchase contract for the company's common stock and a junior subordinated deferrable debenture. Under the purchase contracts, in November 2001 the unit holders will purchase for $40.00 not more than one share and not less than 0.8197 of one share of the company's common stock per unit, depending on the average trading price of the common stock during a specified period in November 2001. In addition, the company pays quarterly deferrable contract fees to the unit holders at 0.55 percent of the stated amount. 17 EMPLOYEE STOCK OWNERSHIP PLANS (ESOP) The company operates two Employee Stock Ownership Plans that serve as the funding vehicles for certain employee savings plans. Pursuant to these plans, the company matches, in part, employee contributions--one plan utilizing common stock and the other, preferred stock of the company. The common stock plan held 14.7 million shares of stock as of December 31, 2000. At its inception, the ESOP acquired shares by using proceeds from the issuance of long-term notes and debentures guaranteed by the company and borrowing $50 from the company. In 2000, 848,119 shares were allocated to participants' savings accounts under the plan. An additional 409,553 shares were released in 2000 awaiting allocation to participants, leaving 6.0 million unallocated shares as of December 31, 2000. Shares held by the ESOP are considered outstanding for earnings-per-share calculations. Compensation expense is equal to the cost of the shares allocated to participants, less cash dividends paid on the shares held by the ESOP. Dividends on the common stock owned by the ESOP are used to repay the ESOP borrowings, which were $83 as of December 31, 2000. Common shares released during 2000, 1999, and 1998 were 1,258,672, 1,937,138; and 944,215, respectively. The preferred stock ESOP was created in 1989. As the ESOP Trust makes debt principal and interest payments, a proportionate amount of preferred stock is released for allocation to plan participants. The preferred shares are allocated to participants' accounts based upon their respective savings plan contributions and the dividends earned on their previously allocated preferred shares. As of December 31, 2000, 2,367 preferred shares had been released and allocated; 441 shares were released but unallocated; and 3,710 shares remained unreleased, of which 104 shares are committed to be released. Preferred shares released during 2000, 1999, and 1998 were 502, 421, and 391, respectively. Eventual conversion of all preferred shares is assumed in the earnings per share computations. Under the agreement whereby the company guaranteed third-party debt of the ESOP Trust, the company is obligated to provide sufficient cash annually to the Trust to enable it to make required principal and interest payments. The company satisfies this annual cash flow requirement through payment of dividends on all preferred shares outstanding, loans and cash contributions. The company has fully and unconditionally guaranteed the ESOP Trust's payment obligations whether at maturity, upon redemption, upon declaration of acceleration, or otherwise. The holders of the debt securities have no recourse against the assets of the ESOP Trust except in the event that the Trust defaults on payments due and the company also fails to make such payments. In that event, the holders may have recourse against unallocated funds held by the Trust. At December 31, 2000, assets of the ESOP trust consisted primarily of $263 of Pharmacia Corporation Convertible Perpetual Preferred Stock. Expense of the preferred stock ESOP is determined by a formula that apportions debt service to each year of the plan based on shares allocated to participants and deducts dividends paid on all preferred stock held by the trust. ESOP expense represents a fringe benefit and, as such, it forms a part of payroll costs that comprise a portion of all functional expense captions in the earnings statement. Combined measures of the ESOP plans are presented in the table that follows.
================================================================================ Years Ended December 31 2000 1999 1998 - -------------------------------------------------------------------------------- Interest expense of ESOP Trust $31 $34 $37 Dividend income of ESOP Trusts: Preferred 17 17 17 Common 4 2 2 Company contributions to ESOP Trusts 51 59 32 Company ESOP expense 40 45 34 ================================================================================
18 STOCK COMPENSATION The company has granted stock options under three fixed plans. Prior to the merger, the former Monsanto and P&U granted options to certain employees under similar plans. Options granted under both of these plans are for exercise prices equal to or exceeding the market price of the company's stock on the date of grant and have a maximum term of ten years. Options granted prior to the merger were subject to varying vesting terms; however, all options became fully vested at the time of the merger as a result of change in control provisions, which were included in the original terms of the plans. Options granted since the merger vest pro rata over three years. Certain options which had been granted to former Monsanto senior management prior to the merger were to have vested upon the attainment of pre-established prices within specified time periods. 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 68 Pharmacia Corporation Annual Report 2000 37 market value on the date of the original grant. A non-cash charge of $232 was recorded in the first quarter in conjunction with the re-pricing of these options. Most regular full-time and regular part-time employees of the former Monsanto Company were granted options under the Monsanto Shared Success Stock Option Plan. 500 shares of common stock were granted per participant in 1998, 300 shares in 1999, with no new stock being granted in 2000. These options were to have vested at the end of three years, but became fully vested in 2000 upon change in control in accordance with the original terms of the plan. The exercise price of each option was generally equal to the price of the company's common stock on the date of grant, with a maximum term of 10 years. Information concerning option activity and balances follows:
================================================================================ Weighted Average Number Exercise Price of Shares Per Share (000) - -------------------------------------------------------------------------------- Balance outstanding, January 1, 1998 $ 25.25 94,506 Granted 46.49 53,791 Exercised 19.50 (15,508) Canceled 35.12 (3,744) - -------------------------------------------------------------------------------- Balance outstanding, December 31, 1998 34.51 129,045 Granted 46.86 17,950 Exercised 22.05 (11,527) Canceled 46.80 (5,575) - -------------------------------------------------------------------------------- Balance outstanding, December 31, 1999 36.79 129,893 Granted 38.92 14,483 Exercised 30.82 (43,574) Canceled 51.31 (2,909) - -------------------------------------------------------------------------------- Balance outstanding, December 31, 2000 $ 39.33 97,893 ================================================================================
================================================================================ Composition of the Weighted Weighted December 31, 2000 Balance: Average Average Number Options Having a Remaining Exercise Price Of Shares per-share Exercise Price of: Life Per Share (000) - -------------------------------------------------------------------------------- $ 0.51-19.99 2.91 years $ 12.96 9,633 $20.00-29.99 5.21 years 26.79 11,158 $30.00-39.99 6.29 years 33.76 23,974 $40.00-49.99 8.17 years 43.92 19,646 $50.00-59.99 7.39 years 51.57 32,738 $60.00-75.00 8.39 years 73.47 744 ================================================================================
As of December 31, 2000, 1999, and 1998, Pharmacia Corporation had exercisable options of 94,174,000, 65,889,000, and 65,112,000, respectively, with weighted average exercise prices of $38.60, $27.78, and $26.26, respectively. As permitted by Statement of Financial Accounting Standard (FAS) No. 123, "Accounting for Stock-Based Compensation," Pharmacia Corporation has elected to continue following the guidance of APB No. 25, "Accounting for Stock Issued to Employees" for measurement and recognition of stock-based transactions with employees. In accordance with APB No. 25, no compensation cost has been recognized for the company's option plans. Had the determination of compensation cost for these plans been based on the fair market value at the grant dates of the awards under these plans, consistent with the method of FAS No. 123, Pharmacia Corporation's earnings from continuing operations would have been reduced by approximately $403 or $.31 per share for 2000, $239 or $.19 per share for 1999, and $264 or $.21 per share for 1998. In computing the proforma compensation expense, the fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:
======================================================================================================= 2000 1999 1998 - --------------------------------------------- --------------------- --------------------- Pharmacia Former Former Corp P&U Monsanto P&U Monsanto - ------------------------------------------------------------------------------------------------------- Expected dividend yield 1.0% 1.98% 0.34% 2.70% 0.25% Expected volatility 26.00% 24.8% 39.5% 24.0% 30.0% Risk-free interest rate 6.75% 6.64% 4.4% 4.72% 5.6% Expected option lives (years) 5.0 5.0 4.1 5.1 4.0 =======================================================================================================
69 Pharmacia Corporation Annual Report 2000 38 Monsanto Stock Option Plans Monsanto, a consolidated subsidiary of Pharmacia, established three fixed stock option plans for employees in 2000. Under the Monsanto 2000 Management Incentive Plan and the Monsanto Non-Employee Director Equity Incentive Compensation Plan, Monsanto may grant key officers, directors and employees of Monsanto or Pharmacia stock-based awards, including stock options, of up to 22.6 million shares of common stock. Other employees were granted options under the Monsanto Broad-Based Stock Option Plan which permits the granting of a maximum of 2.7 million shares of common stock to employees other than officers subject to special reporting requirements. Under the plans, the exercise price of the options must be no less than the fair market value of Monsanto's common stock on the grant date. The plans provide that the term of any option granted may not exceed 10 years. In total, under the Monsanto plans, approximately 22.6 million options were granted at a weighted-average exercise price of $20.07 during 2000, and 22.6 million remain outstanding at year end. Of those outstanding, approximately 22.2 million had a weighted-average exercise price and contractual life of $20.00 and 9.8 years, respectively. Approximately .4 million had a weighted-average exercise price and contractual life of $24.83 and 9.9 years, respectively. As of December 31, 2000, none of the outstanding Monsanto options was exercisable as the majority vest in increments of 50 percent in 2002 and 50 percent in 2003. 19 RETIREMENT BENEFITS The company has various pension plans covering substantially all employees. Benefits provided under the defined benefit pension plans are primarily based on years of service and the employee's compensation. The company also provides nonpension benefits to eligible retirees and their dependents, primarily in the form of medical and dental benefits. The following tables summarize the changes in benefit obligations and plan assets during 2000 and 1999.
================================================================================ Other Retirement Pension Benefits Benefits Change in Benefit Obligation: 2000 1999 2000 1999 - -------------------------------------------------------------------------------- Benefit obligation at beginning of year $ 3,968 $ 4,110 $ 848 $ 809 Service cost 121 124 26 26 Interest cost 278 264 62 55 Benefits paid (372) (459) (66) (43) Actuarial (gain) loss 136 (97) 42 -- Plan amendment and other adjustments 7 26 8 1 - -------------------------------------------------------------------------------- Benefit obligation at end of year $ 4,138 $ 3,968 $ 920 $ 848 ================================================================================ Change in Plan Assets: 2000 1999 2000 1999 - -------------------------------------------------------------------------------- Fair value of plan assets at beginning of year $ 3,860 $ 3,623 $ 252 $ 211 Actual return on plan assets (8) 620 (25) 41 Employer contribution 74 69 63 26 Plan Participant Contributions 5 3 -- -- Benefits paid (371) (459) (66) (27) Other adjustments 43 (2) 3 1 Currency exchange effects (31) 5 -- -- - -------------------------------------------------------------------------------- Fair value of plan assets at end of year $ 3,572 $ 3,859 $ 227 $ 252 ================================================================================ At December 31, 2000 1999 2000 1999 - -------------------------------------------------------------------------------- Funded status $ (566) $ (109) $(693) $(596) Unrecognized net losses (gains) 23 (433) (24) (112) Unamortized net transition asset (27) (40) -- -- Unrecognized prior service cost 117 120 (29) (35) - -------------------------------------------------------------------------------- Accrued liability $ (453) $ (462) $(746) $(743) ================================================================================
70 Pharmacia Corporation Annual Report 2000 39 The projected benefit obligation, accumulated benefit obligation, and fair value of plan assets for the pension plans with accumulated benefit obligations in excess of plan assets were, $654, $602, and $109 as of December 31, 2000, and $730, $661, and $118 as of December 31, 1999, respectively.
================================================================================ Other Retirement Pension Benefits Benefits At December 31, 2000 1999 2000 1999 - -------------------------------------------------------------------------------- Postretirement liabilities $(859) $(822) $(746) $(714) Other current liabilities -- -- -- (29) Prepaid balances 262 231 -- -- Minimum pension liability offsets: Intangible assets 12 16 -- -- Shareholders' equity (pretax) 132 113 -- -- - -------------------------------------------------------------------------------- Accrued benefit cost $(453) $(462) $(746) $(743) ================================================================================
================================================================================ Weighted-Average Assumptions as of December 31, 2000 1999 1998 - -------------------------------------------------------------------------------- Discount rate 7.23% 7.43% 6.72% Salary growth rate 4.00-4.50 3.67-4.50 3.68-4.00 Return on plan assets 9.39 9.51 9.38 Health care cost rate--initially 5.25-5.50 5.25-5.62 5.75-5.83 Trending down to 5.00-5.25 5.00-5.25 4.75-5.00 ================================================================================
==================================================================================================================================== Pension Benefits Other Retirement Benefits Components of Net Periodic Benefit Cost: 2000 1999 1998 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------------ Service cost $ 121 $ 124 $ 114 $ 26 $ 26 $ 23 Interest cost 279 264 261 62 55 54 Expected return on plan assets (304) (320) (265) (24) (20) (15) Amortization of transition amount (17) (8) (9) -- -- -- Amortization of prior service cost 16 4 5 (5) (3) (3) Recognized actuarial loss (gain) 1 52 25 (10) 11 (3) - ------------------------------------------------------------------------------------------------------------------------------------ Net periodic benefit cost 96 116 131 49 69 56 Settlement/curtailment loss (gain) 9 3 (3) -- -- -- - ------------------------------------------------------------------------------------------------------------------------------------ Net benefit cost $ 105 $ 119 $ 128 $ 49 $ 69 $ 56 ====================================================================================================================================
The assumption concerning health care cost trend rate has a significant effect on the amounts reported. Increasing the rate by one percentage point in each year would increase the postretirement benefit obligation as of December 31, 2000 by $59 and the total of service and interest cost components of net postretirement benefit cost for the year by $7. Conversely, decreasing the rate by one percentage point in each year would decrease the postretirement benefit obligation as of December 31, 2000 by $55 and the total of service and interest cost components of net postretirement benefit cost for the year by $6. The company has recorded an additional minimum liability of $144 for underfunded plans at December 31, 2000. This liability represents the amount by which the accumulated benefit obligation exceeds the sum of the fair market value of plan assets and accrued amounts previously recorded. The additional liability is offset by an intangible asset ($12) to the extent of previously unrecognized prior service cost offsets the additional liability. The remaining amount ($132) is recorded, net of tax benefits, as a reduction to shareholders' equity within accumulated other comprehensive income. 20 SEGMENT INFORMATION As a result of the recent merger involving the former Monsanto Company and Pharmacia & Upjohn, management's reporting methodologies and definition of operating segments have changed. The company's reportable segments are organized principally by product line, and include Prescription Pharmaceuticals, Agricultural Productivity, and Seeds and Genomics. The Prescription Pharmaceutical 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 segments, they have been included in an "Other Pharmaceuticals" category. 71 Pharmacia Corporation Annual Report 2000 40 The accounting policies of all of the company's segments are the same as those outlined in the summary of significant accounting policies. Corporate amounts represent general and administrative expenses of corporate support functions, restructuring charges, and other corporate items such as litigation accruals, merger costs and non-operating income and expense. Corporate support functions and costs are allocated to agricultural segments. Accordingly, these costs are only shown separately in the following tables for non-agricultural segments. Certain goodwill and intangible assets and associated amortization are not allocated to segments. The following tables show 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 segment 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. Segment information for 1999 and 1998 has been restated to conform to the current presentation. Segments for year ended December 31, 2000:
==================================================================================================================================== Pharmaceuticals Agricultural ------------------------------------------------ -------------------------------------- Seeds & Prescription Other Corporate Total Productivity Genomics Total Total - ------------------------------------------------------------------------------------------------------------------------------------ Sales $10,824 $1,827 $ -- $12,651 $ 3,885 $ 1,608 $ 5,493 $18,144 Earnings from equity affiliates -- 12 24 36 (3) (31) (34) 2 Amortization 62 8 82 152 4 360 364 516 EBIT(*) 2,087 373 (1,363) 1,097 1,099 (581) 518 1,615 - ------------------------------------------------------------------------------------------------------------------------------------ Interest expense, net 242 - ------------------------------------------------------------------------------------------------------------------------------------ Earnings before taxes $ 1,373 ====================================================================================================================================
Segments for year ended December 31, 1999:
==================================================================================================================================== Pharmaceuticals Agricultural ------------------------------------------------ -------------------------------------- Seeds & Prescription Other Corporate Total Productivity Genomics Total Total - ------------------------------------------------------------------------------------------------------------------------------------ Sales $9,255 $1,922 $ -- $11,177 $ 3,586 $ 1,662 $ 5,248 $16,425 Earnings from equity affiliates -- 34 (12) 22 (9) (9) (18) 4 Amortization 73 9 80 162 10 307 317 479 EBIT(*) 1,771 427 (508) 1,690 897 (391) 506 2,196 - ------------------------------------------------------------------------------------------------------------------------------------ Interest expense, net 298 - ------------------------------------------------------------------------------------------------------------------------------------ Earnings before taxes $ 1,898 ====================================================================================================================================
Segments for year ended December 31, 1998:
==================================================================================================================================== Pharmaceuticals Agricultural ------------------------------------------------ -------------------------------------- Seeds & Prescription Other Corporate Total Productivity Genomics Total Total - -------------------------------------------------------------------------------------------------------------------------------- Sales $7,209 $2,080 $ -- $9,289 $ 3,500 $ 948 $ 4,448 $13,737 Earnings from equity affiliates 1 56 (9) 48 (10) (21) (31) 17 Amortization 78 17 102 197 7 194 201 398 EBIT(*) 1,290 431 (752) 969 869 (835) 34 1,003 - -------------------------------------------------------------------------------------------------------------------------------- Interest expense, net 111 - -------------------------------------------------------------------------------------------------------------------------------- Earnings before taxes $ 892 ================================================================================================================================
* Earnings before interest and taxes (EBIT) is presented here to provide additional information about the company's operations. This item should be considered in addition to, but not as a substitute for or superior to, net earnings, cash flow or other measures of financial performance prepared in accordance with generally accepted accounting principles. Determination of EBIT may vary from company to company. 72 Pharmacia Corporation Annual Report 2000 41 The company's products are sold throughout the world to a wide range of customers including pharmacies, hospitals, chain warehouses, governments, physicians, wholesalers, and other distributors. No single customer accounts for 10 percent or more of the company's consolidated sales. The top selling 20 products in 2000 represent approximately 69 percent of total sales with no one product constituting more than 15 percent of total sales. The following table shows the company's sales geographically:
================================================================================ Geographic sales for years ended December 31 2000 1999 1998 - -------------------------------------------------------------------------------- Sales to customers in: North America $10,538 $ 9,108 $ 6,701 Europe/Africa 3,773 3,934 4,306 Asia Pacific 2,097 1,903 1,547 Latin America 1,736 1,480 1,183 - -------------------------------------------------------------------------------- Total sales $18,144 $16,425 $13,737 ================================================================================
Long-lived assets include property, plant and equipment, goodwill and other intangibles, all net of depreciation or amortization.
================================================================================ Long-lived assets, December 31 2000 1999 - -------------------------------------------------------------------------------- North America $ 7,154 $ 7,875 Europe/Africa 3,545 3,254 Asia Pacific 287 313 Latin America 1,444 1,179 - -------------------------------------------------------------------------------- Total long-lived assets $12,430 $12,621 ================================================================================
21 DISCONTINUED OPERATIONS On July 1, 1999, the company announced its intention to sell the artificial sweetener (bulk aspartame and tabletop sweeteners) and biogum businesses. The results of operations, financial position, and cash flows of these businesses, and of the alginates and ORTHO lawn and garden products businesses, the divestitures of which were approved by the company's board of directors in 1998, have been reclassified as discontinued operations; and, for all periods presented, the consolidated financial statements and notes have been reclassified to conform to this presentation. Net sales and income from discontinued operations for 2000 represent the biogums, bulk aspartame, tabletop sweeteners and ORTHO lawn and garden businesses whereas 1999 also included the alginates business. Pharmacia completed the sale of the remaining former Monsanto Nutrition and Consumer Products businesses in 2000. As a result, there were no net assets from discontinued operation as of December 31, 2000 compared with net assets from the alginates, biogums, bulk aspartame and tabletop sweeteners businesses at the end of 1999. Net sales and income from discontinued operations in 2000 include nine months of biogums, five months of bulk aspartame and two months of the tabletop sweeteners business and a settlement of litigation related to the ORTHO lawn and garden products business. Net sales and income from discontinued operations in 1999 included the alginates, biogums, bulk aspartame, and tabletop sweeteners, and one month of the ORTHO lawn and garden products business. Net sales, income and net assets from discontinued operations include the ORTHO lawn and garden products, alginates, bulk aspartame, tabletop sweeteners, and biogums businesses for 1998.
================================================================================ 2000 1999 1998 - -------------------------------------------------------------------------------- Net Sales $ 350 $ 980 $ 1,288 (Loss) Income from discontinued operations before income tax (88) 150 (158) Income tax expense (benefit) (51) 58 (39) - -------------------------------------------------------------------------------- Net (Loss) income from discontinued operations $ (37) $ 92 $ (119) Net assets of discontinued operations: Current assets -- 545 994 Non-current assets -- 1,240 1,269 - -------------------------------------------------------------------------------- Total assets $ -- $1,785 $ 2,263 Current liabilities -- 213 272 Non-current liabilities -- 15 67 - -------------------------------------------------------------------------------- Total liabilities $ -- $ 228 $ 339 - -------------------------------------------------------------------------------- Net assets of discontinued operations $ -- $1,557 $ 1,924 ================================================================================
On September 29, 2000, Pharmacia completed the sale of the biogums business to a joint venture formed between Hercules, Inc. and Lehman Brothers Merchant Banking Partners II, L.P. for cash proceeds of $592. On March 17, 2000, Pharmacia completed the sale of the tabletop sweeteners business to Merisant Company for $570 in cash. On May 24, 2000, Pharmacia completed the sale of its sweetener ingredient business to J.W. Childs Equity Partners II, L.P., for $440 in cash proceeds. Also on May 24, 2000 Pharmacia completed the sale of equity interests in two European joint venture companies, NutraSweet A.G., and Euro-Aspartame S.A., to Ajinomoto Co., Inc., for $67 in cash proceeds. Proceeds from these transactions were used to pay down debt and for other corporate purposes. In January 1999, the company completed the sale of the ORTHO lawn and garden products business. Proceeds of $340 were used to reduce debt in 1999 and for general corporate purposes. On October 15, 1999, the company completed the sale of the alginates business to International Specialty Products (ISP). Proceeds of $40 from the sale were used to reduce debt. 73 Pharmacia Corporation Annual Report 2000 42 QUARTERLY DATA Dollars in Millions, Except Per-Share Data
2000 (unaudited) First Quarter Second Quarter Third Quarter Fourth Quarter - ------------------------------------------------------------------------------------------------------------------------------------ As As As Previously As(1) Previously As(1) Previously As(1) As Reported Restated Reported Restated Reported Restated Reported ==================================================================================================================================== Net sales $ 4,293 $ 4,172 $ 5,029 $ 5,187 $ 4,286 $ 4,289 $ 4,496 Gross profit 2,888 2,768 3,519 3,674 2,991 2,994 3,052 Earnings before extraordinary item and cumulative effect of accounting change 98 27 379 479 247 252 189 Net earnings (loss) 98 (171) 379 479 247 252 157 Basic earnings per share-earnings before extraordinary item and cumulative effect of accounting change $ .07 $ .01 $ .30 $ .38 $ .19 $ .20 $ .14 Diluted earnings per share--earnings before extraordinary item and cumulative effect of accounting change .07 .01 .29 .37 .19 .19 .14 Basic earnings (loss) per share--net earnings .07 (.14) .30 .38 .19 .20 .11 Diluted earnings (loss) per share-- net earnings .07 (.14) .29 .37 .19 .19 .11 Market price(2): High $ 51.50 $ 59.75 $ 60.19 $ 61.00 Low 34.25 48.94 52.00 50.75
1999 (unaudited) First Quarter Second Quarter Third Quarter Fourth Quarter ==================================================================================================================================== Net sales $ 4,100 $ 4,359 $ 3,738 $ 4,228 Gross profit 2,723 3,002 2,494 2,887 Earnings before cumulative effect of accounting change 344 536 234 284 Net earnings 324 536 234 284 Basic earnings per share--earnings before cumulative effect of accounting change $ .27 $ .43 $ .19 $ .23 Diluted earnings per share--earnings before cumulative effect of accounting change .27 .42 .18 .22 Basic earnings per share--net earnings .25 .43 .19 .23 Diluted earnings per share--net earnings .25 .42 .18 .22 Market price(2): High $ 50.75 $ 50.13 $ 45.44 $ 47.50 Low 37.38 38.25 32.75 33.56 ====================================================================================================================================
(1) The U.S. SEC published new revenue recognition interpretations during the fourth quarter of 1999 which were effective as of January 1, 2000 (SAB 101--refer to Note 2). The cumulative effect of conforming to SAB 101 was recorded in the first quarter of 2000. The restated amounts reflect quarterly results as if SAB 101 had been applied for each quarter. (2) Amounts calculated on a pre-merger basis through March 31, 2000. 74 Pharmacia Corporation Annual Report 2000 43 SIX-YEAR SUMMARY OF FINANCIAL INFORMATION Dollars in Millions, Except Per-Share Data
Years ended December 31 2000 1999 1998 1997 1996 1995 ================================================================================================================================== OPERATING RESULTS Net sales $18,144 $16,425 $13,737 $12,580 $12,066 $11,152 Cost of product sold 5,656 5,319 5,004 4,444 4,086 3,700 Research & development 2,753 2,815 2,176 2,144 1,936 1,814 Selling, general & administrative 6,739 5,874 4,875 4,540 4,063 3,893 Amortization and adjustment of goodwill 327 248 233 134 163 136 Acquired in-process research & development -- -- 402 633 -- -- All other, net (24) (82) (201) (214) (191) (266) Merger & restructuring charges 1,078 55 245 316 897 291 - ---------------------------------------------------------------------------------------------------------------------------------- Earnings before interest and taxes 1,615 2,196 1,003 583 1,112 1,584 Interest expense/(income), net 242 298 111 21 (62) (74) - ---------------------------------------------------------------------------------------------------------------------------------- Earnings before income taxes and minority interests 1,373 1,898 892 562 1,174 1,658 Provision for income taxes 395 592 411 172 336 535 Minority interest in agricultural subsidiaries, net of tax (6) -- -- -- -- -- - ---------------------------------------------------------------------------------------------------------------------------------- Earnings from continuing operations 984 1,306 481 390 838 1,123 Discontinued operations, net of taxes (37) 92 (119) 321 106 353 - ---------------------------------------------------------------------------------------------------------------------------------- Earnings before extraordinary item and cumulative effect of accounting change 947 1,398 362 711 944 1,476 Extraordinary item, net of tax (32) -- -- -- -- -- Cumulative effect of a change in accounting principle, net of income tax benefit (198) (20) -- -- -- -- - ---------------------------------------------------------------------------------------------------------------------------------- Net earnings 717 1,378 362 711 944 1,476 Dividends on preferred stock (net of tax) 13 13 13 13 13 13 - ---------------------------------------------------------------------------------------------------------------------------------- Net earnings on common stock $ 704 $ 1,365 $ 349 $ 698 $ 931 $ 1,463 - ---------------------------------------------------------------------------------------------------------------------------------- Net earnings per common share--diluted $ 0.54 $ 1.07 $ 0.28 $ 0.57 $ 0.77 $ 1.20 ================================================================================================================================== FINANCIAL POSITION Cash and cash equivalents $ 2,166 $ 1,600 $ 970 $ 932 $ 832 $ 1,146 Short-term investments 35 138 384 616 728 1,018 Trade accounts receivable, less allowance 5,025 4,131 3,536 2,793 2,925 2,433 Inventories 2,772 2,905 2,754 2,013 1,869 1,731 Other 1,569 1,908 2,080 1,622 1,415 1,417 - ---------------------------------------------------------------------------------------------------------------------------------- Current assets 11,567 10,682 9,724 7,976 7,769 7,745 Net assets of discontinued operations -- 1,557 1,924 2,105 2,530 2,661 Properties, net 7,171 6,825 6,257 5,323 5,235 4,811 Goodwill and other intangibles, net 5,259 5,796 6,519 3,068 2,605 2,526 Other non-current assets 2,659 2,334 2,281 2,498 1,752 1,893 - ---------------------------------------------------------------------------------------------------------------------------------- Total assets $26,656 $27,194 $26,705 $20,970 $19,891 $19,636 ================================================================================================================================== Short-term debt, including current maturities of long-term debt $ 833 $ 1,992 $ 1,401 $ 2,127 $ 889 $ 889 Other current liabilities 5,328 5,182 5,254 3,891 3,959 3,565 Long-term debt and ESOP debt 4,586 6,236 6,772 2,630 2,431 2,537 Other non-current liabilities 3,988 2,873 2,719 2,644 2,596 2,463 Shareholders' equity 11,921 10,911 10,559 9,678 10,016 10,182 - ---------------------------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $26,656 $27,194 $26,705 $20,970 $19,891 $19,636 ==================================================================================================================================
75 Pharmacia Corporation Annual Report 2000 44 DIRECTORS AND SENIOR MANAGEMENT* BOARD OF DIRECTORS Frank C. Carlucci Chairman, The Carlyle Group (merchant banking) M. Kathryn Eickhoff President, Eickhoff Economics Incorporated (economic consulting) Fred Hassan Chairman & Chief Executive Ofocer, Pharmacia Corporation Michael Kantor Partner, Mayer, Brown & Platt (law firm) Gwendolyn S. King President, Podium Prose (speakers bureau) Philip Leder, M.D. Chairman, Department of Genetics, Harvard Medical School & Senior Investigator, Howard Hughes Medical Institute R.L. Berthold Lindqvist Retired President & Chief Executive Officer, Gambro AB (medical technology) Olof G. Lund Chairman, TietoEnator Corporation (information technology) C. Steven McMillan President & Chief Executive Officer, Sara Lee Corporation (consumer goods) William U. Parfet Chairman & Chief Executive Officer, MPI Research Inc. (clinical testing) Jacobus F.M. Peters Retired Chairman of the Executive Board & Chief Executive Officer, Aergon NV (insurance) Ulla B. Reinius President, Finansfakta R. AB (publisher and consultant on corporate governance) John E. Robson Senior Advisor, Robertson Stephens (investment banking) William D. Ruckelshaus Principal, Madrona Investment Group L.L.C. (venture capital) Bengt I. Samuelsson, M.D., Ph.D. Professor of Medical & Physiological Chemistry, Karolinska Institute (university and medical research facility) SENIOR MANAGEMENT Goran Ando, M.D. (1 2 3) Executive Vice President & President, Research & Development Hakan Astrom (1 2 3) Senior Vice President, Strategy & Corporate Affairs Ken Banta (2) Vice President, Strategic Communications Richard Collier (1 2 3) Senior Vice President & General Counsel Christopher Coughlin (1 2 3) Executive Vice President & Chief Financial Officer Carrie Cox (1 2 3) Executive Vice President & President, Global Prescription Business Terry Crews (2) Executive Vice President & Chief Financial Officer, Monsanto Company Michael DuBois (2) Senior Vice President, Corporate Licensing Paul Edick (2) Group Vice President & President, Latin America/ Asia Pacific Robb Fraley (2) Executive Vice President & Chief Technology Officer, Monsanto Company Margriet Gabriel-Regis (2) Group Vice President, Hospital Products Hugh Grant (2) Executive Vice President & Chief Operating Officer, Monsanto Company Larry Hansen, Ph.D. (2) R&D Chief of Staff Fred Hassan (1 2 3) Chairman & Chief Executive Officer Leslie Hudson, Ph.D. (2) Senior Vice President & Head of Emerging Technologies Apet Iskendarian (2) Group Vice President & President, Europe, Middle East & Africa Birgitta Klasen (1 2) Senior Vice President, Information Technology & Chief Information Officer Robert Little (2) Group Vice President, Diversified Products, Global Pricing & Reimbursement Nancy Lurker (2) Group Vice President, General Therapeutics Stephen P. MacMillan (1 2 3) Sector Vice President, Global Specialty Operations Paul Matson (1 2) Senior Vice President, Human Resources Ian McInnes (1 2) Senior Vice President, Global Supply John P. McKearn, Ph.D. (2) Senior Vice President, Discovery Research Philip Needleman,Ph.D. (1 2 3) Senior Executive Vice President, Chief Scientific Officer & Chairman, Research & Development Judith A. Reinsdorf (1) Assistant Secretary Timothy Rothwell (1 2 3) Executive Vice President & President, Global Prescription Business Don Schmitz (1) Vice President & Secretary A.J. Shoultz (1) Vice President, Corporate Taxes Mark Spiers (2) Group Vice President, North American Operations Michael Tansey (2) Senior Vice President, Medical Development & Chief Medical Officer Robert Thompson (1 2) Senior Vice President & Corporate Controller Alexandra van Horne (1) Vice President & Treasurer Hendrik Verfaillie (1 2 3) President & Chief Executive Officer, Monsanto Company Neil Wolf (2) Group Vice President, General Therapeutics (1)Corporate Officer (2)Operations Committee (3)Management Committee (*)as of March 1, 2001 76 Pharmacia Corporation Annual Report 2000 EX-21 7 k59836ex21.txt SUBSIDIARIES 1 EXHIBIT (21) SUBSIDIARIES OF THE REGISTRANT Jurisdiction in which Corporate Name Incorporated PHARMACIA CORPORATION Delaware (Parent) Subsidiaries (excluding those which when considered n the aggregate as a single subsidiary did not constitute a significant subsidiary as of December 31, 2000: Monsanto Argentina SAIC Argentina Monsanto Europe S.A. Belgium Upjohn Coordination Center NV Belgium Searle Belgium, S.A. Belgium Monsanto do Brasil Ltda. Brazil Monsanto Company Delaware Pharmacia & Upjohn Inc. Delaware Pharmacia & Upjohn Company Delaware G. D. Searle LLC Delaware Greenstone Ltd. Delaware Pharmacia & Upjohn SpA Italy Pharmacia K.K. Japan Pharmacia Enterprises, S.A. Luxembourg Pharmacia & Upjohn International BV Netherlands Pharmacia & Upjohn Caribe, Inc. Puerto Rico Monsanto Caribe, Inc. Puerto Rico Searle & Co. Puerto Rico Regaine AB Sweden Pharmacia Treasury Service AB Sweden Pharmacia AB Sweden Pharmacia Export AB Sweden Pharmacia Ltd. United Kingdom Monsanto P.L.C. United Kingdom
EX-23.1 8 k59836ex23-1.txt CONSENT OF PRICEWATERHOUSECOOPERS LLP 1 EXHIBIT (23)(1) CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 2-36636, 2-76696, 33-13197, 33-21030, 33-39704, 33-39705, 33-39706, 33-39707, 33-49717, 33-53363, 33-53365, 33-53367, 333-02783, 333-02961, 333-02963, 333-33531, 333-38599, 333-34112, 333-34344, 333-45341, 333-76653, and 333-40136) of Pharmacia Corporation of our report dated February 12, 2001 relating to the financial statements, which report appears in the Annual Report to Shareholders, which is incorporated by reference in this Annual Report on Form 10-K. /s/ PRICEWATERHOUSECOOPERS LLP FLORHAM PARK, NEW JERSEY MARCH 23, 2001 EX-23.2 9 k59836ex23-2.txt CONSENT OF DELOITTE & TOUCHE LLP 1 EXHIBIT (23)(2) INDEPENDENT AUDITORS' CONSENT PHARMACIA CORPORATION: We consent to the incorporation by reference in Pharmacia Corporation's Registration Statements on Form S-8 (Nos. 2-36636, 2-76696, 33-13197, 33-21030, 33-39704, 33-39705, 33-39706, 33-39707, 33-49717, 33-53363, 33-53365, 33-53367, 333-02783, 333-02961, 333-02963, 333-33531, 333-34112, 333-34344, 333-38599, 333-40136, 333-45341 and 333-76653), of our report dated February 25, 2000, on the consolidated financial statements of the former Monsanto Company and subsidiaries as of December 31, 1999, for the each of the two years in the period ended December 31, 1999, incorporated by reference in this annual report on Form 10-K of Pharmacia Corporation for the year ended December 31, 2000. /s/ DELOITTE & TOUCHE LLP St. Louis, Missouri March 23, 2001 EX-24 10 k59836ex24.txt BOARD OF RESOLUTION 1 Exhibit (24) CERTIFICATE OF CORPORATE RESOLUTION I, Don W. Schmitz, Secretary of Pharmacia Corporation, hereby certify that the following resolutions were duly adopted by the Board of Directors of Pharmacia Corporation at a meeting held on February 22, 2001: RESOLVED, that the Company's Annual Report on Form 10-K for the year ended December 31, 2000, in substantially the form presented to the meeting and with such changes as may be approved by the Company's General Counsel, be and hereby is approved for filing with the U.S. Securities and Exchange Commission. /s/ Don W. Schmitz ------------------------- Don W. Schmitz Dated: March 26, 2001 EX-99 11 k59836ex99.txt REPORT OF INDEPENDENT ACCOUNTANTS 1 EXHIBIT (99) INDEPENDENT AUDITORS' REPORT To the Board of Directors of the former Monsanto Company: We have audited the accompanying statement of consolidated financial position of the former Monsanto Company and subsidiaries ("former Monsanto") as of December 31, 1999 and the related statements of consolidated income (loss), cash flow, shareowners' equity and comprehensive income (loss) for each of the two years in the period ended December 31, 1999 (not presented separately herein). These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of former Monsanto as of December 31, 1999, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States of America. /s/ DELOITTE & TOUCHE LLP St. Louis, Missouri February 25, 2000 2 INDEPENDENT AUDITORS' REPORT To the Shareowners of Monsanto Company: We have audited the accompanying statement of consolidated financial position of Monsanto Company and subsidiaries as of December 31, 2000, and the related statements of consolidated income, cash flows, shareowners' equity and comprehensive income (loss) for the year then ended (not presented separately herein). These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Monsanto Company and subsidiaries as of December 31, 2000, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 3 to the consolidated financial statements, in 2000 Monsanto Company changed its method of recognizing revenue to conform to the Securities and Exchange Commissions' Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements. /s/ DELOITTE & TOUCHE LLP St. Louis, Missouri February 12, 2001 -----END PRIVACY-ENHANCED MESSAGE-----