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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q/A
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-2516
PHARMACIA CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 43-0420020
(STATE OF INCORPORATION) (I.R.S. EMPLOYER
IDENTIFICATION
NO.)
PHARMACIA CORPORATION, 100 ROUTE 206 NORTH, PEAPACK, NJ 07977
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
908/901-8000
REGISTRANT'S TELEPHONE NUMBER
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months, and (2) has been subject to such filing
requirements for the past 90 days.
[X] YES [ ] NO
The number of shares of Common Stock, $2 Par Value, outstanding as of
August 9, 2001 was 1,301,517,238
Page 1 of 33 pages
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The undersigned registrant hereby amends Item 1 ("Financial Statements")
and Item 2 ("Management's Discussion and Analysis of Financial Condition and
Results of Operations") of its Form 10-Q filed electronically with the
Securities and Exchange Commission on August 14, 2001, for the quarter ended
June 30, 2001, pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934.
The following changes have been made within the Condensed Consolidated
Balance Sheets of Item 1 (page 6):
A reclassification of $100 (million) was made between preferred stock and
accumulated other comprehensive loss on the condensed consolidated balance sheet
as of June 30, 2001 as a result of an inadvertent misclassification. This change
has no impact on total shareholders' equity, total assets, total liabilities or
net earnings.
In addition, Note E -- Comprehensive Income (page 8) has been modified to
reflect the aforementioned changes made herein:
"Comprehensive income for the three months ended June 30, 2001 and 2000 was
$608 (million) and $319 (million), respectively. Comprehensive income for the
six months ended June 30, 2001 and 2000 was $627 (million) and $423 (million),
respectively."
The following sentences within the Comprehensive Income discussion of Item
2 (page 28) have also been modified to reflect the aforementioned changes made
herein:
"Comprehensive income for the three months ended June 30, 2001 and 2000 was
$608 million and $319 million, respectively. For the six months ended June 30,
2001 and 2000, comprehensive income was $627 million and $423 million,
respectively."
The entire text of Item 1 and Item 2, reflecting the aforementioned
changes, is set forth in this report on Form 10-Q/A.
2
3
QUARTERLY REPORT ON FORM 10-Q/A
PHARMACIA CORPORATION
QUARTER ENDED JUNE 30, 2001
INDEX OF INFORMATION INCLUDED IN REPORT
PAGE
----
PART I -- FINANCIAL INFORMATION............................. 4
Item 1. Financial Statements................................ 4
Consolidated Statements of Earnings....................... 4
Condensed Consolidated Statements of Cash Flows........... 5
Condensed Consolidated Balance Sheets..................... 6
Notes to Consolidated Financial Statements................ 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 17
Item 3. Quantitative and Qualitative Disclosures about
Market Risk............................................... 30
PART II -- OTHER INFORMATION................................ 31
Item 5. Other Information................................... 31
Item 6. Exhibits and Reports on Form 8-K.................... 31
3
4
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PHARMACIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(DOLLARS IN MILLIONS, EXCEPT PER-SHARE DATA)
(UNAUDITED)
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------------- ------------------
2001 2000 2001 2000
------- ------- ------ ------
Net sales........................................... $5,424 $5,187 $9,940 $9,359
Cost of products sold............................... 1,559 1,513 3,000 2,917
Research and development............................ 664 716 1,411 1,411
Selling, general and administrative................. 1,780 1,754 3,503 3,356
Amortization and adjustment of goodwill............. 55 145 116 202
Merger and restructuring............................ 206 111 351 572
Interest expense.................................... 88 104 170 201
Interest income..................................... (30) (25) (69) (54)
All other, net...................................... (4) 28 13 (31)
------ ------ ------ ------
Earnings before income taxes and minority
interest.......................................... 1,106 841 1,445 785
Provision for income taxes.......................... 296 303 373 278
Minority interest in agricultural subsidiaries, net
of tax............................................ 58 -- 66 --
------ ------ ------ ------
Earnings from continuing operations................. 752 538 1,006 507
Loss on sale of discontinued operations, net of
tax............................................... (3) (59) (8) (1)
------ ------ ------ ------
Earnings before extraordinary items and cumulative
effect of accounting change....................... 749 479 998 506
Extraordinary items, net of tax..................... (12) -- (12) --
Cumulative effect of accounting change, net of
tax............................................... -- -- 1 (198)
------ ------ ------ ------
Net earnings........................................ $ 737 $ 479 $ 987 $ 308
====== ====== ====== ======
Net earnings per common share:
Basic
Earnings from continuing operations............... $ .58 $ .42 $ .77 $ .39
Net earnings...................................... .57 .38 .76 .24
Diluted
Earnings from continuing operations............... $ .56 $ .41 $ .75 $ .39
Net earnings...................................... .55 .37 .74 .24
====== ====== ====== ======
See accompanying notes.
4
5
PHARMACIA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
(UNAUDITED)
FOR THE SIX MONTHS
ENDED JUNE 30,
------------------
2001 2000
------ ------
Net cash provided (required) by continuing operations....... $ 86 $ (450)
Net cash (required) by discontinued operations.............. -- (1)
------ ------
Net cash provided (required) by operations.................. 86 (451)
------ ------
Cash flows (required) provided by investment activities:
Proceeds from sale of subsidiaries........................ -- 75
Purchases of subsidiaries................................. (65) (4)
Proceeds from sales of investments........................ 78 91
Purchases of other acquisitions and investments........... (81) (226)
Purchases of property, plant and equipment................ (553) (643)
Proceeds from sale of discontinued operations, net........ -- 1,077
Other..................................................... (29) 5
------ ------
Net cash (required) provided by investment activities....... (650) 375
------ ------
Cash flows provided (required) by financing activities:
Proceeds from issuance of debt............................ -- 12
Repayment of debt......................................... (65) (379)
Payments of ESOP debt..................................... (85) (31)
Net increase (decrease) in short-term borrowings.......... 779 (33)
Dividend payments......................................... (319) (334)
Issuance of stock......................................... 158 480
------ ------
Net cash provided (required) by financing activities........ 468 (285)
------ ------
Effect of exchange rate changes on cash..................... (70) (40)
------ ------
Net change in cash and cash equivalents..................... (166) (401)
Cash and cash equivalents, beginning of year................ 2,166 1,600
------ ------
Cash and cash equivalents, end of period.................... $2,000 $1,199
====== ======
See accompanying notes.
5
6
PHARMACIA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN MILLIONS)
(UNAUDITED)
JUNE 30, DECEMBER 31,
2001 2000
-------- ------------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 2,000 $ 2,166
Trade accounts receivable, less allowance of $292 (2000:
$292).................................................. 5,966 5,025
Inventories............................................... 2,721 2,772
Other current assets...................................... 1,858 1,604
------- -------
Total current assets........................................ 12,545 11,567
Long-term investments....................................... 297 444
Properties, net............................................. 7,155 7,171
Goodwill and other intangible assets, net................... 5,009 5,259
Other noncurrent assets..................................... 1,834 2,215
------- -------
Total assets................................................ $26,840 $26,656
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt, including current maturities of long-term
debt................................................... $ 2,312 $ 833
Accounts payable.......................................... 1,249 1,361
Other current liabilities................................. 3,572 3,967
------- -------
Total current liabilities................................... 7,133 6,161
Long-term debt and guarantee of ESOP debt................... 3,718 4,586
Other noncurrent liabilities................................ 2,562 2,904
Minority interest in agricultural subsidiaries.............. 1,105 1,084
------- -------
Total liabilities........................................... 14,518 14,735
------- -------
Shareholders' equity:
Preferred stock, one cent par value; at stated value;
authorized 10 million shares; issued 6,462 shares
(2000: 6,518 shares)................................... 260 263
Common stock, two dollar par value; authorized 3 billion
shares; issued 1.468 billion shares.................... 2,937 2,937
Capital in excess of par value............................ 2,762 2,694
Retained earnings......................................... 11,418 10,781
ESOP-related accounts..................................... (296) (307)
Treasury stock............................................ (1,955) (2,003)
Accumulated other comprehensive loss...................... (2,804) (2,444)
------- -------
Total shareholders' equity.................................. 12,322 11,921
------- -------
Total liabilities and shareholders' equity.................. $26,840 $26,656
======= =======
See accompanying notes.
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7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- UNAUDITED
(DOLLARS IN MILLIONS, EXCEPT PER-SHARE DATA UNLESS OTHERWISE INDICATED)
Trademarks are indicated in all upper case letters. In the notes that
follow, per-share amounts are presented on a diluted, after-tax basis.
The term "the company" is used to refer to Pharmacia Corporation or to
Pharmacia Corporation and its subsidiaries, as appropriate to the context. The
term "former Monsanto" is used to refer to pre-merger operations of the former
Monsanto Company and "Monsanto" refers to the agricultural subsidiary.
A -- INTERIM CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial information presented herein is unaudited, other
than the condensed balance sheet at December 31, 2000, which is derived from
audited financial statements. The interim financial statements and notes thereto
do not include all disclosures required by generally accepted accounting
principles and should be read in conjunction with the financial statements and
notes thereto included in Pharmacia Corporation's annual report filed on Form
10-K for the year ended December 31, 2000.
In the opinion of management, the interim financial statements reflect all
adjustments of a normal recurring nature necessary for a fair statement of the
results for interim periods. The current period's results of operations are not
necessarily indicative of results that ultimately may be achieved for the year.
B -- NEW ACCOUNTING STANDARDS
DERIVATIVE INSTRUMENTS AND HEDGING
On January 1, 2001, the company adopted Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (SFAS 133) and its amendments. 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. Gains and losses on non-hedging instruments
attributable to changes in the fair value are recorded in earnings. If elected
and qualified, special hedge accounting is available whereby gains and losses on
derivatives and certain other instruments can be offset or deferred.
In accordance with the transition provisions of SFAS 133, the company
recorded a net-of-tax cumulative effect adjustment in earnings as of January 1,
2001 for approximately a $1 gain. This amount is comprised of the excluded
component of instruments previously designated in cash flow hedges and other
changes in recorded basis to bring derivatives to fair value, both of which were
less than $1 on an individual basis. Also included in the $1 gain were
offsetting adjustments to the carrying value of a hedged item and the hedging
derivative for a fair value hedge each in the amount of $19. A similar
cumulative effect adjustment in the amount of $3 (net of tax) has been made on
the balance sheet to other comprehensive income. This amount reflects the
deferred amount of derivative instruments previously designated in cash flow
hedges.
Upon adopting SFAS 133, the company elected to reclassify $52 of
held-to-maturity securities as available-for-sale securities. The unrealized
gain associated with the reclassification was not material and is recorded in
other comprehensive income. Under the provisions of SFAS 133, such a
reclassification does not call into question the company's intent to hold
current or future debt securities until their maturity.
REVENUE RECOGNITION
In connection with the fourth quarter 2000 adoption of the interpretations
of Securities and Exchange Commission (SEC) Staff Accounting Bulletin 101,
"Revenue Recognition in Financial Statements" (SAB 101), the company recorded a
cumulative effect of a change in accounting principle, effective January 1,
2000, and has restated the quarterly results of 2000 as if SAB 101 had been
applied for each quarter. For a further discussion of this accounting change,
see the company's Form 10-K for the year ended December 31, 2000.
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8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- UNAUDITED
(DOLLARS IN MILLIONS, EXCEPT PER-SHARE DATA UNLESS OTHERWISE
INDICATED) -- (CONTINUED)
C -- ACQUISITION
During March 2001, the company completed the acquisition of Sensus Drug
Development Corporation by purchasing the remaining 80.1 percent of its stock.
The assets purchased were valued at $117, which includes $67 allocated to
in-process research and development. Cash paid in connection with this purchase
was $65 and included certain direct closing costs and is net of contractual
holdback amounts.
D -- EXTRAORDINARY ITEMS
On June 28, 2001, the company retired certain debt obligations relating to
one of the employee stock ownership plans. The principal amount of the debt was
$65. Certain costs related to the transaction, including a premium to retire the
debt and other direct costs, were $4 (net of taxes of $2) and have been
classified as an extraordinary item on the company's consolidated statements of
earnings.
Through a private transaction entered into on June 29, 2001, the company
retired debt related to the adjustable conversion-rate equity securities (ACES)
in the principal amount of $700. Premium on the debt and other direct costs of
$8 (net of taxes of $5) were accrued as an extraordinary item.
E -- COMPREHENSIVE INCOME
Comprehensive income for the three months ended June 30, 2001 and 2000 was
$608 and $319, respectively. Comprehensive income for the six months ended June
30, 2001 and 2000 was $627 and $423, respectively.
F -- MERGER AND RESTRUCTURING CHARGES
The company recorded an additional $216 of merger and restructuring charges
during the second quarter of 2001 in connection with the merger and integration
of the former Monsanto and Pharmacia & Upjohn companies into Pharmacia
Corporation. These charges are part of the comprehensive integration plan
approved by the board of directors during 2000. Of the total charges in the
quarter, $206, comprised of $138 of merger costs and $68 of restructuring
expenses, was recorded on the merger and restructuring line of the consolidated
statements of earnings and an additional $10 was recorded in cost of products
sold.
For the six months ended June 30, 2001, the company recorded a total of
$362 of merger and restructuring costs. Of this total, $351, comprised of $194
of merger costs and $157 of restructuring expenses, was recorded on the merger
and restructuring line of the consolidated statements of earnings and an
additional $11 was recorded in cost of products sold.
The $194 of 2001 merger costs includes costs incurred to integrate the
former companies into a single organization such as consultant and relocation
costs. This effort includes the company's plan to exit its Sweden-based
metabolic diseases research activities, biopharmaceutical development unit and
the company's plasma business. As a result of this effort, the company entered
into a definitive agreement on June 7, 2001, related to the partial divestiture
of these operations, establishing Biovitrum AB (Biovitrum). The related
estimated loss of $50 is included within the second quarter 2001 merger costs
and included the write-down of the net assets to market value and certain
transaction-related expenses. Under the Biovitrum-related agreements, Pharmacia
will initially retain ownership of approximately 35 percent of the new company
with the remaining shares owned by outside investors. It is possible that
Pharmacia's share will be further reduced to below 20 percent as additional
outside investors may participate in the new company by acquiring shares from
Pharmacia. At the current 35 percent ownership level, the company will account
for its share of Biovitrum using the equity method of accounting following the
closing of the transaction. The closing occurred on July 31, 2001 and,
accordingly, there were no cash flows associated with the transaction in the
second quarter.
8
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- UNAUDITED
(DOLLARS IN MILLIONS, EXCEPT PER-SHARE DATA UNLESS OTHERWISE
INDICATED) -- (CONTINUED)
The $78 of aggregate restructuring costs for the quarter comprises $28
related to prescription pharmaceuticals, $9 associated with corporate and
administrative functions and $41 in connection with the agricultural subsidiary.
On a year-to-date basis, the company has recorded $168 of aggregate
restructuring charges as follows: $88 associated with prescription
pharmaceuticals, $15 associated with corporate and administrative functions, $2
in connection with other pharmaceutical operations and $63 related to the
agricultural subsidiary.
The $28 relating to prescription pharmaceuticals consists of $17 in
connection with the involuntary termination of approximately 70 employees and
$11 relating to asset impairments. For the six months ended June 30, 2001, the
$88 total restructuring charges associated with prescription pharmaceuticals
comprises $63 in connection with the separation of approximately 360 employees,
$17 resulting from asset impairments and $8 associated with other exit costs.
The $9 associated with the corporate and administrative functions for the
quarter includes $4 relating to the involuntary separation of approximately 30
employees and $5 resulting from asset impairments. The 2001 year-to-date total
of $15 for corporate and administrative functions includes $10 relating to the
separation of approximately 90 employees and the $5 of asset impairments.
Although there are no charges associated with the other pharmaceutical
operations during the second quarter 2001, the year-to-date restructuring
balance includes $2 associated with the separation of approximately 10
employees.
The $41 of agricultural subsidiary restructuring charges for the quarter is
composed of $31 on the merger and restructuring line and $10 on the cost of
products sold line related to the write-off of inventories in connection with
Monsanto's restructuring plan. The $31 in merger and restructuring comprises $5
relating to workforce reduction costs associated with the involuntary separation
of approximately 110 employees, $14 relating to facility closures and other exit
costs including contract terminations resulting from the exit of certain
research programs and non-core activities, and $12 relating to the write-off of
assets. For the 2001 year-to-date total of $63 ($11 in cost of products sold and
$52 in merger and restructuring), Monsanto recorded $20 in connection with the
involuntary separation of approximately 230 employees, $18 relating to facility
closures and other exit costs, $14 in connection with the write-down of assets
and $11 in cost of products sold in connection with the write-off of
inventories.
During the second quarter of 2000, the company recorded aggregate merger
and restructuring charges of $227. During that quarter, the company recorded on
the merger and restructuring line an additional $7 of merger costs, totaling
approximately $470 in merger-related costs for the first six months of 2000.
These merger-related costs are comprised, in part, of transaction costs
including investment bankers, attorneys, registration and regulatory fees and
other professional services. In addition, these costs included various employee
incentive and change-of-control costs directly associated with the merger. The
latter includes a non-cash charge of $232 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.
The $220 of additional charges during the second quarter of 2000 represents
restructuring charges and was recorded on several lines of the consolidated
statements of earnings. $104 was recorded on the merger and restructuring line
and included $90 associated with the involuntary separation of 424 employees and
$14 relating to asset impairments and contract termination costs. An inventory
write-off of $32 was recorded in cost of products sold and goodwill impairments
of $84 were recorded in the amortization and adjustment of goodwill line, both
in connection with the restructuring of the agricultural subsidiary.
Of the second-quarter 2000 charges to merger and restructuring, $59 relates
to the restructuring of corporate functions including the involuntary separation
of 49 employees, primarily the result of duplicate positions. The remaining $45
of charges are associated with the restructuring of agricultural products
9
10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- UNAUDITED
(DOLLARS IN MILLIONS, EXCEPT PER-SHARE DATA UNLESS OTHERWISE
INDICATED) -- (CONTINUED)
operations and include the involuntary separation of 375 employees throughout
the world, mainly in research and development.
A rollforward from year-end 2000 of restructuring charges and spending
associated with the current restructuring plans relating to the integration of
the former Monsanto and Pharmacia & Upjohn companies and the restructuring of
the agricultural products and other pharmaceutical operations is included in the
table below. As of June 30, 2001, the company has paid a total of $369 relating
to the separation of approximately 2,745 employees associated with these
restructuring plans.
WORKFORCE OTHER
REDUCTIONS EXIT COSTS TOTAL
---------- ---------- -----
December 31, 2000........................................ $ 192 $ 15 $ 207
Year-to-date charges..................................... 95 26 121
Year-to-date spending.................................... (222) (24) (246)
----- ---- -----
June 30, 2001............................................ $ 65 $ 17 $ 82
===== ==== =====
G -- EARNINGS PER SHARE
Basic earnings per share is computed by dividing the earnings measure by
the weighted average number of shares of common stock outstanding. Diluted
earnings per share is computed assuming the exercise of stock options,
conversion of preferred stock, and the issuance of stock as incentive
compensation to certain employees. Also in the diluted computation, earnings
from continuing operations and net earnings are reduced by an incremental
contribution to the Employee Stock Ownership Plan (ESOP). This contribution is
the after-tax difference between the income that the ESOP would have received in
preferred stock dividends and the dividend on the common shares assumed to have
been outstanding.
10
11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- UNAUDITED
(DOLLARS IN MILLIONS, EXCEPT PER-SHARE DATA UNLESS OTHERWISE
INDICATED) -- (CONTINUED)
The following table reconciles the numerators and denominators of the basic
and diluted earnings per share computations:
FOR THE THREE MONTHS ENDED JUNE 30,
--------------------------------------
2001 2000
----------------- -----------------
BASIC DILUTED BASIC DILUTED
------ ------- ------ -------
EPS numerator:
Earnings from continuing operations............. $ 752 $ 752 $ 538 $ 538
Less: Preferred stock dividends, net of tax..... (3) -- (3) --
Less: ESOP contribution, net of tax............. -- (2) -- (2)
------ ------ ------ ------
Earnings from continuing operations available to
common shareholders........................... $ 749 $ 750 $ 535 $ 536
====== ====== ====== ======
EPS denominator:
Average common shares outstanding............... 1,300 1,300 1,269 1,269
Effect of dilutive securities:
Stock options and stock warrants.............. -- 13 -- 26
Convertible instruments and incentive
compensation............................... -- 13 -- 13
------ ------ ------ ------
Total shares (in millions)...................... 1,300 1,326 1,269 1,308
====== ====== ====== ======
Earnings (loss) per share:
Continuing operations......................... $ .58 $ .56 $ .42 $ .41
Discontinued operations....................... -- -- (.04) (.04)
Extraordinary items........................... (.01) (.01) -- --
------ ------ ------ ------
Net earnings.................................. $ .57 $ .55 $ .38 $ .37
====== ====== ====== ======
11
12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- UNAUDITED
(DOLLARS IN MILLIONS, EXCEPT PER-SHARE DATA UNLESS OTHERWISE
INDICATED) -- (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30,
--------------------------------------
2001 2000
----------------- -----------------
BASIC DILUTED BASIC DILUTED
------ ------- ------ -------
EPS numerator:
Earnings from continuing operations............. $1,006 $1,006 $ 507 $ 507
Less: Preferred stock dividends, net of tax..... (6) -- (6) --
Less: ESOP contribution, net of tax............. -- (4) -- (4)
------ ------ ------ ------
Earnings from continuing operations available to
common shareholders........................... $1,000 $1,002 $ 501 $ 503
====== ====== ====== ======
EPS denominator:
Average common shares outstanding............... 1,299 1,299 1,263 1,263
Effect of dilutive securities:
Stock options and stock warrants.............. -- 16 -- 19
Convertible instruments and incentive
compensation............................... -- 12 -- 12
------ ------ ------ ------
Total shares (in millions)...................... 1,299 1,327 1,263 1,294
====== ====== ====== ======
Earnings (loss) per share:
Continuing operations......................... $ .77 $ .75 $ .39 $ .39
Discontinued operations....................... -- -- -- --
Extraordinary items........................... (.01) (.01) -- --
Cumulative effect of accounting change........ -- -- (.15) (.15)
------ ------ ------ ------
Net earnings.................................... $ .76 $ .74 $ .24 $ .24
====== ====== ====== ======
H -- INVENTORIES
JUNE 30, DECEMBER 31,
2001 2000
-------- ------------
Estimated replacement cost (FIFO basis):
Finished products......................................... $ 793 $1,042
Raw materials, supplies and work-in-process............... 2,145 1,941
------ ------
Inventories (FIFO basis).................................... 2,938 2,983
Less reduction to LIFO cost................................. (217) (211)
------ ------
Inventories................................................. $2,721 $2,772
====== ======
Inventories valued on the LIFO method had an estimated replacement cost
(FIFO basis) of $1,301 at June 30, 2001, and $1,434 at December 31, 2000.
I -- COMMITMENTS, CONTINGENT LIABILITIES AND LITIGATION
The consolidated balance sheets include accruals for estimated product,
intellectual property and other litigation and environmental liabilities. The
latter includes exposures related to discontinued operations, including the
industrial chemical facility referred to below and several sites 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
12
13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- UNAUDITED
(DOLLARS IN MILLIONS, EXCEPT PER-SHARE DATA UNLESS OTHERWISE
INDICATED) -- (CONTINUED)
to be used. Actual costs to be incurred may vary from the estimates, given the
inherent uncertainties in evaluating environmental exposures.
ENVIRONMENTAL MATTERS
With regard to the company's discontinued industrial chemical facility in
North Haven, Connecticut, the company will be required to submit a corrective
measures study report to the U.S. Environmental Protection Agency (EPA). It is
reasonably possible that a material increase in accrued liabilities will be
required. It is not possible, however, to estimate a range of potential losses.
Accordingly, it is not possible to determine what, if any, additional exposure
exists at this time.
LITIGATION MATTERS
On March 20, 1998, a jury verdict was returned against Pharmacia in a
lawsuit filed in the California Superior Court. The lawsuit was brought by
Mycogen Corporation (Mycogen), Agrigenetics, Inc. and Mycogen Plant Science,
Inc. claiming that Pharmacia delayed providing access to certain gene technology
under a 1989 agreement with Lubrizol Genetics Inc., a company which Mycogen
subsequently purchased. The jury awarded $174.9 in future damages. This jury
award was overturned on appeal by the California Court of Appeals. The
California Supreme Court has granted Mycogen's petition requesting further
review. Monsanto will continue to vigorously pursue its position on appeal. 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 Genetics (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. Pharmacia & Upjohn
Company, a subsidiary of the company, announced in 1998 that it reached a
settlement with the plaintiffs in the federal class action cases for $103; and
Searle, also a subsidiary of the company, received a favorable verdict in 1999.
Eighteen class action lawsuits seeking damages based on the same alleged conduct
were filed in 14 states and the District of Columbia. The plaintiffs
13
14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- UNAUDITED
(DOLLARS IN MILLIONS, EXCEPT PER-SHARE DATA UNLESS OTHERWISE
INDICATED) -- (CONTINUED)
claim to represent consumers who purchased prescription drugs in those
jurisdictions and four other states. All but one of the state cases have been
dismissed or settled. All that remain of the federal cases are those brought by
plaintiffs who opted out of the federal class and have Robinson-Patman Act and
Sherman Antitrust Act claims.
On April 11, 2000, the University of Rochester filed suit in U.S. District
Court for the Western District of New York, asserting patent infringement
against the company and certain of its subsidiaries as well as Pfizer, Inc. The
University asserts that its U.S. patent granted on April 11, 2000, is infringed
by the sale and use of CELEBREX. The patent has claims directed to a method of
treating human patients by administering a selective COX-2 inhibitor. The
University has sought injunctive relief, as well as monetary compensation for
infringement of the patent. The trial date is tentatively scheduled for
September 2002.
The company is also a defendant in a suit filed by Great Lakes Chemical
Company. The original complaint was filed in the U.S. District Court in Delaware
on January 20, 2000, alleging violations of Federal and Indiana Securities Laws,
common law fraud and breach of contract claims. The lawsuit itself is a result
of Great Lakes' purchase of the NSC Technologies unit of former Monsanto.
According to Great Lakes, NSC's actual sales for 1999 were significantly below
the projected sales. On May 25, 2000, the Federal Court dismissed Great Lakes'
complaint for lack of federal subject matter jurisdiction holding that the sale
of NSC was not a "security" under federal law. On June 9, 2000, Great Lakes
filed a new complaint in Delaware Superior Court. The company's motion to move
the case from Superior Court to Delaware Equity Court was granted. On February
13, 2001, oral argument was held on the company's motion to dismiss the state
court action. In a ruling issued June 29, 2001, the Court dismissed Counts I,
II, III and VII of the Great Lakes Complaint, disposing of the fraud allegations
and precluding the possibility of punitive damages, thereby significantly
reducing the company's exposure, to the extent there was any exposure. Discovery
is now proceeding on the remaining counts.
On April 12, 2001, the company was sued by CP Kelco in the U.S. District
Court in Delaware. CP Kelco is seeking compensatory and punitive damages for
alleged breach of contract, common law fraud and securities law violations
arising from the sale of the business. Lehman Brothers Merchant Banking Partners
II, L.P. purchased the Kelco biogums business from the company for $592 to form
CP Kelco with a combination of the Kelco biogums business and a business
purchased from Hercules, Inc. According to CP Kelco, their financial projections
for the Kelco biogums business were materially lower than the projections
provided by company management before the closing of the transaction, which
occurred on September 28, 2000. The original asset purchase agreement was
executed between the company and CP Kelco on February 22, 2000 and amended
twice: on August 7, 2000 and September 15, 2000. The company believes the
allegations of CP Kelco to be without merit and intends to defend them
vigorously. The company has asserted counterclaims against CP Kelco for the
return of certain payments and specific performance of its obligation under the
Asset Purchase Agreement to provide certain severance benefits to certain
transferred employees. The company also has asserted indemnification and other,
related claims against Lehman Brothers Merchant Banking Partners II, L.P.
Hercules, Inc. and Hercules 2000, LLC in a third party complaint. Discovery has
begun in the lawsuit.
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.
14
15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- UNAUDITED
(DOLLARS IN MILLIONS, EXCEPT PER-SHARE DATA UNLESS OTHERWISE
INDICATED) -- (CONTINUED)
J -- SEGMENT INFORMATION
The company's reportable segments are organized principally by product
line. They are: Prescription Pharmaceuticals, Agricultural Productivity, and
Seeds and Genomics. The Prescription Pharmaceuticals segment includes general
therapeutics, ophthalmology and hospital products including oncology and
diversified therapeutics. The Agricultural Productivity segment consists of crop
protection products, animal agriculture and environmental technologies business
lines. The Seeds and Genomics segment is comprised of global seeds and related
trait businesses and genetic technology platforms.
The company also operates several business units that do not constitute
reportable business segments. These operating units include consumer health
care, animal health, diagnostics, plasma, pharmaceutical commercial services and
biotechnology. Due to the size of these operating units, they have been included
in an "Other Pharmaceuticals" category.
Corporate amounts represent general and administrative expenses of
Pharmacia corporate support functions, restructuring charges relating to the
pharmaceutical and corporate functions and other corporate items such as
litigation accruals, merger costs and non-operating income and expense.
Corporate support functions and costs are allocated to agricultural segments.
Accordingly, these costs are only shown separately in the following table for
the non-agricultural segments. Certain goodwill and intangible assets and
associated amortization are not allocated to segments.
The following 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 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 on a segment basis. Historical
segment information has been restated to conform to the current presentation.
FOR THE THREE MONTHS ENDED JUNE 30,
-----------------------------------
NET SALES EBIT*
---------------- ---------------
2001 2000 2001 2000
------ ------ ------ -----
Prescription Pharmaceuticals.................... $2,943 $2,732 $ 719 $ 476
Other Pharmaceuticals........................... 470 448 100 95
Corporate....................................... -- -- (305) (162)
------ ------ ------ -----
Total Pharmaceuticals & Corporate............... 3,413 3,180 514 409
------ ------ ------ -----
Agricultural Productivity....................... 1,574 1,461 635 605
Seeds & Genomics................................ 437 546 15 (94)
------ ------ ------ -----
Total Agricultural.............................. 2,011 2,007 650 511
------ ------ ------ -----
Total Pharmacia................................. $5,424 $5,187 1,164 920
====== ======
Interest expense, net........................... (58) (79)
Income tax provision............................ (296) (303)
Minority interest in agricultural subsidiaries,
net of tax.................................... (58) --
------ -----
Net earnings from continuing operations......... $ 752 $ 538
====== =====
15
16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- UNAUDITED
(DOLLARS IN MILLIONS, EXCEPT PER-SHARE DATA UNLESS OTHERWISE
INDICATED) -- (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30,
-----------------------------------
NET SALES EBIT*
---------------- ---------------
2001 2000 2001 2000
------ ------ ------ -----
Prescription Pharmaceuticals.................... $5,672 $5,106 $1,156 $ 906
Other Pharmaceuticals........................... 951 925 204 198
Corporate....................................... -- -- (571) (814)
------ ------ ------ -----
Total Pharmaceuticals & Corporate............... 6,623 6,031 789 290
------ ------ ------ -----
Agricultural Productivity....................... 2,382 2,294 774 803
Seeds & Genomics................................ 935 1,034 (17) (161)
------ ------ ------ -----
Total Agricultural.............................. 3,317 3,328 757 642
------ ------ ------ -----
Total Pharmacia................................. $9,940 $9,359 1,546 932
====== ======
Interest expense, net........................... (101) (147)
Income tax provision............................ (373) (278)
Minority interest in agricultural subsidiaries,
net of tax.................................... (66) --
------ -----
Net earnings from continuing operations......... $1,006 $ 507
====== =====
---------------
* Earnings before interest and taxes (EBIT) is presented here to provide
additional information about the company's operations. This item should be
considered in addition to, but not as a substitute for or superior to, net
earnings, cash flows or other measures of financial performance prepared in
accordance with generally accepted accounting principles. Determination of
EBIT may vary from company to company.
16
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Trademarks of Pharmacia Corporation and its subsidiaries are indicated in
all upper case letters. In the following discussion of consolidated results,
per-share amounts are presented on a diluted, after-tax basis.
The term "the company" is used to refer to Pharmacia Corporation or to
Pharmacia Corporation and its subsidiaries, as appropriate to the context. The
term "former Monsanto" is used to refer to pre-merger operations of the former
Monsanto Company and "Monsanto" refers to the agricultural subsidiary.
FINANCIAL REVIEW
OVERVIEW
The table below provides a comparative overview of consolidated results for
the second quarter and first six-month periods of 2001 and 2000 in millions of
dollars, except per-share data.
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
--------------------------- ---------------------------
PERCENT PERCENT
2001 CHANGE 2000 2001 CHANGE 2000
------ ------- ------ ------ ------- ------
Net sales............................ $5,424 5% $5,187 $9,940 6% $9,359
Earnings from continuing operations
before interest and income
taxes*............................. 1,164 27 920 1,546 66 932
Earnings from continuing
operations......................... 752 40 538 1,006 98 507
Discontinued operations.............. (3) n.m. (59) (8) n.m. (1)
Extraordinary Items.................. (12) n.m. -- (12) n.m. --
Cumulative effect of accounting
change............................. -- n.m. -- 1 n.m. (198)
Net earnings......................... 737 54 479 987 220 308
Net earnings per common share:
Continuing operations:
Basic........................... $ .58 38% $ .42 $ .77 97% $ .39
Diluted......................... .56 37 .41 .75 92 .39
Net earnings
Basic........................... $ .57 50% $ .38 $ .76 217% $ .24
Diluted......................... .55 49 .37 .74 208 .24
---------------
n.m. = not meaningful
* Earnings before interest and taxes (EBIT) is presented here to provide
additional information about the company's operations. This item should be
considered in addition to, but not as a substitute for or superior to, net
earnings, cash flow or other measures of financial performance prepared in
accordance with generally accepted accounting principles. Determination of
EBIT may vary from company to company.
Quarter-to-quarter and year-to-year comparisons are complicated by a number
of factors, including special charges incurred throughout the first six months
of 2001. Specifically, aggregate merger and restructuring charges total $216
million and $227 million before tax during the second quarter of 2001 and 2000,
respectively. Of the second quarter 2001 charges, $206 million ($123 million
after tax or $0.09 per share) is recorded within merger and restructuring and
$10 million ($6 million after tax or $0.01 per share) is recorded in cost of
products sold. Second quarter 2000 includes a $111 million ($81 million after
tax or $0.05 per share) charge reported as merger and restructuring, a $32
million ($20 million after tax or $0.02 per share) charge recorded within cost
of products sold, and $84 million ($83 million after tax or $0.07 per share)
recorded as adjustments to goodwill relating to the write-down of goodwill in
the Monsanto restructuring.
Year-to-date 2001 aggregate merger and restructuring charges are $362
million before tax, of which $351 million ($215 million after tax or $0.17 per
share) is reported as merger and restructuring and $11 million ($7 million after
tax or $0.01 per share) is recorded within cost of products sold. Year-to-date
2000 aggregate merger and restructuring charges amounted to $688 million before
tax. Of these charges, $572 million ($404
17
18
million after tax or $0.30 per share) is recorded within merger and
restructuring, $32 million ($20 million after tax or $0.02 per share) is
recorded within cost of products sold, and $84 million ($83 after tax or $0.07
per share) was recorded as adjustments to goodwill relating to the write-down of
goodwill in the Monsanto restructuring.
Year-to-date 2001 includes charges of $67 million ($42 million after tax or
$0.03 per share) which was recorded in research and development (R&D) in
association with the Sensus purchase acquisition and $50 million ($31 million
after tax or $0.02 per share) of expense in R&D related to an agreement with
Celltech Group plc in connection with the compound CDP 870.
A charge of $100 million ($62 million after tax or $0.05 per share) to
selling, general and administrative (SG&A) relates to a charitable contribution
and is included in year-to-date 2000.
NET SALES
Consolidated net sales rose 5 percent to $5.4 billion for the quarter and 6
percent to $9.9 billion for the first six months as compared to the same periods
of 2000. The increase in sales growth for both the quarter and first half of
2001 is the result of volume increases of 8 percent and 10 percent,
respectively. These volume increases were driven primarily by sales of CELEBREX
and ROUNDUP. For both periods, the volume increases were offset by a 3 percent
negative impact of currency exchange rates coupled with a slight decrease in
prices. The negative exchange impact is due to the strengthening U.S. dollar
against most foreign currencies, particularly the euro and yen.
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
--------------------------- ---------------------------
PERCENT PERCENT
2001 CHANGE 2000 2001 CHANGE 2000
------ ------- ------ ------ ------- ------
(DOLLARS IN MILLIONS)
Sales:
Pharmaceuticals
Prescription Pharmaceuticals....... $2,943 8% $2,732 $5,672 11% $5,106
Other Pharmaceuticals.............. 470 5 448 951 3 925
------ --- ------ ------ --- ------
Total Pharmaceuticals........... 3,413 7 3,180 6,623 10 6,031
------ --- ------ ------ --- ------
Agricultural
Agricultural Productivity.......... 1,574 8 1,461 2,382 4 2,294
Seeds & Genomics................... 437 (20) 546 935 (10) 1,034
------ --- ------ ------ --- ------
Total Agricultural.............. 2,011 -- 2,007 3,317 -- 3,328
------ --- ------ ------ --- ------
Total sales.......................... $5,424 5% $5,187 $9,940 6% $9,359
====== === ====== ====== === ======
PHARMACEUTICAL NET SALES
Pharmaceutical net sales were $3.4 billion for the second quarter and $6.6
billion for the first six months of 2001, an increase over the same periods of
2000 of 7 percent and 10 percent, respectively. Excluding the impact of foreign
currency exchange, global pharmaceutical sales increased 11 percent for the
quarter and 14 percent year to date. Pharmaceutical sales growth was led by
CELEBREX, which had improved sales of $80 million, or 13 percent, for the
quarter and $204 million, or 18 percent, for the first half of 2001.
In the company's largest market, the U.S., pharmaceutical sales growth was
11 percent for both the quarter and six-month periods ended June 30, 2001.
Japan, the company's second largest market, recorded a decline of 10 percent for
the quarter and 9 percent for the first six months relative to the comparative
periods of 2000. Excluding the negative impact of foreign currency exchange,
Japan had sales growth of 4 percent and
18
19
3 percent for the quarter and first six months, respectively. Sales performance
in the following table is based on location of the customer.
FOR THE THREE MONTHS ENDED JUNE 30, FOR THE SIX MONTHS ENDED JUNE 30,
------------------------------------- ---------------------------------
%CHG. %CHG.
PERCENT EXCL. PERCENT EXCL.
2001 CHANGE EX.* 2000 2001 CHANGE EX.* 2000
------- -------- ------ ------- ------ ------- ----- ------
(DOLLARS IN MILLIONS)
United States...................... $1,891 11% 11% $1,710 $3,562 11% 11% $3,194
Japan.............................. 227 (10) 4 252 421 (9) 3 461
Italy.............................. 151 4 11 144 293 4 11 281
France............................. 132 51 62 87 273 54 65 177
Germany............................ 118 8 15 110 244 12 19 218
United Kingdom..................... 103 (14) (8) 121 222 -- 8 222
Rest of world...................... 791 5 13 756 1,608 9 17 1,478
------ --- -- ------ ------ -- -- ------
Pharmaceutical net sales........... $3,413 7% 11% $3,180 $6,623 10% 14% $6,031
====== === == ====== ====== == == ======
---------------
* Underlying growth reflects the percentage change excluding currency exchange
effects.
A comparison of the period-to-period consolidated net sales of the
company's major pharmaceutical products (including generic equivalents where
applicable) is provided in the table below.
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
--------------------------- ---------------------------
PERCENT PERCENT
2001 CHANGE 2000 2001 CHANGE 2000
------ ------- ------ ------ ------- ------
(DOLLARS IN MILLIONS)
CELEBREX............................. $ 710 13% $ 630 $1,359 18% $1,155
XALATAN.............................. 171 14 151 371 19 312
AMBIEN............................... 112 (32) 165 327 23 265
CAMPTOSAR............................ 180 62 111 317 66 191
DETROL LA/DETROL..................... 158 70 93 293 52 194
GENOTROPIN........................... 131 2 128 248 3 241
XANAX................................ 91 13 81 167 2 165
MEDROL............................... 87 13 78 159 11 144
CLEOCIN.............................. 74 (22) 95 149 (15) 175
DEPO-PROVERA......................... 79 14 69 144 15 125
NICORETTE Line....................... 63 16 54 129 18 109
PHARMORUBICIN/ELLENCE................ 68 39 49 128 29 99
ARTHROTEC............................ 77 7 73 122 (5) 128
FRAGMIN.............................. 58 3 56 111 (3) 114
ALDACTONE/Spiro Line................. 50 (2) 52 92 (4) 96
MIRAPEX.............................. 41 36 30 80 32 60
ROGAINE.............................. 30 (17) 36 64 (5) 68
CABASER/DOSTINEX..................... 43 39 31 80 44 56
ZYVOX................................ 30 59 19 53 175 19
PLETAL............................... 20 29 15 46 87 24
------ --- ------ ------ --- ------
Total................................ $2,273 13% $2,016 $4,439 19% $3,740
====== === ====== ====== === ======
19
20
PRESCRIPTION PHARMACEUTICALS SEGMENT
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
--------------------------- ---------------------------
PERCENT PERCENT
2001 CHANGE 2000 2001 CHANGE 2000
------ ------- ------ ------ ------- ------
(DOLLARS IN MILLIONS)
Net sales............................ $2,943 8% $2,732 $5,672 11% $5,106
Cost of products sold................ 531 (2) 542 1,074 4 1,035
Research and development............. 485 (8) 526 1,055 2 1,039
Selling, general and
administrative..................... 1,182 2 1,157 2,316 10 2,105
EBIT*................................ 719 51 476 1,156 28 906
---------------
* 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. Merger and restructuring charges for
pharmaceutical segments have been included as part of corporate costs in the
determination of EBIT.
Prescription pharmaceutical net sales, which constituted more than 85
percent of total pharmaceutical sales during both the quarter and six-month
period ending June 30, 2001, increased by 8 percent in the quarter and 11
percent year-to-date as compared to the respective periods of 2000. Sales growth
in the prescription pharmaceutical business was driven by CELEBREX, XALATAN,
CAMPTOSAR, DETROL LA and ZYVOX. Sales of these products for the quarter totaled
$1.3 billion, a 25 percent increase from the second quarter of 2000, and
represented 43 percent of the quarter's prescription pharmaceutical sales
compared to 37 percent for the year ago period. On a year-to-date basis, these
products recorded sales of $2.4 billion, a 28 percent increase from prior year,
and represented 42 percent of the prescription pharmaceutical sales for the
period.
CELEBREX, the company's leading product and the number-one selling
prescription arthritis medication worldwide, recorded sales of $710 million in
the second quarter and $1.4 billion in the first half of 2001. Global sales
increased 13 percent in the quarter and 18 percent on a year-to-date basis
driven by successful launches in Europe. Sales in the U.S. during the first six
months of 2001 were negatively impacted by trade purchasing in the fourth
quarter of 2000 due to a price increase.
XALATAN, the top-selling glaucoma medication in the U.S. and worldwide,
achieved sales of $171 million, a 14 percent increase over the second quarter of
2000. In the first six months of 2001, XALATAN recorded sales of $371 million, a
19 percent increase. XALATAN is the number one prescribed glaucoma medication in
the U.S., Europe and Japan. In the U.S., sales increased 11 percent to $68
million for the quarter despite the introduction of two new competitors. During
the quarter, the company received European Union approval for XALACOM, a fixed
combination of XALATAN and timolol. European launches of XALACOM are expected to
occur in the second half of 2001.
Sales of AMBIEN, the market leading treatment for short-term insomnia in
the U.S., were $112 million in the second quarter. Sales were negatively
impacted by a previously announced increase in wholesale inventory levels during
the first quarter preceding a March price increase. On a year-to-date basis,
sales of AMBIEN increased 23 percent to $327 million.
CAMPTOSAR, the leading treatment for colorectal cancer in the U.S.,
recorded sales of $180 million in the second quarter, an increase of 62 percent.
Sales were positively influenced by an increase in trade purchasing during the
quarter in connection with a price increase. First half sales reached $317
million, a 66 percent increase. Since receiving U.S. Food and Drug
Administration (FDA) approval in 2000 as a component of first-line treatment of
metastatic colorectal cancer, first-line use of CAMPTOSAR now accounts for more
than half of CAMPTOSAR sales.
20
21
Sales of DETROL LA/DETROL, the world's leading treatment for overactive
bladder, increased 70 percent to $158 million in the second quarter and 52
percent to $293 million in the first half. Sales in the U.S. were $126 million
reflecting strong demand for the new, once-daily DETROL LA which Pharmacia
introduced in January. During the quarter, DETROL LA also received European
Union approval. The company expects to launch the once-daily version across
Europe in the second half of 2001 under various brand names including DETRUSITOL
SR.
GENOTROPIN, the world's leading growth hormone, recorded sales of $131
million during the second quarter, an increase of 2 percent. In the first six
months, sales of GENOTROPIN were $248 million. In the U.S., sales increased 19
percent in both the quarter and the year-to-date periods. Outside the U.S.,
sales gains were offset by weaker currencies in Europe and Japan.
ZYVOX, the company's new antibiotic for Gram-positive infections, recorded
sales of $30 million in the quarter, an increase of 59 percent. In the
year-to-date period, ZYVOX sales reached $53 million. ZYVOX is the first
antibiotic from a completely new class of antibiotics in over 30 years.
Following the approval and launch of ZYVOX in the United Kingdom in January, the
European Union approved ZYVOX for marketing in Europe during the second quarter.
The product will be sold under the brand name ZYVOXID when it is launched in
Europe in the second half of 2001.
The company's older antibiotic product, CLEOCIN, declined 22 percent in the
quarter and 15 percent in the first six months due to continued generic
competition.
Sales of the company's Parkinson's disease drugs continued to grow at a
rapid pace. MIRAPEX increased 36 percent in the second quarter to $41 million.
First half sales increased 32 percent to $80 million. Meanwhile, sales of
CABASER/DOSTINEX for Parkinson's disease and hyperprolactinemia grew 39 percent
in the quarter and 44 percent in the first six months.
PHARMORUBICIN, a widely used chemotherapeutic agent for breast cancer,
increased 39 percent to $68 million in the quarter and 29 percent to $128
million for the first half. Sales gains were driven by growing demand in the
U.S., where the product was launched in the fourth quarter of 1999 under the
trade name ELLENCE.
Sales of ARTHROTEC, one of the company's older arthritis medications, and
XANAX, for anxiety, increased in the second quarter due to fluctuations in trade
purchasing in advance of a price increase. Sales of these products in the first
six months are more indicative of true demand. On a year-to-date basis, XANAX
increased 2 percent and ARTHROTEC decreased 5 percent.
In the second quarter, sales of FRAGMIN, for the prevention of blood clots
after surgery, increased 3 percent. Weaker currencies in Europe and Japan offset
an 84 percent increase in U.S. sales of FRAGMIN.
In other developments related to the prescription pharmaceutical segment,
Pharmacia received FDA approval to market AXERT for the treatment of migraine
headaches. Pharmacia launched AXERT in the third quarter of 2001.
The company announced the receipt of an approvable letter for SOMAVERT, the
first in a new class of medicines called growth hormone receptor antagonists for
the treatment of acromegaly. Pharmacia is working closely with FDA to resolve
outstanding issues required for approval. Pharmacia also plans to provide
additional data to the FDA in response to the not-approvable letter regarding
parecoxib, a non-narcotic injectable analgesic.
Cost of products sold for the quarter and year-to-date periods ended June
30, 2001 and 2000 was $531 million and $542 million and $1.1 billion and $1.0
billion, respectively. A favorable shift in the product mix resulted in cost of
products sold as a percent of sales to drop two percentage points to 18 percent
in the quarter and one percentage point for the year-to-date period over the
prior year.
Research and development (R&D) spending for the quarter decreased by $41
million, or 8 percent, as compared to the second quarter of 2000. The decrease
was due to lower development spending related to recent sNDA and NDA filings for
the COX-2 projects (CELEBREX, valdecoxib, and parecoxib), ZYVOX
21
22
and the cancellation of certain other projects. Spending for the year-to-date
period ended June 30, 2001 increased 2 percent, or $16 million, over the prior
year. The increase was largely attributable to two events that occurred during
the first quarter. During March, the company completed the acquisition of Sensus
Drug Development Corporation and accounted for the transaction as a purchase. In
conjunction with this accounting, an expense relating to in-process research and
development was incurred for $67 million. Also during the first quarter, the
company entered into an agreement with Celltech Group plc for the co-
development and co-promotion of Celltech's proprietary compound CDP 870. CDP 870
belongs to a new therapeutic class of medicines, which show promise in certain
autoimmune and inflammatory diseases. In connection with the agreement, the
company recorded an expense of $50 million related to an up-front R&D payment.
Offsetting these amounts were the aforementioned decreases in development
spending and project cancellations, which have been realized throughout the
first half of 2001.
Selling, general and administrative (SG&A) expenses increased between the
quarterly and year-to-date periods ending June 30, 2001. An increase of $25
million, or 2 percent, was realized for the quarter while the year-to-date
period recorded an increase of $211 million, or 10 percent, both compared to the
corresponding prior-year periods. Mainly increased co-promotion payments, sales
force expansion and promotional spending on strategic products drove the
increases. The sales force expansion has been to support CELEBREX, LUNELLE,
ACTIVELLA and ZYVOX.
OTHER PHARMACEUTICALS
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
----------------------- -----------------------
PERCENT PERCENT
2001 CHANGE 2000 2001 CHANGE 2000
---- ------- ---- ---- ------- ----
(DOLLARS IN MILLIONS)
Net sales.................................. $470 5% $448 $951 3% $925
Cost of products sold...................... 204 6 193 401 (2) 410
Research and development................... 43 3 42 86 10 78
Selling, general and administrative........ 136 (4) 141 280 -- 280
EBIT*...................................... 100 5 95 204 3 198
---------------
* 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. Merger and restructuring charges for
pharmaceutical segments have been included as part of corporate costs in the
determination of EBIT.
Net sales in the company's other pharmaceutical businesses are mainly
comprised of consumer health care (over-the-counter products), animal health,
pharmaceutical commercial services and diagnostics. Sales for the quarterly and
year-to-date periods increased by $22 million and $26 million, respectively, in
2001 versus 2000. Increases in sales for the second quarter 2001 over 2000 was
attributable to the pharmaceutical commercial services (PCS) business. Sales for
this business increased 23 percent over the comparative quarter for 2000. In the
year-to-date period, animal health, PCS and consumer health care were the
drivers behind the favorable results with increases of 8 percent, 6 percent and
5 percent, respectively, versus the prior year.
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AGRICULTURAL NET SALES
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
--------------------------- ---------------------------
PERCENT PERCENT
2001 CHANGE 2000 2001 CHANGE 2000
------ ------- ------ ------ ------- ------
(DOLLARS IN MILLIONS)
Agricultural Sales:
Agricultural Productivity............ $1,574 8% $1,461 $2,382 4% $2,294
Seeds and Genomics................... 437 (20) 546 935 (10) 1,034
------ ---- ------ ------ --- ------
Agricultural Sales................... $2,011 -- $2,007 $3,317 -- $3,328
====== ==== ====== ====== === ======
Agricultural EBIT*:
Agricultural Productivity............ $ 635 5% $ 605 $ 774 (4)% $ 803
Seeds and Genomics................... 15 n.m. (94) (17) 89 (161)
------ ---- ------ ------ --- ------
Agricultural EBIT*................... $ 650 27% $ 511 $ 757 18% $ 642
====== ==== ====== ====== === ======
---------------
n.m. = not meaningful
* Earnings before interest and taxes (EBIT) is presented here to provide
additional information about the company's operations. This item should be
considered in addition to, but not as a substitute for or superior to, net
earnings, cash flow or other measures of financial performance prepared in
accordance with generally accepted accounting principles. Determination of
EBIT may vary from company to company.
Net sales for the company's agricultural business were relatively unchanged
for the three months and six months ended June 30, 2001 compared with the same
periods of the prior year. For the three months ended June 30, 2001, sales of
the ROUNDUP family of herbicides increased while the Seeds and Genomics segment
experienced higher soybean trait revenues which were more than offset by lower
corn seed sales resulting from higher than anticipated corn seed returns in
Latin America and fewer planted acres of corn in the United States. The strength
of the U.S. dollar against foreign currencies, particularly the euro and the
yen, negatively affected sales in the second quarter by 2 percent, or $33
million.
Year-to-date, increased sales of the ROUNDUP lawn and garden products
combined with increased biotechnology trait revenues and higher soybean seed
sales were offset by lower conventional corn seed sales, resulting from higher
than anticipated returns in Latin America and lower planted corn acreage in the
U.S. and currency effects of a strong U.S. dollar. The strength of the U.S.
dollar during the six months negatively affected sales by nearly 2 percent or
$60 million.
AGRICULTURAL PRODUCTIVITY SEGMENT
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
--------------------------- ---------------------------
PERCENT PERCENT
2001 CHANGE 2000 2001 CHANGE 2000
------ ------- ------ ------ ------- ------
(DOLLARS IN MILLIONS)
Net Sales............................ $1,574 8% $1,461 $2,382 4% $2,294
EBIT*................................ 635 5 605 774 (4) 803
---------------
* 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.
Net sales for the Agricultural Productivity segment increased 8 percent in
the second quarter of 2001 compared with the second quarter of 2000. Sales of
the ROUNDUP family of herbicides and other glyphosate products (excluding
ROUNDUP lawn and garden) rose 4 percent on higher volumes, primarily in the U.S.
and Latin America, partly offset by a decline in sales in Asia, primarily
attributable to lower prices, including
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the effects of currency. Higher sales in Latin America of branded ROUNDUP
herbicide and other glyphosate products (excluding ROUNDUP lawn and garden)
primarily reflected increased adoption of conservation tillage in Argentina. The
Agricultural Productivity segment also benefited from a 16 percent increase in
sales by other businesses, including ROUNDUP lawn and garden and POSILAC bovine
somatotropin.
EBIT for the Agricultural Productivity segment rose 5 percent in the three
months ended June 30, 2001 compared with the same period of 2000. Gross profit
for the segment increased 2 percent on higher sales but gross profit as a
percent of sales declined 3 percentage points. The decline in gross margin
percentage was largely attributable to lower ROUNDUP prices, including the
effects of branded product mix and the effects of currency fluctuations. Higher
sales of ROUNDUP lawn and garden products, together with improved operational
performance of the animal agriculture business, also contributed to the increase
in EBIT. Operating expenses for the segment decreased 8 percent from the second
quarter of 2000. SG&A and research spending as a percent of sales dropped 3
percentage points quarter over quarter, reflecting continued cost management.
Year-to-date net sales for the Agricultural Productivity segment increased
4 percent over the same period in the prior year. Increased ROUNDUP lawn and
garden product sales combined with higher sales in the animal agricultural
business were partly offset by a decrease in net sales in certain selective
chemistry products. Sales of ROUNDUP herbicide and other glyphosate products
(excluding ROUNDUP lawn and garden) were nearly flat. Volumes of these products
increased 12 percent but were offset by lower prices and product mix. In the
United States, volumes increased 9 percent largely on increased demand for
over-the-top applications used in conjunction with ROUNDUP READY seeds. Net
sales in the U.S. were higher as modest price declines, driven largely by
marketing programs and branded product mix, slightly offset volume increases.
Sales of ROUNDUP herbicide also increased in Argentina where adoption of
conservation tillage increased. However, sales in Canada, Australia, and Japan
declined mainly from price competition, unfavorable weather conditions, and
currency effects.
EBIT for the Agricultural Productivity segment decreased 4 percent, or $29
million, in the first six months of 2001 compared with the same period of 2000.
Excluding charges for restructuring in 2001, reduced SG&A and research and
development spending offset lower gross profit for the segment. Gross profit of
ROUNDUP and other glyphosate sales outside the U.S. were lower due to the
strength of the U.S. dollar against other currencies combined with the mix of
branded products sold.
SEEDS AND GENOMICS SEGMENT
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
----------------------- -------------------------
PERCENT PERCENT
2001 CHANGE 2000 2001 CHANGE 2000
---- ------- ---- ---- ------- ------
(DOLLARS IN MILLIONS)
Net Sales................................. $437 (20)% $546 $935 (10)% $1,034
EBIT*..................................... 15 n.m. (94) (17) 89 (161)
---------------
n.m. = not meaningful
* Earnings before interest and taxes (EBIT) is presented here to provide
additional information about the company's operations. This item should be
considered in addition to, but not as a substitute for or superior to, net
earnings, cash flow or other measures of financial performance prepared in
accordance with generally accepted accounting principles. Determination of
EBIT may vary from company to company.
Net sales for the Seeds and Genomics segment decreased 20 percent to $437
million in the second quarter of 2001 from $546 million in the same quarter of
2000. The decline was mainly caused by higher than anticipated corn seed returns
(approximately $80 million) in Latin America during the second quarter. In
addition, corn seed sales were lower in the United States as the result of lower
corn planted acreage compared with the prior year. Trait revenues were
relatively unchanged quarter to quarter reflecting higher soybean seed trait
revenues offset by lower corn and cotton seed trait revenues.
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EBIT for the Seeds and Genomics segment improved in the second quarter of
2001 to $15 million compared with a loss of $94 million in the same quarter of
2000. The second quarter of 2000 included an $84 million write-off of goodwill
and restructuring charges that exceeded those in 2001 by $45 million. Excluding
these one-time differences, earnings from the core business decreased nearly $20
million. The reduction in operating expenses in 2001 was not sufficient to
offset the lower segment gross profit resulting from lower conventional corn
seed sales caused by higher than anticipated corn seed returns in Latin America
and lower corn seed sales in the U.S.
For the six months ended June 30, 2001, net sales for the Seeds and
Genomics segment fell 10 percent or $99 million. Higher than anticipated corn
seed returns in Latin America were primarily responsible for the decline. In the
United States, increased revenues from biotechnology traits, mainly soybeans and
cotton, and higher soybean sales volumes were offset by lower corn seed sales.
Higher soybean trait revenue reflected the increased demand for ROUNDUP READY
soybeans while cotton producers purchased more cotton seed stacked with BOLLGARD
and ROUNDUP READY traits. The company estimates that seeds bearing its
insect-resistant and ROUNDUP READY technologies were planted on approximately 80
million acres in the 2001 growing season, an increase of 11 percent over the
previous growing season.
Year-to-date EBIT for the Seeds and Genomics segment improved from a loss
of $161 million in 2000 to a loss of $17 million in 2001. The six month period
for 2000 included the $84 million write-off of goodwill and restructuring
charges that exceeded the same six-month period of 2001 by $35 million.
Excluding these one-time differences, earnings improved $25 million
year-to-date. Lower gross profit from lower corn seed sales were more than
offset by lower operating expenses and increased biotechnology trait revenues.
AGRICULTURAL OUTLOOK
Due to the seasonal nature of the agricultural business, Monsanto
represents a disproportionately large amount of second-quarter sales and
earnings. The first half of the year is largely focused on the peak agricultural
season in the northern hemisphere. As the company enters the second half of the
year, the southern hemisphere becomes increasingly important. As a result,
second-half 2001 growth is somewhat dependent on the economic conditions in the
key Latin American agricultural markets of Argentina and Brazil. Given the
recent economic trends in those markets, the company will continue to closely
track the conditions there. The company has taken several steps to help it
manage these businesses for profitability. Importantly, the agricultural markets
in Argentina and the soybean market in Brazil are export oriented with grain
trading denominated largely in U.S. dollars. However, if the economic
conditions, including currency exchange rates and conditions in the agricultural
markets, deteriorate substantially, it could have a material adverse effect on
the company's credit risk profile, financial position and profitability.
CORPORATE AND OTHER
Corporate expenses totaled $305 million and $162 million for the second
quarters of 2001 and 2000, respectively. Merger costs included in these balances
totaled $138 million for 2001 and $7 million in 2000. Additionally,
restructuring charges associated with the pharmaceutical and corporate functions
are included in the corporate expenses. These charges totaled $37 million and
$59 million for the second quarter of 2001 and 2000, respectively. Restructuring
charges associated with the agricultural segments are included in the respective
segments.
For the six-month periods ending June 30, 2001 and 2000, corporate expenses
totaled $571 million and $814 million, respectively. Merger costs included in
these balances were $194 million in 2001 and approximately $470 million for
2000. Pharmaceutical and corporate restructuring charges included in corporate
expense totaled $105 million and $59 million for the first half of 2001 and
2000, respectively. Year-to-date 2000 also included a $100 million charitable
contribution.
The net interest expense for the quarter decreased $21 million, or 27
percent, in relation to the comparable quarter of 2000 and decreased $46
million, or 31 percent, when comparing the six-month periods ending June 30,
2001 and 2000. The decreases are the result of significantly reduced net debt
levels and increased cash balances.
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The estimated annual effective tax rate for 2001 is 29 percent, excluding
merger and restructuring and certain other costs. This compares with a
30-percent rate for the full year 2000.
MERGER AND RESTRUCTURING CHARGES
The company recorded an additional $216 million of merger and restructuring
charges during the second quarter of 2001 in connection with the merger and
integration of the former Monsanto and Pharmacia & Upjohn companies into
Pharmacia Corporation. These charges are part of the comprehensive integration
plan approved by the board of directors during 2000. Of the total charges in the
quarter, $206 million, comprised of $138 million of merger costs and $68 million
of restructuring expenses, was recorded on the merger and restructuring line of
the consolidated statements of earnings and an additional $10 million was
recorded in cost of products sold.
For the six months ended June 30, 2001, the company recorded a total of
$362 million of merger and restructuring costs. Of this total, $351 million,
comprised of $194 million of merger costs and $157 million of restructuring
expenses, was recorded on the merger and restructuring line of the consolidated
statements of earnings and an additional $11 million was recorded in cost of
products sold.
The $194 million of 2001 merger costs includes costs incurred to integrate
the former companies into a single organization such as consultant and
relocation costs. This effort includes the company's plan to exit its
Sweden-based metabolic diseases research activities, biopharmaceutical
development unit and the company's plasma business. As a result of this effort,
the company entered into a definitive agreement on June 7, 2001, related to the
partial divestiture of these operations, establishing Biovitrum AB (Biovitrum).
The related estimated loss of $50 million is included within the second quarter
2001 merger costs and included the write-down of the net assets to market value
and certain transaction-related expenses. Under the Biovitrum-related
agreements, Pharmacia will initially retain ownership of approximately 35
percent of the new company with the remaining shares owned by outside investors.
It is possible that Pharmacia's share will be further reduced to below 20
percent as additional outside investors may participate in the new company by
acquiring shares from Pharmacia. At the current 35 percent ownership level, the
company will account for its share of Biovitrum using the equity method of
accounting following the closing of the transaction. The closing occurred on
July 31, 2001 and, accordingly, there were no cash flows associated with the
transaction in the second quarter.
The $78 million of aggregate restructuring costs for the quarter comprises
$28 million related to prescription pharmaceuticals, $9 million associated with
corporate and administrative functions and $41 million in connection with the
agricultural subsidiary. On a year-to-date basis, the company has recorded $168
million of aggregate restructuring charges as follows: $88 million associated
with prescription pharmaceuticals, $15 million associated with corporate and
administrative functions, $2 million in connection with other pharmaceutical
operations and $63 million related to the agricultural subsidiary.
The $28 million relating to prescription pharmaceuticals consists of $17
million in connection with the involuntary termination of approximately 70
employees and $11 million relating to asset impairments costs. For the six
months ended June 30, 2001, the $88 million total restructuring charges
associated with prescription pharmaceuticals comprises $63 million in connection
with the involuntary separation of approximately 360 employees, $17 million
resulting from asset impairments and $8 million associated with other exit
costs.
The $9 million associated with the corporate and administrative functions
for the quarter includes $4 million relating to the involuntary separation of
approximately 30 employees and $5 million resulting from asset impairments. The
2001 year-to-date total of $15 million for corporate and administrative
functions includes $10 million relating to the involuntary separation of
approximately 90 employees and the $5 million of asset impairments. Although
there are no charges associated with the other pharmaceutical operations during
the second quarter 2001, the year-to-date restructuring balance includes $2
million associated with the involuntary separation of approximately 10
employees.
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The $41 million of agricultural subsidiary restructuring charges for the
quarter is composed of $31 million on the merger and restructuring line and $10
million on the cost of products sold line related to the write-off of
inventories in connection with Monsanto's restructuring plan. The $31 million in
merger and restructuring comprises $5 million relating to workforce reduction
costs associated with the involuntary separation of approximately 110 employees,
$14 million relating to facility closures and other exit costs including
contract terminations costs resulting from the exit of certain research programs
and non-core activities, and $12 million relating to the write-off of assets.
For the 2001 year-to-date total of $63 million ($11 million in cost of products
sold and $52 million in merger and restructuring), Monsanto recorded $20 million
in connection with the involuntary separation of approximately 230 employees,
$18 million relating to facility closures and other exit costs, $14 million in
connection with the write-down of assets and $11 million in cost of products
sold in connection with the write-off of inventories.
During the second quarter 2000, the company recorded aggregate merger and
restructuring charges of $227 million. During that quarter, the company recorded
on the merger and restructuring line an additional $7 million of merger costs,
totaling approximately $470 million in merger-related costs for the first six
months of 2000. These merger-related costs are comprised, in part, of
transaction costs including investment bankers, attorneys, registration and
regulatory fees and other professional services. In addition, these costs
included various employee incentive and change-of-control costs directly
associated with the merger. The latter includes a non-cash charge of $232
million 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.
The $220 million of additional charges during the second quarter of 2000
represents restructuring charges and was recorded on several lines of the
consolidated statements of earnings. $104 million was recorded on the merger and
restructuring line and included $90 million associated with the involuntary
separation of 424 employees and $14 million relating to asset impairments and
contract termination costs. An inventory write-off of $32 million was recorded
in cost of products sold and goodwill impairments of $84 million were recorded
in the amortization and adjustment of goodwill line, both in connection with the
restructuring of the agricultural subsidiary.
Of the second-quarter 2000 charges to merger and restructuring, $59 million
relates to the restructuring of corporate functions including the involuntary
separation of 49 employees, primarily the result of duplicate positions. The
remaining $45 million of charges are associated with the restructuring of
agricultural products operations and include the involuntary separation of 375
employees throughout the world, mainly in research and development.
A rollforward from year-end 2000 of restructuring charges and spending
associated with the current restructuring plans relating to the integration of
the former Monsanto and Pharmacia & Upjohn companies and the restructuring of
the agricultural products and other pharmaceutical operations is included in the
table below. As of June 30, 2001, the company has paid a total of $369 million
relating to the separation of approximately 2,745 employees associated with
these restructuring plans.
WORKFORCE OTHER
REDUCTIONS EXIT COSTS TOTAL
---------- ---------- -----
(DOLLARS IN MILLIONS)
December 31, 2000........................................ $ 192 $ 15 $ 207
Year-to-date charges..................................... 95 26 121
Year-to-date spending.................................... (222) (24) (246)
----- ---- -----
June 30, 2001............................................ $ 65 $ 17 $ 82
===== ==== =====
Due to the comprehensive nature of the restructuring and integration, the
company anticipates the restructuring activities to span multiple years with
total merger and restructuring costs equaling $2.0 billion to $2.5 billion with
annual savings in excess of $600 million.
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COMPREHENSIVE INCOME
Comprehensive income equals net earnings plus other comprehensive income
(OCI). For Pharmacia Corporation, OCI includes currency translation adjustments,
deferred amounts for hedging purposes, unrealized gains and losses on
available-for-sale securities, and minimum pension liability adjustments.
Comprehensive income for the three months ended June 30, 2001 and 2000, was $608
million and $319 million, respectively. For the six months ended June 30, 2001
and 2000, comprehensive income was $627 million and $423 million, respectively.
The difference between net earnings and comprehensive income in both years was
largely due to fluctuations in the currency translation adjustments reflecting
the changes in the strength of the dollar against other currencies at June 30,
2001 as compared to the previous December 31, 2000.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
JUNE 30, DECEMBER 31,
2001 2000
-------- ------------
(DOLLARS IN MILLIONS)
Working capital............................................. $ 5,412 $ 5,406
Current ratio............................................... 1.76:1 1.88:1
Debt to total capitalization................................ 30.9% 29.3%
The company's working capital was mainly unchanged at June 30, 2001 as
compared to year-end. Seasonal increases in accounts receivable relating to the
agricultural business grew current assets while increases in short-term debt
served to increase current liabilities. Seasonal commercial paper borrowing in
the agricultural business and a reclassification of debt from long-term to
short-term were mainly responsible for the mitigation of net working capital
growth. The current ratio and debt-to-total-capitalization ratio were slightly
unfavorable compared to December 31, 2000 due to the aforementioned seasonal
activity.
During the second quarter, the company retired certain third party debt
pertaining to the Employee Stock Ownership Plan (ESOP). The cash impact of the
transaction was $71 million.
During March 2001, the company acquired Sensus Drug Development
Corporation. The cash paid in connection with this transaction was $65 million.
On June 29, 2001, the company committed to a definitive agreement to retire
$700 million in debt securities. This action resulted in the reclassification of
the debt from a long-term to a short-term classification in the condensed
consolidated balance sheets during the period. The physical settlement of these
securities occurred in July 2001.
The company continues to monitor the economic conditions in certain Latin
American countries and the impact that an adverse change could have on working
capital, liquidity and profitability. While the entire company has exposure to
such an adverse event, the effects would be felt most strongly in the
agricultural segments as indicated under "Agricultural Outlook" above.
The company's future cash provided by operations and borrowing capacity are
expected to cover normal operating cash flow needs, planned capital acquisitions
and dividend payments as approved by the board of directors for the foreseeable
future.
CONTINGENT LIABILITIES AND LITIGATION
Various suits and claims arising in the ordinary course of business,
including suits for personal injury alleged to have been caused by the use of
the company's products, are pending against the company and its subsidiaries.
The company also is involved in several administrative and judicial proceedings
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 Genetics (DEKALB)
(which is now a wholly owned subsidiary of Monsanto) in a lawsuit filed in U.S.
District Court in North Carolina. The lawsuit
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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, believes it has meritorious grounds to overturn the verdict and
intends to vigorously pursue all available means to have the verdict overturned.
No provision has been made in the company's consolidated financial statements
with respect to the award for punitive damages.
In June 1996, Mycogen Corporation, Mycogen Plant Sciences, Inc. and
Agrigenetics filed suit against former Monsanto in California State Superior
Court in San Diego alleging that the company failed to license, under an option
agreement, technology relating to Bt corn and glyphosate-tolerant corn, cotton
and canola. On October 20, 1997, the court construed the agreement as a license
to receive genes rather than a license to receive germplasm. Jury trial of the
damage claim for lost future profits from the alleged delay in performance ended
March 20, 1998, with a verdict against the company awarding damages totaling
$175 million. On June 28, 2000, the California Court of Appeals for the Fourth
Appellate District issued its opinion reversing the jury verdict and related
judgment of the trial court, and directed that judgment should be entered in the
company's favor. Mycogen's subsequent motion for rehearing has been denied.
Mycogen's petition with the California Supreme Court requesting further review
was granted on October 25, 2000, and their appeal of the reversal of judgment is
continuing. No provision has been made in the company's consolidated financial
statements with respect to this verdict.
Based on information currently available and the company's experience with
lawsuits of the nature of those currently filed or anticipated to be filed which
have resulted from business activities to date, the amounts accrued for product
and environmental liabilities are considered adequate. 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.
The company's estimate of the ultimate cost to be incurred in connection
with environmental situations could change due to uncertainties at many sites
with respect to potential clean-up remedies, the estimated cost of clean-up, and
the company's share of a site's cost. With regard to the company's discontinued
industrial chemical facility in North Haven, Connecticut, the company will be
required to submit a corrective measures study report to the EPA. As the
corrective action process progresses, it may become appropriate to reevaluate
the existing reserves designated for remediation in light of changing
circumstances. It is reasonably possible that a material increase in accrued
liabilities will be required. It is not possible, however, to estimate a range
of potential losses. Accordingly, it is not possible to determine what, if any,
exposure exists at this time or when the expenditures might be made.
EXTRAORDINARY ITEMS
On June 28, 2001, the company retired certain debt obligations relating to
one of the employee stock ownership plans. The principal amount of the debt was
$65 million. Certain costs related to the transaction, including a premium to
retire the debt and other direct costs, were $4 million (net of taxes of $2
million) and have been classified as an extraordinary item on the company's
consolidated statements of earnings.
Through a private transaction occurring on June 29, 2001, the company
retired debt related to the adjustable conversion-rate equity securities (ACES)
in the principal amount of $700 million. Premium on the debt and other direct
costs of $8 million (net of taxes of $5 million) were accrued as an
extraordinary item. The physical settlement, including the exchange of cash,
occurred in July 2001.
NEW ACCOUNTING STANDARDS
On June 29, 2001, the Financial Accounting Standards Board approved for
issuance Statement of Financial Accounting Standards (SFAS) No. 141 "Business
Combinations". The new rules require that the purchase method of accounting be
used for all business combinations after June 30, 2001. The use of the
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pooling of interests method is now prohibited. There was no impact on the
company's financial statements with the adoption of these rules.
Also during the quarter, the Financial Accounting Standards Board approved
for issuance SFAS No. 142 "Goodwill and Other Intangible Assets". These new
rules change the accounting methodology for goodwill from a model which
amortizes goodwill to one which evaluates it for impairment. Amortization of
goodwill, including previously recorded goodwill, will end upon adoption of the
new rules. The new rules also eliminate amortization of certain other
intangibles -- those with indefinite useful lives. These, too, will be subject
to the impairment test. The company is currently evaluating the effects the new
rules may have on its financial statements and will adopt SFAS 142 as of January
1, 2002.
On January 1,2001, the company adopted 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. Gains and losses of non-hedging
instruments attributable to changes in the fair value are recorded in earnings.
If elected and qualified, special hedge accounting is available whereby gains
and losses of derivatives and certain other instruments can be offset or
deferred.
Under the new rules, the net consolidated statements of earnings effect of
adopting SFAS 133 is presented as a cumulative effect adjustment of an
accounting change and is less than $1 million (net of tax). This amount is
comprised of the excluded component of instruments previously designated in cash
flow hedges and other changes in the recorded basis to bring derivatives to fair
value, both of which were less than $1 million on an individual basis. There was
no net impact to the cumulative effect adjustment required to reflect the fair
value of derivatives that are designated as fair value hedges, as the
adjustments to recognize the difference between the carrying values and the fair
values of hedged items and related derivatives offset. A similar cumulative
effect adjustment in the amount of $3 million (net of tax) has been made on the
condensed consolidated balance sheets to other comprehensive income. This amount
reflects the deferred amount of derivative instruments previously designated in
cash flow hedges. Upon adopting SFAS 133, the company elected, in accordance
with the rules, to reclassify $52 million of held-to-maturity securities as
available-for-sale securities. The unrealized gain associated with this
reclassification is not material and is recorded in shareholders' equity.
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 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 the 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. 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At June 29, 2001, the company entered into a definitive agreement for the
retirement of $700 million in fixed-rate debt securities. The effect of this
retirement served to reduce the company's exposure to interest rate risk.
Physical settlement of these securities occurred during July 2001.
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There are no other material changes related to market risk from the
disclosures in Pharmacia Corporation's Form 10-K filed with the Securities and
Exchange Commission for the year ended December 31, 2000.
PART II -- OTHER INFORMATION
ITEM 5. OTHER INFORMATION
CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING INFORMATION
Certain statements contained in this Report, as well as in other documents
incorporating by reference all or part of this Report, are "forward-looking
statements" provided under the "safe harbor" protection of the Private
Securities Litigation Reform Act of 1995. These statements are made to enable a
better understanding of the Company's business, but because these
forward-looking statements are subject to many risks, uncertainties, future
developments and changes over time, actual results may differ materially from
those expressed or implied by such forward-looking statements. Examples of
forward-looking statements are statements about anticipated financial or
operating results, financial projections, business prospects, future product
performance, future research and development results, anticipated regulatory
filings and approvals, and other future matters.
These forward-looking statements are based on the information that was
currently available to the Company, and the expectations and assumptions that
were deemed reasonable by the Company, at the time when the statements were
made. The Company does not undertake any obligation to update any forward-
looking statements in this Report or in any other communications of the Company,
whether as a result of new information, future events, changed assumptions or
otherwise, and all such forward-looking statements should be read as of the time
when the statements were made, and with the recognition that these
forward-looking statements may later prove to be incorrect.
Among the many factors that may cause or contribute to actual results or
events being materially different from those expressed or implied by such
forward-looking statements are acquisitions, divestitures, mergers,
restructurings or strategic initiatives that change the Company's structure or
business; competitive effects from current and new products, including generic
products, sold by other companies; price constraints imposed by managed care
groups, institutions and government agencies; governmental actions which result
in lower prices for the Company's products; the Company's ability to discover
and license new compounds, develop product candidates, obtain regulatory
approvals and market new products; the Company's ability to secure and defend
its intellectual property rights; the Company's ability to attract and retain
management and other key employees; product developments, including adverse
reactions or regulatory actions; social, legal, political and governmental
developments, especially those relating to health care reform, pharmaceutical
pricing and agricultural biotechnology; seasonal and weather conditions
affecting agricultural markets; new product, antitrust, intellectual property or
environmental liabilities; changes in foreign currency exchange rates or in
general economic or business conditions; changes in applicable laws and
regulations; changes in accounting standards or practices; and such other
factors that may be described elsewhere in this Report or in other Company
filings with the U.S. Securities and Exchange Commission ("SEC").
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits -- See the Exhibit Index
(b) Reports on Form 8-K during the quarter ended June 30, 2001:
Report on Form 8-K dated June 22, 2001 was filed pursuant to Item 5
(Other Events) and Item 7 (Financial Statements and Exhibits).
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SIGNATURE:
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PHARMACIA CORPORATION
--------------------------------------
(Registrant)
/s/ R. G. THOMPSON
--------------------------------------
R. G. Thompson
Senior Vice President
and Corporate Controller
DATE: August 21, 2001
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EXHIBIT INDEX
These Exhibits are numbered in accordance with the Exhibit Table of Item
601 of Regulation S-K.
EXHIBIT
NUMBER DESCRIPTION
------- -----------
2. Omitted -- Inapplicable
4. Omitted -- Inapplicable
10. Omitted -- Inapplicable
11. Omitted -- Inapplicable; see Note G of Notes to Financial
Statements on page 10.
15. Omitted -- Inapplicable
18. Omitted -- Inapplicable
19. Omitted -- Inapplicable
22. Omitted -- Inapplicable
23. Omitted -- Inapplicable
24. Omitted -- Inapplicable
99. Omitted -- Inapplicable
33