AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 20, 2001
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 20-F
(Mark One)
[X] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF
THE SECURITIES EXCHANGE ACT OF 1934
OR
[ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission file number
BAYER AKTIENGESELLSCHAFT
(Exact name of Registrant as specified in its charter)
BAYER CORPORATION*
(Translation of Registrant's name into English)
FEDERAL REPUBLIC OF GERMANY
(Jurisdiction of incorporation or organization)
BAYERWERK, GEBAUDE W1
KAISER-WILHELM-ALLEE
51368 LEVERKUSEN, GERMANY
(Address of principal executive offices)
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Securities registered or to be registered pursuant to Section 12(b) of the
Act.
TITLE OF EACH CLASS: NAME OF EACH EXCHANGE ON WHICH REGISTERED:
-------------------- ------------------------------------------
American Depositary Shares representing Bayer AG
ordinary shares of no par value................... New York Stock Exchange
Bayer AG ordinary shares of no par value........... New York Stock Exchange**
------------------------------------
Securities registered or to be registered pursuant to Section 12(g) of the
Act.
None
(Title of class)
Securities for which there is a reporting obligation pursuant to Section
15(d) of the Act.
None
(Title of class)
Indicate the number of outstanding shares of each of the issuer's classes
of capital or common stock as of the close of the period covered by the annual
report.
As of December 31, 2000, 730,341,920 ordinary shares, of no par value, of
Bayer AG were outstanding.
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [ ] No [ ] Not applicable.
Indicate by check mark which financial statement item the registrant has
elected to follow:
Item 17 [ ] Item 18 [X]
* Bayer Corporation is also the name of a wholly-owned subsidiary of the
registrant in the United States.
** Not for trading, but only in connection with the registration of American
Depositary Shares.
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TABLE OF CONTENTS
PART I...................................................... 5
Item 1. Identity of Directors, Senior Management and
Advisors............................................... 5
Item 2. Offer Statistics and Expected Timetable........... 5
Item 3. Key Information................................... 6
Item 4. Information on the Company........................ 14
Item 5. Operating and Financial Review and Prospects...... 87
Item 6. Directors, Senior Management and Employees........ 128
Item 7. Major Shareholders and Related Party
Transactions........................................... 137
Item 8. Financial Information............................. 138
Item 9. The Listing....................................... 144
Item 10. Additional Information........................... 145
Item 11. Quantitative and Qualitative Disclosures about
Market Risk............................................ 153
Item 12. Description of Securities Other Than Equity
Securities............................................. 157
PART II..................................................... 163
Item 13. Defaults, Dividend Arrearages and
Delinquencies.......................................... 163
Item 14. Material Modifications to the Rights of Security
Holders and Use of Proceeds............................ 163
Item 15. [Reserved]....................................... 163
Item 16. [Reserved]....................................... 163
PART III.................................................... 163
Item 17. Financial Statements............................. 163
Item 18. Financial Statements............................. 163
Item 19. Exhibits......................................... 163
2
FORWARD-LOOKING INFORMATION
This registration statement contains forward-looking statements that
reflect our plans and expectations. These forward-looking statements involve
known and unknown risks, uncertainties and other factors that may cause our
actual results, performance, achievements or financial position to be materially
different from any future results, performance, achievements or financial
position expressed or implied by these forward-looking statements. These factors
include:
- Cyclicality in our industries;
- Reduced demand for older products in response to advances in
biotechnology;
- Increasingly stringent regulatory controls;
- Increased raw materials prices;
- The expiration of patent protections;
- Environmental liabilities and compliance costs;
- Failure to compete successfully, integrate acquired companies or develop
new products and technologies;
- Risks from hazardous materials;
- Litigation and product liability claims; and
- Fluctuations in currency exchange rates.
A discussion of these and other factors which may affect our actual
results, performance, achievements or financial position is contained in Item 3,
Key Information -- Risk Factors, Item 5, Operating and Financial Review and
Prospects and elsewhere in this registration statement.
ENFORCEABILITY OF CIVIL LIABILITIES UNDER U.S. FEDERAL SECURITIES LAWS
We are a German corporation. All of our directors and executive officers,
and the experts named in this Registration Statement, are residents of Germany.
A substantial portion of our assets and those of such individuals is located
outside the United States.
As a result, although a multilateral treaty to which both Germany and the
United States are party guarantees service of writs and other legal documents in
civil cases if the current address of the defendant is known, it may be
difficult or impossible for you to effect service of process upon these persons
from within the United States.
Also, because these persons and assets are outside the United States, it
may be difficult for you to enforce judgements against them in the United
States, even if these judgements are of U.S. courts and are based on the civil
liability provisions of the U.S. securities laws.
If you wish to execute in Germany the judgement of a foreign court, you
must first obtain from a German court an order for execution
(Vollstreckungsurteil). A German court may grant an order to execute a U.S.
court judgement with respect to civil liability under the U.S. federal
securities laws if that judgement is final as a matter of U.S. law. In granting
the order, the German court will not enquire whether the U.S. judgement was, as
a matter of U.S. law, correct. However, the German court must refuse to grant
the order if:
- the U.S. court lacked jurisdiction, as determined under German law;
- the person against whom the judgement was obtained did not receive
service of process adequate to permit a proper defence, did not
otherwise acquiesce in the original action and raises the lack of
service of process as a defence against the grant of the execution
order;
- the judgement would conflict with the final judgement of a German court
or with the final judgement of another foreign court that is
recognizable under German law;
3
- recognition of the judgement would violate an important principle of
German law, especially basic constitutional rights; or
- there is a lack of reciprocity between Germany and the jurisdiction
whose court rendered the original judgement.
You should be aware that German courts hold certain elements of some U.S.
court judgements, for example punitive damages, to violate important principles
of German law. Judgements for ordinary compensatory damages are generally
enforceable, unless in an individual case one of the reasons described above
would forbid enforcement.
If you bring an original action before a German court based on the
provisions of the U.S. securities laws and the court agrees to take jurisdiction
over the case, the court will decide the matter in accordance with the
applicable U.S. laws, to the extent that these do not violate important
principles of German law. However, the court may refuse to accept jurisdiction
if another action is pending before a U.S. or other foreign court in the same
matter. Furthermore, the court might decide that, for a lawsuit brought by a
U.S. resident under U.S. law against a defendant that, like Bayer, has a
significant presence in the United States, a U.S. court would be the more proper
forum.
4
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS
DIRECTORS AND SENIOR MANAGEMENT
The following table sets forth information about the members of our Board
of Management (Vorstand). The address of each person listed is c/o Bayer AG,
51368 Leverkusen, Germany.
NAME POSITION
---- --------
Dr. Manfred Schneider........................ Chairman, Board of Management
Dr. Attila Molnar............................ Member, Board of Management
Dr. Frank Morich............................. Member, Board of Management
Dr. Udo Oels................................. Member, Board of Management
Werner Spinner............................... Member, Board of Management
Werner Wenning............................... Member, Board of Management
Dr. Gottfried Zaby........................... Member, Board of Management
AUDITORS
NAME ADDRESS
---- -------
PwC Deutsche Revision Aktiengesellschaft Friedrich-List-Strasse 20, 45128 Essen, Germany
Wirtschaftsprufungsgesellschaft
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
5
ITEM 3. KEY INFORMATION
SELECTED FINANCIAL DATA
We derived the following selected financial data for each of the years in
the five-year period ended December 31, 2000, from our consolidated financial
statements and for the six month periods ended June 30, 2001 and 2000 from our
unaudited consolidated financial statements. We have prepared our consolidated
financial statements in accordance with International Accounting Standards, or
IAS and where indicated, in accordance with U.S. Generally Accepted Accounting
Standards or U.S. GAAP. Note 44 to our consolidated financial statements and
Note 7 to our unaudited consolidated financial statements included in Item 18 of
this registration statement describe the reconciliation of significant
differences between IAS and U.S. GAAP.
Since January 1, 1999, we have prepared our financial statements in
European Union euros (E). We originally prepared our consolidated financial
statements for the years ending December 31, 1997 and 1998, in German marks
(Deutsche Mark, or DM). We have restated these financial statements in euros,
converting German mark values to euro values at the irrevocably fixed conversion
rate of DM 1.95583 = E1.00. These restated financial statements depict the same
trends and relationships among our financial accounts as do the corresponding
original financial statements that we reported in German mark amounts prior to
the introduction of the euro. Unless otherwise indicated, we have expressed all
monetary amounts (except per share amounts) in the consolidated financial
statements and in the notes in millions of euros.
In this registration statement we have translated certain euro amounts into
U.S. dollar amounts at the rate of $0.8474 = E1.00, the noon buying rate on June
29, 2001. We have translated these amounts solely for your convenience, and you
should not assume that, on that or any other date, one could have converted
these amounts of euros into dollars at that or any other exchange rate.
The financial information presented below is only a summary. You should
read it together with the consolidated financial statements included in Item 18.
CONSOLIDATED INCOME STATEMENT DATA
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
------------------------ ------------------------------------------------------
2001 2001 2000 2000 2000 1999 1998(1) 1997(1) 1996(1)
------ ------ ------ ------ ------ ------ ------- ------- -------
$ E E $ E E E E E
(IN MILLIONS, EXCEPT PER SHARE DATA)
(UNAUDITED)
IAS:
NET SALES.................................... 13,535 15,972 15,238 26,245 30,971 27,320 28,062 28,124 24,853
Of which discontinuing operations............ (300) (354) (739) 1,263 1,491 2,973 5,586 5,497 4,980
OPERATING RESULT............................. 1,416 1,671 1,994 2,785 3,287 3,357 3,155 3,077 2,306
Of which discontinuing operations............ 267 315 73 131 155 1,178 403 468 162
Non-operating result......................... (195) (230) (218) (252) (297) (521) (427) (465) (23)
Income before income taxes................... 1,221 1,441 1,776 2,534 2,990 2,836 2,728 2,612 2,283
Income taxes................................. (370) (437) (732) (973) (1,148) (818) (1,113) (1,102) (878)
Income after taxes........................... 851 1,004 1,044 1,561 1,842 2,018 1,615 1,510 1,405
Minority stockholders' interest.............. (2) (2) 11 (22) (26) (16) (1) (6) (11)
NET INCOME................................... 852 1,006 1,033 1,539 1,816 2,002 1,614 1,504 1,394
Average number of shares in issue............ 730.34 730.34 730.34 730.34 730.34 730.34 726.81 707.01
Basic net income per share................... 1.17 1.38 1.41 2.11 2.49 2.74 2.21 2.07 1.97
Diluted net income per share................. 1.17 1.38 1.41 2.11 2.49 2.74 2.21 2.07 1.95
Dividends per share.......................... -- -- -- 1.19 1.40 1.30 1.02 0.97 0.87
U.S. GAAP:
Net income................................... 789 931 1,006 1,512 1,783 1,967 -- -- --
Basic and diluted net income per share....... 1.08 1.28 1.38 2.07 2.44 2.69 -- -- --
6
CONSOLIDATED BALANCE SHEET DATA
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
------------------------ ------------------------------------------------------
2001 2001 2000 2000 2000 1999 1998(1) 1997(1) 1996(1)
------ ------ ------ ------ ------ ------ ------- ------- -------
$ E E $ E E E E E
(IN MILLIONS, EXCEPT PER SHARE DATA)
(UNAUDITED)
IAS:
TOTAL ASSETS................................. 33,316 39,315 33,850 30,889 36,451 31,279 29,377 27,697 25,283
Of which discontinuing operations............ 206 243 1,002 980 1,157 950 4,788 4,825 4,579
Stockholders' equity......................... 14,657 17,296 15,156 13.677 16,140 15,006 12,568 12,009 10,532
Liabilities.................................. 18,572 21,916 18,504 17,011 20,074 16,097 16,598 15,465 14,517
Of which long-term financial obligations..... 2,746 3,240 3,015 2,375 2,803 2,359 2,404 2,150 1,615
Of which discontinuing operations............ 64 75 483 486 574 476 2,246 2,062 2,036
U.S. GAAP:
Stockholders' equity......................... 15,981 18,859 17,941 16,194 19,110 17,177 -- -- --
Total assets................................. 34,032 40,160 35,957 32,828 38,740 32,769 -- -- --
---------------
(1) The 1998, 1997 and 1996 figures have been restated from German marks into
euro at the irrevocably fixed conversion rate of DM 1.95583 = E1.00.
DIVIDENDS
The following table indicates the dividend amount per share we paid for the
years 2000, 1999, 1998, 1997 and 1996. The table shows dividend amounts in euro
for each of the years indicated. The table also reflects the related tax credits
available to German taxpayers who receive dividend payments. Shareholders who
are U.S. residents should be aware that they will be subject to German
withholding tax on dividends received. See Item 10, Additional Information --
Taxation.
2000 1999 1998 1997 1996
----- ----- ----- ----- -----
(IN EUROS)
Total dividend (E in millions)........................ 1,022 949 747 710 629
Dividend per share.................................... 1.40 1.30 1.02 0.97 0.87
Tax credit............................................ 0.45 0.08 0.33 0.41 0.37
See also "Dividend Policy and Liquidation Proceeds" in Item 8, Financial
Information.
EXCHANGE RATE DATA
The following table shows, for the periods and dates indicated, the
exchange rate of the euro to the U.S. dollar based on the noon buying rate of
the Federal Reserve Bank of New York. For periods prior to the introduction of
the euro on January 1, 1999, we have converted the then-prevailing German
mark/U.S. dollar rates to a notional euro/dollar rate at the irrevocably fixed
euro/mark rate of E1.00 = DM 1.95583. Fluctuations in the exchange rate between
the euro and the dollar will affect the market price of the shares and the ADSs,
the dollar amount received by holders of shares and the ADSs on conversion by
the Depositary of any cash dividends paid in euro and the dollar translation of
our results of operations and financial condition.
YEAR PERIOD END AVERAGE HIGH LOW
---- ---------- ------- ------ ------
1997............................................... 1.0871 1.1287 1.2690 1.0398
1998............................................... 1.1733 1.1132 1.2178 1.0548
1999............................................... 1.0070 1.0655 1.1812 1.0016
2000............................................... 0.9388 0.9233 1.0335 0.827
2001............................................... -- -- -- --
7
PREVIOUS SIX MONTHS HIGH LOW
------------------- ------ ------
July 2001................................................... 0.8797 0.8370
August 2001................................................. 0.9194 0.8775
September 2001.............................................. 0.9310 0.8868
October 2001................................................ 0.9181 0.8893
November 2001............................................... 0.9044 0.8770
December 2001............................................... -- --
CAPITALIZATION AND INDEBTEDNESS
SEPTEMBER 30, 2001
------------------
(EUROS IN
MILLIONS)
IAS:
Short-term debt............................................. 4,956
------
Long-term debt.............................................. 3,003
------
Shareholders' equity:
Capital stock: 730,341,920 ordinary shares of no par
value;
E256 million authorized, E83 million conditional....... 1,870
Capital reserves.......................................... 2,942
Retained earnings......................................... 10,137
Net income................................................ 823
Translation differences................................... 533
------
Shareholders' equity...................................... 16,305
Minority shareholders' interest........................... 102
------
Total capitalization........................................ 24,366
======
8
RISK FACTORS
An investment in our shares or ADSs involves a significant degree of risk.
You should carefully consider these risk factors and the other information in
this registration statement before deciding to invest in our shares or ADSs. The
risks described below are not the only ones that may exist. The occurrence of
any of these events could seriously harm our business, operating results and
financial condition. In that case, the trading price of our shares or ADSs could
decline and you could lose all or part of your investment.
CYCLICALITY MAY REDUCE OUR OPERATING MARGINS OR CAUSE OPERATING LOSSES
Several of the industries in which Bayer operates are cyclical. In
particular, these industries include chemicals and polymers. Typically,
increased demand during peaks in the business cycle in these industries leads
producers to increase their production capacity. Although peaks in the business
cycle have been characterized by increased selling prices and higher operating
margins, in the past these capacity increases have led to overcapacities because
they have exceeded demand growth. Low periods in the business cycles are then
characterized by decreasing prices and excess capacity. These factors can
depress operating margins and may result in operating losses.
We believe that several areas within the chemical and polymer industries
currently show overcapacity, especially those areas, such as basic chemicals,
that are subject to commoditization, and we expect that there may be further
capacity additions in the next few years. We cannot assure you that future
growth in demand will be sufficient to absorb current overcapacity or future
capacity additions without significant downward pressure on prices and adverse
effects on operating results.
The agriculture sector is moreover subject to seasonal and weather factors
and fluctuations in crop prices, which can make its operations less predictable
than those of our other business segments.
ADVANCES IN BIOTECHNOLOGY MAY REDUCE DEMAND FOR SOME OF OUR OLDER PRODUCTS
The growing importance of biotechnology, especially in the pharmaceutical
and crop protection fields, could reduce market demand for some traditional
products. In particular, new agrochemical compounds that achieve similar or
improved results with less toxicity and smaller doses may reduce market demand
for traditional chemical products.
REGULATORY CONTROLS AND CHANGES IN PUBLIC POLICY MAY REDUCE THE PROFITABILITY OF
NEW OR CURRENT PRODUCTS
We must comply with a broad range of regulatory controls on the testing,
manufacture and marketing of many of our products. In some countries, including
the United States, regulatory controls have become increasingly demanding. We
expect that this trend will continue and will expand to other countries,
particularly those of the European Union. A proposed new EU chemicals policy
could mandate a significant increase in the testing and assessment of basic
chemicals and chemical intermediates, leading to increased costs and reduced
operating margins for these products. Although we have adopted measures to
address these stricter regulations, such as increasing the efficiency of our
internal research and development process in order to reduce the impact of
extended testing on time-to-market, we cannot assure you that stricter
regulatory regimes will not delay product development or restrict marketing and
sales.
Our Pharmaceuticals and Consumer Care & Diagnostics segments are subject to
particularly strict regulatory regimes. Failure to achieve regulatory approval
of new products can mean that we do not recoup our research and development
investment through sales of that product. Withdrawal by regulators of an
approval previously granted can mean that the affected product ceases to
generate revenue. This can occur even if regulators take action falling short of
actual withdrawal. For example, the U.S. Food and Drug Administration issued a
recommendation to all manufacturers of products containing phenylpropanolamine
(PPA). As a result, we voluntarily discontinued marketing our Consumer Care
products that contained this substance. In addition, in some cases we may
voluntarily cease marketing a product even in the absence of regulatory action,
as in the case of our cerivastatin anti-cholesterol drugs.
9
Pharmaceutical product prices are subject to controls or pressures in many
markets. Some governments intervene directly in setting prices. In addition, in
some markets major purchasers of pharmaceutical products (whether governmental
agencies or private health care providers) have the economic power to exert
substantial pressure on prices. Price controls limit the financial benefits of
growth in the life sciences markets and the introduction of new products. We
cannot predict whether existing controls will increase or new controls will be
introduced, further limiting our financial benefits from these products.
Similarly, international negotiations currently ongoing at the World Trade
Organization may affect the agriculture policy of the European Union. For
example, a change in EU agricultural policy leading to an increase in "set
aside" acreage could reduce the overall market for agricultural products in the
European Union. Additionally, a radical review and reduction of pricing support
in the European Union could affect customer and pricing structure and harm our
operating results. It is impossible at present to determine precisely what
changes, if any, may occur or when. We expect the operating results of our Crop
Protection and Animal Health segments to reflect the uncertainties of this
industry.
OUR OPERATING MARGINS MAY DECREASE IF WE CANNOT PASS INCREASED RAW MATERIAL
PRICES ON TO CUSTOMERS OR IF PRICES FOR OUR PRODUCTS DECREASE FASTER THAN RAW
MATERIAL PRICES
Significant variations in the cost and availability of raw materials and
energy may reduce our operating results. Bayer uses significant amounts of
petrochemical-based raw materials in manufacturing a wide variety of our
products. We also purchase significant amounts of natural gas, coal, electricity
and fuel oil to supply the energy required in our production processes. The
prices and availability for these raw materials and energy vary with market
conditions and may be highly volatile. There have been in the past, and may be
in the future, periods during which we cannot pass raw material price increases
on to customers. Even in periods during which raw material prices decrease, we
may suffer decreasing operating profit margins if the prices of raw materials
decrease more slowly than do the selling prices of our products. In the past, we
have entered into hedging arrangements with respect to raw materials prices only
to a limited extent. If the market for these hedging arrangements attains
sufficient liquidity and we can obtain their protection at a reasonable cost, we
would consider making more extensive use of these hedge instruments.
THE LOSS OF PATENT PROTECTION MAY RESULT IN LOSS OF SALES TO COMPETING PRODUCTS
During the life of its patent, a patented product is normally only subject
to competition from alternative products. After a patent expires, the producer
of the formerly patented product is likely to face increased competition from
generic products entering the market. This competition is likely to reduce
market share and sales revenue. See Item 4, Information on the Company --
Intellectual Property Protection, for a discussion of the scheduled expiration
dates of our significant patents. In addition, generic drug manufacturers,
particularly in the United States, may seek marketing approval for
pharmaceutical products currently under patent protection by attacking the
validity or enforceability of a patent. If a generic manufacturer succeeds in
voiding a patent protecting one of our products, that product could be exposed
to generic competition before the natural expiration of the patent. See Item 8,
Financial Information -- Legal Proceedings, for a discussion of several
important patent-related proceedings in which we are involved.
The extent of patent protection varies from country to country. In some of
the countries in which we operate, patent protection may be significantly weaker
than in the United States or the European Union. Piracy of patent-protected
intellectual property has often occurred in recent years, particularly in some
Asian countries. In addition, in an effort to control public health crises, some
developing countries, such as South Africa and Brazil, have recently announced
plans for substantial reductions in scope of patent protection for
pharmaceutical products. In particular, these countries could facilitate
competition within their markets from generic manufacturers who would otherwise
be unable to introduce competing products for a number of years. Furthermore, in
response to the recent bioterror attacks in the United States, the U.S. and
Canadian governments contemplated compulsory licensing of our ciprofloxacin
antibiotic -- in effect, permission to generic manufacturers to market
ciprofloxacin before the expiry of our patent rights. Although we reached
agreements with the two governments intended to ensure adequate supplies of
ciprofloxacin while preserving our existing patent rights, we cannot assure you
that these or other governments would not impose compulsory licensing in future
in response to
10
renewed or increased bioterror attacks. We do not currently expect any proposed
patent law modifications to affect us materially. Nevertheless, if a country in
which we sell a substantial volume of an important product were to effectively
void our patent rights in that product, our revenue could suffer.
FAILURE TO COMPETE SUCCESSFULLY OR INTEGRATE NEWLY ACQUIRED BUSINESSES MAY
REDUCE OUR OPERATING PROFITS
Bayer operates in highly competitive industries. Actions of our competitors
could reduce our profitability and market share. In some commodity areas
(especially within our Plastics & Rubber, Polyurethanes, Coatings & Colorants
and Chemicals segments), we compete primarily on the basis of price and
reliability of product and supply. All of our segments, however, also compete in
specialty markets on the basis of product differentiation, innovation, quality
and price. Significant product innovations, technical advances or the
intensification of price competition by competitors could harm our operating
results.
From time to time we acquire all or a portion of an established business
and combine it with our existing business units. Integration of existing and
newly acquired businesses requires difficult decisions with respect to staffing
levels, facility consolidation and resource allocation. We must also plan
carefully to ensure that established product lines and brands retain or increase
their market position. In October 2001, we announced the acquisition of Aventis
CropScience from Aventis SA and Schering AG for E7.25 billion. This price
consists of both cash that we will pay to Aventis and Schering and outstanding
debt of Aventis CropScience that we will assume. This acquisition marks the
single largest acquisition in our history, and the integration of Aventis
CropScience with our Crop Protection segment will pose formidable management
challenges. Any failure to combine these businesses successfully could harm our
operating results.
FAILURE TO DEVELOP NEW PRODUCTS AND PRODUCTION TECHNOLOGIES MAY HARM OUR
COMPETITIVE POSITION
Bayer's operating results significantly depend on the development of
commercially viable new products and production technologies. We devote
substantial resources to research and development. Because of the lengthy
development process, technological challenges and intense competition, we cannot
assure you that any of the products we are currently developing, or may begin to
develop in the future, will become market-ready and achieve substantial
commercial success. If we are unsuccessful in developing new products and
production processes in the future, our competitive position and operating
results will be harmed.
RISKS FROM THE HANDLING OF HAZARDOUS MATERIALS COULD HARM OUR OPERATING RESULTS
Bayer's operations are subject to the operating risks associated with
pharmaceutical and chemical manufacturing, including the related storage and
transportation of raw materials, products and wastes. These hazards include,
among other things:
- pipeline and storage tank leaks and ruptures;
- explosions; and
- discharges or releases of toxic or hazardous substances.
These operating risks can cause personal injury, property damage and
environmental contamination, and may result in the shutdown of affected
facilities and the imposition of civil or criminal penalties. The occurrence of
any of these events may significantly reduce the productivity and profitability
of a particular manufacturing facility and harm our operating results.
Although we maintain property, business interruption and casualty insurance
that we believe is in accordance with customary industry practices, we cannot
assure you that this insurance will be adequate to cover fully all potential
hazards incident to our business.
For more detailed information on environmental issues, see Item 4, Business
Overview -- Governmental Regulation.
11
ENVIRONMENTAL LIABILITIES AND COMPLIANCE COSTS MAY HAVE A SIGNIFICANT NEGATIVE
EFFECT ON OUR
OPERATING RESULTS
The environmental laws of various jurisdictions impose actual and potential
obligations on Bayer to remediate contaminated sites. These obligations may
relate to sites:
- that we currently own or operate,
- that we formerly owned or operated, or
- where waste from our operations was disposed.
These environmental remediation obligations could significantly reduce our
operating results. In particular, our accruals for these obligations may be
insufficient if the assumptions underlying these accruals prove incorrect or if
we are held responsible for additional, currently undiscovered contamination.
See Item 4, Business Overview -- Governmental Regulation.
Furthermore, Bayer is or may become involved in claims, lawsuits and
administrative proceedings relating to environmental matters. An adverse outcome
in any of these might have a significant negative impact on our operating
results.
Stricter environmental, safety and health laws and enforcement policies
could result in substantial costs and liabilities to Bayer and could subject our
handling, manufacture, use, reuse or disposal of substances or pollutants to
more rigorous scrutiny than is currently the case. Consequently, compliance with
these laws could result in significant capital expenditures as well as other
costs and liabilities, thereby harming our business and operating results.
LITIGATION AND PRODUCT LIABILITY CLAIMS COULD HARM OUR OPERATING RESULTS AND
CASH FLOWS
Bayer AG or its subsidiaries have been named as defendants in various
lawsuits. Companies like Bayer have historically been subject to large product
liability claims, especially with respect to pharmaceutical and similar
products. We are currently involved in a number of lawsuits that could involve
substantial claims for damages. These include claims alleging product liability
(as in the case of our cerivastatin anticholesterol products and our products
formerly containing phenylpropanolamine) as well as claims alleging antitrust
violations (as in the case of our ciprofloxacin and nifedepine pharmaceuticals).
We are also involved in lawsuits to enforce our patent rights in the latter two
products. If we are not successful in these various actions, it is possible that
the ultimate liability could be material to our results of operations and cash
flows. See Item 8, Financial Information -- Legal Proceedings.
In cases where we believe it appropriate, we have established provisions to
cover potential litigation-related costs. We may establish such provisions for
additional cases, if we believe that developments in those proceedings make it
appropriate to do so. We believe that these provisions (together with insurance
proceeds in cases where our liability would be covered by insurance) would
substantially cover judgements for damages against us in these cases. We cannot
assure you, however, that our litigation provisions will be adequate or that we
will fully recover claims under our insurance policies. Furthermore, if some of
our key products lose their patent protection, we would expect our revenue from
those products to decline as generic competitors enter the market. As a result,
adverse decisions in the lawsuits in which we are involved could harm our
results of operations or cash flows in any given year.
FLUCTUATIONS IN EXCHANGE RATES MAY AFFECT OUR FINANCIAL RESULTS
Bayer conducts a significant portion of its operations outside the euro
zone. Fluctuations in currencies of countries outside the euro zone, especially
the U.S. dollar, can materially affect our revenue as well as our operating
results. For example, changes in currency exchange rates may affect:
- the relative prices at which we and our competitors sell products in the
same market; and
- the cost of items we require for our operations.
12
Although these fluctuations can benefit us, they can also harm our results.
From time to time, we may use financial instruments to hedge our exposure to
foreign currency fluctuations. As of December 31, 2000, we had entered into
forward foreign exchange contracts and currency swaps with a total notional
value of E3.42 billion. See Item 11, Quantitative and Qualitative Disclosures
About Market Risk.
13
ITEM 4. INFORMATION ON THE COMPANY
HISTORY AND DEVELOPMENT OF THE COMPANY
Bayer Aktiengesellschaft, or Bayer AG, is a stock corporation
(Aktiengesellschaft) organized under the laws of the Federal Republic of
Germany. In this registration statement, "Bayer AG" refers solely to the
ultimate parent company of the consolidated Bayer Group.
Bayer AG was incorporated in 1951 under the name "Farbenfabriken Bayer AG"
for an indefinite term and adopted its present name in 1972. Bayer AG's
registered office (Sitz) and principal place of business are at the Bayerwerk,
51368 Leverkusen, Germany. Its telephone number is +49 (214) 30-1 and its home
page on the World Wide Web is at www.bayer.com. Reference to our website does
not incorporate the information contained on the website into this registration
statement.
Although Bayer AG was incorporated in 1951, it traces its roots to Friedr.
Bayer & Co., an aniline dye works founded in Wuppertal, Germany in 1863 by
Friedrich Bayer and Johann Friedrich Weskott. This company achieved a leading
position in its industry, opening facilities and agencies in the United States
and in other European countries. Friedr. Bayer & Co. made numerous discoveries,
most notably of aspirin (acetylsalicylic acid), perhaps the best-known and most
widely used medication in world history.
In 1925 the original Bayer company merged with five other leading German
chemical and pharmaceutical companies, including the ancestors of today's
Aventis and BASF, to form I.G. Farbenindustries AG. After the second World War,
the Allied High Commission, formed by the United States, the United Kingdom,
France and the former Soviet Union to administer occupied Germany, seized the
assets of I.G. Farben. Pursuant to Law No. 35 of the Allied High Commission,
some of these assets were later distributed among 12 newly formed companies,
including the present Bayer AG.
After World War I, the U.S. government expropriated the U.S. rights to the
Bayer name and trademarks as "enemy property". In 1986, Bayer reacquired the
U.S. rights to the Bayer trademark with respect to products for the
manufacturing industry and, in 1994, reacquired full U.S. rights to its name and
trademarks, including the "Bayer cross".
Friedr. Bayer & Co. established operations in the United States as early as
1870. In 1992, Bayer AG's U.S. subsidiaries Mobay Corporation, Miles Inc. and
Agfa Corporation merged with the management holding company Bayer USA Inc. to
form a new operating company, Miles Inc. In April 1995, Miles Inc. changed its
name to the current form, Bayer Corporation.
Since 1998, we have incurred capital expenditures as follows:
2000 1999 1998
---- ---- ----
(MILLIONS OF EUROS)
Pharmaceuticals............................................. 553 525 366
Consumer Care & Diagnostics................................. 192 205 123
Crop Protection............................................. 233 184 102
Animal Health............................................... 50 33 42
Plastics & Rubber........................................... 652 575 677
Polyurethanes, Coatings & Colorants......................... 359 446 529
Chemicals................................................... 470 521 512
In 1998 we spent E1.4 billion on acquisitions, mainly for Chiron
Diagnostics. In 1999 we spent E0.4 billion on acquisitions. Major projects in
1999 included the acquisition of the plastic sheet businesses of the chemical
companies DSM-Axxis N.V. and Sheffield Plastics; the purchase of the business
and assets of Elastochem Inc.; and an 11.3 percent equity investment in LION
Bioscience AG. In 2000, we spent a total of E4.2 billion on acquisition
activity, mainly in further aligning our polymers and chemicals activities
toward specialties through the acquisitions of Lyondell Chemical Company's
polyols business, Sybron, CSM Holding, Inc. and Cytec's sizing and strength
paper chemicals business. In the life science area we strengthened our crop
protection business by acquiring the Flint(R) strobilurin product line.
14
In October 2001, we entered into an agreement to acquire Aventis
CropScience from Aventis and Schering. The consummation of this transaction is
conditioned upon antitrust and competition reviews in the United States and the
European Union. Assuming that we receive the requisite regulatory approvals, we
expect to complete this acquisition by the end of the first quarter of 2002. See
below, -- Crop Protection -- Segment Strategy and "Aventis CropScience
Acquisition" in Item 5, Operating and Financial Review and Prospects -- Recent
Developments and Trend Information -- Outlook.
In 1998 our major divestments included the sale of our citric acid
business, the sale of Agfa's copying systems business unit, the placement of our
titanium dioxide business into a joint venture with Kerr-McGee Chemical LLC, the
combination of the silicones activities of Bayer and GE Plastics into another
joint venture and the sale of our zeolites business. Major divestments in 1999
included our flotation of 70 percent of the former Agfa business segment. In
2000, the addition of a new partner in the DyStar joint venture reduced our
capital share in that joint venture to 35 percent; since then we consider DyStar
a non-core business and classify it under "Discontinuing Operations". We
continued to streamline our portfolio through 2000, divesting our animal health
biologicals, acrylic fibers and solar-grade silicon businesses, Troponwerke
GmbH, and Basics, our generic pharmaceuticals business in Germany. We divested
our investments in Myriad Genetics Inc. and in Schein Pharmaceuticals, a U.S.
generics business. In the first half of 2001, we also sold our acrylic fiber and
spandex yarn product lines, a part of our Fibers business group, now classified
under "Discontinuing Operations". In May 2001, we sold our interest in the EC
Erdolchemie joint venture, which we had previously classified under
"Discontinuing Operations". In December 2001, we announced plans to divest
Haarmann & Reimer from our business group, as we no longer consider it to be
part of the Chemicals segment's core activities.
15
BUSINESS OVERVIEW
We are a global company offering a wide range of products, including
ethical pharmaceuticals, diagnostics and other health-care products;
agricultural products; polymers; and chemicals.
Bayer comprises the parent company, Bayer AG of Leverkusen, Germany, and
over 250 consolidated subsidiaries. We are organized into seven business
segments -- Pharmaceuticals; Consumer Care & Diagnostics; Crop Protection;
Animal Health; Plastics & Rubber; Polyurethanes, Coatings & Colorants; and
Chemicals.
In December 2001, the Supervisory Board approved plans to transform Bayer
AG into a management holding company structure. We expect to implement this
plan, which must still be approved by our shareholders, with effect from January
1, 2003. This holding company structure, which evolves out of our historical
"four pillar" strategy, calls for the establishment of four new, independently
operating subsidiaries. Each of these will comprise one or more current business
segments. The new subsidiaries will be:
- Health Care (comprising the current Pharmaceuticals, Consumer Care &
Diagnostics and Animal Health segments);
- Crop Protection (consisting of our current Crop Protection segment);
- Polymers (comprising the current Plastics & Rubber and Polyurethanes,
Coatings & Colorants segments); and
- Chemicals (consisting of our current Chemicals segment).
Under the new structure, the Management Board of Bayer AG would continue to
determine the overall strategy of the Bayer Group, control resource allocation,
and nominate the management of the subsidiary Group companies. These new
entities will be wholly owned by Bayer AG, although we may consider strategic
partnerships, particularly for our Health Care businesses. If we do form any
strategic partnerships, we would expect to maintain both majority ownership and
operational control.
For the year ended December 31, 2000, Bayer reported total sales of E31.0
billion, an operating result of E3.3 billion, and net income of E1.8 billion.
Sales from continuing operations accounted to E29.0 billion. Europe accounted
for 47.2 percent of these sales in 2000. Our activities in North America
accounted for 32.4 percent of sales. The Asia/Pacific region contributed 12.7
percent to sales, while Latin America, Africa and the Middle East accounted for
7.7 percent. As of December 31, 2000, we employed 122,100 people worldwide,
including employees in our discontinuing operations.
By continuing to align our portfolio strategically in favor of the more
profitable life sciences, we aim to increase Bayer's overall operating margin to
above 15 percent. We plan to achieve this shift in our portfolio by maintaining
our existing strategy of selective life science acquisitions like those of
Chiron, Gustafson and Flint, the expected acquisition of Aventis CropScience,
and through strong organic growth. In our Health Care businesses we are aiming
to win market share and grow profitability without stifling our growth potential
at the same time.
We will strive to continue expanding the strong market position of our
Polymers businesses. After integrating Lyondell's polyol business, our main
focus will be on expansion in Asia, where we see opportunities for above-average
growth, and on developing new applications for our products. In the Chemicals
segment, we plan to focus on further improving our margins. Our plan for
achieving this goal calls for the further streamlining of our portfolio and the
expansion of our specialties, including by means of selected acquisitions.
We aim to avoid accidents, to prevent our activities from harming human and
animal health and to tailor our product range to the tenets of sustainability.
Bayer's long-term strategy and activities are guided by the principles of
sustainable development. Our objective is to meet the economic, ecological and
social needs of today's society without compromising the ability of future
generations to meet their own needs. We contribute to sustainable development by
participating in the worldwide Responsible Care(R) initiative developed by
companies in the global chemical industry.
16
PHARMACEUTICALS
OVERVIEW
Our Pharmaceuticals segment focuses on the development and marketing of
ethical pharmaceuticals, or medications requiring a physician's prescription and
sold under a specific brand name. The following table shows the segment's
performance for the last three years.
2000 1999 1998
----- ----- -----
(EUROS IN MILLIONS)
External net sales.......................................... 6,140 5,003 4,340
Percentage of total sales (continuing operations)......... 21.4 21.2 20.1
Intersegment sales.......................................... 39 51 34
Operating result before exceptional items................... 1,165 922 751
Percentage of total operating result (continuing
operations)............................................ 32.8 29.5 23.9
The following table shows our revenue during the past three years from the
products that we regard as material to the revenue of the segment as a whole.
2000 1999 1998
------------------------- ------------------------- -------------------------
REVENUE REVENUE REVENUE
(EUROS PERCENTAGE OF (EUROS PERCENTAGE OF (EUROS PERCENTAGE OF
IN SEGMENT IN SEGMENT IN SEGMENT
PRODUCT MILLIONS) REVENUE MILLIONS) REVENUE MILLIONS) REVENUE
------- --------- ------------- --------- ------------- --------- -------------
Cipro....................... 1,785 29.1 1,519 30.4 1,295 29.8
Adalat...................... 1,155 18.8 1,021 20.4 967 22.3
SEGMENT STRATEGY
We plan to hold all our Health Care businesses (including Pharmaceuticals,
Consumer Care & Diagnostics and Animal Health) as a separate wholly owned direct
subsidiary of Bayer AG. See -- Business Overview. To better focus our management
of the Pharmaceuticals segment, we also plan to organize it into two business
groups: Ethical Products and Biological Products.
Our strategic priorities for the Pharmaceuticals segment are improving
profitability and gaining market share. At the end of 1998, we began an
extensive restructuring program in the segment that includes divesting
activities we no longer regard as strategic core businesses. By means of the
various elements of this restructuring program, we aim by 2003 to reduce costs
in the Pharmaceuticals segment by as much as E415 million compared with their
level in 1998. Following the withdrawal of our Lipobay/Baycol cerivastatin
products, we are currently considering further restructuring of our
Pharmaceuticals business.
Life cycle management, enabling us to extend the commercial success of
established products, is a strategic priority. At the same time, we will provide
the necessary marketing support for new products, with the goal of making every
product launch a success. Through international cooperations with numerous
leading biotechnology companies we seek to ensure a leading position in all key
technologies as well as enhanced research productivity.
In 2000, the Pharmaceuticals segment spent E553 million on capital
expenditures. We recently expanded our pharmaceutical research center at West
Haven, Connecticut. We aim to strengthen our biologicals business by increasing
our production capacity.
We allocate the largest portion of our research and development budget to
the Pharmaceuticals segment. Our activities in this field focus on:
- innovative drug products for the treatment of conditions for which
current therapeutic options are either inadequate or unavailable, such
as arteriosclerosis, diabetes and cancer; and
- alliances with leading biotech firms to expand our high-tech research
platform.
17
PRODUCTS
The following table lists the major products of the Pharmaceuticals
segment.
BRAND NAME ACTIVE INGREDIENT INDICATION
---------- ----------------- ----------
ANTIINFECTIVES
Cipro..................... Ciprofloxacin Bacterial infection
Avelox.................... Moxifloxacin Bacterial infection
CARDIOVASCULARS
Adalat.................... Nifedipine Angina, hypertension
Trasylol.................. Aprotinin Perioperative blood loss
BIOLOGICAL PRODUCTS
Kogenate.................. Factor VIII Hemophilia
Gamimune.................. Human immune globulin Immunodeficiency
Prolastin................. a1-antitrypsin Emphysema
CENTRAL NERVOUS SYSTEM
Nimotop................... Nimodipine Subarachnoid hemorrhage/CNS disorders
METABOLIC DISEASES
Precose/Glucobay.......... Acarbose Type 2 diabetes mellitus
Ciprofloxacin, marketed under the trademark Cipro(R) in the United States
and Ciproxin(R), Ciproxine(R), Ciprobay(R) and Ciflox(R) in other countries, is
a broad-spectrum antimicrobial agent. It is the leading representative of the
fluoroquinolone class. We launched Cipro in 1986 and have since marketed it in
more than 100 countries.
Cipro's main uses are in the treatment of urinary tract infections and in
severe hospital infections, where it competes with other fluoroquinolones as
well as with antibiotics of other classes. Cipro is our leading pharmaceutical
product and is among the top 20 leading pharmaceutical brands worldwide (source:
International Medical Statistics MAT III, 2000). Physicians have used Cipro in
over 300 million patient treatments; it has been the subject of more than 35,000
scientific papers. We believe that Cipro's success and continued growth are the
result of its proven efficacy and excellent safety record.
Bayer's continuous and effective life cycle management program reflects our
strong commitment to Cipro. We are currently conducting clinical development of
a single-daily-dose formulation intended to further improve dosing convenience
and patient compliance.
Avelox(R) (moxifloxacin), marketed in Germany under the name Avalox(R), is
an antibiotic used to treat common bacterial respiratory tract infections.
Launched in Germany and the United States in 1999, Avelox has since obtained
approvals in most major markets (except Japan, where we expect to obtain
approval in 2003). We currently market Avelox in 61 countries. Avelox is
indicated for the treatment of community-acquired pneumonia, acute exacerbations
of chronic bronchitis and acute sinusitis. Avalox's launch was the most
successful of any antibiotic in Germany (source: IMS). It has established itself
as one of the leading respiratory antibiotics in Germany, and we expect it to
develop into one of the leading products in its class in other countries as
well. In several major markets, we have entered co-promotion/co-marketing
programs to realize the full potential of this product. Avelox complements our
other leading antibiotic, Cipro, which is a leading product for the treatment of
urinary tract infections and severe hospital-acquired infections.
In November 2000, we applied for regulatory approval in Europe and the
United States for the use of Avelox i.v.(R) in treating community-acquired
pneumonia in the hospital setting. In November 2001, the U.S. Food and Drug
Administration approved Avelox i.v. We expect to launch this product in the
United States and (subject to regulatory approval) in Germany by the end of the
first quarter of 2002.
Adalat(R) is the brand name for nifedipine, the first representative of the
dihydropyridine class of calcium antagonists. Calcium plays an important role in
the body's regulation of blood pressure and the supply of blood to the heart
tissues. By doing so, it reduces blood pressure and improves blood supply to
heart tissue. Adalat is an important cornerstone in Bayer's cardiovascular risk
management portfolio. We launched Adalat in 1975; it is currently available
worldwide.
18
Clinical trials have shown that Adalat can:
- reduce the risk of illness and death from heart attack and stroke in
patients with high blood pressure and other risk factors, as well as
improving symptoms of atherosclerosis, or hardening of the arteries, in
these patients; and
- improve endothelial function, which is essential for the proper balance
of blood vessel constriction and dilation. Endothelial dysfunction,
present in many cardio-vascular diseases, increases constriction and can
contribute to the development of atherosclerosis.
Adalat has faced strong competition from other calcium antagonists for a
number of years. More recently, generic once-daily nifedipines as well as such
other classes of drugs as beta-blockers, diuretics, ACE inhibitors and A II
antagonists have begun to compete with Adalat.
The antihypertensive market totaled approximately E33 billion in 2000; we
expect this market to grow to more than E42 billion by 2005. Of this total,
calcium antagonists represented a market of approximately E10.8 billion in 2000.
We expect this portion of the total market to decrease to approximately E10.1
billion by 2005 as the result of increased pressure from generic products.
Kogenate(R) FS (Kogenate(R) Bayer in the EU) is a genetically engineered
recombinant version of Factor VIII (fVIII), a protein essential to blood
clotting. The human body normally produces an adequate supply of fVIII
naturally. Patients with hemophilia A, a genetic disorder that affects males
almost exclusively, cannot produce sufficient fVIII, and their blood therefore
cannot clot properly. If left untreated, hemophilia can trigger bleeding into
organs and joints, causing severe pain, disabilities and even death. Physicians
have successfully treated hemophilia for a number of years by administering
fVIII. All fVIII for medical use originally derived from the plasma of blood
donors; plasma-derived fVIII is still in use. Kogenate FS, however, is a
recombinant fVIII, synthesized from the protein's basic genetic components.
Because recombinant products do not derive from human donors, the risk that
their users will inadvertently contract infection with HIV, hepatitis or other
viruses occasionally present in plasma-derived products is greatly reduced. We
expect that the fVIII market will grow at a compounded rate of 13-15 percent
over the next three to five years, driven by:
- single-digit growth in the patient population,
- more aggressive prophylactic (preventive) dosing.
Along with Bayer there are three major multinational companies that market
recombinant fVIII products -- Baxter, Aventis Behring and Genetics Institute (a
division of American Home Products). We supply recombinant fVIII to Aventis
Behring, which markets it under the brand name Helixate FS(R). Kogenate FS and
Helixate FS are significant brand names in their market segment. We produce
recombinant fVIII under licenses from Genentech and another licensor, which
together give us worldwide production rights.
Glucobay(R), Precose(R) (in the United States) and Prandase(R) (in Canada)
are our trade names for acarbose, an oral antidiabetic product that delays
carbohydrate digestion. Glucobay improves metabolic control in diabetics alone
or in combination with other antidiabetic drugs.
Glucobay was approved in Germany in 1990 as the first drug of its class.
The drug received approvals in the United States in 1995 and in Japan in 1993;
it is now available in more than 95 countries worldwide. Although Glucobay
continues to hold a strong position in Europe and Japan, it faces increasing
competition from GlaxoSmithKline and Takeda/Eli Lilly, which have entered the
market for oral antidiabetic products based on new therapeutic principles.
19
Gamimune(R)/Polyglobin(R) is a plasma-derived concentrate of human
antibodies (Intra-Venous Immunoglobulin G, or IVIG) registered in 33 countries
worldwide, including the United States, Canada, Germany and Japan. Physicians
use it to treat immune system deficiencies as well as for the treatment of some
autoimmune disorders, in which the immune system mistakenly attacks the body's
own tissues. We position Gamimune/Polyglobin as a high-end, convenient product,
contrasting its high concentration and ready-to-use liquid formulation against
the lower-concentration powdered products that currently make up more than 60
percent of the worldwide market. According to both the Market Research Bureau
and our own internal studies, this brand has been the leader in world sales
since 1999. Physicians typically use this drug to treat patients with
insufficient or impaired antibody protection caused by such conditions as:
- Primary Immunodeficiency Diseases,
- Secondary Immunodeficiency Diseases,
- Pediatric HIV (anti-infection prophylaxis), and
- Bone marrow transplantation.
IVIG is currently approved for use in the therapy of such autoimmune
diseases as Idiopathic Thrombocytopenic Purpurea and Kawasaki's Disease, and
there is also increasing evidence that IVIG will prove a strong therapeutic
option for other autoimmune diseases. We believe that the most promising area is
the treatment of neurological diseases like Myasthenia Gravis and Multiple
Sclerosis (MS). Canada and Germany recently granted the first approvals for the
use of Gamimune/Polyglobin in treating Guillain-Barre syndrome, a neurological
condition, and we are currently conducting studies in an effort to obtain
approval of the drug for the treatment of MS.
There are currently no recombinant substitutes available for IVIG, and we
do not expect any such substitutes to become available in the foreseeable
future. We therefore expect that demand for this drug will continue to exceed
supply. We anticipate launching our next-generation IVIG product in the United
States in 2002. In addition to further improvement in product performance, we
expect our new, patented purification process to enable us to make significantly
greater amounts of this scarce product available.
Prolastin(R) (a1-proteinase inhibitor human) is a plasma-derived product
approved for use in the United States, Canada and several European countries. It
is used for chronic therapy in individuals with emphysema related to congenital
a1-antitrypsin (AAT) deficiency. AAT deficiency is an inherited disorder that
causes insufficient AAT in the body. This deficiency can cause serious lung
disease and, ultimately, emphysema.
We recently entered into a collaboration with PPL Therapeutics to develop a
recombinant AAT from the milk of genetically modified sheep. In addition, Bayer
and PPL Therapeutics are developing an aerosolized formulation that patients
take by inhalation. We expect aerosol delivery to make delivery of the drug more
convenient and reduce the amount needed for treatment. In addition to its
indication for genetic deficiency of AAT, we are investigating whether
aerosolized recombinant AAT treatment may benefit patients suffering from cystic
fibrosis. PPL Therapeutics has obtained orphan drug designation for the new
product for both these indications.
We launched Nimotop(R) (nimodipine) globally in the mid-1980s. A member of
the dihydropyridmine class of calcium antagonists developed by Bayer
researchers, Nimotop improves the stability and function of nerve cells
following certain types of hemorrhage in the brain by inhibiting calcium influx
into the cells. Nimotop is the only product approved for the treatment of
aneurysmatic sub-arachnoid hemorrhage, a serious condition involving bleeding in
the brain beneath its outer protective membrane following the rupture of a blood
vessel.
We derive our Plasbumin(R) and Plasmanate(R) fluid management products from
fraction V of human plasma. Plasbumin is a highly purified albumin solution;
Plasmanate contains albumin as well as alpha and beta globulins. These products
draw fluid from body tissues into the bloodstream, thereby helping to stabilize
blood pressure and circulation in patients who have lost large amounts of blood
through trauma, disease or surgery. Health care professionals use our fraction V
products primarily in treating shock victims.
20
Trasylol(R) is a natural proteinase inhibitor obtained from bovine lung
tissue. Used prophylactically, it reduces blood loss during coronary bypass
surgery, reducing the patient's need for blood transfusions. We supply Trasylol
as a colorless, sterile isotonic solution for intravenous administration.
Marketing withdrawal of Cerivastatin products
Baycol(R)/Lipobay(R) (cerivastatin) is a statin, one of a class of
medications used to lower elevated blood levels of cholesterol and other lipids,
or fatty substances. We launched cerivastatin in its original dosages of 0.1 mg,
0.2 mg and 0.3 mg in 1997. We later obtained regulatory marketing approval for
higher dosages, up to 0.8 mg.
Statins are powerful medications that can reduce the risk of coronary heart
disease. However, they can also cause significant side effects, including
rhabdomyolosis. This is a serious condition which, in its most severe form, can
lead to life-threatening kidney failure.
Rhabdomyolysis has been reported more frequently in patients taking
cerivastatin than other statins. This was particularly true in patients taking
cerivastatin in combination with gemfibrozil, another lipid-lowering medication,
and in patients taking cerivastatin in the 0.8 mg dosage. We are currently aware
of approximately one hundred patients diagnosed with rhabdomyolysis while taking
cerivastatin who have died.
We had provided prescription information that warned of the risk of
rhabdomyolysis and contained strong warnings and a contraindication against the
combination of cerivastatin and gemfibrozil. However, we continued to receive
reports of this condition in patients who had been taking cerivastatin.
Accordingly, we voluntarily ceased marketing cerivastatin in August 2001.
Microbial resistance to antibiotics
The development by microbes of resistance to antibiotics, especially to
fluoroquinolone and other quinolone-class products, has been a cause of concern
for the medical and pharmaceutical communities in recent years. Nonetheless, a
number of studies have shown that resistance has not materially impaired the
effectiveness of our two key quinolone products, ciprofloxacin and moxifloxacin,
against their respective primary target microbes. Ciprofloxacin remains
effective against over 90 percent of the key bacteria causing urinary tract
infections, Similarly, moxifloxacin has shown over 99 percent effectiveness
against S. pneumoniae and H. influenzae.
We encourage health care professionals to adopt standards of appropriate
antibiotic use to avoid facilitating the development of resistance.
Inappropriate use of antibiotics is one factor that facilitates the development
of microbial resistance. We have initiated the LIBRAINITIATIVE.COM project to
provide physicians and patients with information on how they can use antibiotics
appropriately, which should contribute to these drugs' continued therapeutic
effectiveness.
Resistance development is, however, a natural process whose outcome we
cannot predict, and it is almost certainly impossible to eliminate it
altogether. Emergent ciprofloxacin or moxifloxacin resistance could become a
problem on an isolated, individual-patient basis. Nevertheless, we do not
believe that microbial resistance will impair the general clinical usefulness of
these two quinolones in large patient populations in the foreseeable future.
Ciprofloxacin: increased demand and governmental agreements following bioterror
attacks
Cipro (ciprofloxacin) has been approved for the treatment of anthrax since
2000 in the United States and since November 2001 in Germany. Set off by the
impending higher demand for Cipro following anthrax bioterror attacks in the
United States, we have increased our global production of this antibiotic to
provide the quantities required. In order to ensure that sufficient antibiotics
will be available from U.S. governmental stockpiles, and in addition to donating
four million Cipro tablets, Bayer Corporation has entered into an agreement with
the U.S. government to supply up to 300 million Cipro tablets, the first 100
million tablets to be delivered by the end of 2001 at a price of $0.95 per
tablet. Further orders by the U.S. government for 2002 would be optional and at
a price of $0.85 per tablet for the second 100 million tablets and $0.75 per
tablet for the third 100 million tablets. In Canada, Bayer Inc. -- in addition
to donating 200,000 Cipro tablets -- has agreed to supply one million tablets of
Cipro within 48 hours upon request from the Canadian government and has assured
that it can meet the current
21
and future demand of Cipro in Canada. We are also currently involved in
discussions with the Israeli authorities about additional supplies of Cipro.
MARKETS AND DISTRIBUTION
The Pharmaceuticals segment's principle markets are North America, Western
Europe and Asia (especially Japan). The segment's sales by region and total, for
the past three years are as follows:
2000 1999 1998
----- ----- -----
(EUROS IN MILLIONS)
Europe...................................................... 1,698 1,571 1,518
North America............................................... 2,812 2,135 1,735
Asia/Pacific................................................ 1,159 883 689
Latin America/Africa/Middle East............................ 471 414 398
----- ----- -----
Total..................................................... 6,140 5,003 4,340
===== ===== =====
The following table sets forth the segment's sales for the last three
years, broken down by key products.
2000 1999 1998
----- ----- -----
(EUROS IN MILLIONS)
Cipro/Ciprobay.............................................. 1,785 1,519 1,295
Adalat...................................................... 1,155 1,021 967
Baycol/Lipobay.............................................. 636 350 114
Kogenate.................................................... 491 377 386
Gamimune N.................................................. 350 287 186
Glucobay.................................................... 311 277 246
Prolastin................................................... 140 74 69
Avelox...................................................... 132 12 --
Nimotop..................................................... 129 127 128
Fraction V products......................................... 118 109 101
Trasylol.................................................... 104 74 65
----- ----- -----
Sum of top eleven products................................ 5,351 4,227 3,557
All other products........................................ 789 776 783
----- ----- -----
Total..................................................... 6,140 5,003 4,340
===== ===== =====
Among the factors that have affected, or may affect, our Pharmaceuticals
business are:
- in Europe and North America, increasingly competitive price pressures as
managed care groups, health care institutions, government agencies and
other purchaser groups seek price discounts and rebates for
pharmaceutical products;
- the impact of competing generic products entering the European and North
American markets;
- in Europe, currency effects resulting from transactions in countries
outside the euro zone;
- competition from large pharmaceutical companies in the North America
market with substantial resources for research, product development and
promotion;
- in Japan, regulation of pharmaceutical prices and mandatory price
reductions stipulated by the Japanese Ministry of Health and Welfare;
- in Japan, extensive periods of time historically required for the
development and the approval of new drug applications by the Japanese
Ministry of Health and Welfare.
We currently produce the active ingredients for our ethical pharmaceutical
products almost exclusively at the Bayer facilities in Wuppertal and Leverkusen,
Germany. We obtain the raw materials for these ingredients partly
22
from Bayer's Chemicals business segment and partly from third parties in Europe
and Asia. Strategic reserves of our products as well as the planned long-term
buildup of our production capacity help us ensure an unbroken supply chain.
We produce biological raw materials and, under a license from Genentech,
recombinant fVIII at our facilities in Clayton, North Carolina and Berkeley,
California in the United States. We obtain raw plasma as well as some
intermediates and supplies for plasma-derived products from third-party U.S.
suppliers. The availability of raw plasma depends on the available donor base,
purchases from other fractionators, regulatory procedures and ongoing
consolidation with larger collectors. In late 2000 we received reports from the
U.S. Food and Drug Administration following FDA inspections of our Clayton and
Berkeley sites. The FDA reports contained observations on production issues,
particularly with regard to data integrity, management and record-keeping as
well as technical production issues. In responding to the reports, we conducted
follow-up investigations that identified certain technical problems affecting
the manufacture of recombinant fVIII products. In July 2001, after receiving our
response, the FDA issued a so-called warning letter, identifying items on which
it requires further action. Although we cannot currently state when we will be
able to return to full production capacity, we are taking action to rectify
these issues. As a result of these issues, our total production of recombinant
fVIII products for 2001 was significantly less than in 2000, leading to periods
of shortage in these products on the market.
Bayer facilities throughout the world compound our raw materials and
package the finished product for shipment. Our main pharmaceutical production
facilities are in Leverkusen, Germany; Garbagnate, Italy; Berkeley, California
and West Haven, Connecticut; and Shiga, Japan. We also operate regional
production facilities in Mexico, Brazil, China and Indonesia. We use contract
manufacturers in some countries and for certain special technological processes.
We obtain additional ingredients and packaging materials from diverse
suppliers on a worldwide basis. As a rule, we approve several suppliers for each
required material. At the same time, we are increasingly entering into global
contracts in order to secure advantageous pricing. Where a required material is
available from only one supplier, our policy is to amass a strategic reserve,
typically equal to a 90-day supply, while mounting an intensive search for
potential alternative suppliers.
We generally distribute our products through wholesalers, pharmacies and
hospitals as well as, to a certain extent, directly to patients. Where
appropriate, we actively seek to supplement the efforts of our sales force
through co-promotion and co-marketing arrangements. In November 2001, we entered
into a co-promotion agreement with GlaxoSmithKline for our erectile-dysfunction
medication vardenafil, currently in late-stage development. We plan to introduce
vardenafil to the market in the near to medium term, subject to obtaining
regulatory approvals following the U.S. Food and Drug Administration's
assessment. We expect the results of this assessment in the second half of 2002.
We encounter competition in all of our geographical markets from large
national and international competitors. In the antibacterial products market,
our main competitors are GlaxoSmithKline, Pfizer and Abbott Laboratories.
Pfizer, Merck & Co. and AstraZeneca dominate the area of hypertension and
coronary heart disease therapy. The market leader for oral antidiabetics is
Bristol-Myers Squibb. Baxter, Bayer and Aventis are the leaders in the blood
coagulation market. Together with Novartis, these three companies also play the
major role in the markets for proteinase inhibitors and immunoglobulins.
Important competitive factors include:
- product characteristics and dependability (including safety, efficacy,
range of indications, dosage form and convenience);
- product price and demonstrated cost-effectiveness;
- customer service;
- sales force size and expertise;
- advertising and promotion;
23
- production and manufacturing costs; and
- research and development of new products and processes.
RESEARCH AND DEVELOPMENT
Within the Pharmaceuticals segment, we focus our research and development
activities on therapeutic areas in which we believe there is a high degree of
inadequately met medical need and where we expect our research and development
investment to yield high productivity. Our established areas of core competency
are bacterial infections as well as cardiovascular diseases and related
disorders such as lipid abnormalities and diabetes. In order to increase the
breadth and depth of our portfolio we are expanding into selected additional
areas: cancer, respiratory diseases (chronic obstructive pulmonary disease --
COPD -- and asthma); neurological disorders (stroke, traumatic brain injury,
chronic pain), neurodegenerative disorders (Parkinson's disease and Alzheimer's
disease), benign prostate hyperplasia/urinary incontinence and viral infections
(with a particular focus on HIV, cytomegalovirus and hepatitis), as well as such
promising newly evolving markets as the treatment of erectile dysfunction.
In recent years we have supplemented our internal research activities,
especially in the pharmaceuticals field, through research cooperations with
third parties. As a result of these cooperations, we have significantly
increased the number of new development candidates that we identify each year,
while reducing our research costs per candidate. See Item 4, Information on the
Company -- Research and Development -- Research Cooperations.
The segment's primary research and development facilities are located in
Wuppertal, Germany; West Haven, Connecticut; Berkeley, California; Kyoto, Japan;
and Stoke Court, United Kingdom.
Life cycle management
We have adopted life cycle management measures to optimize our return on
investment for current major drugs. Life cycle management influences our
planning long before patents expire. These measures have contributed to the
maintenance of our leading position in antibacterials (Ciprofloxacin) as well as
in the cardiovascular area (Adalat). Adalat is a prime example of successful
life cycle management: the drug generated E1.16 billion in sales 15 years after
the patent protection for nifedipine, its key component, expired.
Major current life cycle management projects include:
- development of single-daily-dose and pediatric dosages of Ciprofloxacin;
and
- development of an intravenous formulation of the quinolone antibiotic
Avelox. We submitted this formulation for registration in major markets
in November 2000; it was approved in the United States in November 2001.
New products
We currently have four projects in late stages of clinical development. In
September 2001, we submitted our vardenafil product for the treatment of
erectile dysfunction to the FDA for approval. If we receive FDA approval, we
would expect to launch vardenafil in the United States during the second half of
2002. Depending on positive Phase II/III clinical trial results, we expect to
launch the remaining three products in the years 2003-2006. These products are:
PRODUCT/ BRAND NAME INDICATION STATUS
------------------- ---------- ------
Repinotan............................................. Acute ischemic stroke and TBI Phase III
Faropenem............................................. Bacterial infections Phase III
PDE4 inhibitor........................................ COPD Phase II
Bayer AG licenses Faropenem from Suntory Limited on an exclusive basis
outside Japan and on a semi-exclusive basis in Japan.
24
CONSUMER CARE & DIAGNOSTICS
OVERVIEW
Our Consumer Care & Diagnostics segment comprises the Consumer Care and
Diagnostics business groups.
The following table shows the segment's performance for the last three
years.
2000 1999 1998
----- ----- -----
(EUROS IN MILLIONS)
External net sales.......................................... 3,888 3,364 2,688
Percentage of total sales (continuing operations)......... 13.6 14.2 12.5
Intersegment sales.......................................... -- 1 1
Operating result before exceptional items................... 311 173 240
Percentage of total operating result (continuing
operations)............................................ 8.7 5.5 7.6
SEGMENT STRATEGY
We plan to incorporate all our Health Care businesses (including, Consumer
Care & Diagnostics Pharmaceuticals and Animal Health) through a wholly owned
direct subsidiary of Bayer AG. See -- Business Overview.
Our strategic priorities for the Consumer Care & Diagnostics segment are
improving profitability and gaining market share. In the Consumer Care business
group, our goal is to consolidate production site targeting to realize
cumulative savings of E100 million over five years. In Diagnostics we concluded
the integration of Chiron Diagnostics' activities in 2000; we are aiming to
realize the synergy potential of E125 million savings annually by 2001.
Our research and development activities in this segment focus on:
- the optimization and extension of the indications of over-the-counter
medicines such as Aspirin; and
- the development of efficient and cost-effective tests and systems for
medical diagnostics.
CONSUMER CARE
OVERVIEW
Our Consumer Care business group develops and markets over-the-counter
(OTC) medications (analgesics, cough and cold, dermatological and
gastrointestinal remedies), vitamin and nutritional supplements and
insecticides.
PRODUCTS
The following table lists the major products of the Consumer Care business
group.
BRAND NAME ACTIVE INGREDIENT PRINCIPAL APPLICATION
---------- ----------------- ---------------------
Analgesics
Aspirin............................ Acetylsalicylic acid Pain relief; heart attack
prevention
Aspirin + C........................ Acetylsalicylic acid, Vitamin Relief of cold symptoms
C
Aleve.............................. Naproxen sodium Pain relief; fever reduction
Midol.............................. Ibuprofen, Acetaminophen, Pain relief
Pamabrom, Pyrilamine Maleate
25
BRAND NAME ACTIVE INGREDIENT PRINCIPAL APPLICATION
---------- ----------------- ---------------------
Cough/cold
Alka-Seltzer Plus.................. Chlorpheniramine maleate, Relief of cold and flu
Dextromethorphan hydrobromide, symptoms
Doxylamine succinate,
Phenylephrine hydrochloride,
Acetaminophen
Tabcin............................. Acetylsalicylic acid, Relief of cold and flu
Chlorpheniramine maleate, symptoms
Phenylephrin
Aleve Cold & Sinus................. Naproxen sodium, Pain relief/decongestant
Pseudoephedrine hydrochloride
Dermatologicals
Canesten........................... Clotrimazole, Bifonazole, Vaginal yeast infection
Hydrocortisone treatment, treatment of
athlete's foot and other
dermatological indications
Mycelex............................ Clotrimazole, Butoconazole Vaginal yeast infection
treatment
Rid................................ Pyrethrum extract, Piperonyl Head lice treatment
butoxide
Gastrointestinals
Alka-Seltzer....................... Acetylsalicylic acid, Sodium Relief of heartburn, acid
bicarbonate, Citric Acid, indigestion, sour stomach,
Simethicone, Calcium carbonate with pain relief
Phillips' Milk of Magnesia......... Magnesium hydroxide Constipation relief
Talcid............................. Hydrotalcite Control of gastro-intestinal
acid
Nutritionals
One-A-Day.......................... Vitamins A, C, D, E, K, B6, Dietary supplement
B12, Thiamin, Riboflavin,
Niacin, Folic Acid,
Pantothenic Acid, Biotin,
Calcium, Iron, Zinc, Iodine,
Magnesium, Selenium, Copper,
Manganese, Chromium, Chloride,
Molybdenum, Potassium,
Phosphorus
Flintstones(R), Bugs Bunny(R)and
Scooby-Doo(R)Chewable Children's
Vitamins........................ Vitamins A, C, D, E, B6, B12, Dietary supplement for
Thiamin, Riboflavin, Niacin, children
Folate, Iron, Pantothenic
Acid, Calcium, Phosphorus,
Iodine, Magnesium, Zinc,
Copper
Household
Baygon............................. Bayothrin, Propoxur, Insecticide
Cyfluthrin, Phoxim
Autan.............................. Diethyltoluamid, Bayrepel Insect repellent
Analgesics
The analgesics market comprises pain relief products both in oral form (for
example, pills and tablets) and for topical use (for example, creams and
salves). We estimate the total market to be E10.4 billion. We concentrate
primarily on the oral products segment; we expect this segment to grow at
approximately 2 percent per year over the next five years. Our main competitors
are Johnson & Johnson (Tylenol, Motrin), GlaxoSmithKline (Panadol), Bristol
Myers Squibb (Efferalgan, Bufferin, Excedrin) and American Home Products
(Advil). Our OTC products
26
also face competition from prescription drugs, for example from such
next-generation pain relievers as cyclooxygenase (COX-II) inhibitors.
Aspirin(R) (Bayer(R) brand aspirin in the United States) is a nonsteroidal
anti-inflammatory drug (NSAID). It is used for pain relief and the prevention of
second heart attacks. Bayer first synthesized aspirin in 1893 and began
marketing it in powder form in Germany in 1900. We introduced the familiar
Aspirin tablets in 1910. Aspirin currently ranks second in the analgesic
category globally (source: International Medical Statistics (IMS) 2000).
Aleve(R) was launched in June 1994 by a Procter & Gamble/Syntex partnership
as an OTC analgesic and is the only branded product on the market with an 8-12
hour dosing. It is a nonprescription strength of Anaprox, a fast-acting form of
the medicine in Naprosyn. Bayer now markets Aleve in the United States through a
joint venture with its producer, Roche Laboratories. Aleve is a long-lasting
pain reliever, and can be used for fever reduction. Aleve ranks fourth in the
U.S. analgesic category (source: Information Resources Inc. (IRI) 2000).
Our Midol(R) product family, which competes in the menstrual pain relief
category, comprises several unique product positions, e.g., Maximum Strength
Menstrual Formula, Teen Formula and Night Time Formula. Midol originally entered
the market in 1910. We sell Midol products only in the United States and Canada.
Midol is the U.S. leader in the menstrual analgesics segment (source: IRI 2000).
Cough/Cold
The total cough and cold market is very large, representing approximately
E10 billion in 2000. The cold/flu remedy segment comprises approximately 42
percent (E4.2 billion) of the total category. We expect the cold/flu segment to
grow at approximately 1.8 percent per year through 2005.
Our main competitors globally are Pfizer (Actifed, Sudafed, Benadryl),
Johnson & Johnson (Tylenol), Procter & Gamble (Vicks brands, including Nyquil),
Schering-Plough (Chlor-Trimeton, Drixoral, Desenfriol, Demazin, Claritin) and
American Home Products (Dimetapp, Dristan, Advil Cold & Sinus). The OTC category
faces threats from "non-medicinal" remedies (e.g., nutritional or herbal
products such as zinc supplements and echinacea) as well as from preventive
medicines available by prescription or under development.
Alka-Seltzer Plus(R) is an effervescent product to relieve symptoms
accompanying the common cold. We market Alka-Seltzer Plus in the United States
and Canada. Tabcin(R) is a line of products similar to Alka-Seltzer Plus; we
market it primarily in Latin America. We launched Alka-Seltzer Plus in 1969.
Subsequent reformulations brought even more cold and flu symptom relief,
providing temporary relief of nasal and sinus congestion, body aches and pains,
runny nose, headaches, sneezing, fever and scratchy sore throat. In 1994, we
introduced a line of Alka-Seltzer Plus in Liqui-Gel form. In late 2000, in
response to a recommendation from the U.S. Food and Drug Administration to all
manufacturers of products containing phenylpropanolamine, we discontinued
marketing Alka-Seltzer Plus and similar products containing phenylpropanolamine
in all of Consumer Care's markets. We began our launch of reformulated products
with Alka-Seltzer Plus in the United States in 2001 and expect to complete the
worldwide relaunch during 2002.
Aleve(R) Cold & Sinus was launched in the United States in 2000 as the
first long-lasting combination of analgesic naproxen sodium and nasal
decongestant.
Dermatologicals
The dermatological category includes a broad range of skin treatments. The
products include medical cures, symptom relief aids, as well as additional
caring items to enhance the treatment of skin problems. The total market
represents approximately E6.1 billion. Within this market, we focus on the
antifungal category, which in turn consists of three sub-segments:
gynecological, dermatological and general topical/other antifungals. We estimate
the antifungal portion of the dermatologicals market at approximately E2.3
billion, and that this market will grow at 2.6 percent per year through 2005.
Our main global competitors in OTC dermatologicals are: Johnson & Johnson,
Novartis, Schering Plough and Roche. All topical dermatologicals face
significant threats from the prescription drug area -- the next generation
antifungals (Lamisil), oral treatments (Diflucan, Sporanox), and potential
switches of shorter duration
27
topical treatment products (Lamisil). Increasing competition also arises from
locally marketed generic products and low-price brands.
Canesten(R) is treatment for vaginal yeast infections, athlete's foot and
other dermatological problems. Our pharmaceuticals business group launched
Canesten in 1973 as a prescription drug; since 1990, it has been switching to
OTC status on a country-by-country basis. The gynecological products include
six-, three- and one-day therapies. The dermatological line includes creams,
powders, sprays and solutions. Canesten is the number two ranked topical
antifungal brand worldwide (source: IMS 2000).
Mycelex(R) is a treatment for vaginal yeast infections. It is available in
seven- and three-day treatments. Mycelex was previously available only with a
prescription; it became an OTC medication in 1992.
Rid(R) is a topical head lice treatment. We acquired this brand from Pfizer
(Warner-Lambert) in 2000. Rid has the largest unit market share in the United
States (source: IRI 2000).
Gastrointestinals
The gastrointestinal (GI) category includes antacids (H2 blockers, proton
pump inhibitors and other substances that regulate excessive stomach acids),
anti-gas products, digestives, laxatives and anti-diarrheals. Most proton pump
inhibitors, however, currently remain under prescription, while H2 blockers have
switched to OTC status only in the United States and a few other countries. Our
primary focus within this category includes all non-prescription segments except
laxatives and anti-diarrheals. In 2000, the global category (excluding those two
segments) was valued at approximately E4.2 billion. We estimate that it will
grow at 2.5 percent per year through 2005.
Our main competitors in the OTC GI category are Johnson & Johnson/Merck,
GlaxoSmithKline and Pfizer. Longer term, all OTC GI products will face threats
from related business areas including products switching from prescription to
OTC status, OTC brand expansion from related categories (e.g., anti-diarrheal
brands extending or re-positioning to cover the antacid segment) and possible
future preventative or curative therapies (e.g., products that eradicate or
manage the ulcer-causing bacterium H. pylori).
Alka-Seltzer(R) was developed in the late 1920s by Miles Laboratories, Inc.
and began U.S. national distribution in 1931. Alka-Seltzer is used for speedy
relief of acid indigestion, sour stomach or heartburn with headache, or body
aches and pains. Today, we market Alka-Seltzer in close to 100 countries.
Phillips' Milk of Magnesia(R) is a saline laxative used as an overnight
remedy for constipation and acid indigestion, heartburn or sour stomach that may
accompany it. The original Phillips' formulation entered the U.S. market in
1873.
Talcid(R) was originally a prescription medication developed and sold by
our Pharmaceuticals segment. Since 1988, it has obtained OTC status in several
countries in Europe, Asia and South America. Talcid is used for the relief of
symptoms from heartburn and acid indigestion.
Nutritionals
The nutritionals category is very broad, encompassing vitamins, minerals,
multi-vitamins/minerals, herbals, sports nutrition and specialty supplements in
many different forms (tablets, powders, tonics, etc.). Applicable regulations
vary greatly, both from country to country and across nutritional segments
(e.g., herbals vs. vitamins). As a general rule, however, regulation of
nutritionals tends to be less stringent than that of other OTC products. For
example, numerous countries permit us to introduce vitamin supplements to the
market as food supplements rather than OTC medications. Distribution channels
for nutritional products are also very broad, usually broader than for other OTC
products, and vary considerably from region to region. Bayer's primary interests
in the nutritionals field are in the vitamin and mineral (especially
multi-vitamins/minerals) and herbals segments.
The total vitamin, mineral and herbal market represented approximately E10
billion in 2000. Herbals represented the largest segment, at E3 billion, with
multivitamins accounting for E2.6 billion. We expect the multivitamin market to
grow at approximately 4.7 percent per year through 2005.
28
Global competition is varied and fragmented in the vitamin and mineral
market, with local competitors playing a significant role in many countries.
Major international companies in the nutritionals category are American Home
Products, Roche and Bristol-Myers Squibb.
One-A-Day(R) multivitamins entered the marketplace in 1940. In 1994, we
restaged the franchise to include the Men's, Women's, 55 Plus, Maximum and
Essential formulas. This restage enabled One-A-Day to position itself as the
right vitamin choice for a variety of differing individual needs. In 1998,
One-A-Day introduced a line of multivitamin/herbals blends to target specific
health concerns (e.g., Energy, Tension, Prostate and Menopause). One-A-Day ranks
number two in the U.S. vitamin category (source: IRI 2000) and has a small
presence in various other countries worldwide.
Flintstones(R) are multivitamin dietary supplements containing 10-19
(depending on type) essential nutrients for children ages 2-12. They were
introduced nationally in the U.S. in 1969, and are currently the children's
chewable vitamin category leader (source: IRI 2000). Bugs Bunny(R) children's
multivitamin were introduced in 1971 in the United States. It is the only
national brand to position itself as sugar free. To strengthen our position in
the children's vitamin market, we launched Scooby Doo(R) children's vitamins in
the United States in 2001.
Household
The Household category consists of various products that kill, repel or
control harmful or annoying insects and protect humans and their personal
environment. The category is valued at E4.7 billion globally; we expect it to
grow at approximately 3 percent per year through 2005.
International players such as Bayer, S.C. Johnson, Sara Lee, Reckitt
Benckiser and Clorox represent 42 percent of the world household market. We do
not market insecticides in North America.
Baygon(R) is a line of household insecticides that target crawling, micro
and flying insects, including moths. Globally, it is the number two insecticide
brand (source: A.C. Nielsen, 2000).
Autan(R) is an insect repellent used for protection, skin care and
after-bite care. It is the number two global insect repellent brand (source:
A.C. Nielsen, 2000).
MARKETS AND DISTRIBUTION
Our Consumer Care business group focuses on two main markets:
- OTC, medicinal products that consumers may generally purchase without a
prescription. In some European markets, this category also includes
products sold to consumers on a prescription basis and later reimbursed
under an insurance plan.
- Insect Control, consumer insecticides used to combat crawling or flying
insects in the household and insect repellents used for personal
protection.
Our internal market studies estimate that the total OTC market represents
approximately E54 billion worldwide, with 2.9 percent growth forecast through
2005. On a regional basis, the forecast annual growth for this period is 2.5
percent in the United States and 3.5 percent in Asia.
On a worldwide basis, the Insect Control market represents approximately
E4.7 billion, with a forecast annual growth of 3 percent through 2005. The
annual growth forecast for this period is 4.1 percent in Asia and 1.1 percent in
South America.
29
The business group's sales by region and total for the past three years are
as follows:
2000 1999 1998
----- ----- -----
(EUROS IN MILLIONS)
Europe...................................................... 465 434 434
North America............................................... 749 685 619
Asia/Pacific................................................ 207 156 129
Latin America/Africa/Middle East............................ 502 408 419
----- ----- -----
Total..................................................... 1,923 1,683 1,601
===== ===== =====
The following table sets forth the business group's sales for the last
three years, broken down by category of activity.
2000 1999 1998
----- ----- -----
(EUROS IN MILLIONS)
Analgesics.................................................. 731 640 620
Cough/Cold.................................................. 110 150 132
Dermatologicals............................................. 225 172 153
Gastrointestinals........................................... 239 199 183
Nutritionals................................................ 179 163 144
Household................................................... 399 338 351
Other....................................................... 40 21 18
----- ----- -----
Total..................................................... 1,923 1,683 1,601
===== ===== =====
Although the business group is not generally subject to seasonality, the
tendency of consumers to purchase more OTC medications in the cough/cold area
can have an impact on this business in the United States, Canada, Mexico and
Argentina, where these products form a significant part of our local OTC product
portfolio. Similarly, Insect Control product sales in Europe can be sensitive to
weather factors.
Consumer Care procures many high-volume raw materials, such as Propoxur,
Bayothrin, acetylsalicylic acid, Bayrepel, and clotrimazole, internally from
other Bayer business groups and companies. This high degree of vertical
integration limits volatility. Our major externally procured high-volume raw
materials are sodium citrate, sodium bicarbonate, citric acid and ascorbic acid.
These are readily available commodities and are usually not subject to
significant price fluctuations. Changes in oil and energy prices can affect a
few key items, such as acetylsalicylic acid, phenol, aerosol cans and aluminum
foil. We diversify our raw materials sources internationally to help balance
currency exchange rate risk.
The typical sales and marketing channels of the business group worldwide
are supermarkets and other mass marketers. In Europe, however, pharmacies are
the usual distribution channel for OTC products.
We regard the following companies as our major competitors in the Consumer
Care business:
- OTC: Johnson & Johnson, GlaxoSmithKline, American Home Products and
Pfizer. Worldwide, we rank fifth, after Pfizer (source: Nicholas Hall
OTC Yearbook 2001).
- Insect Control: S.C. Johnson, Reckitt Benckiser, Clorox and Sara Lee.
Worldwide, we rank second, after S.C. Johnson (source: A.C. Nielsen,
2000).
RESEARCH AND DEVELOPMENT
The Consumer Care business group focuses its research and development
activities on developing and implementing products and programs to contribute to
business growth, including:
- efficient development of new products to support current brands; and
- aggressive clinical and regulatory strategies to creatively pursue
ingredient prescription-to-OTC transitions and technology programs.
30
The business group's primary research and development facilities are
located in Morristown, New Jersey and Leverkusen and Monheim, Germany.
We currently have six products in late stages of development. Depending on
approval by regulatory authorities and completion of internal prelaunch
activities, we expect to launch these products by 2002. These products are:
PRODUCT/BRAND NAME PRINCIPAL APPLICATION STATUS
------------------ --------------------- ------
Aspirin Dry Granules......................... Pain relief Registration approved,
launch expected during
2002
Aspirin + Pseudoephedrine.................... Congestion, pain relief Registration file
submitted
Bayer Women's Aspirin Plus Calcium........... Osteoporosis and heart Launch expected during
regimen 2002
Alka-Seltzer Plus Nose + Throat.............. Runny nose, sore throat Launch expected in late
2002
Aspirin/Bayer Migraine....................... Pain relief Registration approved.
European launch commenced
in 2001
Alka-Seltzer Morning Relief.................. Relief for headache, upset Launch commenced during
stomach and lethargy 2001
Bayer Corporation is involved in a 50 percent joint venture with
Hoffmann-LaRoche to market and sell Aleve, Mycelex, Femstat, Vanquish and Midol
in the United States. Both partners are actively involved in the research and
development planning for these products.
DIAGNOSTICS
OVERVIEW
With more than 8,000 employees worldwide, Bayer Diagnostics, based in
Tarrytown, New York, is one of the largest diagnostics businesses in the world.
We support customers in over 100 countries with an extensive portfolio of
products for the central laboratory, near patient testing, and self-testing
environments. These products serve in the assessment and management of health in
such areas as infectious diseases, cardiovascular disease, oncology, virology,
women's health and diabetes.
PRODUCTS
The following table lists the major products of the Diagnostics business
group.
BRAND NAME DESCRIPTION PRINCIPAL APPLICATION
---------- ----------- ---------------------
ADVIA.......................... Family of immunoassay, clinical Automation of routine clinical
chemistry, hematology, and lab tests in the central laboratory
automation platforms for the
laboratory testing environment
Versant........................ Nucleic Acid Diagnostics (NAD) Highly specific assays for
assays infectious diseases (HIV, HBV,
HCV)
Clinitek and Multistix......... Family of urine chemistry Hospital and physician's office
analyzers and strips screening for indications of
disease
Rapid Systems.................. Family of instruments used for Monitoring of patients in
the measurement of blood gases/ critical care environment
electrolytes and coagulation
Glucometer..................... Family of instruments for the Diabetes monitoring through
measurement of whole blood patient self-testing and
glucose in diabetics hospital whole blood glucose
testing
31
Central Laboratory Testing
The ADVIA family of products is the centerpiece of our laboratory testing
portfolio, which provides a wide range of solutions for the central laboratory.
The ADVIA family includes:
- The ADVIA Centaur(R) Immunoassay System, a high-throughput immunoassay
system. Immunoassays are important diagnostic tools that measure such
substances as proteins, steroids, drugs and antibodies in patients'
blood. These immuno-diagnostic systems provide physicians with
information to detect and monitor a wide variety of diseases. ADVIA
Centaur has a comprehensive test menu that can perform up to 240 tests
per hour. A survey conducted by Enterprise Analysis Corporation rated
the ADVIA Centaur system number one in the United States for ease of
use, efficiency and productivity;
- The ADVIA(R) 1650 Clinical Chemistry System, a medium-to high-throughput
system with a broad test menu that can perform up to 1650 tests per
hour. Its reduced reagent volume can improve cost efficiency, optimize
workflow, and enhance patient management;
- The ADVIA(R) 120 Hematology System, a high-volume hematology analyzer
with five-part differential that can analyze up to 120 samples per hour,
as well as the ADVIA(R) 70, a medium-sized version that we launched in
2001; and
- The ADVIA WorkCell(R), a laboratory automation solution connecting
instruments from different disciplines for high-volume laboratories.
In addition to our ADVIA family of products, we also offer the ACS:180(R)
and Bayer Immuno 1(R) immunodiagnostic analyzers as well as the Clinitek
Atlas(R) urine chemistry system for high volume urinalysis testing. For highly
specific testing of infectious diseases, we offer a family of DNA probes under
the Versant(R) brand for the testing of HIV and Hepatitis B and C.
Near Patient Testing
We offer a variety of solutions for the near patient testing environment,
both in the hospital and in physicians' office laboratories.
For the critical care environment, we offer the Rapid(R) family of
instruments and reagents for the measurement of Blood Gases/Electrolytes and
Coagulation. Among our major products in this category are:
- Rapidlab 800(R), a fully automated critical care system covering key
critical care whole blood parameters, and offering comprehensive
on-board information management;
- Rapidpoint 400(R), our newest blood gas/electrolyte analyzer,
specifically developed for the hospital point-of-care environment;
- Rapidpoint Coag(R), a portable, battery-operated coagulation monitor
which provides rapid assessment of pre- and post-operative bleeding at
the point of care; and
- RapidLink(R), our critical care information management system.
In the field of urinalysis, we offer the Multistix(R) family of reagent
strips for visual reading of up to 10 parameters and the Clinitek(R) line of
instruments for automated readings.
We also offer the DCA 2000+(R) for use in physicians' offices to complement
our diabetes self-testing products. The DCA 2000+ analyzer allows doctors to
rapidly assess the effectiveness of diabetic patients' self-monitoring over a
period of time.
Self-Testing
Our key self-testing products include:
- The Glucometer Dex/Esprit(R), meters that incorporate a 10-test
cartridge to provide more convenience to patients who test their blood
sugar levels several times per day; and
32
- The Glucometer Elite(R), our best-selling diagnostics product, a
versatile blood glucose meters that serves a wide spectrum of patient
needs.
MARKETS AND DISTRIBUTION
Our Diagnostics business group markets its products in over 100 countries
worldwide, both directly and through a network of distributors. Our principal
markets include North America, Western Europe and Japan.
The business group's sales by region and total, for the past three years
are as follows:
2000 1999 1998
----- ----- -----
(EUROS IN MILLIONS)
Europe...................................................... 700 607 445
North America............................................... 868 716 474
Asia/Pacific................................................ 307 301 134
Latin America/Africa/Middle East............................ 90 57 34
----- ----- -----
Total..................................................... 1,965 1,681 1,087
===== ===== =====
The following table sets forth the business group's sales for the last
three years, broken down by category of activity.
2000 1999 1998
----- ----- -----
(EUROS IN MILLIONS)
Laboratory testing (excl. NAD).............................. 776 674 376
NAD testing............................................... 65 63 5
Near patient testing........................................ 419 352 188
Self-testing................................................ 705 592 518
----- ----- -----
Total..................................................... 1,965 1,681 1,087
===== ===== =====
In 2000, the worldwide diagnostics market amounted to nearly E20 billion.
Although this market contains both mature and high-growth segments, we expect
the market as a whole to grow at 5 to 6 percent per year through 2005.
Laboratory testing represents almost two thirds of the global diagnostics
market, with a value of E13 billion in 2000, and is growing at a rate of 4
percent per year. Abbott leads the traditional laboratory testing market segment
(excluding nucleic acid diagnostics, or NAD), primarily driven by its
established position in the immunoassay market. Roche holds second position in
this segment, due to its strong position in clinical chemistry. We are the fifth
largest company in this category, but have been building a strong position in
immunodiagnostics over the past several years.
Nucleic acid diagnostics is a rapidly expanding area of clinical laboratory
testing that focuses on detection of nucleic acids such as DNA and RNA that can
indicate the presence of infections and other diseases in patients. Although the
NAD segment of the diagnostics market amounted to only E750 million in 2000, it
is growing at over 20 percent per year. Roche leads the NAD market, followed by
GenProbe. We are in fourth position, focusing on tests for Hepatitis C virus
(HCV) and Human immunodeficiency virus (HIV).
The near patient testing markets that we serve include critical care (blood
gas/electrolyte), urinalysis and hospital coagulation systems. In 2000, this
market had a value of approximately E1.2 billion and is growing at 7 percent per
year. We have leading positions in critical care and urinalysis, followed by
Roche.
The market for diabetes testing amounted to nearly E4 billion in 2000 and
is growing at 11 percent per year. Roche is the market leader, followed by
Johnson & Johnson. We are in third position, followed by Abbott. (Sources: SG
Cowen, Clinica, Boston Biomedical Consultants, Merrill Lynch, company annual
reports.)
We market our laboratory testing and NAD products, as well as most of our
near patient testing products of the segment, directly to customers, which are
primarily laboratories and hospitals. We channel our self-testing
33
products to the consumer market through distributors and large pharmacy and
retail chains. In the near patient testing segment, we market urine chemistry
strips primarily through distributors.
We manufacture or assemble a significant portion of our own products,
relying on a vendor management process to supply both raw materials and
sub-assemblies. In addition, we source a number of products from original
equipment manufacturer, or OEM, suppliers. Our most significant OEM relationship
involves our Glucometer Elite blood glucose meter and test sensors. Matsushita
manufactures this equipment in Japan; our supplier is Arkray. Diagnostics sales
typically slow down in the third calendar quarter due to traditional vacation
time in Europe and North America, but show strong performance in the fourth
quarter as customers push to spend budgeted funding before the end of the year.
Our primary competitors in the diagnostics market are:
- Laboratory testing: Abbott, Roche, Beckman Coulter, Dade Behring and
Johnson & Johnson;
- NAD testing: Roche and Abbott;
- Near patient testing: Roche and Radiometer; and
- Self-testing: Roche, Johnson & Johnson (Lifescan) and Abbott.
RESEARCH AND DEVELOPMENT
Our Diagnostics business group focuses its research and development
activities primarily on strengthening its core product lines and in expanding
into high growth/high margin segments of the market:
- In Laboratory Testing, through internal development and in-sourcing of
the ADVIA family of systems and in the expansion of high value assays.
- In NAD testing, through menu expansion of assays for infectious disease
and cancer testing.
- In Near Patient Testing; through enhancements of our Rapid systems, a
new hospital point-of-care platform, and new multiples for urinalysis.
- In Self-Testing, through internal development and in-sourcing of mass
market, user-friendly whole blood glucose systems and by focusing
research in minimally- and non-invasive technologies.
The business group's primary research and development facilities are
located in the United States: in Medfield and Cambridge, Massachusetts;
Tarrytown, New York; Elkhart, Indiana; and Emeryville, California.
We currently have a number of products in late stages of development.
Depending on completion of clinical trials and subsequent grant of any necessary
FDA approvals, we expect to launch these products during the periods indicated
below. These products are:
PRODUCT/BRAND NAME PRINCIPAL APPLICATION STATUS
------------------ --------------------- ------
ADVIA IMS(R)Integrated Modular
System............................... Modular platform, combining Launch planned for 2003
immunodiagnostic and clinical
chemistry on a single
instrument with a broad assay
menu
ADVIA Centaur(R)and ACS:180(R) menu
extension............................ Extension of immunoassay menu Launch planned for 10 methods
for disease diagnosis in 2001 and 10 additional
methods in 2002
VERSANT HIV 3.0...................... Quantitative detection of HIV Awaiting FDA approval trials
VERSANT HCV 3.0...................... Quantitative detection of Undergoing FDA clinical
hepatitis C trials; approved outside the
United States
34
PRODUCT/BRAND NAME PRINCIPAL APPLICATION STATUS
------------------ --------------------- ------
VERSANT HCV TMA...................... Quantitative detection of Undergoing FDA clinical
hepatitis C trials; approved outside the
United States
RapidLab 800 Enhancement............. Blood gas/electrolyte Launch planned for 2003
analyzer for laboratory
testing
MULTISTIX PRO........................ Addition of proprietary Launch planned for 2002
microalbumin and creatine
reagent pads for improved
screening for kidney
dysfunction
Next-generation Glucometer system.... "Less Pain" whole blood Launch planned for 2003
glucose system
CROP PROTECTION
OVERVIEW
Our Crop Protection segment develops and markets conventional chemical crop
protection products (insecticides, fungicides and herbicides). Using functional
genomics, a discipline that analyses the functional effects of differing genetic
structures, we also develop new chemical structures for conventional active
ingredients, creating new modes of action for enhanced effectiveness against
pests, weeds and fungi. The following table shows the segment's performance for
the last three years.
2000 1999 1998
----- ----- -----
(EUROS IN MILLIONS)
External net sales.......................................... 2,456 2,177 2,045
Percentage of total sales (continuing operations)......... 8.6 9.2 9.5
Intersegment sales.......................................... 97 83 76
Operating result before exceptional items................... 401 383 439
Percentage of total operating result (continuing
operations)............................................ 11.3 12.3 14.0
The following table shows our revenue during the past three years from the
product that we regard as material to the revenue of the Crop Protection segment
as a whole.
2000 1999 1998
---------------------- ---------------------- ----------------------
REVENUE PERCENTAGE REVENUE PERCENTAGE REVENUE PERCENTAGE
(EUROS IN OF SEGMENT (EUROS IN OF SEGMENT (EUROS IN OF SEGMENT
PRODUCT MILLIONS) REVENUE MILLIONS) REVENUE MILLIONS) REVENUE
------- --------- ---------- --------- ---------- --------- ----------
Imidacloprid (Confidor, Gaucho,
Admire, Provado)*.............. 560 22.8 464 21.3 414 20.2
---------------
* Also used in our Animal Health segment's Advantage product.
SEGMENT STRATEGY
We plan to incorporate our Crop Protection business as a separate wholly
owned direct subsidiary of Bayer AG. See -- Business Overview. This new Crop
Protection subsidiary will combine our current business and the business that we
expect to acquire upon completion of the Aventis CropScience acquisition (see
below).
We intend to continue expanding our crop protection franchise through
ongoing life cycle management. We significantly strengthened our position in
this field by acquiring Zeneca's seed treatment business, as well as through our
acquisition of 50 percent of the U.S. company Gustafson in 1998. In the Home
Garden Market we seek to be a market leader by fully utilizing our existing
portfolio and product pipeline, as well as through strategic joint ventures and
acquisitions.
35
Because we consider chemical crop protection to be the main driver of
growth in the crop protection market, we will concentrate our product
development activities on research in innovative chemistry. For example, we have
developed imidacloprid into one of the world's leading insecticides by steadily
expanding the indications for which it is approved. Genetically modified
organisms (GMOs) include plants modified to increase crop output or resistance
to certain diseases. Historically, we have not developed GMOs. However, we
believe farmers are willing to pay for products that help protect their sizable
investments in GMO technology. We therefore market crop protection products
designed for use on GMOs. We have concluded that entry into the GMO market would
be attractive if it offered both strategic and economic benefits. We believe
that the successful consummation of the Aventis CropScience acquisition will
provide an opportunity for us to enter this market.
In 2000, the Crop Protection segment spent E233 million on capital
expenditures. We acquired the Flint line of strobilurin products from Novartis
for approximately E880 million. We believe that this acquisition makes us number
two in the world fungicides market and reinforces our crop protection business
for the long term. We are also investing approximately E110 million on a
multi-purpose facility for crop protection active ingredients at our Dormagen,
Germany site.
Our Crop Protection segment's research and development activities seek to
increase agricultural productivity worldwide by developing innovative crop
protection products that excel in terms of efficacy, user-friendliness,
environmental compatibility and cost-effectiveness. To gain access to innovative
technologies, we have entered into collaborations with and invested in several
agrobiological companies. We aim to launch at least two new products in this
segment each year.
In October 2001, we agreed to acquire Aventis CropScience from its current
owners, Aventis and Schering. In November 2001, the U.S. Federal Trade
Commission began an in-depth analysis of the proposed acquisition, and in
December 2001, the European Commission announced that it would subject the
transaction to a detailed investigation to determine whether the acquisition
violates EU competition law. Approval by the applicable antitrust and
competition authorities is one of the conditions to consummating the
acquisition. These regulations could also condition their approval on the
divestiture of individual business lines from the combined enterprise. We do not
believe that these investigations will delay our expected closing by the end of
the first quarter of 2002.
Assuming the successful closing of our Aventis CropScience acquisition, we
would not expect to make additional major acquisitions in our Crop Protection
segment in the near term. For a description of the planned acquisition, see
"Acquisition of Aventis CropScience" in Item 8, Operating and Financial Review
and Prospects -- Recent Developments and Trend Information -- Outlook.
PRODUCTS
The following table lists the major products of the Crop Protection
segment.
ACTIVE INGREDIENT BRAND NAMES PRINCIPAL APPLICATION
----------------- ----------- ---------------------
Insecticides
Imidacloprid....................... Confidor, Gaucho, Admire. Broad spectrum insecticide,
Provado primarily against sucking insects
Cyfluthrin/beta-cyfluthrin......... Baythroid, Bulldock Broad spectrum insecticide,
primarily against biting insects
Fungicides
Tebuconazole....................... Folicur, Raxil Fungicide used as spray, seed
treatment and for special
applications
Trifloxystrobin.................... Flint Fungicide against main plant
diseases in various crops
36
ACTIVE INGREDIENT BRAND NAMES PRINCIPAL APPLICATION
----------------- ----------- ---------------------
Herbicides
Metribuzin......................... Sencor Control of broadleaf weeds and
grasses
Metamitron......................... Goltix Control of broadleaf weeds and
grasses in specialty crops
Flufenacet......................... Axiom, Domain Control of grass weeds
Garden/Professional Care
Imidacloprid....................... Premise, Merit Grub and termite control
Insecticides
Imidacloprid, the first active ingredient in a new class of chemicals
(chloronicotinyls syn. neonicotinoids), represented an agricultural
breakthrough. It answers the current consumer demand for effective insecticides
with low toxicity and environmental impact. Imidacloprid helps control many
pests, including aphids, thrips, whiteflies, leafhoppers, locusts, leafminers,
wireworms, and many species of beetles, and is suitable for a wide variety of
application methods, including foliar spray, soil drench, seed treatment and
drip irrigation. Imidacloprid's broad spectrum of activity and flexible
application have made it a leading insecticide in worldwide agriculture (source:
Wood Mackenzie Agrochemical Service, Companies Section, June 2000). We use
imidacloprid in our Gaucho(R), Confidor(R), Admire(R) and Provado(R) brand
products.
We launched imidacloprid in 1991 and now market it in more than 120
countries for use on over 140 crops. Competitors have recently launched three
products of the same class. We expect the launch of two further competing
compounds within the next three years. To strengthen our position in this
market, we launched a second compound of this class in 2001 and are working
together with Takeda on a third compound, which we expect to launch in 2003.
With these developments, we aim to secure and build upon our current leading
position.
Cyfluthrin (Baythroid(R)) and beta-cyfluthrin (Bulldock(R)) are
broad-spectrum insecticides. Although used primarily against biting insects,
they are also effective against various sucking pests. Both compounds,
introduced in the 1980s, belong to the chemical class of pyrethroids. Their
rapid initial action and long lasting residual activity have been particularly
useful to U.S. cotton farmers. Cyfluthrin and beta-cyfluthrin are also
registered for use on a broad range of other crops, including potatoes,
soybeans, cereals, sugarcane and sunflowers.
We expect the market for cyfluthrin and beta-cyfluthrin to remain stable.
On the one hand, we plan to expand the applicability of these products to
additional crops, creating the potential for growth in new and existing markets.
On the other hand, we expect that price pressure from generic pyrethroids and
the broad acceptance of BT cotton (a GMO cotton that produces its own natural
insecticide) will offset this growth, at least in part.
Fungicides
Folicur(R) and Raxil(R) contain tebuconazole, a fungicidal compound that
plants transport upward through their internal flow of fluids in the case of
seed treatments and towards the leaf tip in the case of spray treatments. Like
all triazole fungicides, tebuconazole prevents the targeted fungus from
synthesizing vital components of its cell membrane.
Tebuconazole belongs to the new generation of triazole fungicides, which
are highly effective against a wide range of pathogens. Tebuconazole can be used
as spray (Folicur and related product brands), as a seed treatment (Raxil) and
in special applications, such as sealing wounds in woody plants and in material
protection. In addition, tebuconazole has certain plant growth-regulatory
properties that are useful in raising certain crops, particularly oilseed rape.
Folicur formulations are registered in over 70 countries for use on more
than 80 crops. Tebuconazole was first introduced in 1988. It is currently Crop
Protection's second most successful compound after imidacloprid.
Tebuconazole faces competition from such new-generation triazole compounds
as epoxiconazole, metconazole and difenoconazole.
37
Flint(R) contains trifloxystrobin, a second generation broad-spectrum
strobilurin-type fungicide with improved protective and curative properties
against main plant diseases in cereals, fruits and nuts, grapes, rice, bananas
and turf.
Strobilurins are a class of broad-spectrum fungicide developed by modifying
a core chemical originally isolated from cultures of the mushroom Strobilurus
tenacellus. The main advantages of the strobilurins are their novel mode of
action, high efficacy against the major groups of fungal diseases, activity on a
wide range of crops, systemic action with outstanding preventive effect, and
excellent safety and environmental profile. Trifloxystrobin represents an
important new addition to Bayer's fungicide portfolio, supplementing our
triazole-based products and extending our capabilities in the specialty cereal
fungicide sector.
Although strobilurin fungicides are used on a wide variety of crops,
cereals represent the most important crop class in terms of strobilurin sales.
Trifloxystrobin first entered the market under the Flint brand name in
Switzerland in 1998 and South Africa in 1999. Trifloxystrobin is currently
registered in 35 countries. We anticipate full commercial roll-out by 2003. Our
goal is to establish a broad portfolio of fungicides by integrating
trifloxystrobin with Bayer's existing fungicide line, notably tebuconazole. We
aim thereby to increase our position in the fungicide field.
Herbicides
Bayer's herbicide portfolio encompasses both mature and growing products as
well as compounds under development that we expect to introduce over the next
few years.
According to our internal market studies, Sencor(R), our major metribuzin
brand, is a leader in the potato market and occupies a major position in the
tomato market. Introduced in 1972, metribuzin is a soil- and leaf-active
herbicide used against broadleaf weeds and grasses. The product can be used on
more than 36 different crops. Despite metribuzin's maturity, we have extended
its lifecycle by using the product as a mix partner with other key herbicides,
thereby increasing our position in the corn and soybean herbicide market.
Flufenacet is our new pre-emergence herbicide for the control of grass
weeds. It is effective in low dosages for the protection of numerous crops,
including corn, soybeans, potatoes, cereals and rice. Flufenacet entered the
worldwide market in 1998. We believe it has a strong potential for growth.
Axiom(R), Domain(R) and Epic(R), our major flufenacet brands in the United
States, are innovative solutions for a changing market environment. For example,
Domain, a flufenacet/metribuzin mix, is a specific herbicide developed for the
protection of "Roundup Ready" soybeans, which have been genetically modified to
resist certain herbicides.
Goltix(R), launched in 1978, is a specialty herbicide, used primarily on
sugar beets to control a range of broadleaf and some grass weeds. Although
Goltix has maintained its number one position in the sugar beet herbicide market
segment (source: Phillips McDougall Agriservice, Crops Section, May 2000), it
faces competition from generic metamitron-based products, most of them from
India. In response to this competition, we have implemented new pricing and
market segmentation strategies.
Garden/Professional Care (GPC)
Premise(R) is an imidacloprid-based termiticide launched in 1996 in the
United States. It was the first liquid non-repellent termiticide. We now market
Premise in the United States, Japan, Australia, South Africa and South East
Asia, covering more than 80 percent of the global termiticide market. Premise
provides excellent termite control with low toxicity, has favorable soil
characteristics and is odorless. Its chief competition is from
chlorpyriphos-based products, pyrethroids and the recently introduced,
fipronil-based Termidor(R). Premise sales have increased significantly during
the last four years. Our goal is to establish Premise as the leading liquid
termiticide worldwide.
We launched Merit(R), an imidacloprid-based compound for the turf and
ornamental market, in 1994 in the United States. Merit is a low-toxicity
insecticide of the new chloronicotinyl class. It is broad-spectrum, systemic and
effective in low doses. It shows excellent season-long control of
soil-inhabiting and crown-inhabiting insects on turf grass, as well as of
sucking and biting insects on ornamental plants. Competitor products are
38
organophosphates, such as chlorpyriphos and pyrethroids. We believe that Merit
is currently the number one product for grub control in the U.S. turf market
segment.
MARKETS AND DISTRIBUTION
In 1999, the global market for crop protection products shrank by 1.4
percent to a value of E26.8 billion. Herbicides for the major arable crops such
as cereals, corn, cotton and soy represented 47 percent of this total. The
market share for insecticides increased to 26 percent and for fungicides to 20
percent, primarily reflecting increased use in the cereal-growing regions of
Europe and in the cultivation of fruit, wine and vegetables.
During the same period, and despite difficulties caused by low commodity
prices and a drop in farm incomes, we increased our market share. Despite
continuing consolidation in this market, we rank second in insecticides (source:
Phillips McDougall Agriservice, Companies Section Part I, May 2000).
Europe has traditionally been Bayer's strongest crop protection market.
This region accounted for 41 percent of our sales in this market in 1999. During
the same period, Europe represented 27 percent of the total world market. The
significance of the European market for Bayer is, however, declining in favor of
other regions.
The largest market in the world is the NAFTA region, including Canada, the
United States and Mexico, accounting for 31 percent of the total in 1999. In
that year, the NAFTA region accounted for 22 percent of our Crop Protection
business, up from 19 percent in 1998. Bayer has also improved its market
position in Latin America in recent years and has experienced an increase in
demand from South-East Asia, Japan and India.
In 2000, the global market for crop protection products grew to a value of
E30.3 billion, an increase of 13.4 percent compared to 1999. Herbicides
represented 46 percent, insecticides 26 percent and fungicides 20 percent of the
total.
Europe accounted for 36 percent of our sales in 2000. We are seeking to
achieve sales balance by increasing our market significance in other,
non-European markets. For example, in 2000 the NAFTA region accounted for 25
percent of our Crop Protection business, up from 22 percent in 1999.
The segment's sales by region and total for the past three years are as
follows:
2000 1999 1998
----- ----- -----
(EUROS IN MILLIONS)
Europe...................................................... 886 881 856
North America............................................... 557 442 358
Asia/Pacific................................................ 517 399 326
Latin America/Africa/Middle East............................ 496 455 505
----- ----- -----
Total..................................................... 2,456 2,177 2,045
===== ===== =====
The following table sets forth the segment's sales for the last three
years, broken down by category of activity.
2000 1999 1998
----- ----- -----
(EUROS IN MILLIONS)
Insecticides................................................ 1,026 929 891
Fungicides.................................................. 722 638 570
Herbicides.................................................. 451 416 435
GPC......................................................... 257 194 149
----- ----- -----
Total..................................................... 2,456 2,177 2,045
===== ===== =====
Because nearly 80 percent of Bayer's crop protection business is located in
the northern hemisphere, our business is affected by the seasonality of the
various crop cycles.
We obtain the bulk of our raw materials from within the Bayer Group. We
also enter into minor long-term contracts with non-Bayer companies, for example
for toll manufacturing, when we believe that these arrange-
39
ments meet our quality standards at competitive prices. We believe that our
supply strategy provides our production, formulation and distribution units with
high-quality raw materials and end products at competitive prices with a high
degree of availability and low volatility.
We typically market our Crop Protection products through a one- to two-step
marketing distribution system. Under this system, we sell to wholesalers, who in
turn sell to retailers, as well as to large-scale retailers. The retailers
supply end users with our products as well as with advice on their use. We
believe that our new e-commerce platform, launched in the United States in late
2000, will fit well into this marketing strategy, helping us to improve service
while satisfying customer demand.
Our main competitors in the insecticide, fungicide and herbicide businesses
are Syngenta, Aventis, Monsanto, BASF, Dow AgroSciences and DuPont. Scotts is
our primary competitor in the home garden business while Aventis, Syngenta and
Dow AgroSciences are our main competitors in professional garden care products.
RESEARCH AND DEVELOPMENT
The Crop Protection segment focuses its research and development activities
on developing new active ingredients for insecticides, fungicides and
herbicides. We also seek to develop new formulations for existing active
ingredients, expanding their applicability to additional crops and countries and
thereby augmenting their sales potential.
The segment's primary research and development facilities are located in
Monheim, Germany, Kansas City, Missouri, and Yuki, Japan.
During 2001 we began the launch process of four new active ingredients, and
expect to launch two additional active ingredients in 2002. These products are:
PRODUCT/ BRAND NAME APPLICATION STATUS
------------------- ----------- ------
Iprovalicarb.......................................... Fungicide Launched in 2001
Thiacloprid........................................... Insecticide Launched in 2001
Fentrazamide.......................................... Herbicide Launched in 2001
Flucarbazone-Sodium................................... Herbicide Launched in 2001
Propoxycarbazone-Sodium (proposed).................... Herbicide Launch expected in 2002
Methoxyfenozide....................................... Insecticide Launch expected in 2002
ANIMAL HEALTH
OVERVIEW
Our Animal Health segment develops and markets such animal health products
as veterinary medicines, environmental health products and nutritionals for the
health care of both companion animals and commercial livestock/poultry. In
addition, the segment develops products for insect and rodent control. The
following table shows the segment's performance for the last three years.
2000 1999 1998
---- ---- ----
(EUROS IN MILLIONS)
External net sales.......................................... 999 917 886
Percentage of total sales (continuing operations)......... 3.5 3.9 4.1
Intersegment sales.......................................... 6 6 6
Operating result before exceptional items................... 157 137 124
Percentage of total operating result (continuing
operations)............................................ 4.4 4.4 4.0
SEGMENT STRATEGY
We plan to hold all our Health Care businesses (including Animal Health,
Pharmaceuticals and Consumer Care & Diagnostics) as a separate wholly owned
direct subsidiary of Bayer AG. See -- Business Overview.
40
To ensure early access to frontline technologies, we have entered into
several collaborations and invested in innovative agrobiological companies whose
biotech-based expertise is broadly applicable to the agricultural industries. We
aim thereby to continue our current pipeline output of at least two new product
launches each year. The segment plans to investigate substances developed by our
Crop Protection and Pharmaceuticals segments with a view to adapting these
substances for animal health applications. Through this approach we aim to
exploit synergies within Bayer's life-science network.
In 2000, the Animal Health segment spent E50 million on capital
expenditures. The segment's research and development activities seek to increase
agricultural productivity worldwide by developing innovative animal health
products that excel in terms of efficacy, user-friendliness, environmental
compatibility and cost-effectiveness.
PRODUCTS
The following table lists the major products of the Animal Health segment.
BRAND NAME ACTIVE INGREDIENT INDICATION
---------- ----------------- ----------
PARASITICIDES
Advantage.......................... Imidacloprid Flea control, cats & dogs
Droncit............................ Praziquantel (plus combinations) Dewormer, cats & dogs
Drontal
Bayticol........................... Flumethrin Tick control
Baycox............................. Toltrazuril Therapy of coccidiosis
ANTIMICROBIALS
Baytril............................ Enrofloxacin Broad spectrum therapy of
bacterial infections
BIOLOGICALS
Bayovac FMD vaccine................ Various FMD virus strains Immunization against foot-and-
mouth disease
Bayovac IBR Marker vaccine......... Gene-deleted IBR virus strain Immunization against bovine
respiratory diseases
ENVIRONMENTAL HEALTH PRODUCTS
Blattanex.......................... Cyfluthrin Control of flying insects
Solfac
Responsar
Tempo
Parasiticides
Advantage is a flea control product in easy-to-use, spot-application form.
Its main competitor is Frontline, produced by Merial. We expect this market to
develop further, especially for anti-flea products combined with products for
such other indications as ticks, heartworm and intestinal worms. Advantage,
which we launched in 1996, remains one of the leading anti-flea products
(source: Wood Mackenzie, Top 30 Veterinary Pharmaceutical Products, info-fax of
June 30, 2000).
The Droncit and Drontal product family offers solutions for the control of
tapeworm and roundworm in various formulations and combinations. This product
family is a leader in its market segment (source: Wood Mackenzie, June 2000). We
are currently conducting a promotion campaign for prophylactic deworming in an
effort to create further market growth.
Bayticol is a highly effective topical treatment against all forms of ticks
in livestock animals. Its main competitor is Ivomec, produced by Merial, and
other avermectins. Demand for these treatments is stable, although prices have
been decreasing.
Baycox is an important treatment for controlling coccidiosis, primarily in
poultry and, more recently, in hogs. We are also exploring the expansion of this
products application to cover other species as well.
41
Antimicrobials
The Baytril family represents the leading antimicrobial of the
fluoroquinolone class in the treatment of severe bacterial infections in animals
(source: Wood Mackenzie, June 2000). Sales of Baytril are, however, coming under
increasing pressure for two reasons:
- competition from generic products; and
- in the United States, concerns about development of potential human
cross-resistance, which could lead to a product ban.
Biologicals
The Bayovac vaccine family comprises two main product types. Foot and mouth
disease, or FMD, vaccines have been part of this product line for 50 years. Our
main competitors in this market are Merial and Intervet. Because of the nature
of the customer base and sales patterns (for example, substantially all sales in
Germany are made to the government for its strategic reserves), we do not
believe there is potential for significant market expansion.
With our Bayovac IBR Marker vaccines we have introduced a new principle in
epidemic control of bovine respiratory disease. This product makes it possible
to distinguish vaccinated from infected animals. As non-infection is a
prerequisite for free trade, we believe that this unique product has strong
potential for sales in regions outside Europe.
Environmental health products
Our family of Cyfluthrin products, which comprises several distinct brands,
targets various flying insects. Based on our internal studies, we believe that
we are number three in this market, where we compete with comparable products
from Aventis, Sumitomo and Zeneca. We expect further growth as we offer customer
tailored system solutions for various customer groups.
MARKETS AND DISTRIBUTION
The Animal Health business covers worldwide markets, including emerging
markets such as China, Vietnam and others in South-East Asia. We organize the
activities of the segment along the lines of its market activities, into
livestock, companion animal and environmental health.
The segment's sales by region and total for the past three years are as
follows:
2000 1999 1998
---- ---- ----
(EUROS IN MILLIONS)
Europe...................................................... 267 268 284
North America............................................... 356 329 300
Asia/Pacific................................................ 184 157 132
Latin America/Africa/Middle East............................ 192 163 170
--- --- ---
Total..................................................... 999 917 886
=== === ===
42
The following table sets forth the segment's sales for the last three
years, broken down by category of activity.
2000 1999 1998
---- ---- ----
(EUROS IN MILLIONS)
Parasiticides............................................... 443 390 416
Antimicrobials.............................................. 191 167 143
Biologicals................................................. 81 95 100
Environmental health products............................... 125 99 94
Nutritionals................................................ 78 68 76
Others...................................................... 81 98 57
--- --- ---
Total..................................................... 999 917 886
=== === ===
On a worldwide basis, the activities of the Animal Health segment are not
subject to any significant seasonal effects. Other business entities belonging
to the Bayer Group are the primary suppliers of materials for Animal Health.
Depending on local legislation Animal Health products may be available to
end users on a prescription or non-prescription basis. End users purchase
prescription products from veterinarians or pharmacies. Non-prescription
products are available through retailers, cooperatives or directly to
integrators in the livestock segment; to pet shops and other specialized
channels in the companion animal market; and on the mass markets. We often use
third-party distributors in these markets.
Our main competitors in the animal health business are Merial, Pfizer
Animal Health and Intervet. We currently rank fourth in this market, closely
behind Intervet (source: Wood Mackenzie, December 2000).
RESEARCH AND DEVELOPMENT
The Animal Health segment focuses its research and development activities
on antimicrobials, parasiticides and pain and cancer remedies. A particular goal
of our research and development efforts is to provide the segment with
patent-protected products (new active ingredients, formulations and application
technologies).
The segment's primary research and development facilities are located in
Monheim, Germany and Kansas City, Missouri.
We see our greatest current challenge in the highly competitive but
attractive field of parasiticides, where we are developing various treatments
and treatment combinations for a variety of indications.
We currently have four products or product families in late stages of
development. Subject to regulatory approval, we expect to launch these products
by 2002-2003. These products are:
PRODUCT/ BRAND NAME INDICATION STATUS
------------------- ---------- ------
Baycox Piglet................................ Coccidiosis control in swine In registration
Pyrethroid spray............................. Tick control in dogs Phase III
Endoparasiticide and ectoparasiticide
combinations................................. Control of fleas, heartworm and Phase III
roundworm in cats and dogs
Cancer remedy................................ Cancer therapy in dogs Phase III
43
PLASTICS & RUBBER
OVERVIEW
Our Plastics & Rubber segment comprises the business groups Plastics and
Rubber. The following table shows the segment's performance for the last three
years.
2000 1999 1998
----- ----- -----
(EUROS IN MILLIONS)
External net sales.......................................... 5,816 4,627 4,331
Percentage of total sales (continuing operations)......... 20.3 19.6 20.0
Intersegment sales.......................................... 122 114 93
Operating result before exceptional items................... 560 443 500
Percentage of total operating result (continuing
operations)............................................ 15.8 14.2 15.9
No individual product is material to the revenue of the segment as a whole.
SEGMENT STRATEGY
We plan to hold our Plastics & Rubber and Polyurethanes, Coatings &
Colorants segments as a separate wholly owned direct subsidiary of Bayer AG that
will be responsible for all Bayer's Polymers businesses. See -- Business
Overview.
Our goal is to continue expanding our global leadership in high-value added
plastic and rubber products. We intend to continue developing new applications
for our products. One example is the use of polycarbonates in automotive glazing
applications. We aim to improve profit margins by continually sifting out any
weaknesses in our existing product portfolio, implementing efficient cost
structures, eliminating capacity constraints and further exploiting our regional
growth potential.
In 2000, the Plastics & Rubber segment spent E652 million on capital
expenditures.
Encouraged by favorable growth forecasts for the Asian polycarbonates
market, we intend to spend up to E960 million there over the next four years on
plastics production facilities alone. We also intend to create a second
northeast Asian production center for our Makrolon polycarbonate at the Shanghai
Chemical Industry Park in China. We are building this facility in cooperation
with Shanghai Chloralkali Company; it is scheduled to go on-stream in 2003. In
addition, we intend to extend our polycarbonate film production operations in
the Far East, thereby increasing our global capacity. We expect to incur further
expenditures at our Leverkusen, Germany site, where we recently spent E60
million to build a new production facility for our hydrogenated nitrile rubber,
Therban. This plant, which incorporates technological innovations designed to
facilitate an environmentally friendly manufacturing process, is receiving the
financial backing of the German Ministry of the Environment.
During the period 2001-2002, we plan to spend a total of E20 million to
increase capacities for emulsion styrene-butadiene rubber and
acrylonitrile-butadiene rubber at our site at La Wantzenau, near Strasbourg,
France, from 100,000 to 150,000 tons. We have chosen this site as the European
center for these products due to its central location and flexibility.
As a leading manufacturer, we aim to exploit the full growth potential of
plastics and rubber materials through innovative research and development. We
place particular emphasis on developing new and improved production processes,
improving our product range and opening up new areas of application.
PLASTICS
OVERVIEW
With its broad product portfolio, our Plastics business group is one of the
leading global suppliers and manufacturers of engineering thermoplastics. Many
Bayer materials have chemical and physical properties that
44
enable them to resist high operating temperatures and corrosive chemicals or
solvents. Impact strength, even at temperatures as low as -40 /-50(LOGO)C, is
another important property typical of our products.
PRODUCTS
The following table lists the major products of the Plastics business
group.
BRAND NAME APPLICATIONS PRINCIPAL USERS
---------- ------------ ---------------
Amorphic thermoplastics
Polycarbonates:
Makrolon........................... Optical data carriers, Electrical engineering and
lighting, telecommunications, electronics, optical sector,
computers, printers, fax data processing, lighting
machines, film, sheets, industry, traffic and
panels, dialyser, oxygenators, transport, domestic sector,
spectacles and lenses, medical equipment, automotive,
household and consumer goods consumer, sheet and appliance
industries
Apec............................... Automotive electric Automotive industry
Lighting Lighting industry
Electrical engineering Electrical industry
Medical equipment Health care sector
Styrenics:
Lustran............................ Automotive components Automotive industry
Novodur............................ Housings for data processing Electrical/electronics
equipment, AV equipment, industry Medical sector
business machines Electrical Toy industry
powered tools Garden equipment Leisure industry
Furniture, toys Cosmetic Household/furniture industry
containers Refrigerator liners Cosmetic industry
Sanitary applications Camping
articles
Bayblend........................... Vehicle interiors and Automotive industry
exteriors
Triax.............................. Computers, printers, fax Information technology
machines Electrical/electronic industry
Telecommunication networks Leisure industry
Electrical/electronic Furniture industry
components Sport sector
Furniture Medical sector
Garden equipment
Sporting goods
Medical equipment
Centrex............................ Automotive exterior parts Automotive industry
45
BRAND NAME APPLICATIONS PRINCIPAL USERS
---------- ------------ ---------------
Fabricated products:
Makrofol........................... Nameplates/labels Technology sector
Bayfol............................. Identity cards Automotive sector
Panels Sport/leisure industry
Instrument panel components
Overlay films
Decorative films
Top layers
In-mould decoration
Solid sheet........................ Construction Construction industry
Multi-wall sheet................... Safety Agriculture
Corrugated sheet................... Greenhouses Advertisement sector
Displays Transportation sector
Signs
Transportation
Semi-crystalline polymers
Semi-crystalline thermoplastics:
Durethan........................... Automotive engine parts Automotive industry
Automotive structural Electrical/electronics
components industry
Electrical powered tools Packaging sector
Mechanical engineering Household/furniture sector
Films and bottles Sports and leisure sector
Household goods
Seating furniture
Sporting goods
Pocan.............................. Connectors and housings for Electrical/electronics
automotive and industry; automotive industry;
electronic/electrical parts; sports and leisure sector
electrical and lighting
equipment; optical fiber cable
tubing
Thermoplastic polyurethane:
Desmopan........................... Film Technology sector
Texin.............................. Hoses Mechanical/plant engineering
Cable sheathing sector
Cords Sports/leisure industry
Linings Automotive industry
Dashboards
Ski boots
In-line skates
Sport shoe soles
Amorphic thermoplastics
Polycarbonates
Polycarbonates are plastics that are highly stable across a wide
temperature range. Transparent forms of polycarbonate offer outstanding light
transmission and good optical properties. Polycarbonates almost completely
dominate the field of optical data storage media, such as recordable CDs and
DVDs, and are widely used throughout the electrical/electronics segments in
general. The construction industry is also a major user of polycarbonates. Since
1993, growth rates have been significantly above those for other engineering
thermoplastics.
46
Makrolon(R) is our leading polycarbonate product. Its key characteristics
include high transparency, heat resistance and toughness. It can be both
sterilized and recycled. Our other polycarbonates include the APEC(R) range.
Styrenics
Styrenics have been on the market for 40 years. Users have found them a
reliable family of plastics for a wide variety of applications, particularly in
the automotive and medical sectors. Styrenics lend themselves well to blending
with other forms of plastic. Blend technology can transform a palette of a few
basic polymers into a wide range of new, advanced polymers with tailored
properties, creating user-specific solutions and, in many cases, cost advantages
as well.
Novodur(R), an acrylonitrile/butadiene/styrene copolymers, is our leading
stryrenic. Other styrenics include Lustran SAN(R), Bayblend(R), Triax(R) and
Centrex(R).
Fabricated Products
We also produce plastic films and sheeting with a broad range of
characteristics for a wide variety of applications. These materials consist of
polycarbonate, polycarbonate blends and mixtures of polycarbonates with other
engineering thermoplastics. We market these materials under trade names
including Makrofol(R), Bayfol(R), Makroform, AX-PET, Carbolux, Carbolite, Vivak,
Laserlite+ and Solartuff.
Semi-crystalline polymers
Polyamides
Polyamides are tough, strong, high-performance plastics. They are resistant
to chemicals and can often replace metal and other materials in applications.
Introduced over 50 years ago, they are still in high demand as engineering
plastics. Their high variability and the many ways in which users can modify
them with fillers, elastomers and additives have also earned them the number two
position among technical plastics. The most important consumers of polyamides
are the automotive, food packaging and electrical/electronic industries. In
addition, we use these materials in producing halogen-free flame retardant
products. In the automotive field alone, applications of polyamides range from
such long-established uses as coolant casings, hubcaps, door handles, external
mirrors, sun-roofs and central electrical systems to more recent developments,
such as tail pipes, vehicle electronics and ABS systems. In addition, we believe
that the newly emerging plastic/metal hybrid technologies will create
significant new potential uses for polyamides in automobile front ends, seats
and instrument panels. Two polyamides, PA 6 and PA 66, together account for 90
percent of all polyamides consumed.
Durethan(R) is our range of engineering thermoplastics based on PA 6, PA 66
and their copolyamides. The products in our Pocan(R) range are semicrystalline
thermoplastic polyesters that show high resistance to chemicals, heat distortion
and stress cracking.
Thermoplastic polyurethanes
Thermoplastic polyurethanes, or TPUs, belong to the high-performance
thermoplastic elastomers family. TPUs came onto the market in the early 1960s.
Since then, the variety of applications for TPUs has grown steadily.
Historically, TPUs have had a tendency to yellow upon exposure to light, a
disadvantage in some applications. Light-stable TPU is a recent development;
small quantities are in commercial use, such as in the manufacture of glass
laminating film and special coatings. Thermoplastic polyurethanes fill the gap
between conventional rubber and rigid thermoplastics. A key TPU property is the
high abrasion- and wear-resistance of TPU articles. TPU's abrasion- and
wear-resistance properties are substantially superior to those of abrasion-
resistant rubber compounds. Its wet abrasion resistance surpasses even that of
most metals. In addition, thermoplastic polyurethanes are an excellent
alternative to polyvinyl chloride. Because PVC was less expensive, in the past
few users chose TPU over PVC. Recent controversies involving the environmental
and health risks associated with PVC, however, could open up new opportunities
for halogen-free TPUs of the same hardness
47
class as PVC. We believe that legal constraints or voluntary limitations on the
use of PVC may help make TPU a preferable alternative to PVC despite its higher
cost.
We market our thermoplastic polyurethanes under the trademarks Desmopan(R)
in Germany and other EU countries and Texin(R) in the United States.
MARKETS AND DISTRIBUTION
We sell the products of our Plastics business group to some 6,500 customers
worldwide. These customers include injection-molding operators and a large
number of plastic-component manufacturers, whose products are overwhelmingly
used in the automotive, electrical, electrical engineering, construction, data
technology, medical and leisure fields. We estimate the total value of our
market at E25 billion. According to Bayer internal market studies, we ranked
second in the world market for technical thermoplastics in 2000, excluding
fabricated products.
The business group's external sales, by region and total, for the past
three years are as follows:
2000 1999 1998
----- ----- -----
(EUROS IN MILLIONS)
Europe...................................................... 1,574 1,352 1,323
North America............................................... 994 768 698
Asia/Pacific................................................ 730 495 345
Latin America/Africa/Middle East............................ 222 155 138
----- ----- -----
Total..................................................... 3,520 2,770 2,504
===== ===== =====
The following table sets forth the business group's sales for the last
three years, broken down by category of activity.
2000 1999 1998
----- ----- -----
(EUROS IN MILLIONS)
Amorphic polymers (polycarbonates, styrenics and structural
fabricates)............................................... 2,918 2,247 1,984
Semi-crystalline polymers (polyamides, polyesters and
thermoplastic polyurethanes).............................. 602 523 520
----- ----- -----
Total..................................................... 3,520 2,770 2,504
===== ===== =====
The market for engineering thermoplastics is a global one, characterized by
constant pressure on margins and growing price competition due to globalization,
consolidation and increasing customer purchasing power. Outside the
polycarbonates market, the primary current driver of competition is price,
followed by global supply capability, quality and technical service. In addition
to competitive pricing, our major customers expect global presence, technical
support and service and reliable delivery. In order to meet these demands and to
achieve leadership in both cost and technology, we are extending our production
and marketing presence in our key regions and markets.
We expect the world market for the relevant thermoplastics to grow by about
6 percent over the medium term. Demand is heavy in all areas, while increasing
amounts of thermoplastics in vehicles have led to growing sales to the
automotive sector. Nevertheless, the area of most rapid growth remains
information and communication technology, such as mobile phones, digital
cameras, MPEG players and personal digital assistants, with growth rates
exceeding 10 percent.
Despite continually growing demand, overcapacity remains a problem for
manufacturers worldwide. Although several producers have cancelled or postponed
expansion plans, capacity continues to increase. We expect the industry's
consolidation process, which began several years ago, to continue, with
large-scale facilities in strategic regions and using new low-cost technologies
replacing smaller, increasingly obsolete facilities.
Bayer does not produce basic petrochemicals. The principal raw materials of
our Plastics business group are styrene, butadiene, acrylonitrile, acetone,
phenol, cyclohexane, butandiol and dimethylterephthalate. Because
48
many of these materials derive from petrochemicals, we obtain them almost
exclusively from third parties. We do, however, obtain chlorine for our
polycarbonates both from within the Bayer Group and externally. We produce
Bisphenol-A (another key polycarbonate component) internally. Nevertheless, our
costs are affected by fluctuations in raw material prices, driven in turn by
fluctuations in oil prices. We typically procure our third-party raw materials
under long-term, "as-if-producer" contracts that establish cost-based pricing
formulas, listing raw material price fluctuation to the effects of fluctuation
in the price of crude oil and energy.
We market substantially all our plastics products through regional
distribution channels, supported by regional competence centers and by our head
office. In addition, we are coming to rely increasingly on e-commerce. For
example, together with such other leading thermoplastics suppliers as BASF, Dow,
DuPont and Celanese/Ticona, Bayer created OMNEXUS, a neutral market place
offering products and services across the full spectrum of technical
thermoplastics business, from injection molding to extrusion.
Our most significant global competitor in all regions is General Electric
Plastics, the market leader with a share of approximately 17 percent. We also
compete with several other companies, most notably BASF, Dow and DuPont.
Particularly in the Far East, local competitors with more limited product
portfolios, such as Teijin, Chimei, Idemitsu, Mitsubishi and LG, are also
important.
RESEARCH AND DEVELOPMENT
The Plastics business group focuses its research and development activities
on process development in polycarbonates, styrenics and semi-crystalline
thermoplastics. We are introducing a new poly-carbonate-manufacturing process to
mass production, standardizing worldwide processes for the manufacture of
emulsion ABS, and furthering the development of the PA 6 polymerization process.
In product development, we focus on consolidating our product portfolio,
developing new blends, refining optical data carriers and modifying the surface
of plastics with coatings.
This business group's primary research and development facilities are
located in Krefeld and Dormagen, Germany; Pittsburgh, Pennsylvania; Springfield,
Massachusetts; and Moxi, India.
We currently have seven products in late stages of development. We expect
to launch these products during 2002. These products are:
PRODUCT/BRAND NAME APPLICATION STATUS
------------------ ----------- ------
Surface-modified Makrolon....... Automotive, construction Start commercialization
Melt polycarbonate.............. Optical/ophthalmic lenses Start commercialization
Bayblend FR 3000 series......... Business machines/information technology Start commercialization
Durethan with structural
viscosity..................... Automotive Start commercialization
Reinforced Pocan blends......... Automotive exterior parts Start commercialization
Structural hybrid components.... Automotive Start commercialization
Light-stable Desmopan........... Instrument panels Start commercialization
RUBBER
OVERVIEW
As a leading supplier of raw materials, our Rubber business group is an
important partner to the rubber and tire industry. Our portfolio comprises
synthetic rubber, rubber chemicals and modifiers for the plastics industry,
along with special preparations and processing chemicals from our subsidiary
Rhein Chemie and latices from PolymerLatex, a joint venture with Degussa AG. We
are currently contemplating divesting Rhein Chemie as well as our interest in
PolymerLatex.
49
PRODUCTS
The following table lists the major products of the Rubber business group.
BRAND NAME APPLICATIONS PRINCIPAL USERS
---------- ------------ ---------------
Solid Rubber
Buna CB, Taktene........... Tires, modifiers for plastics Tire and plastics industry
Buna SL, Buna VSL, Krylene,
Krynol, Polysar S.......... Tires Tire industry
Bayer Butyl, Bayer
Bromobutyl, Bayer
Chlorobutyl................ Tire inner liners and inner Tire industry
tubes
Baypren, Perbunan NT,
Krynac, Buna EP, Therban,
Levapren, Levamelt......... Non-tire automotive Automotive industry
components; electrical and
mechanical engineering;
construction
Rubber Chemicals
Vulkanox, Vulkazon,
Vulkacit, Vulkalent,
Vulkanol, Vulkasil,
Renacit, Cohedur, Zinkoxyd
aktiv, Emulvin,
Coagulant.................. Tires, non-tire automotive Tire industry Automotive industry
components, electrical and Latex industry
mechanical engineering,
shoes, construction,
chemicals
PolymerLatex
Bunatex, Baystal, Lipaton,
Plextol, Perbunan N-Latex,
Baypren-Latex.............. Construction, textiles, Building, textile, paper and shoe
paper, carpets, molded foam, industries
dipping goods, fleece
materials
RheinChemie
Rhenogran, Rhenofit,
Aktiplast, Rhenosin,
Rhenodiv, Antilux.......... Tires, automotive, shoes, Tire industry Automotive industry
cables, other technical
rubber goods
Solid Rubber
We produce a wide range of synthetic rubber products. Our customers may
process our rubber materials into end products, or blend them with other
synthetic rubbers or natural rubber to form additional compounds. Our range
includes:
- butadiene rubbers (Buna(R) CB and Taktene(R)),
- butadiene-styrene copolymers (Buna(R) SL, Buna(R) VSL, Krylene(R) and
Krynol(R)),
- butyl and halogenated butyl rubbers (Bayer Butyl, Bayer Bromobutyl and
Bayer Chlorobutyl),
- chloroprene rubber (Baypren(R)),
- acrylonitrile-butadiene rubbers (Perbunan(R) NT and Krynac(R)),
- ethylene-propylene copolymers and terpolymers (Buna(R) EP),
- hydrogenated nitrile rubber (Therban(R)), and
- ethylene vinyl-acetate copolymers (Levapren(R), Levamelt(R)).
50
Our products offer customers an array of varying characteristics, including
workability, hardness, flexibility and wear, heat and chemical resistance, to
suit their specific needs. The tire industry is a major user of our rubber
products. Our rubber products also serve a wide variety of other applications,
from hoses, cable and wire sheathing through footwear soles to golf balls.
Rubber Chemicals
We produce a broad range of chemical products for use in the rubber
compounding and production process. These products help rubber producers to
control the speed of vulcanization, to protect rubber products against
degradation through heat, oxidation and chemicals, and to alter the consistency
and properties of rubber products. We market these chemicals under a number of
trade names, including Vulkanox(R), Vulkazon(R), Vulkacit(R), Vulkalent(R),
Vulkanol(R), Vulkasil(R), Renacit(R), Cohedur(R), Zinkoxyd aktiv(R) and
Emulvin(R).
PolymerLatex
Our PolymerLatex division produces an extensive range of high-grade polymer
dispersions for a wide variety of applications. Its products include Bunatex(R)
for carpets and molded foam, Baystal(R) for carpets, paper coating and footwear,
Lipaton(R) for paints and coatings, Plextol(R) for paints, textiles and pressure
sensitive adhesives and Perbunan(R) N-Latex and Baypren(R) Latex for dipping
goods and fleece materials.
Rhein Chemie
The products of our subsidiary, Rhein Chemie, include Rhenogran(R),
Rhenocure(R), Poly-Dispersion and Rhenofit(R) (predispersed, polymer-bound
chemicals and additives for the rubber processing industry), Aflux(R),
Aktiplast(R) and Rhenopren(R) (processing promoters that make it easier to
manufacture and process rubber compounds), Rhenodiv(R) and Levaform(R) (compound
and mold release agents, tire paints and bladder coatings), Urepan(R) and
Rhenoblend(R) (specialty polymers) and Antilux(R) (anti-sun check waxes and
antiozonants).
MARKETS AND DISTRIBUTION
The main markets for the Rubber business group are Europe, which accounts
for some 50 percent of our sales, and North America, which accounts for 30
percent of sales. The tire and automotive industries generate about 60 percent
of the business group's revenue, both from new car production and replacement
tires. We rank number one in the synthetic rubber market. (Source: International
Institute of Synthetic Rubber Producers). According to our internal market
research, we are number two in rubber chemicals.
The business group's sales by region and total for the past three years are
as follows:
2000 1999 1998
----- ----- -----
(EUROS IN MILLIONS)
Europe...................................................... 1,033 920 942
North America............................................... 762 559 556
Asia/Pacific................................................ 367 275 225
Latin America/Africa/Middle East............................ 134 103 104
----- ----- -----
Total..................................................... 2,296 1,857 1,827
===== ===== =====
51
The following table sets forth the business group's sales for the last
three years, broken down by category of activity.
2000 1999 1998
----- ----- -----
(EUROS IN MILLIONS)
Solid Rubber................................................ 1,468 1,168 1,149
Rubber Chemicals............................................ 314 280 278
Polymer Latex............................................... 184 156 158
Rhein Chemie................................................ 318 230 209
Other....................................................... 12 23 33
----- ----- -----
Total..................................................... 2,296 1,857 1,827
===== ===== =====
Our Rubber business group is not subject to significant seasonality.
In procuring many of our chemical raw materials, we benefit from
integration with the other companies of the Bayer Group.
We regard the following companies as the major competitors of our Rubber
business group:
- Solid Rubber: Goodyear, Exxon, Enichem, DOW and Nippon Zeon;
- Rubber Chemicals: Flexsys and Crompton;
- PolymerLatex: DOW, BASF and Rhodia; and
- Rhein Chemie: Lubrizol and M.A. Hanna.
RESEARCH AND DEVELOPMENT
The Rubber business group focuses its research and development activities
on creating new products, improving processing technology and improving testing
methods. The business group's primary research and development facilities are
located in Leverkusen and Dormagen, Germany, and Sarnia, Ontario.
Because a substantial portion of our business comes from the automotive
sector, anticipating and meeting that sector's needs is a key priority of our
research and development effort. In the tire field, we concentrate on
improvements in rolling resistance, wet grip and wear. In the non-tire
automotive industry, the primary goal is developing rubber parts that have
longer durability at higher operating temperatures.
We currently have five products in late stages of development. We expect to
launch these products in 2002. These products are:
PRODUCT/ BRAND NAME APPLICATION STATUS
------------------- ----------- ------
Therban HT.................. Heat stabilizing system Field test through end users
Therban XT.................. Improved hot abrasion and Sampling to customers and initial
adhesion sales
Therban LT.................. Improved low temperature Field test through end users
performance for seals and belts and initial sales
Vulcuren.................... Natural Rubber/Truck tire Trial product, sampling to
customers
Modified S-SBR.............. Tire tread First plant trials
52
POLYURETHANES, COATINGS & COLORANTS
OVERVIEW
Our Polyurethanes, Coatings & Colorants segment comprises the Polyurethanes
and the Coatings and Colorants business groups. The following table shows the
segment's performance for the last three years.
2000 1999 1998
----- ----- -----
(EUROS IN MILLIONS)
External net sales.......................................... 5,076 3,904 3,629
Percentage of total sales (continuing operations)......... 17.7 16.5 16.8
Intersegment sales.......................................... 462 482 546
Operating result before exceptional items................... 518 657 604
Percentage of total operating result (continuing
operations)............................................ 14.6 21.0 19.2
No individual product is material to the revenue of the segment as a whole.
SEGMENT STRATEGY
We plan to hold Polyurethanes, Coatings & Colorants together and the
Plastics & Rubber segment through a wholly owned direct subsidiary of Bayer AG
that will be responsible for all Bayer's Polymers businesses. See -- Business
Overview.
Our goal is to continue expanding our global leadership in high-value added
polymers. By acquiring Lyondell's polyol business in 2000, we achieved a
well-balanced portfolio for polyurethane raw materials. After fully integrating
this new asset, we will focus on capacity expansion in Asia, where we see
opportunities for above-average growth.
In 2000, the Polyurethanes, Coatings & Colorants segment spent E359 million
on capital expenditures. As a leading polymers manufacturer, we aim to exploit
the full growth potential of polymeric materials through innovative research and
development. We place particular emphasis on developing new and improved
production processes for our polymers and their base products, improving our
product range and opening up new areas of application.
POLYURETHANES
OVERVIEW
Our Polyurethanes business group focuses on the development, production and
marketing of raw materials, formulations and systems used in producing a wide
variety of polyurethane polymers for a broad range of industrial and consumer
applications.
PRODUCTS
Polyurethanes are polymers formed through the reaction of two liquid
chemicals: an isocyanate -- typically diphenylmethane diisocyanate (MDI) or
toluene diisocyanate (TDI) -- and a polymeric alcohol such as polyether polyols.
We produce a range of different isocyanates and polyether polyols. The
characteristics of a given polyurethane depend on both the raw materials used as
well as the precise proportion of each used in the mix.
Our customers use our isocyanates or polyether polyols, or both, to create
their own specific polyurethane formulations. In addition, upon request we
design and evaluate custom blends to meet specific customer requirements. When
we have perfected a formulation for a specific end product, we deliver the
components to the customer, which then combines them at its manufacturing site.
The customer receives a ready-to-use two-component system. The precise
formulation of each custom blend is proprietary.
53
Typical applications for which our customers use our polyurethane raw
materials include:
PRODUCT BRAND NAMES APPLICATIONS
------- ----------- ------------
Flexible polyurethane foams.......... Desmodur(R), Desmophen(R), Furniture, mattresses,
Arcol(R), Bayfit(R), automotive components,
Ultracel(R), Hyperlite(R), textiles, packaging, technical
Stylex(R) articles
Rigid polyurethane foams............. Desmodur(R), Desmophen(R), Construction, refrigeration,
Baymer(R), Baytherm(R), appliances, technical
Baynat(R) insulation, sports equipment,
automotive components
Polyurethane integral skin foams..... Arcol(R), Desmodur(R), Machine and apparatus
Desmophen(R), Baydur(R), engineering, furniture,
Bayflex(R), Bayflex(R) electrical and electronic
Footwear, Acclaim(R) equipment, sports and leisure
equipment, construction,
automotive components,
automotive components, shoes
and packaging
Polyurethane filling foams........... Desmodur(R), Bayfill(R) Automotive components
Polyurethane elastomers.............. Desmodur(R), Arcol(R), Machine and apparatus
Vulkollan(R), Baytec(R), engineering, automotive
Desmoflex(R), Acclaim(R) components, construction,
transportation, electrical
equipment, shoes, sports and
leisure equipment, sanitation
products
Filled/reinforced polyurethane
systems.............................. Baytec(R), Baypreg(R), Machine and apparatus
Baydur(R), Bayflex(R) engineering, automotive
components, construction,
transportation, electrical
equipment, shoes, sports and
leisure equipment, sanitation
products
Polyurethane and PIR casting
resins............................... Baydur(R), Baymidur(R), Electrical and electronic
Baygal(R), Blendur(R) equipment, tools
Binders.............................. Desmodur(R) Construction, furniture, noise
and thermal insulation of
plant, sports equipment,
foundry applications
MARKETS AND DISTRIBUTION
Europe and the NAFTA nations remain the primary markets for our
Polyurethanes business group, although Asia is growing in importance. We
estimate global annual growth rates in the polyurethane raw materials market at
5 to 7 percent for MDI, 2 to 4 percent for TDI and 4 to 6 percent for polyether
polyols. We believe that we rank number one in all three sectors of the market
worldwide.
54
The Polyurethanes business group's sales by region and total for the past
three years are as follows:
2000 1999 1998
----- ----- -----
(EUROS IN MILLIONS)
Europe...................................................... 1,218 984 999
North America............................................... 1,175 781 699
Asia/Pacific................................................ 394 198 165
Latin America/Africa/Middle East............................ 343 212 213
----- ----- -----
Total..................................................... 3,130 2,175 2,076
===== ===== =====
The following table sets forth the business group's sales for the last
three years, broken down by product type.
2000 1999 1998
----- ----- -----
(EUROS IN MILLIONS)
TDI......................................................... 583 446 435
MDI......................................................... 980 886 817
Polyethers.................................................. 1,226 529 524
Others...................................................... 341 314 300
----- ----- -----
Total..................................................... 3,130 2,175 2,076
===== ===== =====
For our customers' applications, there are no significant man-made or
natural substitute materials for flexible polyurethane foams. Polystyrenes offer
potential competition to rigid polyurethane foams where the application requires
materials in sheet or block form only. Polyurethane elastomers do compete with
other thermoplastic materials; decisive factors are costs of the finished part,
physical performance and fit with the production mix at the customer's site.
In the automotive area, there is constant competition between polyurethanes
and other polymers in many applications, except for seating and steering wheels,
due to required physical properties, costs, design or functional requirements.
On a worldwide level, the Polyurethane business group's sales are not
subject to significant seasonality. On the regional level, business can display
indirect seasonality where, for example, revenue depends on such seasonal
industries as construction and other outdoor applications. Because polyurethane
raw materials are easily transportable, however, we are able to ship materials
for use in other regions in the event of regional overcapacity.
The basic raw materials for isocyanates are toluene and benzene. The main
raw material for polyether polyols is propylene oxide, a derivative of
propylene. Toluene, benzene and propylene are common petrochemical products that
we typically purchase on the open market, as Bayer generally does not produce
petrochemicals. All of these raw materials are readily available commodities,
but they are subject to price fluctuation driven by, for example, changes in
world oil prices. With Bayer's recent acquisition of Lyondell's polyol business,
however, we have secured access to low-cost propylene oxide from Lyondell's
plants.
The Polyurethanes business group sells its products directly to customers
and, to a much smaller degree, through so-called "system houses" and traders.
System houses typically serve smaller-volume customers and may be either
independent companies or the subsidiaries of larger companies. It is our
strategy to systematically establish our own regional system houses.
To further increase efficiency along the supply chain, we are establishing
regional supply chain centers, replacing country-specific organizations, to fill
orders. Ultimately, we plan to have the regional supply chain centers balance
worldwide supply with regional demand.
Our main competitors are DOW, BASF and Huntsman.
55
RESEARCH AND DEVELOPMENT
The Polyurethanes business group focuses its research and development
activities on:
- reducing the thermoconductivity of rigid polyurethane foams;
- halogen-free flame retardants;
- halogen-free blowing agents;
- reduction of volatile components in polyurethane raw materials;
- new applications for polyurethanes and polyurethane raw materials; and
- optimizing costs and improving quality in production processes.
The business group's primary research and technical development facilities
are located in Dormagen and Leverkusen, Germany, Pittsburgh, Pennsylvania, and
South Charleston, West Virginia.
The main field of innovation in the polyurethane field is currently the
development of new or improved polyether polyol types and blends as well as new
processes. The business group concentrates its research and development efforts
with respect to aromatic isocyanates on improving existing products and
technologies for their manufacture.
We currently have various polyether polyol products in late stages of
development. We expect to launch these products during 2002. These products are:
PRODUCT/ BRAND NAME APPLICATION STATUS
------------------- ----------- ------
IMPACT polyols, continuous
process.......................... Flexible foam, integral skin foams, Market introduction
elastomers
COATINGS AND COLORANTS
OVERVIEW
Our Coatings and Colorants business group develops and markets a wide
variety of products that serve as raw materials for lacquers, coatings, sealants
and adhesives and colorants for plastics and building materials.
PRODUCTS
The following table lists the major products of the Coating and Colorants
business group.
BRAND NAME APPLICATIONS PRINCIPAL USERS
---------- ------------ ---------------
Resins
Desmophen.......................... Two component system Automotive, furniture and
plastics industries
Bayhydrol.......................... Water-based two component system Automotive, furniture and
plastics industries
Aliphatic isocyanates
Desmodur N......................... Two component system Automotive and plastics
industries
Bayhydur........................... Water-based two component system Automotive and plastics
industries
Crelan............................. Hardener for powdered lacquers Automotive industry
Aromatic isocyanates
Desmodur L......................... Hardener for lacquers Furniture and woodworking
Special raw materials
Impranil/Imprafix.................. System for coating textiles Textile industry
56
BRAND NAME APPLICATIONS PRINCIPAL USERS
---------- ------------ ---------------
Adhesive raw materials
Dispercoll......................... Water-based adhesive Shoe, furniture and
construction industries
Desmocoll.......................... Adhesive for melting Shoe, packaging and
furniture industries
Colorants
Bayferrox.......................... Inorganic colorant Lacquer and construction
industries
Macrolex........................... Organic colorant Plastics industry
Resins and Hardeners
Lacquers are formed through the combination of a resin with a hardener. We
offer our customers a variety of resins (e.g., Desmophen(R) and Bayhydrol(R))
and hardeners (e.g., Desmodur L(R), Desmodur N(R), Bayhydur(R), and Crelan(R)).
The variety of resins and hardeners in our product palette enables us to provide
custom-tailored solutions for a number of different applications. For example,
aliphatic isocyanate hardeners like Desmodur N produce lacquers that are
extremely weatherfast, and therefore suitable for the automotive industry.
Desmodur L, an aromatic isocyanate, produces lacquers well suited for use in the
furniture and wood industries and other areas where weatherfastness is not the
deciding factor. Our tailored solutions offer high technical quality together
with environmental sustainability. For example, our water-based two-component
polyurethane lacquer system Bayhydrol/Bayhydur received the Presidential Green
Chemistry Challenge Award from the U.S. Environmental Protection Agency in 2000.
Special raw materials
Our special raw material unit produces such specialty products as
Impranil(R)/Imprafix(R), our polyurethane coating systems for textiles.
Adhesive raw materials
Dispercoll(R) and Desmocoll(R) are our raw materials for adhesives. Their
primary users are shoe manufacturers, though we also have customers from the
automotive, furniture and building industries.
Colorants
Bayferrox(R) is our iron oxide-based colorant, available in a variety of
colors for a wide range of uses. For example, it imparts the characteristic
reddish tone of roofing tiles. Bayferrox is well-known in the building industry,
and gaining increasing popularity in the paint and lacquer industry as well.
MARKETS AND DISTRIBUTION
Our Coatings and Colorants business group is a major producer of raw
materials for lacquers and adhesives as well as of organic and inorganic dyes
and pigments. The primary ultimate end-users of our products are the automotive,
furniture and plastics industries; other users include the textile, shoe, paint
and building industries.
The business group's sales by region and total for the past three years are
as follows:
2000 1999 1998
----- ----- -----
(EUROS IN MILLIONS)
Europe...................................................... 934 886 827
North America............................................... 523 433 409
Asia/Pacific................................................ 311 257 177
Latin America/Africa/Middle East............................ 178 153 140
----- ----- -----
Total..................................................... 1,946 1,729 1,553
===== ===== =====
57
The following table sets forth the business group's sales for the last
three years, broken down by category of activity.
2000 1999 1998
----- ----- -----
(EUROS IN MILLIONS)
Resins...................................................... 211 185 171
Aliphatic isocyanates....................................... 543 469 440
Aromatic isocyanates........................................ 223 199 189
Special raw materials....................................... 161 141 136
Adhesive raw materials...................................... 240 212 188
Colorants................................................... 568 523 429
----- ----- -----
Total..................................................... 1,946 1,729 1,553
===== ===== =====
Our revenue is not subject to significant seasonality over the course of
the typical year. Some of the individual markets and regions that we serve
experience seasonal fluctuation, such as the building industry during the winter
months or southern Europe during the summer. All markets and regions taken as a
whole, however, produce relatively constant revenue throughout the year.
Temporary fluctuations in prices, such as the price of crude oil, can have
a significant effect on the cost of our raw materials. Nevertheless, because of
our broadly diversified supplier base and raw material mix, we are not
significantly dependent on any single raw material or supplier of raw materials.
We coordinate and carry out our sales and marketing from our head office in
Leverkusen, Germany, as well as through our various national subsidiaries. In
addition, e-commerce is becoming increasingly important in our marketing
activities. Our key account managers handle our globally active major customers
directly.
Especially important are our Centers of Expertise. Here we work together
with our customers to further improve the quality of our products and the
manufacturing processes of the customers who use them.
We regard the following companies as the chief competitors of our Coatings
and Colorants business group:
- Lacquer hardeners: Solutia;
- Aliphatic isocyanates: Rhodia;
- Organic pigments: Ciba and Clariant; and
- Inorganic pigments: Rockwood, formerly known as Laporte.
RESEARCH AND DEVELOPMENT
The Coatings and Colorants business group focuses its research and
development activities on developing new technologies for the production of our
lacquer resins as well as our aliphatic and aromatic isocyanates that are
environmentally friendly and sparing in their use of natural resources. We are
also exploring ways of reducing the amount of solvent needed for our aliphatic
isocyanates and optimizing the production of our iron-oxide based inorganic
pigments.
The business group's primary research and development facilities are
located in Leverkusen, Dormagen and Uerdingen, Germany and in Bushy Park, South
Carolina and Pittsburgh, Pennsylvania.
CHEMICALS
OVERVIEW
The Chemicals segment comprises the Basic and Fine Chemicals, Specialty
Products, Haarmann & Reimer, H.C. Starck and Wolff Walsrode business groups.
58
The following table shows the Chemical segment's performance for the last
three years.
2000 1999 1998
----- ----- -----
(EUROS IN MILLIONS)
External net sales.......................................... 4,275 3,630 3,682
Percentage of total sales (continuing operations)......... 14.9 15.4 17.0
Intersegment sales.......................................... 466 478 531
Operating result before exceptional items................... 442 411 484
Percentage of total operating result (continuing
operations)............................................ 12.4 13.1 15.4
No individual product is material to the revenue of the Chemicals segment
as a whole.
SEGMENT STRATEGY
The focus of our activities in the Chemicals segment is the further
improvement of our margins. We aim to achieve this goal by streamlining our
portfolio and by expanding our specialties, including by means of selected
acquisitions. Recent examples are H.C. Starck's acquisitions of the U.S.-based
CSM Holding, Inc. as well as our acquisition of the sizing and strength paper
chemicals business of Cytec Industries Inc., with which we expect to give our
Specialty Products business group access to the U.S. market for process
chemicals, thereby strengthening its global position in paper sizing agents. In
keeping with our strategy of focusing on our core activities, we sold our
subsidiary Bayer Solar GmbH to the SolarWorld group in October 2000. In December
2001, we announced plans to divest from the Haarmann & Reimer business group, as
we no longer consider it to be part of the Chemicals segment core activities.
In 2000, the Chemicals segment spent E470 million on capital expenditures.
We expect to invest E0.7 billion in the Chemicals segment in 2002. We plan to
expand H.C. Starck's tantalum production in Germany, the United States and Asia.
The segment's Wolff Walsrode business group plans to expand and modernize its
German methylcellulose and nitrocellulose facilities.
The Chemicals segment's broad research and development spectrum stretches
from fine chemicals for the electronics, pharmaceutical and agrochemical
industries through fragrances and flavors to metal powders.
BASIC AND FINE CHEMICALS
OVERVIEW
Our Basic and Fine Chemicals business group focuses on the development,
manufacture and marketing of a wide range of basic chemicals as well as a
growing range of high specification, customized fine chemicals for use in
advanced industrial sectors such as life sciences.
"Basic" chemicals are produced in bulk quantities using few synthesis
steps. Their raw materials are basic organic and inorganic substances (e.g.
benzene or sodium chloride). We produce most of our basic chemicals in
dedicated, continuous-process manufacturing plants using advanced technologies
to optimize production and quality.
"Fine" chemicals are high added-value, multi-step synthesis products made
to exact specifications by sophisticated and complex chemical synthesis
processes. Fine chemicals comprise two broad categories:
- multi-customer products, or "catalogue" products sold to more than one
customer; and
- single customer products, synthesized to the specifications of
individual customers. Production of our single-customer fine chemicals
often involves various levels of customer partnership as well as
custom-tailored research and manufacturing; typical examples are life
science intermediates for the pharmaceutical and agrochemical
industries.
59
PRODUCTS
The following table lists the major products of the Basic and Fine
Chemicals business group.
PRODUCT APPLICATIONS PRINCIPAL USERS
------- ------------ ---------------
Basic Chemicals
Benzene derivatives Toluene Basic chemicals for a wide Chemical industry, automotive
derivatives Aliphatic compounds range of industries and for industry, building industry,
Electrolysis products Inorganic use in many different etc.
acids applications, e.g. plastics,
coatings, pigments, metallurgy
Fine Chemicals
Photographic chemicals Photographic couplers Photographic industry
Electronic chemicals Chip planarization, conductive Electronics industry
polymers
Biodegradable polymers Water treatment, detergents, Specialty chemical industry
cleaners
Life science intermediates Pharmaceuticals, Life science industry
agrochemicals, animal health
care
The product range of the Basic and Fine Chemicals business group contains
approximately 2,700 individual products and articles for thousands of
applications.
MARKETS AND DISTRIBUTION
The business group's principal markets are industrial intermediates, custom
manufacturing and fine chemicals for the photographic, electronics and life
science industries.
The business group's sales, by region and total, for the past three years
are as follows:
2000 1999 1998
----- ----- -----
(EUROS IN MILLIONS)
Europe...................................................... 622 560 611
North America............................................... 194 184 195
Asia/Pacific................................................ 129 86 63
Latin America/Africa/Middle East............................ 61 56 76
----- ----- -----
Total..................................................... 1,006 886 945
===== ===== =====
The following table sets forth the business group's sales for the last
three years, broken down by category of activity.
2000 1999 1998
----- ----- -----
(EUROS IN MILLIONS)
Fine chemicals.............................................. 286 190 201
Industrial intermediates.................................... 293 262 258
Life science intermediates.................................. 219 253 247
Inorganic basic chemicals................................... 208 181 239
----- ----- -----
Total..................................................... 1,006 886 945
===== ===== =====
Our Basic and Fine Chemicals business group is not subject to significant
seasonality. Basic chemicals are more strongly influenced by fluctuations in raw
material prices (e.g. toluene, benzene) than are fine chemicals, primarily
because our basic chemical operations make greater use of petrochemicals, whose
price is driven by changing oil prices.
We market the products of our Basic and Fine Chemicals business group
primarily through Bayer's worldwide network of trading companies and agencies,
with their specialized and experienced salespeople.
60
The business group's chief competitors in the various industrial
intermediates segments are Solutia, Clariant, BASF and Tessenderlo. In various
fine chemicals segments, we compete against Lonza, DSM, Clariant and Rhodia.
RESEARCH AND DEVELOPMENT
The Basic and Fine Chemicals business group's focus on research and
development is twofold. In the field of bulk chemicals, our priority is the
improvement of the manufacturing process of industrial intermediates. In life
science intermediates, electronic chemicals and biodegradable polymers, we
concentrate both on improving the manufacturing process and on developing new
technologies and applications.
The business group's primarily research and development facilities are
located in Leverkusen, Germany.
SPECIALTY PRODUCTS
OVERVIEW
Our Specialty Products business group develops and markets specialized
compounds for use in various industries. In contrast to other chemicals business
lines, these products typically display a high degree of "custom tailoring",
being developed to address specific needs of their users. Specialty Products
serves a broad range of industries, including textile and paper manufacture;
leather, plastic and wood products; agricultural products; pharmaceuticals; and
water treatment.
PRODUCTS
Specialty Products offers its customers thousands of compounds designed to
fulfil their specific needs. We have a variety of broad product families, each
of which contains several product lines. Each product line represents numerous
individual compounds that are related as to general chemical composition and
area of function. The following table lists our major product families and the
primary industries and applications they serve.
PRODUCT FAMILIES SAMPLE PRODUCT LINES PRIMARY USES
---------------- -------------------- ------------
Textile processing chemicals......... Solvents, multiple repellents, Textile industry
softeners, binders,
thickeners, wetting agents
Special dyes......................... Special formulations of dyes Ink-jet printing; paper
and organic pigments coatings
Synthesis chemicals and additives.... Sulfur and phosphorus-based Pharmaceutical, agrochemical
chemicals and cleanser manufacturers
Leather chemicals and dyes........... Tanning agents, dyes and Leather industry
pigments, finishing and
coating products
Paper colorants, whiteners,
processing chemicals................. Whiteners, dyes and pigments, Paper industry
strengthening and sizing
agents
Polymer additives.................... Flame retardants, Plastics, PVC and polyurethane
plasticizers, additives industries
Biocides and material protection..... Wood protectants, Personal care products; food
disinfectants, industrial and beverage preservation;
preservatives wood disinfecton and
industrial preservation
61
PRODUCT FAMILIES SAMPLE PRODUCT LINES PRIMARY USES
---------------- -------------------- ------------
Ion exchange resins and water
treatments........................... Ion exchange resins; scale and Water and wastewater treatment
corrosion inhibitors and environmental protection;
water cooling and heating
systems; industrial cleaners;
chemical synthesis
MARKETS AND DISTRIBUTION
The specialty chemicals market is a wide-ranging field of activity
characterized by broad and heterogeneous market segmentation. Market
participants range from small and medium-sized local suppliers to
globally-active multinational concerns. In recent years this market has been
undergoing a phase of consolidation, with participants exhibiting
rapidly-changing organizational structures and product portfolios as a result of
heavy mergers and acquisition activity. We believe that this business group's
products are, because of their specialized nature, less subject to
commoditization than many other chemical products, and that Specialty Products'
profit margins are therefore less subject to downward pressure than are those of
many other participants on the broader chemicals market.
Our Specialty Products business group is a globally active supplier of a
broad range of high-performance specialty chemicals with a primary focus on
individual customer requirements. The business structure is based on a worldwide
network of local subsidiaries supported by regional centers, and production
sites located in five continents. We have committed an experienced sales force,
supported by specially trained technicians, to assist our customers in creating
tailor-made solutions and to provide them with the commercial and technical
assistance they require.
The business group's sales by region and total, for the past three years
are as follows:
2000 1999 1998
----- ----- -----
(EUROS IN MILLIONS)
Europe...................................................... 607 565 560
North America............................................... 239 204 199
Asia/Pacific................................................ 257 210 192
Latin America/Africa/Middle East............................ 209 170 165
----- ----- -----
Total..................................................... 1,312 1,149 1,116
===== ===== =====
The following table sets forth the business group's external sales for the
last three years, broken down by category of activity.
2000 1999 1998
----- ----- -----
(EUROS IN MILLIONS)
Textile, paper and leather chemicals........................ 891 782 760
Polymer additives, material protection, ion exchange resins
and
water treatment chemicals................................. 421 367 356
----- ----- -----
Total..................................................... 1,312 1,149 1,116
===== ===== =====
The market for specialty chemicals is not generally subject to seasonality.
Fluctuations in the business cycle and rising oil prices affect this market to a
lesser degree than they affect the market for basic chemicals.
Specialty Products acquires a major part of the raw materials it uses
internally, from other companies of the Bayer Group. There are typically
multiple sources for the rest of its raw materials; we purchase these from
suppliers worldwide, usually under long-term contracts. The Specialty Products
business has not historically been affected by shortages; rising oil prices have
thus far had a moderate impact on production cost.
62
We regard Avecia, BASF, Ciba Specialty Chemicals, Clariant, Rhodia and
(except in leather chemicals; see below) Rohm & Haas as significant competitors
across a number of the Specialty Products business group's activities.
Additional competitors in specific areas are Atochem (synthesis chemicals and
additives), TFL (leather dyes and chemicals), Hercules (paper dyes and
chemicals), Great Lakes (polymer additives), Lonza (material protection) and Dow
Chemical and Purolite (ion exchange resins). We have entered into a world-wide
cooperation with Rohm & Haas under which we have assumed marketing and logistics
responsibilities for Rohm & Haas's leather chemical products.
RESEARCH AND DEVELOPMENT
The Specialty Products business group focuses its research and development
activities on:
- new products for the textile industry;
- high-performance data storage media for information technology;
- improved ion exchange resins for waste treatment and metal recovery;
- new surface sizing agents for the paper industry;
- new biocides for material protection; and
- environmentally friendly formulations of products for the paper and
leather industries.
The business group's primary research and development facilities are
located in Leverkusen, Germany; Ede, the Netherlands; and Woodbridge,
Connecticut.
We currently have approximately 160 products in late stages of development.
We expect to launch these products during 2002 and 2003.
HAARMANN & REIMER
OVERVIEW
Our Haarmann & Reimer business group develops and markets flavors,
fragrances, aroma chemicals and cosmetic ingredients for use in beverages,
foodstuffs, household goods, fine fragrances, personal care products and
cosmetics. The primary operator of the business group is our wholly-owned
subsidiary, Haarmann & Reimer GmbH, assisted by other members of the Bayer
Group. As discussed under "Segment Strategy", we intend to divest from this
business group as it is no longer considered part of the segment's core
activities.
PRODUCTS
The following table lists Haarmann & Reimer's major products.
PRODUCTS APPLICATION PRINCIPAL USERS
-------- ----------- ---------------
Flavors.............................. Foodstuffs, beverages, Food and beverage producers
confectionary products,
chewing gum, pharmaceutical
products
Fragrances........................... Perfumes and related products, Manufacturers of fragrances
personal care products, and personal care products
household products,
Aroma Chemicals and Cosmetic
Ingredients
Menthol.............................. Oral care products, chewing Manufacturers of oral and
gum, pharmaceuticals personal care products; food
producers
Neo-Heliopan......................... Sunscreens Manufacturers of skin
protection and cosmetic
products
63
Flavors are compounds of natural and artificial ingredients to impart a
flavor to, or enhance the flavor of, foodstuffs and beverages. Haarmann & Reimer
offers several thousand individual products, most of them tailor-made for the
requirements of its customers in the food and consumer goods industry. H&R's
customer markets fall into five broad categories, along which lines H&R has
organized its flavor business. These categories of flavorings, and the products
for which they are primarily used, are:
- Sweet (confectionery products, chewing gum, baked goods, pharmaceutical
products);
- Dairy (yogurt, ice cream, other dairy products);
- Savory (snacks, soups, sauces, other convenience foods);
- Beverages (soft drinks, fruit juices, alcoholic and other beverages);
and
- Fillings (cakes, other baked goods).
Fragrances are compounds of natural and synthetic ingredients to determine
or improve the aroma of consumer goods. H&R offers tens of thousands of
fragrance products, most of them tailor-made for the requirements of its
customers in the consumer goods industry. H&R organizes its fragrance business
into four business units; these units, and the products in which their products
are primarily used, are:
- Fine Fragrances (perfumes, eaux de toilette, extraits);
- Personal Care (soaps, shampoos, other body care products);
- Household (fabric care, air fresheners, surface care, other household
goods); and
- Mint (including Optamint(R) and similar compounds) (toothpaste, other
oral care products).
Aroma Chemicals and Cosmetic Ingredients (ACC). Aroma chemicals are
molecules with a distinctive fragrance and/or flavor. H&R sells aroma chemicals
both internally to companies within the Bayer Group and to third parties for use
in compounding flavors and fragrances. Cosmetic ingredients are organic
chemicals that provide functionality and stability for cosmetics and other
personal care products. The primary products of H&R's ACC business are:
- Menthol Products. H&R has produced menthol synthetically since 1974.
Menthol gives a fresh, minty taste to such consumer goods as toothpaste,
other oral care products, chewing gum, pharmaceuticals, personal care and
household goods. H&R's major competitors in menthol production are Takasago,
which produces synthetic menthol by a different process, and producers of
natural menthol in China and India. The Bayer Group uses menthol internally,
primarily in H&R's Optamint(R) compounds. H&R also markets its menthol
products to third parties, including other producers of flavors and
fragrances, consumer goods companies with their own compounding facilities,
and pharmaceutical companies.
- Neo Heliopan(R). H&R's Neo Heliopan(R) brand products are chemicals that
act as sunscreen agents in such products as suntan lotion, bronzers and
other cosmetic products. These chemicals protect the skin against the sun's
rays for a certain length of time, as indicated by the individual product's
"SPF factor". Major competitors of H&R's Neo Heliopan(R) product line are
BASF and Hoffmann LaRoche.
MARKETS AND DISTRIBUTION
Haarmann & Reimer is active in the flavor and fragrance industry worldwide.
Haarmann & Reimer GmbH and 20 other Bayer subsidiaries in 20 countries make up
the business group. The busines group also maintains sales offices in 29 further
countries and has several sales agencies in smaller markets.
64
The business group's sales by region and total, for the past three years
are as follows:
2000 1999 1998
---- ---- ----
(EUROS IN MILLIONS)
Europe...................................................... 377 363 377
North America............................................... 189 159 236
Asia/Pacific................................................ 136 111 81
Latin America/Africa/Middle East............................ 163 142 138
--- --- ---
Total..................................................... 865 775 832
=== === ===
The following table sets forth the business group's sales for the last
three years, broken down by category of activity.
2000 1999 1998
---- ---- ----
(EUROS IN MILLIONS)
Flavors..................................................... 357 325 301
Fragrances.................................................. 324 286 271
ACC......................................................... 182 160 155
Other....................................................... 2 4 105
--- --- ---
Total..................................................... 865 775 832
=== === ===
Haarmann & Reimer's business is not subject to significant seasonality.
The flavor and fragrance business demands a great variety of raw materials.
Suppliers include chemical producers e.g., (BASF, Clariant, Rhodia), flavor and
fragrance competitors (Firmenich, Givaudan, International Flavors and
Fragrances), food companies (Danisco, Nestle, Unilever) and producers and
distributors of natural materials, mainly essential oils (Adrian, Polarome,
Todd).
Approximately 25 percent by value of H&R's raw material purchases are
natural products, therefore dependent on crops and their yields. We believe that
H&R's major competitors face a similar risk.
H&R divides responsibility for sales and marketing among its 21 national
companies and 29 national sales offices. It operates a global key account
management for major international customers. The flavors and fragrances
business is organized on regional lines in North America, Europe (also covering
Africa and the Middle East) and South-East Asia (also coordinating Japan and
Greater China). We expect South America to join this regional system during
2001. The ACC business is organized on global lines.
Our major competitors by size of turnover are International Flavors and
Fragrances, Givaudan, Quest and Firmenich.
RESEARCH AND DEVELOPMENT
Haarmann & Reimer focuses its research and development activities on:
- the extension of the mint product line, making full use of in-house
menthol technology;
- new molecules enhancing the flavor, aroma and quality of our customers'
products;
- added-value benefits for existing products (e.g., longer-lasting
presence on material or skin);
- biodegradable macrocyclic musk products; and
- controlled release of flavors and fragrances.
The business group's primary research and development facilities are
located in Holzminden, Germany, Paris, France and Teterboro, New Jersey.
65
H.C. STARCK
OVERVIEW
Our subsidiary H.C. Starck GmbH develops, produces and markets metallic and
ceramic powders and mill products for various markets and applications.
Headquartered in Goslar (Germany), H.C. Starck has subsidiaries and production
sites in Germany, the United States, the United Kingdom, Canada, Japan and
Thailand. In a major expansion in November 2000, H.C. Starck acquired CSM
Holding, Inc., bringing the group seven new production sites, primarily for
molybdenum and tungsten products. In November 2001 we also created H.C. Starck
Ceramics GmbH & Co. KG from the merger of our existing industrial ceramics
subsidiary with TeCe Technical Ceramics of Selb, Germany, which we had acquired
in January 2001. In January 2002, we expect to concentrate all of Bayer's
electronic chemicals business in the H.C. Starck business group.
PRODUCTS
The following table lists H.C. Starck's major products.
PRODUCT APPLICATIONS PRINCIPAL USERS
------- ------------ ---------------
Metallic products
Metal powders (tungsten, molybdenum, Intermediates for hard Metal working and
tantalum, niobium, rhenium, cobalt, nickel) metals, diamond tools, processing, metallurgical,
and their compounds (carbides, oxides, lamp filaments, production tool, mill product,
silicides, nitrides, etc.) of mill products, lighting, medical
capacitors and other equipment, optics,
electronic components, chemical and electronics
additives for optical industries
lenses
Ampergy Nickel hydroxide and Battery manufacturers
cobalt suboxide
intermediates for
rechargeable batteries
Molyform Solid molybdenum disulfide Lubricant and automotive
Lubriform lubricants industries
Amperkat Tungsten, molybdenum and Chemical industry
nickel chemical catalysts
Amperit Thermal spray powder for Machine tool and
thermal coatings, wear aeronautical industries
resistance, thermal
insulation
Tungsten, molybdenum and tantalum mill Construction parts and Chemical process,
products wire electronics, medical and
aircraft industries
Ceramic products
Ceramic powders Intermediates for advanced Advanced ceramics industry
ceramics
Ceramic parts Parts for machine Machine tool and metal
construction and for processing industry
handling molten metal
Metallic products
We produce a wide range of powders, mill products and semi-finished goods
from such metals as tungsten, molybdenum, tantalum and niobium and their various
compounds (e.g., carbides and oxides) for our industrial customers. Our
customers use these products in making machine tools, electrical components, and
a variety of specialized products, from medical devices through lamp filaments
to optical lenses.
Battery intermediates
Ampergy(TM) is our trade name for our nickel hydroxide and cobalt suboxide
battery intermediates. Our customers in the electrochemical industry use Ampergy
in making rechargeable batteries for modern communications devices as well as in
large-scale industrial batteries.
66
Metallic chemical products
Molyform(R) powders are our molybdenum disulfide solid lubricants. We
market a range of powdered lubricants, such as boron nitride and tungsten
disulfide, under the brand name Lubriform(R). Our customers use these compounds
in producing lubricants; in addition, the automotive industry uses Molyform in
manufacturing brake linings.
Amperkat(R) is the trade name for our line of tungsten, molybdenum and
nickel-based chemical catalysts. The chemical industry uses these products in,
among other things, plastics production, hydration processes and the
desulphurization of exhaust gases in coal-burning power stations.
Thermal spray powders
Amperit(R) is the trade name of our line of thermal spray powders. These
are metallic powders that our customers apply to their products with an intense
flame, melting the powder. This process creates a protective layer whose
characteristics (e.g., stress protection, thermal insulation) depend on the
composition of the specific powder. Our Amperit customers are primarily from the
machine tool and aeronautics industries.
Ceramic products
Because of their resistance to aggressive substances, high mechanical
durability and low weight, advanced high-performance ceramic materials are
increasingly replacing metals in various industrial uses. We produce a broad
range of component intermediates for use in the creation of these new advanced
ceramics.
MARKETS AND DISTRIBUTION
The world tungsten market is marked by growing consumption. The hard metals
market in the United States and Japan, however, is declining. Although the
market for battery intermediates continues to be marked by disproportionate
growth, extreme competition in nickel hydroxide is currently causing a dramatic
price decrease. However, we do not believe this phenomenon will affect the
growth of our newly-developed nickel dihydroxide and lithium nickelate
intermediates.
Beginning in 1999, the mobile communications, computer, entertainment and
automotive industries fuelled a rapid increase in demand for passive electronic
components (e.g., capacitors and surface filters) made from tantalum, niobium
and ceramic. To answer this increased demand, manufacturers increased their
capacities significantly during 2000. This increase caused a corresponding
increase in demand for our metallic powders, especially tantalum, during the
first half of 2001. More recently, however, the worldwide electronics market has
weakened significantly, leading to decreases in sales of these metals. We cannot
predict when this market may recover, in part because the business cycle in the
electronics industry is becoming ever shorter.
Although growth in the demand for ceramic products has been steady, strong
competitive pressure has seriously depressed prices. We expect that the market
for the ceramic parts produced by our subsidiary H.C. Starck Ceramics will
continue to grow steadily across all segments for the foreseeable future,
occasionally showing rapid growth.
The business group's sales by region, as well as its overall sales, for the
past three years are as follows:
2000 1999 1998
---- ---- ----
(EUROS IN MILLIONS)
Europe...................................................... 280 193 185
North America............................................... 143 109 102
Asia/Pacific................................................ 196 106 75
Latin America/Africa/Middle East............................ 46 27 21
--- --- ---
Total..................................................... 665 435 383
=== === ===
China is the primary source for the raw materials for tungsten products.
During some periods in the past, China limited production, causing a shortage of
these materials. We have our own tungsten chemical and
67
recycling facilities, however, and are therefore only partly dependent on
Chinese imports and do not bear the full brunt of raw material price increases.
Our acquisition of CSM Holding substantially strengthened our procurement
channels for molybdenum raw materials.
H.C. Starck has its own internal sales organization in Europe, the United
States and Japan, its most important markets. In addition, we have liaison
offices for Scandinavia, the Benelux countries, France and the United Kingdom
that maintain direct contact with our customers. We also have a liaison office
in Singapore for the South-East Asia region. We expect to open a new liaison
office in Italy in early 2002. In other countries we either rely on the
Bayer-wide sales organization or use third-party sales agents.
We regard the following companies as our chief competitors:
- Metallic products: Bergla, Cabot Group (including its associated joint
ventures), Molymet, OMG, Osram Sylvania, Union Miniere;
- Battery intermediates: OMG, Tanaka;
- Chemical catalysts: Activated Metals, Degussa, Grace;
- Ceramic products: ACC, Denky Kagaku, SB Boron; and
- Thermal spray powders: Praxair, Sulzer Metco, Woka.
RESEARCH AND DEVELOPMENT
H.C. Starck focuses its research and development activities on innovative
new products and system solutions for future markets.
For example, we are currently developing high-capacity tantalum and niobium
powders as intermediates for capacitors and high-purity tantalum and niobium
compounds for electroceramics and surface acoustic wave filters in computers and
mobile telephones. H.C. Starck is also strongly committed to developing
materials for the fast-growing markets for secondary batteries, fuel cells and
other applications in the fields of energy storage and power generation. We
expect that, by 2004, approximately 60 percent of our product palette will
consist of new products.
The business group's primary research and development facilities are
located in Germany, the United States (tantalum products) and Japan (tantalum
products and battery intermediates).
We currently have four products in late stages of development, and expect
to begin their launch in 2002. These products are:
PRODUCT/ BRAND NAME APPLICATION
------------------- -----------
Niobium powder.............................................. Capacitors
High-capacity tantalum powder............................... Capacitors
Alternative (ferrous, nickel, cobalt) binders............... Diamond tools and hard metals
Lithium mixed metal oxide................................... Li-ion and Li-polymer batteries
WOLFF WALSRODE
OVERVIEW
The primary operator of our Wolff Walsrode business group is Wolff Walsrode
AG, our wholly-owned subsidiary, assisted by other companies of the Bayer Group.
The business group develops and markets cellulose derivatives, primarily for use
as additives in building materials, as binders in industrial coatings and inks,
and as additives in pharmaceuticals, food and health care products, as well as
various plastic films for packaging and technical applications. With effect from
June 1, 2001, we sold Covexx, an indirect subsidiary. Covexx had been
responsible for our former Combithen and Combitherm food packaging film lines.
68
PRODUCTS
The following table lists Wolff's major products.
BRAND NAME APPLICATIONS PRINCIPAL USERS
---------- ------------ ---------------
Cellulose Derivatives
Walocel M.......................... Additive for building Producers of tile adhesives,
materials mortars, paints, plasters and
others
Walsroder NC....................... Binder for coatings and inks Producers of industrial
(nitrocellulose) coatings,
inks for flexible packaging,
nail varnishes and others
Walocel C.......................... Additive for pharmaceuticals, Producers of oral care
tooth care products, food and products, food and drug
industrial uses and products compounders, textile, paper
and oil drilling companies
Plastic films
Walothen........................... Food packaging Converters, food producers
Walopur............................ Sound insulation Automotive industry
Walotex............................ Breathable films Textile industry
Walsroder.......................... Sausage casing Meat packers
Cellulose Derivatives
Walocel M is composed of methylhydroxyethylcellulose (MHEC) or
methylhydroxypropylcellulose (MHPC). It is an additive that regulates moisture
balance and improves the workability and adhesion of such building materials as
tile adhesives, plasters, mortars and dispersion paints. Wolff began production
of Walocel M in 1959. Our growth has outstripped that of the market as a whole;
based on our internal market studies, we believe we currently rank number three
worldwide. We believe that the market for Walocel M has good growth potential,
due to both the variety of Walocel M's applications and the expansion of modern
building techniques that use industrially premixed materials, whether in new
building construction or in maintenance and renovation. Wolff is investing in
the expansion of its production capacity.
Walsroder NC is a nitrocellulose (NC) for industrial applications. It
serves in resin form in wood coatings and other industrial coatings as well as
in printing inks for flexible packaging; it is also used as a component of nail
polish and other specialty items. Production began in 1878. Despite its long
history, NC has excellent properties and its market continues to grow. According
to our internal estimates, Wolff occupies the number two position worldwide and
is the market leader in Europe. We are increasing capacity to match the growth
in customer demand, and investing in modern and safe production processes.
Walocel C is a high purity carboxymethylcellulose (Na-CMC), produced since
1950, with such properties as high water retention, pH- and temperature
stability, clear solubility and compatibility with other hydrocolloids. Walocel
C is used primarily as a thickener and binder in aqueous systems. It is also
effective as a stabilizer and additive for improving consistency. It is useful
in a wide variety of applications, from pharmaceuticals, dairy products and
toothpaste to such technical uses as ceramics compounding, textile and paper
manufacture and oil drilling. The markets of Na-CMC are varying in development;
it is primarily the regulated markets that show good growth rates. It is in
these markets that we have been steadily increasing our market share with the
Walocel CRT-A line for pharmaceuticals, tooth care products and foodstuffs.
Plastic films
Walothen is a class of BOPP (biaxially-oriented polypropylene) films for
food and cigarette packaging and paper lamination.
69
Walopur is a class of thermoplastic polyurethane films with high
elasticity, mechanical strength and resistance against chemicals. Our customers
use Walopur in automobile engines and for many other technical applications.
Walotex is a membrane film for textile lamination. It permits water vapor
transmission through the textile, making the textile "breathable".
Walsroder is a fibrous cellulose and plastic casing for the production of a
wide range of sausages.
MARKETS AND DISTRIBUTION
With its cellulose derivatives, Wolff competes in the building materials,
industrial coatings, flexible packaging ink and life sciences markets as well as
in specialized industrial fields. We market our plastic films primarily for use
in food packaging, including sausage casings, and for technical applications in
the automotive and textile industries.
The business group's sales by region and total, for the past three years
are as follows:
2000 1999 1998
---- ---- ----
(EUROS IN MILLIONS)
Europe...................................................... 295 293 323
North America............................................... 76 55 48
Asia/Pacific................................................ 19 14 12
Latin America/Africa/Middle East............................ 37 23 23
--- --- ---
Total..................................................... 427 385 406
=== === ===
The following table sets forth the business group's sales for the last
three years, broken down by category of activity.
2000 1999 1998
---- ---- ----
(EUROS IN MILLIONS)
Cellulose derivatives....................................... 195 166 158
Plastic films............................................... 229 216 245
Other....................................................... 3 3 3
--- --- ---
Total..................................................... 427 385 406
=== === ===
Wolff generally conducts direct sales operations in Germany and the United
States for its cellulose products and in Germany for its plastic films. Outside
these areas, we ordinarily sell through Bayer's worldwide sales organization,
although we do sometimes use independent distributors.
The main raw material for our cellulose derivatives is chemical-grade
cellulose derived from wood pulp. Because pulp producers have been expanding
capacities in recent years, we have not had any significant problems with
availability. The raw materials for our plastic films include polyethylene,
polypropylene, Nylon 6, polyurethanes and printing inks. As there is a wide
number of suppliers for these raw materials, availability is not generally
problematic. Polymers, however, can be subject to price volatility caused by
fluctuation in the price of oil.
Because many of its customers are producers of building materials, our
cellulose derivatives business has traditionally been subject to seasonality
tied to the seasonality of the building trade. Our sales outside Europe,
however, have tended increasingly to balance this effect. Although our plastic
films business is not generally seasonal, our sales of Walsroder sausage casings
are strongest in autumn.
Our chief competitors in the cellulose derivatives business are Hercules
(Aqualon), Dow, Clariant, Bergerac NC/SNPE, NEC/ICI, TNC, Nitroquimica
Brasileira, Noviant and Akzo. In the plastic films business, our main
competitors are Exxon Mobil (BOPP films), Alusuisse (converted films), J.P.
Stevens (TPU films) and Kalle Nalo (sausage casings).
70
RESEARCH AND DEVELOPMENT
Wolff Walsrode focuses its research and development activities on cellulose
derivatives for applications in construction materials, coatings,
pharmaceuticals, food and cosmetics and on high-performance films from synthetic
polymers for packaging and technical applications.
In addition to conducting research and development for its own core
businesses, Wolff Walsrode is the Bayer Group's competence center for cellulose
chemistry. Cellulose is a natural product made from renewable materials. It is a
significant research and development challenge to convert this substance into
Wolff's derivative specialty products while continually improving production
processes. In response, Wolff has created a new polysaccharide pilot plant
facility to serve as an interface between the laboratory, manufacturing and the
market.
Wolff's primary research and development facilities are in Bomlitz,
Germany, near its traditional home base of Walsrode. In addition, we carry out a
portion of the application development work for our films business in South
Deerfield, Massachusetts. We currently have eight products in late stages of
development. We expect to launch these products in 2002. These products are:
PRODUCT/ BRAND NAME APPLICATION STATUS
------------------- ----------- ------
New Walocel M additive (based on methyl
cellulose)................................ High performance tile adhesives Pilot plant, application
testing
New Walocel M additive (based on methyl
cellulose)................................ Joint compounds (wall board Pilot plant, application
setting) testing
New grade of methyl cellulose............. Formulation of pharmaceuticals Pilot plant, application
testing
Very high viscous carboxymethyl cellulose
(Walocel C)............................... Additives for pet food Pre-marketing
Phthalate-free plastified
nitrocellulose............................ Wood coatings and printing inks Pre-marketing
Free-flowing nitrocellulose............... Wood coatings and printing inks In market introduction
Breathable membrane films based on
polyurethanes............................. Textiles, leisurewear Pre-marketing
High-strength polyurethane films.......... Automotive airbags In market introduction
71
RESEARCH AND DEVELOPMENT
Bayer's research and development effort has a threefold structure. Each of
our business groups (or segments, in the case of segments consisting of a single
business group) bears the primary responsibility for its research and
development activities. See the descriptions of the individual businesses above
for a discussion of their specific research and development focus as well as
their new product pipelines. Our Central Research division complements the
activities of the various businesses. Finally, we supplement our internal
research with a variety of external cooperations. These may be relatively simple
and small scale. For example, all of our business groups may from time to time
commission scientists at a university or research institute to carry out
specific experiments and report their findings. On the other hand, these
cooperations can be complex and of long term. Specifically in the life sciences,
we have built up a structure of external research partnerships that, taken as a
whole, is a significant part of our life sciences research and development
effort.
CENTRAL RESEARCH
Although each business group conducts independent research and development,
the Central Research service division is one element of Bayer's commitment to
technical leadership.
Spread across three facilities at Bayer sites in Leverkusen, Dormagen and
Uerdingen, Germany, approximately 1,400 Central Research employees -- including
some 300 scientists, engineers, and technicians -- work to provide all our
businesses with technical innovations for their future-generation products,
processes, and services. Central Research conducts early-stage research on
products and processes as yet too new for applied use by the business groups.
Central Research develops promising new ideas to the stage at which the business
groups' research and development teams can put them to use.
Our Central Research professional staff comprises virtually all major
scientific and engineering disciplines. This diversity of talent enables Central
Research to quickly assemble large, multidisciplinary research and development
teams to tackle complex projects and serve as a knowledge hub for the entire
Bayer Group.
RESEARCH COLLABORATIONS
To supplement our internal research and development efforts, we have
established an integrated program for collaborations with research-oriented
firms as well as with international key technology leaders. Focusing primarily
on the life sciences, and especially on pharmaceuticals research, our research
collaboration program brings together over 20 major research partners to create
a pool of expertise covering the entire research cycle, from discovery of
disease-causing mechanisms through characterization of new active compounds to
identification of a novel development candidate. We regard research
collaboration as indispensable for delivery of a continuous flow of innovative
human and animal drug and crop protection product development candidates.
The following table illustrates the phases of the typical life
sciences/pharmaceutical research cycle, the various disciplines and techniques
involved and the partners that provide us with active assistance in our research
efforts.
RESEARCH CYCLE DISCIPLINE / TECHNIQUE PARTNERS
-------------- ---------------------- --------
Understanding the disease mechanism; Genomics (mapping the Millennium; Genome
identifying new targets for expression of a gene in an Therapeutics; Incyte;
pharmaceutical research; designing organism or tissue); Affymetrix; CuraGen; Oxford
the new molecular target Functional genomics Glycoscience
(functional analysis of
genetic data);
Proteomics (mapping protein
expression and function in an
organism or tissue)
Bioinformatics (applying the LION Bioscience; Incyte
tools of information
technology to biological data
analysis)
72
RESEARCH CYCLE DISCIPLINE / TECHNIQUE PARTNERS
-------------- ---------------------- --------
Screening the candidate substances High throughput screening, or CyBio; Novalon; Greiner
HTS (rapid, automated testing
of compounds for potential
effectiveness against a given
target)
Optimizing the lead compounds Pharmacophore informatics LION Bioscience
(linking chemical and
biological data to increase
the probability of success
for screening hits and lead
compounds)
Toxico-CuraGen/Pharmacogeno
mics (increasing the quality
and probability of success of
drug candidates)
Increasing the pool of potential drug Combinatorial chemistry/ ArQule; ComGenex; Oxford
candidates by small-chemical Substance synthesis Asymmetry; Genzyme
molecules and macromolecules (techniques for increasing
(proteins, peptides) the number and diversity of
test compounds)
Pool of Bayer biomolecules Genzyme; Morphosys
(e.g., soluble proteins,
monoclonal antibodies)
In recent years we have created a framework of research collaborations to
which we have committed expenses totalling approximately E1 billion. This
investment has given us access to more than one million substances; the HTS
technologies that we developed in collaboration with our partners enable us to
screen more than 200,000 substances for a given target in a single day.
Three of our partnerships -- those with Millennium, LION Bioscience and
CuraGen -- are of particular importance. Although our relationship with each of
our individual research partners is important to us, it is the cooperative
structure as a whole that is a key element of our strategy. With the exception
of the three cooperations mentioned above, we do not regard our arrangements
with any single partner as material from a financial or business perspective for
the Bayer Group as a whole.
MILLENNIUM
Through our cooperation agreement with the Cambridge, Massachusetts based
Millennium Inc., we have created what we believe to be the world's biggest
collaborative effort to use the tools of genomics to identify new drug targets.
Through this collaboration, we expect Millennium to provide us with 225
disease-relevant proprietary target genes and approximately 100 complete assay
systems for high throughput screening. Our goal in this collaboration is to
produce approximately 30 development candidates for new treatments in areas
relevant to Bayer's pharmaceutical research.
The search for new targets begins in giant libraries of cDNA, molecular
copies of the genetic information contained in the cell nucleus. Millennium uses
DNA chips to analyse the expression of genes in healthy and diseased tissue.
Millennium performs a complete sequence analysis of the genes presumed to be
involved in the disease process (i.e., those expressing themselves differently
in diseased tissue) and their tissue distribution pattern. The proteins that
these genes code for become our targets; HTS assays then test multiple hundreds
of thousands of compounds for effectiveness against these targets. We believe
that the intellectual property we gain through this process gives us a
significant competitive advantage.
We expect to expense a total of up to $465 million in our collaboration
with Millennium. This amount reflects our $96 million equity investment in the
company as well as a five-year, performance-dependent research agreement for the
identification of potential drug targets and screening assays. This agreement
has a maximum value of $369 million, consisting of an initial $44 million
payment for technology transfer at the commencement
73
of the collaboration and yearly payments thereafter in an aggregate amount of up
to $325 million. The agreement is scheduled to expire on October 31, 2003,
though we have the option of terminating it earlier in case of non-performance
by Millennium. One goal of our collaboration is to obtain the technology and
know-how that will enable us continue the genomics program on an independent,
in-house basis after the completion of the collaboration.
LION BIOSCIENCE
We have established two cooperations with LION Biosciences, a leading
provider of bioinformatics technology. We believe these cooperations have
established a new world standard in bioinformatics competence.
Under the first of our two cooperations, which began in 1999, LION has
established a subsidiary in Cambridge, Massachusetts, LION Bioscience Research
Inc. (LBRI). LBRI works exclusively for Bayer, providing our entire life
sciences effort with a strong IT platform and software development program.
With LION's help, we have developed an international bioinformatics network
connecting Bayer life sciences research centers. Through this network, our
researchers all over the world communicate online with LBRI's powerful
computers, which also continuously screen other relevant databases worldwide.
LBRI analyzes, interprets and distributes this data to us, allowing us to
visualize drug-relevant gene target data ("in silico") for processing in our
laboratories ("wet biology").
Our LBRI cooperation with LION has exceeded our expectations. In its first
twelve months of operations, LBRI delivered more than 200 disease-related
targets, which we have developed into a large number of new patent applications.
In October 2000 we began our second cooperation with LION, in the field of
pharmacophore informatics. The goal of this collaboration is to develop software
tools for the cross-linking of biological and chemical data.
We expect to invest a total of $82.5 million in our collaborations with
LION. Under the five-year agreement governing our initial cooperation, which is
scheduled to end in 2004, we acquired an 11 percent equity stake in LION for $30
million. LION receives yearly payments in an aggregate amount of $25 million as
well as more than $6 million in license fees for the software it develops for
us. We have an option to acquire LBRI for integration into our in-house research
and development capacity upon the completion of our collaborations with LION.
Under our second cooperation, scheduled to end in 2003, LION receives an
aggregate payment of $21.5 million to develop software for us.
CURAGEN
We have complemented our collaboration with Millennium by starting two
collaborative projects with CuraGen. The first cooperation focuses on the
discovery, development and joint commercialization of small-molecule drugs for
the treatment of obesity and adult-onset diabetes. The second cooperation is a
broad-based project using CuraGen's functional genomics technologies and
pharmacogenomics expertise to evaluate our research and development pipeline of
pharmaceutical compounds across all disease areas.
CuraGen is to provide 80 drug targets during the initial five years of our
first cooperation. In addition, CuraGen will provide us with access to its
comprehensive suite of functional genomics technology as well as its
bioinformatics and pharmacogenomic expertise to select and prioritize targets.
We will use our HTS, combinatorial chemistry, medicinal chemistry,
pharmacological and development expertise to develop small-molecule compounds to
attack the targets identified by CuraGen.
CuraGen has committed with us to bring approximately 12 candidates for
obesity and diabetes treatment to clinical development over a fifteen-year
period. During this period, we will share the risks and expenses of pre-clinical
and clinical development (up to $1.34 billion), as well as co-promotion rights
and any ultimate profits, from these drugs with CuraGen.
74
Under our second cooperation, CuraGen will apply its pharmacogenomic,
toxicogenomic and pharmacogenetic technologies and expertise to evaluate our
developmental and pre-clinical pipeline of pharmaceutical compounds. Through
this cooperation, we expect to:
- reduce drug development costs;
- reduce time to market;
- create safer and more effective drugs; and
- compile a database of gene-based markers and information that will
enable our scientists to predict potential drug toxicities, understand
how specific drugs function and identify new disease conditions.
This five-year cooperation has a total value of $124 million, consisting of
our $85 million equity investment in, and $39 million in committed funding to,
CuraGen.
BAYER TECHNOLOGY SCOUTS
In addition to our formal research and development collaboration structure,
we have established a worldwide network of Bayer International Technology
Transfer Managers, or "scouts", for all therapeutic research areas. These scouts
evaluate and propose collaborations with emerging biotech companies and academic
institutions on new biological targets, mechanisms or reagents. The efforts of
our scouts have resulted in more than 100 collaborations.
GOVERNMENTAL RESEARCH AND DEVELOPMENT INCENTIVES
Research and development is a cost-intensive activity. This is especially
true in the pharmaceutical field, where concerns for drug effectiveness and
patient safety require thorough pre-clinical and clinical testing of all new
drug candidates. See below, "Governmental Regulation". Although not every new
drug candidate will ultimately become a successful market entrant, Bayer and
other pharmaceuticals developers cannot undertake costly research and
development activities unless there is at least the possibility of a return on
their investment. There are a number of rare diseases that urgently require
effective medications, but which affect so few patients that it would be
impossible, absent government assistance, for pharmaceuticals developers to
recoup their research and development investments. Governments typically provide
developers with an incentive to carry out research on these rare diseases by
granting marketing privileges that exceed those normally available under patent
laws.
The U.S. Orphan Drug Act provides manufacturers with incentives to develop
and market drugs for rare diseases or conditions (i.e., those affecting fewer
than 200,000 persons in the United States at the time the manufacturer applies
for orphan drug designation). The first applicant who obtains both orphan drug
designation and approval of a marketing application for a drug is entitled to
marketing exclusivity for a period of seven years, subject to certain
limitations. However, a drug that FDA considers different from a particular
orphan drug is not barred from sale in the United States during this seven-year
exclusive marketing period even if the second drug has received marketing
approval for the same indication.
In January 2000, the European Union also implemented an incentive program
for the development of drugs for rare diseases. Under the EU rules, a drug is
eligible for designation as an orphan medicinal product if its sponsor
establishes at the time of application that the drug is intended for the
diagnosis, prevention or treatment of a life-threatening or chronically
debilitating condition affecting not more than five in 10,000 persons in the
European Community, or that without incentives, it is unlikely that the
marketing of the drug would generate sufficient return to justify the investment
necessary to develop the drug. The sponsor must also establish that there is no
existing satisfactory method for the diagnosis, prevention or treatment of the
condition in the European Community. A sponsor who obtains orphan drug
designation is generally entitled to 10 years' marketing exclusivity (although
this period may expire after only six years if the drug no longer meets the
criteria for orphan status). Subsequent producers of similar drugs may obtain a
marketing authorization for the same therapeutic indication as an orphan drug
even during the orphan's exclusivity period if the orphan's producer cannot
supply sufficient quantities of the drug, or if the subsequent applicant
establishes that its drug is safer, more effective or otherwise clinically
superior to the original orphan drug.
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INTELLECTUAL PROPERTY PROTECTION
To succeed in its business, Bayer, like any company active in our markets,
must continually seek new products that provide our customers with better
solutions for existing problems and new solutions for emerging problems. Our
drive for innovation requires us to expend significant effort on research,
development, manufacturing and marketing. To preserve the value of our
investment, we rely on the protections made available by the patent and
trademarks laws of the jurisdictions where we do business. In addition, our
production technologies typically incorporate highly specialized proprietary
know-how.
We have both developed intellectual property internally and acquired it as
assignee through various acquisitions. In addition to using our intellectual
property in our own business, Bayer -- like most other companies in our markets
-- may from time to time grant licenses to third parties to use our patents and
know-how, and may obtain licenses from others to manufacture and sell products
using their technology and know-how.
PATENTS
Our policy is to seek the maximum available patent protection for our
products in our major markets. Thus each of our patented products may in fact be
covered by a number of different patents. Depending on the jurisdiction, patent
protection may be available for:
- individual active ingredients;
- specific compounds, formulations and combinations containing active
ingredients;
- manufacturing processes;
- intermediates useful in the manufacture of products;
- genomic research; and
- new uses for existing products.
The actual protection that a patent provides can vary significantly from
country to country depending on the type of claim granted, the scope of the
claim's coverage and the legal remedies available in that country for the
enforcement of patents. For example, although patent protection in the United
States is generally strong, under some circumstances U.S. law permits generic
pharmaceuticals manufacturers to attempt to obtain regulatory approval to market
generic versions of patented products before the patents expire. See Item 8,
Financial Information -- Legal Proceedings. In addition, some developing
countries have announced plans to significantly reduce levels of patent
protection for some drugs.
The advance of genomic research has accelerated our patent filings for
biological products. We typically seek protection upon determining a gene's
function.
We currently hold thousands of patents, and have applications pending for a
significant number of new patents. Although our patents are important to our
business, we believe that, with the exception of those covering our
pharmaceutical products Adalat, Avalox and Cipro, as well as the patent on
Imidacloprid, a compound used in Advantage, Gaucho, and a number of our other
agricultural products, no single patent (or group of related patents) is
currently of material importance to Bayer's business as a whole.
TERM AND EXPIRATION OF PATENTS
Patents are valid for varying periods, depending on the laws of the
jurisdiction granting the patent. In some jurisdictions, patent protection
begins from the date the patent application was filed; in others, it begins on
the date the patent is granted.
The European Union, the United States, Japan and certain other countries
provide for the extension or restoration of patent terms or supplementary
protection certificates to compensate for patent term loss due to the regulatory
review process and the substantial investment made for product research and
development and regulatory approval. Our policy is to obtain these extensions
where possible.
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The patent protection (or analogous regulatory exclusivity measures) in our
major markets for some of our key products is scheduled to expire in the near
term. Although the expiration of a patent for an active ingredient normally
results in the loss of market exclusivity, we may continue to derive commercial
benefits from:
- later-granted patents on processes and intermediates used in
manufacturing the active ingredient;
- patents relating to specific uses for the active ingredient;
- patents relating to novel compositions and formulations; and
- in certain markets (including the United States), market exclusivity
that may be available under applicable laws other than patent laws.
The following table sets forth the expiration dates in our major markets of
the patents covering Adalat, Avalox, Cipro, and Imidacloprid.
MARKET
-----------------------------------------------------------------
PRODUCT GERMANY FRANCE U.K. ITALY SPAIN JAPAN U.S.A. CANADA
------- ------- ------ ---- ----- ----- ----- ------ ------
Adalat
Crystal patent (Retard).............. -- -- -- 2003 -- -- 2010 --
Adalat CC (Coat Core)................ 2008 2008 2008 2008 2008 2008 2008 2009
Gits/Oros excl. license (Alza)....... 2004 2004 2003 2004 2004 2004 -- 2004
Avalox
Compound............................. 2009 2009 2009 2014 2009 2009 2014 2016
Hydrochloride-Monohydrate............ 2016 2016 2016 2016 2016 2016 2016 2016
Tablet formulation................... 2019 2019 2019 2019 2019 2019 2019 2019
Cipro
Active ingredient.................... -- 2004 2002 2009 -- -- 2003 2004*
Process.............................. 2002 2002 2002 2002 2003 2002 -- 2004
IV formulation....................... 2006 2006 2006 2006 2006 2006 2007 2008
Tablet formulation................... 2007 2007 2007 2007 2007 2007 2011 2009
Imidacloprid........................... 2007 2007 2007 2007 2007 2005 2006 2007
---------------
* Composition
See Item 8, Financial Information -- Legal Proceedings for a description of
patent-related litigation in which we are involved.
TRADEMARKS
We market most of our products under a wide variety of trademarks
world-wide. Our best-known trademarks include Alka-Seltzer, Aspirin, Autan,
Baygon, Canesten, Flint, One-A-Day, Perlon and Rid, as well as the Bayer name
itself and our distinctive "Bayer cross". Trademark protection varies widely
throughout the world. In some countries, trademark protection continues as long
as the mark is used. Other countries require registration of trademarks.
Registrations are generally for fixed but renewable terms. Although our
portfolio of trademarks is important to our business, we do not believe that any
single trademark is material to Bayer's business as a whole.
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GOVERNMENTAL REGULATION
Our business is subject to significant government regulation. Many of our
products must be examined and approved by regulatory agencies for safety and
effectiveness before we may market them. In addition, all our operations must
comply with applicable environmental regulations.
PRODUCT REGULATION
Many Bayer products are subject to significant regulatory requirements. The
primary emphasis of these requirements is to assure the safety and effectiveness
of our products. Regulation in the United States is of particular importance
because of the United States' large share of the worldwide market. In the United
States the Food and Drug Administration (FDA) regulates many of our products,
primarily those in our Health Care businesses. In addition, our pharmaceutical
facilities typically require regulatory approval and are subject to periodic
re-inspection.
PHARMACEUTICAL PRODUCTS
Given their direct effect on human health, the products of our
Pharmaceutical segment are subjected to more stringent regulation than our other
products. Pharmaceutical products must receive regulatory approval before they
can be marketed in individual countries. The regulatory requirements follow
stringent standards that vary by country. Before a drug can qualify for
marketing approval, a registration dossier must be submitted to a regulatory
authority for review and evaluation. The registration dossier principally
contains detailed information about the safety, efficacy and quality of a new
medication. It also provides details about the manufacturing process, the
production facilities and information to be provided to patients. The
registration process can last from a few months to a few years and depends on
the nature of the medication under review, the quality of the submitted data and
the efficiency of the relevant agency's review procedure. If a drug meets the
approval requirements, a regulatory authority will grant a product license for
marketing. In some countries, negotiation on pricing and reimbursement follow
the grant of the product license. After the product launch and during marketing,
it is typically a legal requirement that the manufacturer monitor adverse
reactions and report any to the appropriate authorities.
The process of developing a pharmaceutical product from discovery through
testing, registration and initial product launch typically takes approximately
10 years. After identifying a candidate pharmaceutical compound, the
manufacturer tests it in clinical Phase I on a small group of healthy volunteers
for safety, side effects and pharmacological profile. In clinical Phase II, a
pharmaceutical compound is tested on a limited number of volunteers (both
patients and healthy persons) for safety, efficacy and appropriate dosage. In
clinical Phase III, a pharmaceutical compound is tested in a larger diverse
group of patient volunteers to assess safety, efficacy, side effects and dosage
in a statistically significant fashion. The results of these clinical trials are
then submitted to appropriate regulatory authorities with the objective of
obtaining approval to sell the drug. After commercial launch, trials are
typically held to monitor the safety and efficacy of the products in large
patient groups and to investigate potential new applications.
The principal regulatory authority in the United States is the FDA, which
administers and executes requirements covering the testing, approval, safety,
effectiveness, manufacturing, labeling and marketing of prescription
pharmaceuticals. Over the years, FDA requirements have increased the amount of
time and money necessary to develop new products and bring them to market in the
United States. In 1997, the U.S. Congress enacted the Food and Drug
Administration Modernization Act to streamline regulatory procedures and improve
the regulation of drugs, medical devices, and food. The legislation was
principally designed to expedite the premarket review process for new products.
A key provision of the legislation is the re-authorization of the Prescription
Drug User Fee Act of 1992, which permits the continued collection of user fees
from prescription drug manufacturers to augment FDA resources earmarked for the
review of human drug applications. This helps provide the resources necessary to
ensure the timely approval of safe and effective new drugs.
In the European Union, there are two different approval procedures
available: a centralized procedure and one based on the Mutual Recognition
Procedure. The London-based European Agency for the Evaluation of Medicinal
Products governs the centralized drug registration and approval process and
consists of two
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committees, one for proprietary medicinal products (CPMP) and one for veterinary
medicinal products (CVMP). Each member state of the European Union has two
members on each committee. The committee makes a recommendation based on a
review by appointed officials known as the rapporteur and co-rapporteur, who are
part of the CPMP/CVMP. Following the committee's recommendation, the European
Commission issues its formal decision, which is valid throughout the EU without
further action. When the approval process is successful, the drug may be
marketed within all member states of the European Union. The other method is the
Mutual Recognition Procedure in which one country carries out the primary and
main evaluation. The other member states then have 90 days to decide if they
accept or reject the decision made by the reference member state. If a country
does not follow the decision of the reference country, the applicant may refer
the process to the CPMP for review as in the centralized procedure, or may
withdraw that country from the procedure. The formal decision will be made by
the European Commission based on this evaluation.
In Japan, two issues complicate the approval process for drugs developed
outside of that country. First, the Japanese approval agency does not recognizes
all documents used in registration procedures in other countries. Second, the
Japanese approval agency requires that tests to determine appropriate dosages
for Japanese patients be conducted on Japanese patient volunteers. Due to these
issues, parts of Phase II and of Phase III of the clinical program generally
need to be repeated in Japan. This could mean a delay of two or three years in
introducing a drug developed outside of Japan to the Japanese market.
Among the products that our Pharmaceuticals segment markets is a special
group of substances known as "biologicals". Biologicals derive from biological
sources (e.g. from human plasma or from cell lines genetically engineered to
produce a specific protein). In the United States and in many other markets,
biologicals are subject to additional regulation beyond those governing other
drug products. For example, in order to minimize the risk of infectious disease
transmission, human plasma-derived products require donor screening and plasma
testing, as well as multiple manufacturing steps designed to remove viruses and
other infectious agents. Biological products are chemically complex, often
depending on a precise structure (e.g., the specific folding of a molecule) for
their effectiveness. Regulations require us to subject these products to
rigorous testing to ensure the stability of the products over its shelf-life. In
addition, because biological products typically cannot withstand conventional
sterilization techniques, we must use special processes, under stringent
conditions of cleanliness, to ensure sterility. Under applicable regulatory
requirements, we must submit detailed documentation to demonstrate appropriate
controls over our manufacturing facilities, including associated equipment and
supporting utilities like water supply and climate control.
In recent years, efforts have been made between the European Union, the
United States and Japan to achieve shorter development and registration times
for medicinal products by harmonizing the individual requirements of the three
regions. The process is called the International Conference on Harmonization.
For the foreseeable future, however, we will need to obtain approval in each
market.
CONSUMER CARE AND DIAGNOSTICS PRODUCTS
Many of the products of Consumer Care are subject to regulatory regimes
similar to those governing the products of the Pharmaceuticals segment. For
example, new over-the-counter medications must receive regulatory approval
before they can be marketed in individual countries. In the United States, the
FDA and, in part, the Federal Trade Commission oversee the marketing,
manufacturing and labeling of dietary supplements, including vitamins.
The products of the Diagnostics business group are in vitro diagnostic
(IVD) products, subject to regulatory controls similar to those governing the
development and marketing of pharmaceutical products.
In the United States, the FDA is the governmental agency that regulates IVD
products as medical devices, through its Center for Devices and Radiological
Health. All manufacturers of medical devices must register their facilities with
the FDA, and obtain from the FDA an Establishment Registration Number. All
registered establishments are subject to periodic inspections by FDA
investigators to ensure compliance with the quality requirements. These
manufacturers must also maintain with the FDA a list of all the devices they
market. The FDA classifies IVD products as Class I, Class II or Class III,
depending on their potential impact on health.
79
In general, IVD products require FDA clearance or approval before they may
be marketed. The majority of Class I IVDs and a small number of Class II IVDs
are, however, exempt from this requirement. Where possible, we seek FDA
clearance on the grounds that the new product demonstrates "substantial
equivalence" with a similar product that the FDA has already cleared. FDA
clearance usually takes between two and eighteen months, depending on the degree
of novelty involved. For truly new IVD products, we must obtain FDA approval,
submitting extensive data to demonstrate safety and effectiveness, based on
actual clinical trials under controlled conditions. The FDA review and approval
process takes from nine months to two years or longer. This approval almost
invariably involves an FDA inspection of the facilities where the product in
question is manufactured, including a review of the design and manufacturing
processes employed. After obtaining FDA approval, we must also file an annual
report of actual experience in the market place, including all adverse incidents
in which the product was allegedly involved.
Outside the United States, our Diagnostics products are subject to a
variety of regulatory regimes. In the EU, two major Directives regulate these
products. The Medical Device Directive governs diagnostic products that come in
direct contact with the human body. The IVD Directive, as the name implies,
applies to products use in vitro, i.e., those that do not come in direct contact
with the human body. In Japan, a special section of the Pharmaceutical Affairs
Law regulates diagnostic products. In Australia and Canada, the applicable laws
and regulations are similar to the European model. Many countries in South
America and Asia have regulatory requirements similar to those promulgated
either by the FDA or by the European Commission. All of these requirements
involve product registration/approval by local regulatory agencies, and the
reporting of adverse incidents and field corrective actions.
CROP PROTECTION AND ANIMAL HEALTH PRODUCTS
The Center for Veterinary Medicine within the FDA is responsible for
ensuring that animal drugs and medicated feeds are safe and effective for their
intended uses and that food from treated animals is safe for human consumption.
Animal health products are also regulated in the United States by the U.S.
Department of Agriculture (USDA) and the Environmental Protection Agency (EPA).
In most countries, crop protection products must obtain government
regulatory approval prior to marketing. This regulatory framework is directed to
ensure the protection of the consumer, the applicator and the environment. The
strictest standards are applied in the United States, Japan and Western Europe.
In the United States, the EPA has the responsibility for registration of all
chemicals released into the environment, including herbicides, insecticides,
fungicides and plant growth regulators whether they are used for crop protection
or for public health. Significant amounts of EPA resources are concentrated on
the effects of crop protection products on the environment and on the safety of
fish, wildlife and water resources. Plant-based crop protection products are
also regulated by the USDA for environmental safety of the plant and by the FDA
to ensure the safety of the food.
Since human exposure to these products may occur from residues on food or
from residential lawn use and/or indoor residential use, the safety assessment
considers the human risk from all anticipated routes of exposure. Special
sensitivities, food consumption and exposure patterns on infants and children
are specifically considered. If the product is used on a food crop, a legal
limit for residual chemical or a tolerance is established for the specific
chemical. This limit is based on a strict health standard and the data provided
by the manufacturer.
It generally takes seven to nine years from discovery of a new crop
protection product until the dossier is submitted to the appropriate regulatory
agency for product approval. There are no statutory time frames in the United
States for registration of new crop protection products. The standard time
frames for a pesticide not regulated under an EPA priority are typically 36 to
48 months. For a pesticide with an EPA priority, this time frame is shortened to
an average of 24 months. Numerous initiatives on the part of both the EPA and
crop protection manufacturers aiming to streamline the review process and reduce
the review time for a new product have not been successful to date.
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PROPOSED NEW EU REGULATIONS
The European Union is currently contemplating a new policy for the testing
and assessment of basic chemicals and chemical intermediates. This new policy
would require companies like Bayer that manufacture and import chemicals to
compile dossiers on a large number of chemical substances, describing exposure
to these substances during their production and application and noting their
potential risks, such as environmental damage or health risks. Although we
cannot accurately predict the final form of the proposed new regulations or the
additional costs we would incur in complying with them, we expect that these
costs would be substantial.
ENVIRONMENTAL REGULATION
The production and distribution of many Bayer products involves the use,
storage, transportation and disposal of toxic and hazardous materials. We are
subject to extensive, evolving and increasingly stringent national and local
environmental laws and regulations, which address, among other things, the
following:
- emissions into the air;
- discharges of waste water;
- other releases into the environment;
- generation, handling, storage, transportation, treatment and disposal of
waste; and
- maintenance of safe conditions in the workplace.
We are subject to environmental laws and regulations that may require us to
remove or mitigate the effects of the disposal or release of chemical substances
at various sites. Under some of these laws and regulations, a current or
previous owner or operator of property may be held liable for the costs of
removal or remediation of hazardous substances on, under, or in its property,
without regard to whether the owner or operator knew of, or caused the presence
of the contaminants, and regardless of whether the practices that resulted in
the contamination were legal at the time they occurred. As many of our
production sites have an extended history of industrial use, it is impossible to
predict precisely what effect these laws and regulations will have on us in the
future. As is typical for companies involved in the chemical and related
industries, soil and groundwater contamination has occurred in the past at some
of our sites, and might occur or be discovered at other sites.
It is our policy to comply with all environmental, health and safety
requirements and to provide workplaces for employees that are safe and
environmentally sound, incurring capital expenditures to do so when necessary.
In 2000, combined worldwide expenditures, including those with respect to third
party and divested sites, for compliance with environmental control regulations
and internal company initiatives totaled E1.0 billion, of which E183 million was
for capital projects. We expect that Bayer, and its industries in general, will
continue to be subject to stringent environmental regulation. Although we cannot
predict future expenditures with certainty, we believe that the current spending
trends will continue.
We do not believe that any of our German sites have unexpected levels of
contamination. Nevertheless, we could discover unexpected contamination at any
of these sites, especially in view of the fact that some have been in operation
for over 100 years. Consistent with German law and with agreements with the
relevant governmental entities, we are addressing known contamination at our
German facilities. In Germany, we record a provision for known environmental
liabilities when we are obligated to remediate a facility. This provision
includes all costs that we are likely to incur and that we can reasonably
estimate. We adjust these provisions if we make new remedial commitments.
Although we record provisions for known environmental liabilities, we do not
record provisions for potential liabilities because we cannot accurately
estimate the costs for investigation and clean-up. In the event that we discover
such liabilities, the costs for removal or clean-up could be significant. See
Note 29 to our consolidated financial statements.
We are subject to claims brought by United States federal or state
regulatory agencies or private individuals regarding the cleanup of sites that
we own, formerly owned or operated, or where waste from our operations was
disposed. In particular, we have a potential liability under the U.S. Federal
Comprehensive Environmental Response, Compensation, and Liability Act, commonly
known as "Superfund", the U.S. Resource Conservation
81
and Recovery Act and related state laws for investigation and clean-up costs at
a number of sites. At many of these sites, numerous companies, including Bayer,
have been notified that the U.S. Environmental Protection Agency, state
governing body or private individuals consider such companies to be potentially
responsible parties under Superfund or related laws. The proceedings relating to
these sites are in various stages. The clean-up process at many sites is
ongoing. We regularly review the liabilities for these sites and have accrued
our best estimate of our ultimate liability for investigation or clean-up costs.
Although the ultimate liability may vary from these estimates because of the
many variables involved in forming estimates of this type, we do not believe
that the expenditures involved will have a material adverse effect on our
financial position, results of operations or cash flows.
It is difficult to estimate the future costs of environmental protection
and remediation because of many uncertainties, including uncertainties about the
status of laws, regulations and information related to individual locations and
sites. Subject to the foregoing, but taking into consideration our experience to
date regarding environmental matters of a similar nature and facts currently
known, we believe that capital expenditures and remedial actions to comply with
existing laws governing environmental protection will not have a material
adverse effect on our financial position, results of operations or cash flows.
As of December 31, 2000, we had reserved E230 million for environmental matters.
We believe that we are in substantial compliance with applicable
environmental, health and safety laws and regulations. We continue to devote
attention to the health and safety of our employees and the protection of the
public health and the environment in the regions where we operate. Although this
compliance has not hitherto had an adverse effect on our competitive position or
business, we cannot predict the effect of possible future regulations. As a
member of the American Chemical Council, Bayer is committed to the principles of
Responsible Care, the chemical industry's health, safety and environmental
performance improvement initiative.
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ORGANIZATIONAL STRUCTURE
Bayer AG is the ultimate parent company of the Bayer Group. The Group
operates in seven segments comprising 14 business groups. For a discussion of
the activities of each segment, see above, -- Business Overview. In December
2001, we announced plans to transform Bayer AG, with effect from January 1,
2003, into a management holding company structure that would group our business
into four newly formed, independently operating subsidiaries. In addition to its
seven segments, Bayer has 17 central divisions, comprised of corporate
divisions/staffs and central service divisions, that provide key support and
administrative services. The corporate divisions/staffs are Corporate Planning
and Controlling; Finance; Legal, Patents, Licenses and Insurance; Corporate
Communications; Executive Personnel; Corporate Auditing; Quality, Environment
and Safety Policy; Taxes and eCommerce. The central service divisions consist of
Procurement; Information Systems; Human Resources; Enterprise Accounting and
Reporting, Site Services, Environmental Protection and Safety; Central Research;
Central Logistics and Central Technology.
SUBSIDIARIES
The following table lists Bayer AG's principal consolidated subsidiaries
and its beneficial ownership interest in each.
COMPANY NAME AND PLACE OF BUSINESS BAYER'S INTEREST (%)
---------------------------------- ---------------------
GERMANY
Bayer Faser GmbH, Dormagen.................................. 100
Bayer Industrieprodukte GmbH & Co. KG, Leverkusen........... 100
Bayer Vital GmbH & Co. KG, Cologne.......................... 100
Haarmann & Reimer GmbH, Holzminden.......................... 100
H.C. Starck GmbH & Co. KG, Goslar........................... 100
Rhein Chemie Rheinau GmbH, Mannheim......................... 100
Wolff Walsrode AG, Walsrode................................. 100
OTHER EUROPEAN COUNTRIES
Bayer A/S, Denmark.......................................... 100
Bayer Antwerpen N.V., Belgium............................... 100
Bayer B.V., Netherlands..................................... 100
Bayer Hispania, S.A., Spain................................. 100
Bayer International S.A., Switzerland....................... 100
Bayer plc, U.K.............................................. 100
Bayer Rubber N.V., Belgium.................................. 100
Bayer S.p.A., Italy......................................... 100
Quimica Farmaceutica Bayer, S.A., Spain..................... 100
Bayer Pharma S.A., France................................... 99.9
Bayer S.A., France.......................................... 99.9
NORTH AMERICA
Bayer Corporation, United States............................ 100
Bayer Inc., Canada.......................................... 100
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COMPANY NAME AND PLACE OF BUSINESS BAYER'S INTEREST (%)
---------------------------------- ---------------------
ASIA / PACIFIC
Bayer China Co., Ltd., Hong Kong............................ 100
Bayer Ltd., Japan........................................... 100
Bayer (South East Asia), Singapore.......................... 100
Bayer Yakuhin Ltd., Japan................................... 100
Bayer Australia Ltd., Australia............................. 99.9
Nihon Bayer Agrochem K.K., Japan............................ 99.5
Sumika Bayer Urethane Co., Ltd., Japan...................... 60
LATIN AMERICA / AFRICA / MIDDLE EAST
Bayer de Mexico, S.A. de C.V., Mexico....................... 100
Bayer (Proprietary) Ltd., South Africa...................... 100
Bayer S.A., Argentina....................................... 99.9
Bayer S.A., Brazil.......................................... 99.9
PROPERTY, PLANTS AND EQUIPMENT
As a company with wide-ranging global presence, we operate through a large
number of offices, research facilities and production sites throughout the
world. The principal executive offices of Bayer AG as well as a number of
Bayer's key production facilities are located in Leverkusen, Germany. We have
facilities in Europe, the Americas, Asia, Oceania and Africa, of which the most
important are in Germany and the United States. We also have other properties,
including office buildings, laboratory and research laboratories and
distribution centers.
Our policy is to acquire full ownership rights in our manufacturing
facilities whenever possible. We own most of our manufacturing facilities and
other properties. Where locally applicable law does not permit this or
acquisition of full property rights is otherwise unfeasible, we acquire
possessory interests conferring substantially the same rights of use as does
ownership (e.g German-law hereditary building rights or Erbbaurechte and granted
land use rights in Asian countries).
E-COMMERCE
The "New Economy" emphasizes the use of new technologies to improve
existing business relationships and generate new ones. The internet is
revolutionizing sales and procurement channels and significantly changing the
way we co-operate with our partners across the entire process and value chain,
(e.g., in research and development, engineering, marketing and logistics).
We have charged our core worldwide team of more than 100 e-commerce experts
to guide the Bayer Group to leadership in this emerging field. By year-end 2000,
we had already achieved an e-commerce based transactional volume of more than
E250 million. We expect this figure to grow significantly over the next few
years, reaching approximately E5 billion by 2004. We plan to charge as expense
approximately E100 million in e-commerce solutions by the end of 2001.
As a company organized under the laws of a European Union member state, we
are required to comply with the EU Directive on Legal Aspects of Information
Society Services (The Electronic Commerce Directive), Directive 2000/31/EC and
the Directive of the European Parliament and of the Council concerning the
processing of personal data and the protection of privacy in the
telecommunications sector, Directive 1997/66/EC. We believe that we comply with
these directives; compliance has not had a material impact on our business.
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We have built Bayer's e-commerce strategy on four cornerstones:
WEB-ENABLING OUR CORE BUSINESS PROCESSES
We collect and analyze information to learn more about customers and
suppliers. We use this information to add customer value and improve our
products and services. We expect powerful front-end solutions, supported by
efficient content-management systems, to reduce transaction costs significantly.
Our efforts in Customer Relationship Management range from supply chain
integration (vendor-managed inventory, electronic data interchange) to account
and collaboration portals. Our e-commerce solutions include:
- BayerDirect.com, our U.S.-based internet portal for biological health
care products;
- our polymers and chemicals portal BayerOne.com;
- the agricultural portal Bayervalue.com; and
- Solutionsforpaper.com, a specialized portal for the paper industry.
These portals have been online since June 2000. Our most recent launch in
the industry solutions/ collaborations category is Plastics.bayer.com, offering
comprehensive online product and application consulting.
We also implement e-solutions for key internal purposes, (e.g. to shorten
time-to-market periods or to facilitate "business to administration" interaction
in the fields of drug safety and registration).
INTEGRATING WEB-BASED BUSINESS MODELS AND DISTRIBUTION CHANNELS
Neutral e-commerce marketplaces are gaining in importance in various
markets. We participate in Chematch and Chemconnect, and also use Portum and
Freemarkets. We actively seek out entrepreneurial companies like yet2.com with a
view to technology transfer.
Bridging the gap between producer and consumer is another important
objective of our e-commerce strategy. BayerDirect, our enrollment and product
delivery service for biological health care products, exemplifies this strategy.
We recently launched our second platform of this type, Bayer MD, in the United
States to sell our biologically-produced Gamimune products to physicians.
FORGING STRATEGIC E-COMMERCE PARTNERSHIPS
We focus our interest on large industry consortia with the economic
strength to improve chances of future success. We seek to form partnerships with
other industrial leaders whose liquidity and broad range of offerings makes them
attractive not only for customers, but also for future members and partners. We
believe that continuing consolidation in these markets will increase their
attractiveness for customers.
Examples of marketplaces in which Bayer was a founding member include:
- Elemica (chemicals), which has now integrated the former rubber and
rubber chemicals-focused ElastomerSolutions marketplace; and
- Omnexus (polymers; packaging and equipment for the injection molding and
blow molding industry)
On the procurement side, CC-Chemplorer -- the maintenance, repair and
operations and packaging material e-marketplace -- exemplifies how we strive to
improve internal processes and use procurement know-how (e.g., experience with
electronic catalogues) to build profitable new businesses.
BUILDING UP OUR E-CULTURE AND E-BRANDING
The center of our e-culture is the management of customer relations as a
strategic asset and the allocation of resources to exceed customers'
expectations. Our next important steps are web-enabling our organization and
integrating customer knowledge across distribution and communication channels as
well as across our business groups and geographic regions.
85
Supporting and leveraging our corporate brand is a central issue. We are
currently optimizing and harmonizing our almost 200 corporate and product web
sites to show "one face to the customer", in terms of both functionality and
appearance.
86
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
Prospective investors should read the following operating and financial
review and prospects with the consolidated financial statements and the notes to
those financial statements included elsewhere in this registration statement. We
have prepared these financial statements in accordance with IAS, which differs
in some respects from U.S. GAAP. For a reconciliation of net income and
stockholder's equity to U.S. GAAP, see note 44 to our consolidated financial
statements.
The forward-looking statements in this Item 5 are not guarantees of future
performance. They involve both risk and uncertainty. Several important factors
could cause our actual results to differ materially from those anticipated by
these statements. Many of those factors are macroeconomic in nature and are,
therefore, beyond the control of our management.
OVERVIEW
We are a global company offering a wide range of products, including
high-value pharmaceuticals, diagnostics and other health-care products;
agricultural products; polymers; and chemicals.
Bayer comprises the parent company, Bayer AG of Leverkusen, Germany, and
over 250 consolidated subsidiaries. We are organized into seven business
segments -- Pharmaceuticals; Consumer Care & Diagnostics; Crop Protection;
Animal Health; Plastics & Rubber; Polyurethanes, Coatings & Colorants; and
Chemicals. In December 2001, we announced plans to transform Bayer AG, with
effect from January 1, 2003, into a holding company that will hold our operating
business through four newly-formed direct operating subsidiaries of Bayer AG.
See "Business Overview" in Item 4, Information on the Company.
Although Bayer AG was first incorporated in 1951, we trace our historical
roots to Friedr. Bayer & Co., founded in 1863. Since our formation in 1951, we
have pursued a program of growing both organically and through selective
acquisitions. In 1998 we spent E1.4 billion on acquisitions mainly for Chiron
Diagnostics, an acquisition that gave us entry into the field of nucleic acid
diagnostics. In 1999 we spent E0.4 billion on acquisitions. Major projects in
1999 included the acquisition of the plastic sheet businesses of the chemical
companies DSM-Axxis, N.V. and Sheffield Plastics Inc.; the purchase of
Elastochem Inc.; and an 11.3 percent equity investment in Lion Bioscience AG. In
2000, we spent a total of E4.2 billion on acquisition activity, mainly in the
acquisition of Lyondell Chemical Company's polyols business, Sybron Chemicals
Inc., CSM Holding, Inc. and Cytec Industries Inc.'s sizing and strength paper
chemicals business. In the life sciences area we strengthened our crop
protection business with two acquisitions: the Flint line of strobilurin
fungicides and a 50.1 percent stake in South Korea's Misung Ltd., which thereby
became a wholly-owned subsidiary.
In October 2001, we entered into an agreement to acquire Aventis
CropScience from Aventis and Schering. The consummation of this transaction is
conditioned upon antitrust and competition reviews in the United States and the
European Union. Assuming that we receive the requisite regulatory approvals, we
expect to complete this acquisition by the end of the first quarter of 2002. See
below, -- Recent Developments and Trend Information -- Outlook -- Aventis
CropScience Acquisition.
We complement our growth program by divesting businesses and assets that we
believe no longer fit into our overall strategic plan. Our major divestments in
1998 were the sale of our citric acid, copying systems and zeolites businesses.
We also transferred our titanium dioxide and silicones activities to joint
ventures. In 1999, we floated 70 percent of our former Agfa photographic
business segment in an initial public offering. In 2000, BASF joined the DyStar
joint venture as a new partner, combining its textile dyes business with
DyStar's. The resulting increase in DyStar's share capital reduced our
proportionate share to 35 percent. Since that time we consider DyStar a non-core
business and classify it under "Discontinuing Operations". We intend to divest
our holdings in Agfa in the near term. We continued to streamline our portfolio
through 2000, divesting our animal health biologicals and solar-grade silicon
businesses as well as our generic pharmaceuticals businesses in the United
States (Schein Pharmaceutical, Inc.) and Germany (Basics GmbH), and in Myriad
Genetics Inc. and Troponwerke GmbH & Co. KG. In May 2001, we sold our interest
in the EC Erdolchemie joint venture, which we had previously classified under
"Discontinuing Operations". During the first half of 2001 we also sold our
former acrylic fiber and spandex yarn product lines which we have classified,
along with the remainder of the Fibers
87
business group, as "Discontinuing Operations" for all periods presented. In
December 2001, we announced plans to divest from our business group Haarmann &
Reimer, as we no longer consider it to be part of the Chemicals core business.
OPERATING RESULTS 2000, 1999 AND 1998
We derive our revenue primarily from the sale of consumer and industrial
products and, to a lesser extent, from the sale of services. The primary factors
that affect our revenue include the introduction of new products as well as our
ability to manage the life-cycles of existing products. In 2000 we were
generally able to increase prices, thus improving margins. In 1999 and 1998, by
contrast, the prices to customers for many of our products generally held stable
or declined. Increased unit volume has therefore had a greater effect on the
growth of our revenue during the last three years as a whole than has our
ability to increase selling prices. We record revenue for the majority of our
products upon delivery to customers. Mergers and acquisition activities also
affect our revenue. In addition to the major acquisitions and divestments that
we discuss in this section, as a large and diversified global company we often
enter into a number of smaller transactions, none of which are material to our
results on an individual basis but which, taken as a whole, can have a
significant effect. Because we conduct our operations globally, fluctuations of
exchange rates between the euro and non-euro currencies can affect our revenue.
In recent years these fluctuations (especially in the euro-U.S. dollar exchange
rate) have had a significant and generally positive effect on our revenue. For a
description of measures that we have adopted for controlling exchange rate risk,
see Item 11, Quantitative and Qualitative Disclosures about Market Risk.
The single most important factor that affects our costs is the price of raw
materials for our products. We seek to reduce our sensitivity to fluctuations in
many raw material prices by producing at least a part of our requirements
internally, within the Bayer Group. Petrochemical feedstocks are important raw
materials in many of our products, especially in our Polymers and Chemicals
segments. We do not produce significant volumes of petrochemicals. Effective May
1, 2001, we sold our 50 percent interest in the EC Erdolchemie joint venture,
which had been our one significant venture into this area, to Deutsche BP, our
former joint venture partner. We had classified EC Erdolchemie as a
discontinuing operation in 1999. Because of this lack of internal petrochemicals
sourcing, as well as the volatility of oil prices in recent years, our single
greatest raw-materials sensitivity is to fluctuations in the price of
petrochemicals. Other significant factors that affect our costs include labor as
well as trigger or milestone payments under various joint ventures and
cooperations. In recent years, the integration of an enterprise management
system has increased our general administration expenses. We began this
integration in 1998 and expect to complete it by 2004.
88
Acquisitions and divestitures during 2000 and 1999 had a positive effect on
net sales of E0.7 billion. This activity affected the comparison between the two
years' sales figures as follows:
CHANGE IN 2000 FROM 1999
------------------------
(EUROS IN MILLIONS)
Acquisitions
Polyols business (from Lyondell).......................... 646
Plastic sheet business (from DSM; effective April 1,
1999).................................................. 80
Purchase of remaining interest in Misung Ltd., Pyongtaek,
South Korea............................................ 58
Sybron Chemicals Inc., Birmingham, New Jersey............. 35
Paper chemicals business (from Cytec Industries).......... 14
------
833
Divestitures
U.S. animal health biologicals business (to Intervet
International)......................................... (27)
Troponwerke GmbH & Co. KG................................. (24)
Other..................................................... (34)
------
(85)
------
Net effect on sales from continuing operations.............. 748
------
Sale of 70 percent of the shares of the Agfa-Gevaert
group..................................................... (1,801)
------
Total....................................................... (1,053)
======
We spent E200 million on restructuring in 2000, E449 million in 1999 and
E242 million in 1998. In 2000, E61 million of these expenses related to the
continuing integration of Chiron Diagnostics, which we acquired in 1998, and E48
million to our integration of the Lyondell polyols business, which we acquired
in spring 2000. The streamlining of the styrenics activities of our Plastics
business group required a further E32 million in 2000. In 1999, our integration
of Chiron accounted for E111 million of restructuring expense, while we spent
E169 million on streamlining our styrenics business.
We recognize research and development costs in accordance with IAS 38.
BAYER GROUP
The following table shows sales and income for Bayer as a whole.
CHANGE FROM CHANGE FROM
PREVIOUS YEAR PREVIOUS YEAR
2000 (%) 1999 (%) 1998
------ ------------- ------ ------------- ------
(EUROS IN MILLIONS, EXCEPT PERCENTAGE OF SALES DATA)
Net sales................................ 30,971 13.4 27,320 (2.6) 28,062
Gross profit............................. 14,318 15.5 12,396 (2.0) 12,643
as percentage of sales (%)............. 46.2 -- 45.4 -- 45.1
Operating result......................... 3,287 (2.1) 3,357 6.4 3,155
as percentage of sales (%)............. 10.6 -- 12.3 -- 11.2
Income before income taxes............... 2,990 5.4 2,836 4.0 2,728
Net income............................... 1,816 (9.3) 2,002 24.0 1,614
as percentage of sales (%)............. 5.9 -- 7.3 -- 5.8
89
The following table shows a geographical breakdown of our sales from
continuing operations.
CHANGE FROM CHANGE FROM
PREVIOUS YEAR PREVIOUS YEAR
2000 (%) 1999 (%) 1998
------ ------------- ------ ------------- ------
(EUROS IN MILLIONS)
Europe................................... 11,630 11.2 10,456 0.7 10,384
North America............................ 9,569 27.3 7,515 13.6 6,617
Asia/Pacific............................. 4,926 44.6 3,406 23.9 2,748
Latin America/Africa/Middle East......... 3,355 13.0 2,970 8.9 2,727
2000 COMPARED WITH 1999
Net Sales
Net sales represents the gross inflow of economic benefits from the sales
of goods and services that we receive or that are receivable by us. Net sales
excludes rebates and discounts that we give our customers as well as the amounts
that we collect on behalf of third parties, such as sales taxes, goods and
services taxes and value added taxes.
Our net sales from continuing operations increased 21.1 percent in 2000, to
E29 billion. The primary internal factors that contributed to growth in net
sales from continuing operations were increased sales volumes, accounting for
7.0 percent of the increase; acquisition activity, primarily our acquisition of
Lyondell's polyols business, which contributed 3.0 percent of our net sales
growth; and increased sales prices, which contributed 2.3 percent of the
increase. In addition, translation of non-euro denominated revenue caused more
than one third of this growth in net sales. Including discontinuing operations,
our net sales increased 13.4 percent from 1999.
Sales in our Pharmaceuticals segment increased 22.7 percent in 2000. The
introduction of new products or new dosage formulations for existing products
made an important contribution to this increase. Further expansion of our field
sales force also contributed to the increase in sales in terms of unit volume of
existing products. Sales in our Consumer Care & Diagnostics segment increased
15.6 percent to E3.9 billion; such new products as Aleve Cold & Sinus and
Alka-Seltzer Heartburn made an important contribution to this growth. Sales in
our Crop Protection segment increased 12.8 percent due to increased unit volume,
primarily in our imidacloprid products. Sales in our Animal Health segment
increased 8.9 percent in 2000. The effects of divesting the animal health
biological business in the United States were offset by the strength of the
segment's other U.S. activities. Sales in our Plastics & Rubber segment advanced
25.7 percent in 2000. Sales in our Polyurethanes, Coatings & Colorants segment
increased 30.0 percent. We attribute half of this increase to the Lyondell
acquisition; other significant factors included increased volumes of existing
products as well as price increases for some products. Sales in our Chemicals
segment increased 17.8 percent. Higher volumes and the effect of currency
exchange rate fluctuation were the primary causes of Chemicals' sales growth.
Gross Profit
Gross profit represents net sales after cost of goods sold and services
provided. Cost of goods sold and services provided include the production costs
of goods sold and the cost of goods purchased for resale.
Our gross profit from continuing operations increased 21.7 percent in 2000.
The primary causes of this increase were a sustained upward trend in unit volume
coupled with higher selling prices. Thus we were able to improve our margin
despite a sharp increase in raw materials prices. These increases affected all
our segments, primarily those with Polymers and Chemicals activities. Increases
in the price of crude oil were the primary cause of the increased cost of our
raw materials, although the effect on the market for individual raw materials
varied. Prices for several of our raw materials, including acrylonitrile,
benzol, butadiene, phenol and styrol more than doubled since the beginning of
1999. The most extreme case was toluol, whose price nearly tripled. Increased
raw materials costs caused more than half of the 20.6 percent increase in our
costs of goods sold in 2000. Currency translation effects also added
significantly to this increase.
90
Operating Result
Operating result represents gross profit after selling expenses, research
and development expenses, general administration expenses and other operating
income and expenses. We distinguish between our result from continuing and
discontinuing operations.
Our result from continuing operations in 2000 before exceptional items
increased E0.5 billion, or 19.1 percent, from the previous year, to E3.3
billion. We attribute this increase primarily to the performance of our
Pharmaceuticals segment. Currency translation effects also contributed
significantly to this increase. After net exceptional charges of E149 million,
mainly for restructuring, this increase was 43.7 percent.
Our result from discontinuing operations comprised E99 million from
Erdolchemie GmbH, E59 million from the Fibers business and E5 million from the
DyStar group. Combining continuing and discontinuing operations, our operating
result for 2000 declined 2.1 percent. This decline reflects the unusually high
result from discontinuing operations for 1999, which included an exceptional
gain of E1.03 billion from our sale of shares in Agfa's IPO.
In 2000, our selling expenses increased 22.3 percent, while research and
development expenses increased 11.4 percent and general administration expenses
increased 22.5 percent. Currency translation effects caused approximately half
of these increases. Increased costs for shipping and advertising were additional
factors in our increased selling expenses. Research and development activities
in our Pharmaceuticals segment contributed disproportionately to our increase in
research and development expense. We allocate the largest portion of our
research and development budget to Pharmaceuticals, and this segment often shows
the greatest increase from year to year as well. Given the particularly strong
emphasis on research, we expect that this segment will continue to be the
primary driver of our overall research and development costs. Costs related to
our integration of a new enterprise management system contributed to the
increase in general administration expenses. By contrast, our other net
operating expenses decreased 16.9 percent, largely because restructuring
expenses in 2000 were lower than in the previous year.
Non-Operating Result
Non-operating result represents income and expenses from investments in
affiliated companies, interest result and other non-operating result.
Our non-operating loss for 2000 increased 43 percent over the previous
year. This improvement was due to an increase of E314 million in income from
affiliated companies, primarily as a result of gains from the sale of our
interests in Schein Pharmaceutical and Myriad Genetics. This increase was
offset, in part, by an increase in net interest expense of E115 million due to
issuances of debt securities, particularly commercial paper, to finance capital
expenditures and acquisitions.
Income Before Income Taxes
Our income before taxes from continuing operations in 2000 increased E1.2
billion, or 70 percent, from the previous year, to E2.9 billion due primarily to
lower exceptional expenses in 2000. Including discontinuing operations, the
increase in income was 5 percent.
Income Taxes
Our income tax expense increased 40 percent from 1999. Our effective tax
rate increased to 38 percent from the 1999 rate of 29 percent. We attribute this
increase primarily to the fact that the 1999 effective tax rate reflected
tax-free income from the sale of Agfa shares.
Net Income
Minority shareholders' interest in 2000 increased 62.5 percent from 1999.
The primary reason for this change was improved profitability from our
partly-owned subsidiaries, particularly Bayer Yakuhin Ltd., a
91
Japanese pharmaceutical producer in which we had a 75.6 percent interest in 2000
(and which has since become our wholly-owned subsidiary). Bayer Yakuhin achieved
significant increases in both net sales and net income.
After minority interests, our net income from continuing operations in 2000
increased E0.8 billion, or 89 percent, to E1.7 billion (E2.32 per share) in 2000
from E0.9 billion (E1.23 per share) in 1999. Including discontinuing operations,
our net income in 2000 decreased 9.3 percent.
1999 COMPARED WITH 1998
Net Sales
Bayer's net sales in 1999 decreased 2.6 percent from 1998. Of this
decrease, we attributed E2.5 billion, or 9.1 percent, to the Agfa divestiture.
Sales from continuing operations increased by 8.3 percent. We attributed more
than 5.0 percent of this increase to growth in volumes. Portfolio changes other
than the Agfa divestiture had a positive impact of 2.8 percent. Currency
fluctuations also had a positive effect, contributing 2.1 percent of the
year-on-year increase. These favorable currency movements primarily reflected an
increase in value of the U.S. dollar relative to the euro. Price erosion,
however, had a negative impact of less than 2.0 percent. State intervention
continued to have a negative effect on the health care industry in Europe and
Japan, while the world market continued to expand. Some of our major customers
(for example, those in the automotive, electrical/ electronics and chemical
industries) enjoyed a favorable business climate in 1999; nevertheless, a drop
in selling prices, exacerbated by an increase in raw material costs, caused our
margins to decline.
Sales in our Pharmaceuticals segment increased 15.3 percent in 1999. Sales
in the Consumer Care and Diagnostics segment increased 25.1 percent. We
attribute approximately three fourths of this increase to the effect of the
Chiron Diagnostics acquisition at the end of 1998. Sales in our Crop Protection
segment increased 6.5 percent in 1999. Although the agricultural industry
expanded in Asia, low agricultural prices and low farm incomes diminished our
sales to this sector, particularly in Latin America. Sales in our Animal Health
segment increased 3.5 percent. Sales in our Plastics & Rubber segment advanced
6.7 percent in 1999. Of this increase, E72 million came from the plastic sheet
business that we acquired in April 1999. Sales in our Polyurethanes, Coating &
Colorants segment increased 7.6 percent. Sales in our Chemicals segment remained
stable in 1999. Excluding sales from the citric acids, titanium dioxide,
silicones and zeolites businesses, divested in 1998, and the effects of other
restructuring measures taken in 1998, Chemicals sales in 1999 increased by 2.0
percent.
Gross Profit
Our cost of goods sold and services provided remained essentially stable in
1999 because the cost increase of 9.3 percent was roughly in proportion to the
increase in sales from continuing operations of 8.3 percent. As a result, our
gross profit from continuing operations in 1999 increased 7.2 percent from the
previous year.
Operating Result
Income from continuing operations before exceptional charges in 1999
declined by 1.6 percent to E2.75 billion from E2.80 billion in 1998. The decline
was mainly due to rising costs for raw materials, primarily petrochemicals.
Lower margins on sales to the manufacturing industry, resulting from downward
price pressure, also contributed to the decline. Expenses related to Year 2000
preparedness and process reengineering also contributed to the decline in
operating result. These items affected most of our cost centers, especially our
production and general administration costs. Although our selling expenses
increased 6.5 percent, this increase was less than our 8.3 percent increase in
sales, reflecting our reduction in sales force and lower shipping and
advertising costs. Research and development costs increased 18.3 percent,
primarily because a continuing trend towards intensified research activities in
our Pharmaceuticals segment also reflected new collaborations with research
partners. Our general administration costs remained essentially stable. Although
we were able to achieve cost reductions in a number of areas that affect our
general administration costs, expenses related to the Year 2000 and to the
integration of an enterprise management system offset these savings.
Exceptional charges in 1999 totaled E575 million, an increase of E528
million from 1998. These exceptional charges included charges related to the
streamlining of the styrenics activities of our Plastics business group, the
92
integration of Chiron Diagnostics, our commitment to help fund the federal
German foundation "Remembrance, Responsibility, and the Future" founded to serve
as the exclusive source of remedies for claims against German companies arising
out of the national socialist era and World War II, and the closing of our
Consumer Care business group's facility in Elkhart, Indiana.
In 1999 we sold the majority of the shares of our former Agfa segment in an
initial public offering. Accordingly, we recorded Agfa's operating result of
E103 million through June 1, 1999, the date of divestiture, as well as our gain
from the sale of Agfa shares, under discontinuing operations. Further
discontinuing operations were the Fibers business, with an operating result in
1999 of E23 million; the DyStar Group, with a loss in 1999 of E24 million; and
Erdolchemie GmbH, with a profit of E46 million. Including discontinuing
operations, our operating result for 1999 rose 6.4 percent from 1998. The
increase was due primarily to the sale of our Agfa activities, which created a
gain of E1.0 billion. Following this sale, our operating result no longer
reflects the result of the businesses and activities of Agfa.
Non-operating Result
Non-operating result decreased to - E521 million in 1999 from - E427
million in 1998. We attributed this decrease primarily to expenses from
investments in affiliated companies, which totaled E31 million in 1999 compared
to income of E21 million from these investments in 1998. The main cause of that
decrease was our sale of 70 percent of the shares of our former wholly-owned
subsidiary Agfa. After this sale, Agfa no longer contributed to our operating
result and was instead included at equity. A loss from this investment in 1999
caused our income from companies included at equity to decline. Interest expense
-- net increased 3.4 percent in 1999. This increase was the result of a 13.5
percent decrease in interest income, partly offset because lower financial debt
resulted in reduced interest expense. Our interest income decreased at a higher
rate, however, resulting in a net increase in expense. Other non-operating
expense -- net increased 13.5 percent, primarily due to higher net exchange
losses in 1999. In 1999, the interest portion of interest-bearing provisions was
E275 million, a decrease of E34 million compared with 1998.
Income before Taxes
With an increase in operating result of E202 million, and a decrease in
non-operating result of E94 million, income before income taxes in 1999
increased 4.0 percent from the previous year. Our income before taxes from
continuing operations in 1999 decreased E0.7 billion, or 28 percent.
Income Taxes
Income tax expense decreased 26.5 percent in 1999, primarily because of the
tax-free income that we earned through the sale of Agfa shares. As a result, our
effective income tax rate dropped from 41 percent to 29 percent. In 1999, income
taxes comprised income taxes paid or accrued in individual countries totaling
E500 million, a decrease of E363 million from 1998, and deferred taxes of E318
million, up E68 million from the previous year.
Net Income
Minority shareholders' interest increased E15 million in 1999 from the 1998
figure of E1 million. This increase reflected both a E9 million increase in
income to E16 million and the absence in 1999 of losses attributable to minority
interest. The increase in minority interest income primarily reflected higher
earnings of Bayer Yakuhin, Japan, of which we then owned 75.6 percent. In 1998,
losses attributable to minority interest had totaled E6 million, which reflected
small losses at a number of companies and offset a E5 million gain from other
companies.
After minority interests, our net income from continuing operations in 1999
decreased E494 million, or 35.5 percent, to E898 million (E1.23 per share) from
E1.39 billion (E1.91 per share) in 1998. Including discontinuing operations, our
net income in 1999 increased 24 percent.
93
SEGMENT DATA
PHARMACEUTICALS
CHANGE FROM CHANGE FROM
PREVIOUS YEAR PREVIOUS YEAR
2000 (%) 1999 (%) 1998
----- ------------- ----- ------------- -----
(EUROS IN MILLIONS)
Net sales (external)........................ 6,140 22.7 5,003 15.3 4,340
Intersegment sales.......................... 39 (23.5) 51 50.0 34
----- ----- ----- ---- -----
Operating result before exceptional items... 1,165 26.4 922 22.8 751
Operating result............................ 1,160 39.4 832 7.4 775
2000 compared with 1999
Sales in our Pharmaceuticals business group increased 22.7 percent in 2000
to E6.1 billion. In 2000, sales of our three best-selling pharmaceutical
products alone -- Ciprobay/Cipro, Adalat and Lipobay/Baycol -- were E3.6
billion. The operating result before exceptional items increased to E1.2 billion
in 2000, an increase of 26.4 percent over 1999. We incurred net exceptional
charges of E5 million in 2000.
1999 compared with 1998
Pharmaceuticals' sales rose 15.3 percent, to E5.0 billion. We attribute
this growth to increased demand for our products, most notably Ciprobay/Cipro,
Avelox/Avalox and Lipobay/Baycol. Despite production shortfalls for biological
products, we achieved a 22.8 percent increase in the segment's operating result
before exceptional items. We incurred net exceptional charges of E90 million in
1999.
CONSUMER CARE & DIAGNOSTICS
CHANGE FROM CHANGE FROM
PREVIOUS YEAR PREVIOUS YEAR
2000 (%) 1999 (%) 1998
----- ------------- ----- ------------- -----
(EUROS IN MILLIONS)
Net sales (external)........................ 3,888 15.6 3,364 25.1 2,688
Intersegment sales.......................... 0 -- 1 -- 1
----- ---- ----- ----- -----
Operating result before exceptional items... 311 79.8 173 (27.9) 240
Operating result............................ 177 -- 16 (93.5) 248
2000 Compared with 1999
Consumer Care & Diagnostics posted sales of E3.9 billion in 2000, an
increase of 15.6 percent from the previous year. We attribute these sales
increases primarily to the introduction of new products in the Consumer Care
business group, chiefly Aleve Cold & Sinus, Alka-Seltzer Heartburn and Aspirin
Migraine, as well as to growth in revenue from the products we acquired through
our acquisition of Chiron Diagnostics.
To enhance the segment's performance, we initiated cost-cutting measures in
its business groups, for example by eliminating less productive facilities and
divesting unprofitable product lines. Because Diagnostics conducts the majority
of its operations in the United States but a large proportion of its sales are
in Europe and other non-U.S. markets, we believe that cost containment will be
especially important in this business group as long as the dollar's value
remains high compared with the euro and other currencies. The operating result
before exceptional items increased to E0.3 billion in 2000, an increase of 79.8
percent over 1999. We incurred net exceptional charges of E134 million. These
charges resulted from restructuring charges as well as from our decision to stop
marketing Alka-Seltzer Plus and similar cold remedies containing the active
ingredient phenylpropanolamine. Consumer Care plans to launch new formulations
of these products in 2001. Our
94
restructuring measures also resulted in exceptional income of E20 million from
several smaller divestitures, which partly offset the exceptional charges.
1999 compared with 1998
Sales of Consumer Care & Diagnostics increased 25.1 percent to E3.4
billion. In addition to being the crucial factor in Diagnostics' sales growth,
the broadened product palette that we obtained through our acquisition of Chiron
Diagnostics contributed 75 percent of the increase in sales for the segment as a
whole. Significant increases in several important markets, such as North
America, drove our worldwide sales growth. Weaker performance in other markets,
however, partially offset this positive development. In particular, recessionary
conditions in South America hurt our Consumer Care sales in that region.
The operating result before exceptional items decreased by 27.9 percent.
The charge that we took for exceptional items totalled E157 million, more than
half of which resulted from our Chiron acquisition.
CROP PROTECTION
CHANGE FROM CHANGE FROM
PREVIOUS YEAR PREVIOUS YEAR
2000 (%) 1999 (%) 1998
----- ------------- ----- ------------- -----
(EUROS IN MILLIONS)
Net sales (external)........................ 2,456 12.8 2,177 6.5 2,045
Intersegment sales.......................... 97 16.9 83 9.2 76
----- ---- ----- ----- -----
Operating result before exceptional items... 401 4.7 383 (12.8) 439
Operating result............................ 402 (6.9) 432 (1.4) 438
2000 compared with 1999
In 2000, as in the previous year, stiff competition, low commodity prices
and depressed farm incomes created difficulties in the agricultural sector.
Nevertheless, Crop Protection's sales increased 12.8 percent to E2.5 billion. In
addition to the effects of currency exchange rate fluctuations, we attribute
this increase primarily to strong growth in demand for Confidor and Gaucho, our
imidacloprid-based insecticides. The operating result before exceptional items
increased 4.7 percent in 2000. The primary factors driving this positive
development were our imidacloprid products.
1999 compared with 1998
The agricultural sector in 1999 faced low commodity prices and depressed
farm incomes. Markets in South America and the states of the former Soviet Union
were particularly weak. The consolidation process that had begun in earlier
years continued. "Green" biotechnology, the use of natural alternatives to
chemical crop protection substances such as ours, began to compete in the
market, inflicting significant losses in the herbicide market in particular.
External sales in Crop Protection grew 6.5 percent to E2.2 billion in 1999.
We attribute these increases to a strongly increased demand for our Confidor and
Gaucho insecticides, as well as to increased demand for our seed treatments and
garden/professional care products. Also contributing was the introduction of new
products, including our Flufenacet herbicides and Teldor. In addition,
acquisition activity (primarily our acquisition of pbi Home & Garden in the UK
and 50 percent of the Gustafson group in North America) accounted for E70
million of our external sales. Exchange rate fluctuation also had a positive
effect on our Crop Protection sales. Price pressure was strongest in the
herbicides market, but this market is the smallest of those that our Crop
Protection business group serves. In 1999, Crop Protection's operating result
before exceptional items decreased 12.8 percent to E383 million.
95
ANIMAL HEALTH
CHANGE FROM CHANGE FROM
PREVIOUS YEAR PREVIOUS YEAR
2000 (%) 1999 (%) 1998
---- ------------- ---- ------------- ----
(EUROS IN MILLIONS)
Net sales (external)............................ 999 8.9 917 3.5 886
Intersegment sales.............................. 6 -- 6 -- 1
--- ---- --- ----- ---
Operating result before exceptional items....... 157 14.6 137 10.5 124
Operating result................................ 182 80.2 101 (17.9) 123
2000 compared with 1999
Animal Health's sales grew 8.9 percent, to E999 million. We attribute this
increase primarily to strong growth in demand for the anti-flea preparation
Advantage, the flagship product of our Animal Health segment. Increased
competition from generic products forced us to lower prices, however. These
lower prices slightly offset our sales growth.
Animal Health's operating result before exceptional items increased 14.6
percent in 2000. This increase reflected improvements in Animal Health. The
primary factors driving this positive development were our products for
livestock.
1999 compared with 1998
External sales in Animal Health grew 3.5 percent to E917 million in 1999.
We attribute these increases to a strongly increased demand of our Animal Health
products for small and companion animals. Exchange rate fluctuation also had a
positive effect on Animal Health sales. Our sales growth was partly offset by
price reductions in response to competition from generic products. In 1999,
Animal Health's operating result before exceptional items increased 10.5 percent
to E137 million. We attribute this decrease primarily to market weakness in the
Americas.
PLASTICS & RUBBER
CHANGE FROM CHANGE FROM
PREVIOUS YEAR PREVIOUS YEAR
2000 (%) 1999 (%) 1998
----- ------------- ----- ------------- -----
(EUROS IN MILLIONS)
Net sales (external)........................ 5,816 25.7 4,627 6.8 4,331
Intersegment sales.......................... 122 7.0 114 22.6 93
----- ----- ----- ----- -----
Operating result before exceptional items... 560 26.4 443 (11.4) 500
Operating result............................ 515 102.8 254 (43.9) 453
2000 compared with 1999
Sales of our Plastics & Rubber segment increased 25.7 percent to E5.8
billion. Increased demand and volumes as well as currency exchange rate
fluctuations caused a significant part of the increase. In addition, we were
able to implement price increases in the Plastics business group, although
prices held stable or declined slightly in other business groups. We achieved a
26.4 percent increase in the operating result before exceptional items despite
lower demand and weak pricing in many of the markets that this segment serves.
Severe increases in raw material and energy costs (which we were able to pass on
to customers only to a limited extent) were the primary obstacle to a more
substantive increase. Because of a rise in crude oil prices, our most severe
price increases were for energy and petrochemical-derived raw materials.
96
1999 compared with 1998
In 1999 our Plastics & Rubber segment sales rose to E4.6 billion (a 6.8
percent increase). Increased volumes, particularly in the Plastics business
group, were a major positive factor in our sales growth; exchange rate effects
also had a positive effect. Strong growth in the Asian markets also contributed
to our increased sales, as Asian economies recovered from a downturn in 1997.
Although we increased sales of our Plastics & Rubber segment, higher raw
material costs squeezed margins contributing to the decline in operating result
before exceptional items.
POLYURETHANES, COATINGS & COLORANTS
CHANGE FROM CHANGE FROM
PREVIOUS YEAR PREVIOUS YEAR
2000 (%) 1999 (%) 1998
----- ------------- ----- ------------- -----
(EUROS IN MILLIONS)
Net sales (external)........................ 5,076 30.0 3,904 7.6 3,629
Intersegment sales.......................... 462 (4.1) 482 (11.7) 546
----- ----- ----- ----- -----
Operating result before exceptional items... 518 (26.8) 657 8.1 604
Operating result............................ 473 (23.6) 619 10.9 558
2000 compared with 1999
Sales of our Polyurethanes, Coatings & Colorants segment grew by 30.0
percent to E5.1 billion. Increased demand and volumes as well as currency
exchange rate fluctuations caused a significant part of the increase, whereas
prices held stable or declined slightly. A major cause of the strong sales
growth in Polyurethanes was our acquisition of Lyondell's polyols business.
Before this acquisition, we produced only one of the two main components of
polyurethane substances. By acquiring the ability to produce polyols, the other
main component, we filled a substantial gap in our production capabilities and
generated significant additional business.
Resulting from lower demand and weak pricing in many of the markets that
this segment serves the operating result before exceptional items of
Polyurethanes, Coatings & Colorants decreased 26.8 percent. Severe increases in
raw material and energy costs (which we were able to pass on to customers only
to a limited extent) were the primary obstacle to an increase. Because of a rise
in crude oil prices, our most severe price increases were for energy and
petrochemical-derived raw materials. In addition, we bore additional expenses
arising from integrating Lyondell's former polyols business.
1999 compared with 1998
In 1999, Polyurethanes, Coatings & Colorants' sales increased by 7.6
percent to E3.9 billion. Increased volumes, particularly in the segment's
Coatings & Colorants business group, were a major positive factor in our sales
growth; exchange rate effects also had a positive effect. Strong growth in the
Asian markets also contributed to our increased sales, as Asian economies
recovered from a downturn in 1997. Our prices to customers, however, held stable
or declined, reducing growth in sales through most of the segment.
Despite our ability to increase the segment's sales, higher raw material
costs for most business groups squeezed margins. Our operating result before
exceptional items increased only 8.1 percent.
97
CHEMICALS
CHANGE FROM CHANGE FROM
PREVIOUS YEAR PREVIOUS YEAR
2000 (%) 1999 (%) 1998
----- ------------- ----- ------------- -----
(EUROS IN MILLIONS)
Net sales (external)........................ 4,275 17.8 3,630 (1.4) 3,682
Intersegment sales.......................... 466 (2.5) 478 (10.0) 531
----- ---- ----- ----- -----
Operating result before exceptional items... 442 7.5 411 (15.1) 484
Operating result............................ 462 32.8 348 (14.7) 408
2000 compared with 1999
Our Chemicals segment comprises the Basic and Fine Chemicals, Specialty
Products, Haarmann & Reimer, H.C. Starck and Wolff Walsrode business groups.
This segment's increased sales reflects sales growth across its business groups
that was generally moderate and steady with the exception of H.C. Starck, which
in relative terms significantly outperformed the other groups within the
segment.
In the segment's Basic and Fine Chemicals business group, sales rose to
E1.0 billion (a 13.5 percent increase); Specialty Products' sales increased to
E1.3 billion (up 14.2 percent). Sales increased at Haarmann & Reimer to E865
million (11.6 percent), at H.C. Starck to E665 million (52.9 percent) and at
Wolff Walsrode to E427 million (10.9 percent). Throughout the segment, higher
volumes and increased demand contributed to sales growth of E645 million, as did
currency exchange rate fluctuations, which accounted for approximately a third
of this increase. The product families contributing most significantly to this
trend were H.C. Starck's tantalum products as well as chemicals for the
electronics industry. The continuing strong growth in sales of chemicals for the
microelectronics and telecommunications sectors, which particularly benefited
the segment's H.C. Starck business group, offset the effect of disappointing
sales of life sciences intermediates, a market weakened by unfavorable
conditions in the agricultural sector. Despite growth in volume and demand,
prices for our products generally remained stable or eroded. We were able to
pass the increasing expense of raw materials on to customers only in exceptional
cases.
Growth in the Chemicals segments' operating result before exceptional items
lagged behind its growth in sales at 7.5 percent. The primary factor affecting
the operating result of the Chemicals segment was a severe increase in raw
materials prices which had a particularly strong adverse effect on our Basic and
Fine Chemicals business group.
1999 compared with 1998
Sales of our Chemicals segment remained essentially stable in 1999. Because
of economic difficulties in many of the markets and industries that are
important for our Chemicals segment's revenue, we experienced significant
downward price pressure from many of our customers. Intensified competition,
especially in the basic chemicals field, also increased price pressure. This
downward trend in pricing largely offset the benefit of increased volumes,
although we did achieve strong growth in sales of chemicals and special metals
products for the electronics industry. Disregarding sales of citric acids,
titanium dioxide, silicones and zeolites (businesses that we divested in 1998)
and the effects of other restructuring measures, our Chemicals sales increased 2
percent from their 1998 level. In the segment's Basic and Fine Chemicals
business group, sales declined 6.2 percent to E886 million. Sales of Specialty
Products rose 3.0 percent to E1.1 billion. Haarmann & Reimer's sales declined
6.9 percent, to E775 million. H&R's 1998 sales, however, included E102 million
of revenue from its former Food Ingredients business, which we sold in 1998;
H&R's sales from continuing operations showed a 5.4 percent increase. H.C.
Starck's sales rose 13.6 percent to E435 million. Wolff Walsrode's sales dropped
5.2 percent to E385 million.
The decline in Chemicals' operating result before exceptional items
reflected the negative effects of increased raw materials costs, downward price
pressure and a generally unfavorable climate in most of the segment's markets.
98
LIQUIDITY AND CAPITAL RESOURCES 2000, 1999 AND 1998
CASH FLOWS
In recent years, our primary source of liquidity has been cash from
operations. We use cash in investing activities primarily for acquisitions as
well as for additions to property, plant, equipment and investments. We use cash
in financing activities primarily to retire debt and pay dividends. At December
31, 2000, we had cash, cash equivalents and working capital totaling E9.30
billion. We believe that our working capital is sufficient for our present
requirements. There are no material legal or economic restrictions on the
ability of member companies of the Bayer Group to transfer funds to Bayer AG.
The following table summarizes our cash flows in each of the last three
years:
CHANGE FROM CHANGE FROM
PREVIOUS YEAR PREVIOUS YEAR
2000 (%) 1999 (%) 1998
------ ------------- ------ ------------- ------
(EUROS IN MILLIONS)
Gross operating cash flow................. 4,164 30.5 3,192 (3.7) 3,315
Thereof discontinuing operations........ 214 (28.7) 300 (38.1) 485
Changes in working capital................ (1,073) -- 1 -- (546)
Net cash provided by operating
activities.............................. 3,091 (3.2) 3,193 15.3 2,769
Thereof discontinuing operations........ 218 (21.0) 276 (54.2) 602
Net cash provided by (used in) investing
activities.............................. (6,189) -- 71 -- (3,192)
Thereof discontinuing operations........ (181) -- 2,473 -- (368)
Net cash provided by (used in) financing
activities.............................. 772 -- (1,669) -- (122)
Thereof discontinuing operations........ 18 -- (29) -- 34
Change in cash and cash equivalents....... (2,326) -- 1,595 -- (545)
Cash and cash equivalents at beginning of
period.................................. 2,812 137.5 1,184 (32.2) 1,746
Change in scope of consolidation.......... (3) -- 19 -- (18)
Exchange rate movements................... 8 (42.9) 14 -- 1
Cash and cash equivalents at end of
year.................................... 491 (82.5) 2,812 137.5 1,184
Marketable securities and other
instruments............................. 213 (35.1) 328 (38.9) 537
Liquid assets as per balance sheets....... 704 (77.6) 3,140 82.5 1,721
CASH FROM OPERATING ACTIVITIES
Cash from operating activities was E4.2 billion in 2000, E3.2 billion in
1999 and E3.3 billion in 1998. In 2000, the gross cash provided by operating
activities increased 30.5 percent from 1999. We attribute this increase mainly
to the higher operating result from continuing operations in 2000. In 1999,
gross operating cash flow declined 3.7 per cent from the previous year,
primarily because of a lower operating result from continuing operations than in
1998.
In 2000, business expansion led to a substantial increase in working
capital and thus a reduction of E0.1 billion, or 3.2 percent, in net cash
provided by operating activities. The higher working capital reflected both
growth in inventories of E0.8 billion and an increase in trade accounts
receivable to E0.5 billion. An increase in trade accounts payable to E0.4
billion partly offset these two factors. In 1999, net cash provided by operating
activities increased 15.3 percent from the previous year, primarily because
working capital had been higher in 1998 than in 1999. Total working capital
increased by E1.1 billion during 2000, having remained essentially stable from
1998 to 1999.
99
INVESTING ACTIVITIES
Bayer's principal liquidity requirement in recent years has been for
acquisitions and for purchases of property, plant and equipment. During the same
period, our primary sources of cash inflows from investing activities have been
sales of property, plant and equipment; interest and dividends received; and
marketable securities. In 2000, we had a net cash outflow for investing
activities of E6.2 billion. We had cash receipts of E0.6 billion from sales of
property, plant and equipment and from inflows from interest and dividend
receipts and from marketable securities. This figure only slightly offset our
E4.1 billion for acquisitions and E2.6 billion for additions to property, plant,
equipment and investments during 2000. There was a net cash inflow from
investing activities of E0.1 billion in 1999. The E2.2 billion in proceeds from
our sale of Agfa shares and our E0.6 billion in proceeds from the sale of
companies formerly owned by Agfa-Gevaert N.V. at the beginning of 1999 led to a
net cash inflow of E2.6 billion. This inflow plus E0.4 billion in interest
receipts and proceeds from redemptions of marketable securities offset cash
outflows of E2.6 billion for capital expenditures and E0.3 billion for
acquisitions. The net cash outflow of E3.2 billion in 1998 reflected E4.1
billion invested in property, plant and equipment and acquisitions, as partially
offset by cash inflows.
FINANCING ACTIVITIES
Financing activities in 2000 provided us with a net cash inflow of E0.8
billion, with net borrowings of E2.1 billion and dividend and interest payments
of E1.3 billion. In 1999, we had a net cash outflow of E1.7 billion from
financing activities. We used part of the operating cash flow to reduce net
borrowings by E0.6 billion. Bayer Corporation, Bayer AG's wholly-owned U.S.
subsidiary, redeemed on maturity $300 million of 7.75 percent Notes issued in
1994. Disbursements for payment of Bayer AG's dividend for 1998 came to E0.8
billion; interest payments totaled E0.3 billion. In 1998, net cash used in
financing activities was E0.1 billion, reflecting our higher net borrowings to
finance that year's acquisitions.
See "-- Borrowings" below for a discussion of the times our existing debt
will mature and of our potential plans for obtaining future financing by issuing
new debt.
We believe that we have sufficient borrowing capacity to meet our
foreseeable needs. To provide flexible short- to medium-term funding, we
established a $5 billion global commercial paper program and a E2 billion
european medium-term note program in 2000. Our committed and uncommitted bank
lines of credit currently amount to more than E4 billion. In addition to these
sources of funding, we may issue debt securities in the capital markets to meet
our longer-term funding requirements.
CAPITAL EXPENDITURES
We generally fund our capital expenditures with cash flow from operations
and, if such funds are not sufficient, through other cash on hand and from the
sale of liquid investments, including cash equivalents and marketable
securities. We fund any further capital expenditures with borrowings. Capital
expenditures amounted to E2.6 billion in each of 2000 and 1999, and to E2.7
billion in 1998.
Our major capital expenditures since 1998 included:
YEAR SEGMENT DESCRIPTION
---- ------- -----------
2000 Pharmaceuticals -- Construction of process development pilot plant,
Wuppertal, Germany (completed 2000)
Consumer Care & -- Expansion of solids plant, Bitterfeld, Germany
Diagnostics
Crop Protection -- Fungicides production facility, Dormagen, Germany
(completed 2000)
-- Expansion of solids formulation plant (parasiticides,
insecticides, rodenticides), Belford Roxo, Brazil
100
YEAR SEGMENT DESCRIPTION
---- ------- -----------
Plastics & Rubber -- Expansion of polycarbonate capacities (Makrolon(R) and
bisphenol A), Map Ta Phut, Thailand
-- Construction of Therban(R) facility, Leverkusen,
Germany (completed 2000)
Polyurethanes, -- Facility for continuous production of long chain
Coatings & Colorants polyethers by our proprietary IMPACT process, Channelview,
Texas
-- Expansion of coating raw materials production,
Leverkusen, Germany
Chemicals -- Construction of sulfuric acid facility, Leverkusen,
Germany
-- Expansion/modification of electrolysis plant,
Leverkusen, Germany
-- Construction of polyaspartic acid facility, Leverkusen,
Germany
-- Expansion of tantalum production at H.C.Starck, Germany
and Japan
1999 Pharmaceuticals -- Expansion of capacities for Kogenate(R), Berkeley,
California
-- Modernization and expansion of blood plasma facilities,
Clayton, North Carolina
-- Launch of plant for Avelox(R)/Avalox(R), Leverkusen,
Germany (Completed 1999)
Consumer Care & -- Expansion of production capacities for urine chemistry
Diagnostics systems, Mishawaka, Indiana
Crop Protection -- Construction of multi-purpose facility for crop
protection products, Dormagen, Germany
Animal Health -- Expansion and start-up of new production facilities for
animal health products in Shawnee, Kansas (completed 1999)
Plastics & Rubber -- Expansion of bisphenol A and Makrolon(R) capacities,
Antwerp, Belgium
-- Modernization/Expansion of (halo)butyl rubber
facilities, Sarnia, Ontario
Polyurethanes, -- Expansion of TDA/TDI capacity, Baytown, Texas
Coatings & Colorants
Chemicals -- Expansion of fine chemicals production, Leverkusen,
Germany
-- Modernization and expansion of tantalum/niobium
facility, Map Ta Phut, Thailand (completed 1999)
-- Ion exchange resin facility, Bitterfeld, Germany
(completed 1999)
101
YEAR SEGMENT DESCRIPTION
---- ------- -----------
1998 Crop Protection -- Formulating plant for crop protection products (Bayer
Zhongxi Agrochemical Co. Ltd.), Shanghai, China
Animal Health -- Production facility for animal health products,
Chengdu, China
Plastics & Rubber -- Bisphenol A plant, Bayton, Texas (completed 1998)
-- Expansion of polycarbonate capacities in Antwerp,
Belgium and Baytown, Texas (completed 1998)
-- Expansion of latex facilities (PolymerLatex GmbH),
Marl, Germany (completed 1998)
Polyurethanes, -- Rock salt electrolysis to supply the Plastics and
Coatings & Colorants Polyurethanes business groups, Baytown, Texas (completed
1998)
-- Expansion of MDI monomer capacity, Baytown, Texas
(completed 1998)
Chemicals -- Chrome plant, Isando, South Africa, and expansion of
facilities for chrome tanning agents, Merebank, South
Africa (both completed 1998)
-- Production of leather chemicals, Wuxi, China (completed
1998)
-- Nickel hydroxide production facility, Sarnia, Ontario
(completed 1998)
-- Expansion of flavor formulation plant, Holzminden,
Germany
COMMITMENTS
INVESTMENTS
We expect to spend E7.25 billion (including the assumption of debt of E1.9
billion) to acquire Aventis' CropScience business. In addition to the effect of
the CropScience acquisition, we expect that our capital expenditures will
increase slightly over the next several years in order to maintain existing
facilities, to meet changing regulatory, health, safety and environmental law
requirements, to achieve process improvement and to facilitate the launch and
manufacture of new products.
For 2001, we originally planned investments totaling E3.1 billion. In light
of world economic developments in that year, we did not spend this full amount.
As in recent years, the main focus of our capital spending will be in our
Polymers business, for example the expansion of polycarbonates capacities in
Asia, Europe and North America.
OTHER COMMITMENTS
In 2000, our minimum non-discounted future lease payments relating to
long-term lease and rental arrangements totaled E883 million, compared with E851
million in 1999. Of this amount, E285 million represented future payments under
financial leases. Under these leases, Bayer companies are regarded as economic
owners of the leased assets, which we capitalize on our balance sheet. In 1999
this figure was E277 million.
Our financial commitment for orders placed under purchase agreements
relating to planned or ongoing capital expenditure projects totaled E446 million
in 2000. We expect to pay the majority of this amount in 2001. In 1999, this
figure was E391 million.
We will fund approximately E349 million during the coming years in
connection with our various research collaborations and approximately E334
million in connection with other commitments based upon the achievement of
certain milestones or other specific conditions.
102
BORROWINGS
Our consolidated financial statements reflect borrowings as "financial
obligations", which include debentures, liabilities to banks, liabilities under
lease agreements, liabilities from the issuance of promissory notes, commercial
paper and other financial obligations. Our financial obligations at December 31,
2000 were E6.67 billion, compared to E4.47 billion at December 31, 1999;
financial obligations at December 31, 1998 were E4.73 billion. Our short-term
financial obligations at December 31, 2000 were E3.86 billion, compared with
E2.11 billion at December 31, 1999 and E2.33 billion at December 31, 1998.
During 2001, we expect to repay financial obligations in the total amount
of E3.9 billion. The following table shows the anticipated maturities of our
outstanding financial obligations at December 31, 2000.
MATURING IN
---------------------------------------------
2001 2002 2003 2004 2005 AFTER 2005
---- ---- ---- ---- ---- ----------
(EUROS IN BILLIONS)
3.9 0.9 0.1 * 0.3 1.5
---------------
* Less than E100 million.
FUNDING AND TREASURY POLICIES
Like any business, we may be exposed to interest rate risk. Because of the
global nature of our business, we are also exposed to currency-related risks
such as exchange rate and translation risk. To hedge our risks, we use primarily
over-the-counter derivative instruments, particularly forward foreign exchange
contracts, option contracts, interest rate swaps, and interest and principal
currency swaps. We do not use derivative instruments for trading or other
speculative purposes.
Interest rate risk applies mainly to receivables and payables with
maturities of over one year. Items with these long maturities are not material
to our operations but are relevant to our investments and financial obligations.
Here, derivative financial instruments are our main method of interest rate
hedging. We use interest rate swaps to convert a small portion of our floating
rate investments into, in effect, fixed rate investments. Short-term interest
rate hedging contracts (including interest and principal currency swaps) totaled
E0.3 billion in 2000 and E1.3 billion in 1999. In 2000, hedges maturing in more
than one year represented E3.2 billion and, in 1999, E1.4 billion.
Because a substantial portion of Bayer's assets, liabilities, sales and
earnings are denominated in currencies other than the euro-zone currencies, we
have translation exposure to fluctuations in the values of these currencies
relative to the euro. These currency fluctuations, especially the fluctuation of
the value of the U.S. dollar relative to the euro, can have a material impact on
our results of operations. For example, an increase in the value of the U.S.
dollar relative to the euro will increase the euro value of Bayer's sales and
earnings made in the dollar zone and increase the competitiveness of its
products produced in Europe against products exported from the United States. In
1999 and 2000, the effects of currency fluctuations were positive, increasing
our total sales by E2.2 billion in 2000 and E0.6 in 1999. This effect was mainly
due to an increase of the value of the U.S. dollar compared to the euro (the
average relative value of one euro in 2000 was $0.93, compared with average
values of $1.07 in 1999 and $1.11 in 1998). During 1998, exchange rate
fluctuations, particularly with respect to Japanese yen, had a negative effect,
depressing sales by E0.2 billion.
In order to mitigate the impact of currency exchange fluctuations, we hedge
a portion of our risk through the use of derivative financial instruments,
particularly forward foreign exchange contracts and currency options. Our
Corporate Treasury department has the central responsibility for managing our
currency exposures and using currency derivatives. We establish the maturity
dates of hedging contracts according to the anticipated cash flows of the Bayer
Group. Our policy is to use a mixture of instruments depending upon our view of
market conditions based on fundamental and technical analysis. As of December
31, 2000, we had entered into forward foreign exchange contracts and currency
swaps with a nominal value of E3.42 billion, compared to E2.34 billion in 1999.
Our aggregate direct transaction risk from sales and purchases in foreign
currencies was approximately E2.9 billion at December 31, 2000, consisting
primarily of dollars ($1.8 billion), Japanese yen (Y70 billion) and
103
British pounds sterling (L0.1 billion). We do not anticipate significant changes
for 2001. Since the introduction of the euro on January 1, 1999, we no longer
face transaction risk in member currencies of the euro zone.
For more information, see Item 11, Quantitative and Qualitative Disclosures
about Market Risk and Item 12, Descriptions of Securities Other Than Equity
Securities.
INFLATION, SEASONALITY AND CYCLICALITY
Inflation has not had a material effect on our operating results in recent
years. Seasonality affects only a few of our business lines, and does not
materially affect our business as a whole. However, a number of our business
groups are subject to cyclicality, either directly or because of the effect of
cyclicality on their customers' businesses, especially in agricultural products.
A general slowdown in worldwide agriculture has affected our Crop Protection and
Animal Health segments as well as our Chemicals segment's sales to customers in
the agrochemicals business. Nevertheless, our diversified palette provides some
protection from cyclicality. In recent years, for example, strong demand for our
Chemicals products from the electronics industry has offset weakening demand
from the agricultural sector.
104
FIRST HALF YEAR 2001 AND 2000
OVERVIEW
BAYER GROUP
The following table shows sales and income for Bayer as a whole.
CHANGE FROM
SIX MONTHS ENDED PREVIOUS HALF-YEAR SIX MONTHS ENDED
JUNE 30, 2001 (%) JUNE 30, 2000
---------------- ------------------ ----------------
(EUROS IN MILLIONS)
Net sales.................................... 15,972 4.8 15,238
Gross profit................................. 7,154 3.0 6,946
as percentage of sales (%)................. 44.8 -- 45.6
Operating result............................. 1,671 (16.2) 1,994
as percentage of sales (%)................. 10.5 -- 13.1
Income before income taxes................... 1,441 (18.9) 1,776
Net income................................... 1,006 (2.6) 1,033
as percentage of sales (%)................. 6.3 -- 6.8
The following table shows a geographical breakdown (by market) of our sales
from continuing operations.
CHANGE FROM
SIX MONTH ENDED PREVIOUS HALF-YEAR SIX MONTH ENDED
JUNE 30, 2001 (%) JUNE 30, 2000
--------------- ------------------ ---------------
(EUROS IN MILLIONS)
Europe........................................ 6,546 10.6 5,916
North America................................. 4,879 4.8 4,657
Asia/Pacific.................................. 2,509 5.6 2,377
Latin America/Africa/Middle East.............. 1,684 8.7 1,549
JUNE 30, 2001 COMPARED WITH JUNE 30, 2000
Net Sales
European economic growth slowed in the second quarter, especially in
Germany and in North America. The slowdown of these economies is having an
increasingly adverse effect on the markets in Asia.
Raw material costs remain high, and we have not generally been able to
offset these costs through higher selling prices. Demand in major customer
industries dropped. Temporary production problems for some of our biological
products also had an adverse effect.
Our sales from continuing operations rose by E1.1 billion, or 7.7 percent,
to E15.6 billion. Portfolio changes and price adjustments accounted for 4.4 and
3.7 percentage points, respectively, while a 1.7 percent improvement in exchange
rates was offset by lower volumes of 2.1 percent attributable to the economic
downturn. The sales of our discontinuing operations, the Fibers and EC
Erdolchemie (until April 30, 2001) business groups, went down by E0.4 billion,
or 52.1 percent, to E0.4 billion. The discontinuing operations included, net
sales increased E0.7 billion, or 4.8 percent, to E16.0 billion.
105
The following table shows, in an overview, the developments in net sales of
our seven business segments:
CHANGE FROM
SIX MONTHS ENDED PREVIOUS HALF-YEAR SIX MONTHS ENDED
BUSINESS SEGMENT JUNE 30, 2001 (%) JUNE 30, 2000
---------------- ---------------- ------------------ ----------------
(EUROS IN MILLIONS)
Pharmaceuticals.............................. 2,932 2.5 2,861
Consumer Care & Diagnostics.................. 1,997 5.9 1,886
Crop Protection.............................. 1,609 1.9 1,579
Animal Health................................ 483 (6.0) 514
Plastics & Rubber............................ 2,989 6.3 2,812
Polyurethanes, Coatings & Colorants.......... 2,682 11.5 2,406
Chemicals.................................... 2,496 18.6 2,104
Gross Profit
Gross profit represents net sales after cost of goods sold and services
provided. Cost of goods sold and services provided include the production costs
of goods sold and the cost of goods purchased for resale.
Despite a sales increase of 7.7 percent, our gross profit from continuing
operations increased only E0.2 billion, or 3.0 percent, to E7.2 billion. Cost of
goods sold, which had increased 12.1 percent from the previous period, cut into
our margins.
Operating Result
Operating result represents gross profit after selling expenses, research
and development expenses, general administration expenses and other operating
income and expenses. We distinguish between our results from continuing and
discontinuing operations.
Our operating result from continuing operations before exceptional items
decreased E0.5 billion, or 23.3 percent, to E1.5 billion. This decrease was due
mainly to production problems for biological products, the sustained high cost
of raw materials and a drop in demand from major customer industries.
The operating result from our discontinuing operations of the Fibers and EC
Erdolchemie (until April 30, 2001) business groups increased E0.2 billion to
E0.3 billion, which includes E0.3 billion in exceptional income from the sale of
our 50 percent interest in EC Erdolchemie.
Our operating result including discontinuing operations fell by E0.3
billion, or 16.2 percent, to E1.7 billion.
The following table shows, in an overview, the developments in operating
result before exceptional items of our seven business segments:
CHANGE FROM
SIX MONTHS ENDED PREVIOUS HALF-YEAR SIX MONTHS ENDED
BUSINESS SEGMENT JUNE 30, 2001 (%) JUNE 30, 2000
---------------- ---------------- ------------------ ----------------
(EUROS IN MILLIONS)
Pharmaceuticals.............................. 315 (47.1) 596
Consumer Care & Diagnostics.................. 130 0 130
Crop Protection.............................. 370 (4.6) 388
Animal Health................................ 83 (16.2) 99
Plastics & Rubber............................ 316 21.1 261
Polyurethanes, Coatings & Colorants.......... 116 (65.5) 336
Chemicals.................................... 293 18.1 248
Non-Operating Result
The non-operating result decreased by 5.5 percent to - E0.2 billion because
of higher interest expense.
106
Income Before Income Taxes
Our income before taxes from continuing operations decreased E0.6 billion,
or 34.0 percent, to E1.1 billion. Including discontinuing operations, the
decrease in income before taxes was 18.9 percent.
Income Taxes
Income tax expense was down by E0.3 billion because of tax-free income from
the sale of our interest in EC Erdolchemie, bringing the effective tax rate down
10.9 percentage points to 30.3 percent. Disregarding this tax-free income, the
tax rate was 38.8 percent.
Net income
After minority interests, net income from continuing operations decreased
E273 million, or 28.0 percent, to E702 million. Including discontinuing
operations, our net income decreased E27 million to E1,006 million.
SEGMENT DATA
PHARMACEUTICALS
CHANGE FROM
SIX MONTH ENDED PREVIOUS HALF-YEAR SIX MONTH ENDED
JUNE 30, 2001 (%) JUNE 30, 2000
--------------- ------------------ ---------------
(EUROS IN MILLIONS)
Net sales (external).......................... 2,932 2.5 2,861
Intersegment sales............................ 18 (10.0) 20
----- ----- -----
Operating result before exceptional items..... 315 (47.1) 596
Operating result.............................. 323 (47.0) 610
Pharmaceuticals' sales grew by 2.5 percent. The main reason for this slow
growth was the delay on product releases of Kogenate. Sales in the business
group's Ethical Products unit, however, rose 7.6 percent, driven primarily by
our anti-infective Avalox/Avelox and the cholesterol-lowering drug
Lipobay/Baycol.
The segment's operating result before exceptional items dropped by 47.1
percent to E0.3 billion due to production problems for biological products. This
led to exceptional charges of E170 million in the first half. We have initiated
a number of programs intended to improve profitability in this segment.
CONSUMER CARE & DIAGNOSTICS
CHANGE FROM
SIX MONTH ENDED PREVIOUS HALF-YEAR SIX MONTH ENDED
JUNE 30, 2001 (%) JUNE 30, 2000
--------------- ------------------ ---------------
(EUROS IN MILLIONS)
Net sales (external).......................... 1,997 5.9 1,886
Intersegment sales............................ 15 -- 0
----- ----- -----
Operating result before exceptional items..... 130 -- 130
Operating result.............................. 118 31.1 90
Consumer Care & Diagnostics posted a 5.9 percent sales increase, largely as
a result of the growth rates for our Baygon household insecticide in Indonesia
and the expansion of business activities in China. In addition, demand was
strong for Canesten and Talcid in Europe and for Aspirin in North and Central
America. Diagnostics contributed to increased sales with growth overall, the
largest increases being in Europe, India and Latin America.
The segment's operating result before exceptional items remained stable at
E0.1 billion.
107
Consumer Care is seeking to identify savings potentials, and Diagnostics
has already begun to improve earnings through a restructuring program. To
improve performance in the Diagnostics business group, we have acquired
development, manufacturing and marketing rights for products to detect hepatitis
C and HIV antibodies.
CROP PROTECTION
CHANGE FROM
SIX MONTH ENDED PREVIOUS HALF-YEAR SIX MONTH ENDED
JUNE 30, 2001 (%) JUNE 30, 2000
--------------- ------------------ ---------------
(EUROS IN MILLIONS)
Net sales (external).......................... 1,609 1.9 1,579
Intersegment sales............................ 77 37.5 56
----- ----- -----
Operating result before exceptional items..... 370 (4.6) 388
Operating result.............................. 370 (3.1) 382
Sales in the Crop Protection business segment increased 1.9 percent
following the acquisitions of the Flint product line and Mikado corn herbicide.
The sluggishness of the economy in the United States and Latin America had an
adverse effect, while sales in Europe were hampered by weather-related sales
declines in products for cereals and mounting competitive pressure from generic
herbicides. The segment's operating result before exceptional items declined 4.6
percent to E0.4 billion.
ANIMAL HEALTH
CHANGE FROM
SIX MONTH ENDED PREVIOUS HALF-YEAR SIX MONTH ENDED
JUNE 30, 2001 (%) JUNE 30, 2000
--------------- ------------------ ---------------
(EUROS IN MILLIONS)
Net sales (external).......................... 483 (6.0) 514
Intersegment sales............................ 5 -- 5
----- ----- -----
Operating result before exceptional items..... 83 (16.2) 99
Operating result.............................. 83 (16.2) 99
Sales in Animal Health declined 6.0 percent. The major cause of this
decline was our divestiture of our former U.S. livestock vaccines business.
Despite the overall downward trend, sales of our flea control product Advantage
increased in North America and Japan while sales of the anti-infective Baytril
increased in North America. The segment's operating result before exceptional
items declined 16.2 percent to E0.1 billion.
PLASTICS & RUBBER
CHANGE FROM
SIX MONTH ENDED PREVIOUS HALF-YEAR SIX MONTH ENDED
JUNE 30, 2001 (%) JUNE 30, 2000
--------------- ------------------ ---------------
(EUROS IN MILLIONS)
Net sales (external).......................... 2,989 6.3 2,812
Intersegment sales............................ 61 5.2 58
----- ----- -----
Operating result before exceptional items..... 316 21.1 261
Operating result.............................. 294 19.5 246
Sales in our Plastics & Rubber segment increased 6.3 percent to E3.0
billion. Even disregarding the effect of portfolio changes, the segment showed
growth in the first half, especially in the Plastics business group, where we
were able to offset the effect of lower demand by increasing prices.
108
The operating result before exceptional items of this segment improved by
21.1 percent to E0.3 billion. Major causes of this increase were cost-cutting
measures, the ability to increase prices and lower raw materials costs.
POLYURETHANES, COATINGS & COLORANTS
CHANGE FROM
SIX MONTH ENDED PREVIOUS HALF-YEAR SIX MONTH ENDED
JUNE 30, 2001 (%) JUNE 30, 2000
--------------- ------------------ ---------------
(EUROS IN MILLIONS)
Net sales (external).......................... 2,682 11.5 2,406
Intersegment sales............................ 86 (3.4) 89
----- ----- -----
Operating result before exceptional items..... 116 (65.5) 336
Operating result.............................. 98 (70.1) 328
The Polyurethanes, Coatings & Colorants sales increased 11.5 percent to
E2.7 billion due to acquisitions, including the Lyondell Chemical Company's
polyols business and Sybron Chemicals Inc.
The operating result before exceptional items fell 65.5 percent to E0.1
billion. Major causes of this decline were the continuing high cost of
petrochemical raw materials and utilities. We also felt the impact of customers'
inventory reductions and of lower production volumes in important customer
industries such as the automotive, electrical and construction sectors.
The Polyurethanes business group has brought all of its European
office-based sales, planning and logistics structures together in a new company
known as Bayer Polyurethanes Business Service Center GmbH & Co. KG. We plan to
extend this concept to other business groups and in other parts of the world,
and believe it will improve the efficiency and transparency of our process
chains.
CHEMICALS
CHANGE FROM
SIX MONTH ENDED PREVIOUS HALF-YEAR SIX MONTH ENDED
JUNE 30, 2001 (%) JUNE 30, 2000
--------------- ------------------ ---------------
(EUROS IN MILLIONS)
Net sales (external).......................... 2,496 18.6 2,104
Intersegment sales............................ 245 2.5 239
----- ----- -----
Operating result before exceptional items..... 293 18.1 248
Operating result.............................. 220 (10.9) 247
Sales in the Chemicals segment increased 18.6 percent to E2.5 billion. We
attributed more than half of this increase to acquisitions. Although the H.C.
Starck business group continued its positive trend of recent periods in all of
its regional markets, we believe that consolidation in the electronics market
will cause the business group's growth to slow in the second half of 2001. The
Specialty Products business group's revenue increased 22.1 percent, largely due
to acquisitions. Sales at Wolff Walsrode increased 15.2 percent, more than half
of which was the result of portfolio changes. The methylcellulose business
performed especially well, primarily in North and Latin America, Eastern Europe
and Asia.
The segment's operating result before exceptional items improved by 18.1
percent to E0.3 billion.
In this segment, too, we intend to pursue an earnings-oriented portfolio
management strategy, along with cost containment programs designed to save E200
million a year. The Basic and Fine Chemicals business group, for example, has
embarked on a major efficiency improvement project for its manufacturing
operations.
109
LIQUIDITY AND CAPITAL RESOURCES, FIRST HALF YEAR 2001 AND 2000
CASH FLOWS
Cash and cash equivalents increased by E0.1 billion during the first half
of 2001. The E0.7 billion and E0.1 billion net cash outflows for investing and
financing activities, respectively, were offset by the net cash inflow of E0.8
billion from operating activities.
The following table summarizes our cash flows as of June 30, 2001 and 2000:
CHANGE FROM
PREVIOUS HALF-YEAR
JUNE 30, 2001 (%) JUNE 30, 2000
------------- ------------------ -------------
(EUROS IN MILLIONS)
Gross operating cash flow......................... 1,836 (15.4) 2,169
Thereof discontinuing operations................ 16 (83.3) 96
Changes in working capital........................ (1,005) (23.0) (817)
Net cash provided by operating activities......... 831 (38.5) 1,352
Thereof discontinuing operations................ 9 (85.2) 61
Net cash provided by (used in) investing
activities...................................... (666) 80.3 (3,377)
Thereof discontinuing operations................ (14) 81.1 (74)
Net cash provided by (used in) financing
activities...................................... (71) 60
Thereof discontinuing operations................ (41) (11)
Change in cash and cash equivalents............... 94 (1,965)
Cash and cash equivalents at beginning of
period.......................................... 491 (82.5) 2,812
Change in scope of consolidation.................. 21 (25.0) 28
Exchange rate movements........................... 2 (33.3) 3
Cash and cash equivalents at June 30,............. 608 (30.8) 878
Marketable securities and other instruments....... 58 (72.8) 213
Liquid assets as per balance sheets............... 666 (39.0) 1,091
CASH FROM OPERATING ACTIVITIES
Cash from operating activities was E1.8 billion and gross cash decreased
15.4 percent, mainly due to lower operating results. Net operating cash flow
declined by E0.5 billion, mainly because of an increase in inventories and a
substantial drop in trade accounts payable.
INVESTING ACTIVITIES
The net cash outflow for investing activities amounted to E0.7 billion,
mainly because of disbursements of E1.6 billion for property, plant and
equipment and acquisitions, partly offset by receipts totaling E0.6 billion from
the sale of property, plant and equipment, as well as from investments.
FINANCING ACTIVITIES
Financing activities led to a net cash outflow of E0.1 billion, with
dividend and interest payments amounting to E1.0 billion and E0.2 billion,
respectively, and net borrowings to E1.1 billion.
CAPITAL EXPENDITURES, STRUCTURAL CHANGES
In the first half of 2001 we spent a total of E1.1 billion for intangible
assets, property, plant and equipment, with Europe accounting for E0.7 billion.
The largest increase in our capital spending was in the Asia-Pacific region,
where investment more than doubled to E144 million.
110
We spun off a number of our business units into legally separate subsidiary
companies effective July 1, 2001. We established a new company, Chemion Logistik
GmbH, to take responsibility for the storage, transport and handling of
chemicals and related products and to perform logistics functions for other
companies. We also set up a new online personnel services company, Job@ctive, to
expand e-commerce activities in the human resources field. In addition, we
transferred our travel management and media services to separate legal entities.
By the end of 2002, we plan to merge our European accounting functions into
two newly formed shared services centers in Leverkusen and Barcelona. Our goal
is to enhance the efficiency of accounting procedures for our business groups
and European subsidiaries.
EMPLOYEES
On June 30, 2001 the Bayer Group had 117,300 employees in its continuing
operations, which was 700 fewer than at the start of the year. Headcount
diminished by 1,600 in Europe but increased by 500 in North America and by 400
in Asia/Pacific; the number of employees in the Latin America/Africa/Middle East
region was unchanged. Compared with the first half of 2000, personnel expenses
increased by E300 million, of which E70 million resulted from currency
translation effects.
RECENT DEVELOPMENTS AND TREND INFORMATION
The world economy continued to slow in the third quarter, with Japan and
the United States in recession. In Germany the economy is stagnating. The
expansion in the emerging Asian economies and in Latin America has become
greatly subdued. On top of this, the terrorist attacks in the U.S. have
discouraged consumer spending and led to a further drop in demand from major
customer industries.
Bayer's sales from continuing operations declined by 6 percent in the third
quarter to E6.9 billion due to the weakness of the economy. In addition, the
withdrawal of the cholesterol-lowering drug Lipobay(R)/Baycol(R) caused a E0.4
billion loss of revenue compared to budget. Sales for the first nine months of
2001 rose 3 percent to E22.5 billion.
FIRST QUARTER SECOND QUARTER THIRD QUARTER
------------- ------------------- ----------------- FOURTH QUARTER
2001 2000 2001 2000 2001 2000 2000
----- ----- ----- ----- ----- ----- --------------
(EUROS IN MILLIONS; UNAUDITED)
SALES FROM CONTINUING OPERATIONS:
Domestic sales................................ 2,335 2,119 2,235 2,089 1,905 2,109 2,124
Foreign sales................................. 5,327 4,843 5,721 5,448 4,963 5,193 5,555
OPERATING RESULT FROM CONTINUING OPERATIONS
BEFORE EXCEPTIONAL ITEMS.................... 936 1,005 555 938 66 711 627
THIRD QUARTER 2001 FIRST THREE QUARTERS 2001
------------------ -------------------------
(PERCENT; UNAUDITED)
CHANGE IN SALES:
Reported............................................. -9.8 -0.1
Continuing operations................................ -5.9 3.1
Volumes.............................................. -4.0 -3.0
Prices............................................... -3.0 2.0
Exchange rates....................................... -1.0 1.0
Portfolio changes.................................... 2.0 3.0
The operating result before exceptional items fell in the third quarter
from E711 million to E66 million, and in the first nine months from E2.7 billion
to E1.6 billion. Major reasons for this, apart from cyclical factors, were the
withdrawal of Lipobay(R)/Baycol(R), the production shortfall for biological
products and high expenditures to reengineer our business processes.
Disregarding these one-time effects, the operating result was down 45 percent in
the third quarter and 20 percent in the first three quarters due to the general
economic slowdown. However, we
111
achieved an initial E0.8 billion improvement in working capital performance,
boosting the net operating cash flow for the third quarter by 30 percent
year-on-year.
The company is in a phase of comprehensive restructuring in terms both of
corporate organization and of business processes and the related cost situation.
On top of the E322 million already spent in the first nine months -- including
E103 million in the third quarter -- for business process reengineering, we
spent E231 million -- including E79 million in the third quarter -- for
structural enhancements such as site consolidation and improvements in operating
efficiency. We expect these cost-saving measures to contribute significantly to
earnings over the near to medium term.
BUSINESS TREND BY SEGMENT
Our seven business segments -- Pharmaceuticals; Consumer Care &
Diagnostics; Crop Protection; Animal Health; Plastics & Rubber; Polyurethanes,
Coatings & Colorants; and Chemicals -- had combined external sales of E21.9
billion in the first three quarters of 2001, achieving an operating result of
E1.8 billion before exceptionals and a gross cash flow of E2.5 billion. Plastics
& Rubber was the largest contributor to sales, earnings and cash flow, while
Animal Health posted the highest return on sales.
FIRST THREE QUARTERS 2001
CONSUMER POLYURETHANES,
CARE & CROP ANIMAL PLASTICS & COATINGS &
PHARMACEUTICALS DIAGNOSTICS PROTECTION HEALTH RUBBER COLORANTS CHEMICALS
--------------- ----------- ---------- ------ ---------- -------------- ---------
(EUROS IN MILLIONS BEFORE RECONCILIATION; UNAUDITED)
PERFORMANCE BY
BUSINESS SEGMENT:
Sales................. 4,075 3,021 2,135 744 4,332 3,989 3,579
Operating result
before exceptional
items............... 215 254 359 141 360 153 320
Gross cash flow....... 58 399 408 126 573 438 480
PHARMACEUTICALS
THIRD QUARTER FIRST THREE QUARTERS FULL YEAR
-------------- -------------------- ---------
2001 2000 2001 2000 2000
----- ----- -------- -------- ---------
(EUROS IN MILLIONS)
(UNAUDITED)
Sales........................................ 1,143 1,527 4,075 4,388 6,140
Operating result before exceptional items.... (100) 254 215 850 1,165
Return on sales before exceptional items..... 8.7% 16.6% 5.3% 19.4% 19.0%
Gross cash flow.............................. (194) 244 58 769 1,048
Business in the Pharmaceuticals segment declined by 25 percent in the third
quarter to E1.1 billion, and by 7 percent in the first nine months to E4.1
billion, mainly due to the withdrawal of Lipobay(R)/Baycol(R) and the production
shortfalls for Kogenate(R). More intensive marketing of Ciprobay(R)/Cipro(R)
brought further significant sales growth for this anti-infective drug. In
addition, it has been in particularly high demand in recent weeks on account of
its indication for the treatment of anthrax; this will be reflected mainly in
fourth-quarter sales.
The Pharmaceuticals segment's operating result fell in the third quarter to
a loss of E100 million and in the first three quarters to a profit of E254
million, including the effects of the Lipobay(R)/Baycol(R) product withdrawal
and the production problems for biologicals, which together diminished earnings
from January through September by E0.5 billion and third-quarter income alone by
E0.4 billion. Before these adverse effects, the operating result for both the
first nine months and the third quarter were down by 18 percent.
We have filed for approval of the new drug vardenafil in the United States
and Mexico for the treatment of erectile dysfunction. Market introduction is
expected in those countries in the second half of 2002 and in Europe
112
shortly thereafter. In late 2001, we entered into a co-promotion agreement with
GlaxoSmithKline for vardenafil. Our successful research alliance with Millennium
Pharmaceuticals of Cambridge, Massachusetts, is being expanded to include the
identification of innovative drugs to treat thrombosis, urinary incontinence and
benign prostatic hypertrophy.
CONSUMER CARE & DIAGNOSTICS
THIRD QUARTER FIRST THREE QUARTERS FULL YEAR
-------------- -------------------- ---------
2001 2000 2001 2000 2000
----- ----- -------- -------- ---------
(EUROS IN MILLIONS)
(UNAUDITED)
Sales........................................ 1,024 991 3,021 2,877 3,888
Operating result before exceptional items.... 124 80 254 210 311
Return on sales before exceptional items..... 12.1% 8.1% 8.4% 7.3% 8.0%
Gross cash flow.............................. 174 107 399 276 371
Consumer Care & Diagnostics' revenue advanced by 3 percent in the third
quarter and by 5 percent in the first three quarters. Growth was driven by
markedly higher sales in North America, where the cold remedies Alka-Seltzer
Plus(R) and Aleve Cold(R) posted large increases. Nucleic acid diagnostics also
contributed significantly to growth. The operating result before exceptional
items increased by 55% in the third quarter and by 21% in the first three
quarters. This increase results from good performance in Diagnostics, where we
realized synergies from the integration of Chiron together with normal on-going
business improvements.
CROP PROTECTION
THIRD QUARTER FIRST THREE QUARTERS FULL YEAR
-------------- -------------------- ---------
2001 2000 2001 2000 2000
----- ----- -------- -------- ---------
(EUROS IN MILLIONS)
(UNAUDITED)
Sales........................................ 526 463 2,135 2,042 2,456
Operating result before exceptional items.... (11) 35 359 423 401
Return on sales before exceptional items..... 2.1% 7.6% 16.8% 20.7% 16.3%
Gross cash flow.............................. 63 87 408 376 397
The world market for agricultural products remains characterized by low
prices and fierce competition. Crop Protection boosted revenues in the third
quarter by 14 percent, mainly due to higher sales of herbicides in the United
States, insecticides in India and Brazil, and fungicides in Argentina. The 5
percent growth in business in the nine-month period was due largely to the
acquisitions of the Flint(R) product line and the corn herbicide Mikado(R).
The operating result of the Crop Protection segment fell to E11 million
loss in the third quarter and to E359 million profit for the first three
quarters, mainly due to the amortization of intangible assets acquired with
Flint(R) and Mikado(R).
ANIMAL HEALTH
THIRD QUARTER FIRST THREE QUARTERS FULL YEAR
-------------- -------------------- ---------
2001 2000 2001 2000 2000
----- ----- -------- -------- ---------
(EUROS IN MILLIONS)
(UNAUDITED)
Sales........................................ 261 259 744 773 999
Operating result before exceptional items.... 58 51 141 150 157
Return on sales before exceptional items..... 22.2% 19.7% 19.0% 19.4% 15.7%
Gross cash flow.............................. 53 62 126 143 160
113
Sales in the Animal Health segment advanced by 1 percent in the third
quarter to E0.3 billion and fell by 4 percent in the first nine months to E0.7
billion. The divestiture of the U.S. livestock vaccines business had a negative
effect of 1 and 4 percentage points, respectively. The parasiticide Advantage(R)
again showed encouraging growth in the United States and Japan.
PLASTICS & RUBBER
THIRD QUARTER FIRST THREE QUARTERS FULL YEAR
-------------- -------------------- ---------
2001 2000 2001 2000 2000
----- ----- -------- -------- ---------
(EUROS IN MILLIONS)
(UNAUDITED)
Sales........................................ 1,343 1,476 4,332 4,288 5,816
Operating result before exceptional items.... 44 148 360 409 560
Return on sales before exceptional items..... 3.3% 10.0% 8.3% 9.5% 9.6%
Gross cash flow.............................. 144 209 573 578 802
Our Plastics & Rubber segment has been particularly hard hit by the
weakness of the global economy, with all major customer industries cutting back
production and reducing inventories. Business was down 9 percent in the third
quarter to E1.3 billion, while revenues for the first nine months were up 1
percent to E4.3 billion. Plastics' sales decreased by 10 percent in the third
quarter, mainly because of sharply lower volumes and mounting pressure on prices
in Europe and North America. Sales of this business group in the first nine
months were up by 2 percent, with growth driven by the expansion of the
polycarbonate sheet business. Sales of the Rubber business group in the third
quarter receded 7 percent, but in the nine-month period nearly matched the
previous year. The business trend in North America and Asia was especially
disappointing. The simultaneous decline in volumes and selling prices diminished
third-quarter and first-three-quarters operating profit in the Plastics & Rubber
segment to E44 million and E360 million, respectively, while the gross cash flow
dipped to E0.1 billion and E0.6 billion, respectively.
The Plastics business group has set up a joint venture with Shanghai Chlor
Alkali Chemicals Co. Ltd. to build a new production facility at Caojing, China.
Our planned future output at this location will include Makrolon(R)
polycarbonate (PC), its precursor bisphenol A, and Bayblend(R)
PC/acrylonitrile-butadiene-styrene (ABS) blend, all destined for the Asian
market. We expect capital expenditures at the site to total approximately E500
million.
POLYURETHANES, COATINGS & COLORANTS
THIRD QUARTER FIRST THREE QUARTERS FULL YEAR
------------------- --------------------- ---------
2001 2000 2001 2000 2000
----- ----- ------ ------ ---------
(EUROS IN MILLIONS)
(UNAUDITED)
Sales....................................... 1,307 1,332 3,989 3,738 5,076
Operating result before exceptional items... 37 105 153 441 518
Return on sales before exceptional items.... 2.8% 7.9% 3.8% 11.8% 10.2%
Gross cash flow............................. 90 163 438 584 794
Sales of our Polyurethanes business group decreased by 2 percent in the
third quarter due to the especially disappointing business trends in North
America and Asia. The 7 percent increase for the first three quarters stemmed
mainly from the acquisition of the polyols business of Lyondell Chemical
Company. Portfolio changes had positive effects of 2 and 5 percent,
respectively. As a result of recent acquisitions, the Coatings & Colorants
business group posted 3 percent higher revenues in the third quarter and a 6
percent improvement for the nine months to September. Sales in North America
were below expectations, as were those in Europe during the third quarter.
114
The operating result in the Polyurethanes, Coatings & Colorants segment
dropped to E37 million in the third quarter and to E153 million in the first
three quarters, due to the continuing high expenses for raw materials and
energy.
CHEMICALS
THIRD QUARTER FIRST THREE QUARTERS FULL YEAR
------------------- --------------------- ---------
2001 2000 2001 2000 2000
----- ----- ------ ------ ---------
(EUROS IN MILLIONS)
(UNAUDITED)
Sales....................................... 1,083 1,056 3,579 3,160 4,275
Operating result before exceptional items... 27 104 320 352 442
Return on sales before exceptional items.... 2.5% 9.8% 8.9% 11.1% 10.3%
Gross cash flow............................. 195 139 480 440 600
Sales in the Chemicals segment rose by 3 percent in the third quarter to
E1.1 billion, and by 13 percent in the nine-month period to E3.6 billion, with
portfolio changes accounting for 6 and 9 percentage points, respectively.
Business in Basic and Fine Chemicals declined by 2 percent in the third quarter,
but increased by the same percentage in the first nine months. Divestitures had
a 5- and a 4-point negative effect, respectively. Higher sales in Germany only
partly offset the slump in business in North America and Japan. The Specialty
Products business group saw sales grow by 10 percent in the third quarter and by
18 percent in the first three quarters due to acquisitions. As in the first half
of the year, the business units with the strongest growth were Textile
Processing Chemicals and Special Fields, and Ion Exchange Resins and Water
Chemicals. Wolff Walsrode lifted sales in the first nine months by 8 percent to
E0.3 billion, helped especially by continuing high growth rates for
methylcellulose in the United States, Latin America and eastern Europe. Sales of
Haarmann & Reimer dipped by 1 percent in the third quarter but rose by 2 percent
in the nine-month period. The business group registered above-average growth in
North and South America. Its strong focus on key accounts began to bear fruit,
especially in the Flavors Business Unit. H.C. Starck was impacted in the third
quarter by substantial consolidation in the electronics industry but reported 6
percent higher revenues due to acquisitions. The significant sales gains in the
first half helped to produce a 42 percent increase for the first nine months,
with portfolio changes accounting for 24 percentage points.
The operating result in the Chemicals segment dropped to E27 million in the
third quarter and to E320 million in the first three quarters, marred by
substantial write-downs of tantalum inventories. The gross cash flow improved to
E195 million and E480 million, respectively.
BUSINESS TREND BY REGION
FIRST THREE QUARTERS 2001
-------------------------------------------------------
LATIN AMERICA/
AFRICA/
EUROPE N. AMERICA ASIA/PACIFIC MIDDLE EAST
------- ----------- ------------- ---------------
(EUROS IN MILLIONS BEFORE RECONCILIATION; UNAUDITED)
PERFORMANCE BY REGION (BY POINT OF ORIGIN)
Sales........................................... 10,311 7,397 2,965 1,813
Operating result before exceptional items....... 1,441 (30) 228 200
Gross cash flow................................. 1,704 416 241 201
Sales of our companies in Europe declined in the third quarter by 7 percent
to E3.0 billion, and advanced in the first nine months by 3 percent to E10.3
billion. The operating result and the gross cash flow declined in the third
quarter and in the first three quarters as a whole. The return on sales,
however, remained above the Group average. In North America, too, sales for the
first nine months moved higher due to acquisitions, but were down in the third
quarter. The operating result and gross cash flow also declined. The picture was
similar in Asia/Pacific, though here the sales figure in euros was affected by
exchange rates. In our Latin America/Africa/ Middle East region, there was an
encouraging increase in the operating result and the gross cash flow.
115
LIQUIDITY AND CAPITAL RESOURCES
The consolidated financial statements for the first three quarters of 2001
have been prepared as for the year 2000 according to the rules issued by the
International Accounting Standards Board, London. Reference should be made as
appropriate to the notes to the 2000 statements. The only change arises from the
application of IAS 39 (Financial Instruments: Recognition and Measurement) to
the accounting treatment of primary and derivative financial instruments; this
is explained in the section on asset and capital structure.
The net operating cash flow declined in the first three quarters by 11
percent to E2.0 billion. In the third quarter it grew by 30 percent to E1.2
billion due to a E0.8 billion improvement in working capital performance
compared with the third quarter of 2000. We anticipate a further improvement
here in the fourth quarter.
In the first nine months, the net cash outflow for investing activities
amounted to E1.2 billion, with net disbursements for property, plant and
equipment totaling E1.5 billion and the cash inflow from investments amounting
to E0.3 billion.
Financing activities led to a net cash outflow of just E10 million, with
dividends and interest payments totaling E1.3 billion almost entirely offset by
net borrowings in the same amount.
With net cash of E2.0 billion provided by operating activities and net cash
of E1.2 billion used in investing and financing activities, cash and cash
equivalents had increased as of September 30, 2001 by E0.8 billion to E1.3
billion.
SUMMARY CASH FLOW STATEMENTS
THIRD QUARTER FIRST THREE QUARTERS
------------- --------------------
2001 2000 2001 2000
----- ---- -------- --------
(EUROS IN MILLIONS; UNAUDITED)
Gross operating cash flow................................ 440 984 2,276 3,153
Changes in working capital............................... 766 (56) (239) (873)
Net cash provided by operating activities................ 1,206 928 2,037 2,280
Of which: discontinuing operations..................... 4 68 13 129
Net cash used in investing activities.................... (558) (441) (1,224) (3,818)
Of which: discontinuing operations..................... (1) (6) (15) (80)
Net cash provided by (used in) operating activities...... 61 (401) (10) (341)
Of which: discontinuing operations..................... - (15) (41) (26)
Change in cash and cash equivalents...................... 709 86 803 (1,879)
Cash and cash equivalents at beginning of period......... 608 878 491 2,812
Exchange rate movements and changes in companies
consolidated........................................... 10 (24) 33 7
Cash and cash equivalents at end of third quarter........ 1,327 940 1,327 940
EARNINGS PERFORMANCE
FIRST THREE
THIRD QUARTER QUARTERS FULL YEAR
-------------- -------------- ---------
2001 2000 2001 2000 2000
----- ----- ----- ----- ---------
(EUROS IN MILLIONS)
(UNAUDITED)
Operating result............................... (316) 724 1,355 2,718 3,287
Of which: discontinued operations............ (9) 38 306 111 155
Non-operating result........................... (187) 48 (417) (170) (297)
Income before income taxes..................... (503) 772 938 2,548 2,990
Net income..................................... (183) 534 823 1,567 1,816
116
The operating result -- including discontinuing operations -- for the first
three quarters of 2001 fell by 50 percent to E1.4 billion. This includes the
E0.3 billion gain from the sale of the interest in EC Erdolchemie. The operating
result from continuing operations before exceptionals dropped by 41 percent to
E1.6 billion.
The non-operating result decreased by E0.2 billion to minus E0.4 billion,
mainly because the previous year's figure included E0.2 billion in gains from
the sale of investments in affiliated companies. Income tax expense declined by
E0.8 billion compared with the same period last year, to E0.1 billion, bringing
the effective tax rate down 26 points to 12 percent. Disregarding exceptional
factors, the largest of which was the tax-free income from the sale of the
interest in EC Erdolchemie, the tax rate was 37 percent. Net income declined by
47 percent to E0.8 billion.
ASSET AND CAPITAL STRUCTURE
SEPTEMBER 30,
---------------- DECEMBER 31,
2001 2000 2000
------ ------ ------------
(EUROS IN MILLIONS)
(UNAUDITED)
Noncurrent assets.......................................... 20,794 19,176 20,344
Current assets............................................. 16,542 16,227 16,107
Stockholders' equity....................................... 16,305 16,261 16,140
Minority stockholders' interest............................ 102 210 237
Liabilities................................................ 20,929 18,932 20,074
Total assets............................................... 37,336 35,403 36,451
Total assets increased during the first nine months by E0.9 billion, or 2
percent, to E37.3 billion.
Noncurrent assets grew by E0.5 billion. The major part of the increase
related to investments and resulted from the revaluation of financial
instruments according to IAS 39. These were carried at cost until December 31,
2000 and at fair value thereafter, leading to a E0.3 billion write-up as of
September 30, 2001, which is not recognized in income. Other increases in
investments, totaling E0.2 billion, resulted from the DyStar group's switch to
at-equity status and the purchase of an equity interest in CuraGen Corporation.
Current assets (including deferred taxes) grew by 3 percent compared with the
end of 2000. While liquid assets increased by E0.7 billion, the total of
inventories and receivables declined by E0.4 billion.
Stockholders' equity rose by E0.2 billion to E16.3 billion. Income after
taxes, translation differences and the valuation of financial instruments
according to IAS 39 added a total of E1.2 billion, while the dividend payment
for 2000 diminished equity by E1.0 billion.
Liabilities (excluding provisions) grew by E1.0 billion, or 9 percent, the
major factor here being a E1.3 billion increase in financial obligations that
was mainly due to the utilization of the commercial paper program. Trade
accounts payable declined by E0.4 billion. The net debt of E6.6 billion on
September 30, 2001 was E0.6 billion greater than at the end of 2000 but E1.0
billion lower than at the beginning of the third quarter.
CAPITAL EXPENDITURES
In the first nine months we spent E1.8 billion for intangible assets,
property, plant and equipment, in line with our stated intention to reduce
capital expenditures to the level of depreciation. Europe accounted for E1.1
billion, of which 83 percent was spent at our German sites. Capital spending in
the Asia/Pacific region was up 77 percent to E0.2 billion, while in North
America it was reduced by 38 percent to E0.4 billion.
We had budgeted for total capital expenditures of E3.1 billion in 2001, but
the actual figure is now likely to be considerably lower.
EMPLOYEES
On September 30, 2001 the Bayer Group had 117,100 employees in its
continuing operations, which was 900 fewer than at the start of the year.
Headcount was reduced by 1,100 in Europe, 200 in the Latin America/
117
Africa/Middle East region and 400 in Asia/Pacific. The number of employees in
North America was unchanged. Compared with the first three quarters of 2000,
personnel expenses increased by E363 million, of which E67 million resulted from
currency translations.
OUTLOOK
Sales and earnings in the Pharmaceuticals segment will continue to be
hampered by the worldwide withdrawal of Lipobay(R)/Baycol(R) and the production
problems for Kogenate(R), which together are expected to impact the operating
result for the full year 2001 by approximately E1.4 billion.
We expect that Crop Protection will top the previous year's sales, thanks
mainly to the new product lines Flint(R) and Mikado(R).
The markets served by our Plastics & Rubber; Polyurethanes, Coatings &
Colorants and Chemicals segments are unlikely to see a cyclical recovery in the
fourth quarter. While our polymers activities have a strong competitive stance,
we will restructure our chemicals businesses to focus more strongly on
specialties.
With the efficiency improvement programs we have initiated already bearing
fruit, we expect to report an operating profit in the fourth quarter despite the
global economic slowdown and the negative factors in the Pharmaceuticals
segment.
AVENTIS CROPSCIENCE ACQUISITION
In October 2001, we agreed to acquire Aventis CropScience from its current
owners, Aventis and Schering. In November 2001, the U.S. Federal Trade
Commission began an in-depth analysis of the proposed acquisition, and in
December 2001, the European Commission announced that it would subject the
transaction to a detailed investigation to determine whether the acquisition
violates EU competition law. Approval by the applicable antitrust and
competition authorities is one of the conditions to consummating the
acquisition. These regulations could also condition their approval on the
divestiture of individual business lines from the combined enterprise. We do not
believe that these investigations will delay our expected closing by the end of
the first quarter of 2002.
We believe that Bayer's Crop Protection segment and Aventis CropScience
complement each other well. Our traditional strength in the Crop Protection
field has been in insecticides and fungicides; we expect that Aventis
CropScience will strengthen our herbicide and garden professional care product
lines. The acquisition would also give us access to Aventis CropScience's
biotechnology capabilities and enable us to enter the GMO market if we chose to
do so, and would add significant know-how in the seed business. We expect the
acquisition to improve our regional presence, balancing our traditional strength
in Europe with Aventis CropScience's presence in North America and Latin
America. Successful consummation of the Aventis CropScience acquisition should
permit us to offer a broader range of crop protection solutions, both
geographically and in terms of products.
We believe that the combination of Aventis CropScience and our existing
Crop Protection business offers significant potential cost savings as compared
to the costs associated with running the two businesses separately. These
savings should arise from streamlining of the production, administration and
marketing activities of the two businesses, as well as from combining their
research and development activities. Any estimate of potential cost savings must
remain preliminary pending the outcome of antitrust and competition reviews by
regulatory authorities and the closing of the acquisition. However, subject to
further work by the integration teams of the two businesses, we have identified
cost savings that we estimate may amount to up to approximately E500 million
annually. We believe that it will take approximately five years to achieve the
full potential of these savings.
Under the terms of the Aventis CropScience acquisition, Bayer will not
acquire Aventis CropScience's StarLink genetic technology and will not assume
liability for any claims connected with that technology.
We intend to finance the acquisition of Aventis CropScience by issuing
commercial paper and through borrowings under our European Medium-Term Note
program. We plan to repay this debt primarily through the cash flow generated by
the combined Crop Protection business. We will also seek to make additional
funds available by improving working capital management, for example, by
reducing inventories. We expect that our
118
increased borrowings will result, at least temporarily, in a reduction of our
credit rating and a consequent increase in our borrowing costs. Although we do
not believe that the lower credit rating will materially harm our business, we
will seek to restore our pre-acquisition debt ratings and financial flexibility
as quickly as possible.
HIGHLIGHTS
THREE-MONTH PERIOD NINE-MONTH PERIOD
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- ----------------------
2001 2000 2001 2000
---------- --------- --------- ---------
(EUROS IN MILLIONS, EXCEPT NUMBER OF EMPLOYEES)
(UNAUDITED)
SALES.............................................. 6,931 7,680 22,903 22,918
of which: discontinuing operations............... 63 378 417 1,117
SALES FROM CONTINUING OPERATIONS................... 6,868 7,302 22,486 21,801
Change........................................... -5.9% 22.5% 3.1% 22.1%
Domestic companies............................... 1,905 2,109 6,475 6,316
Change........................................... -9.7% 16.0% 2.5% 11.8%
Foreign companies................................ 4,963 5,193 16,011 15,485
Change........................................... -4.4% 25.4% 3.4% 26.8%
OPERATING RESULT................................... (316) 724 1,355 2,718
of which: discontinuing operations............... (9) 38 306 111
OPERATING RESULT FROM CONTINUING OPERATIONS........ (307) 686 1,049 2,607
Change........................................... -- 23.4% -59.8% 27.4%
OPERATING RESULT FROM CONTINUING OPERATIONS BEFORE
EXCEPTIONAL ITEMS................................ 66 711 1,557 2,654
Change........................................... -90.7% 11.1% -41.3% 21.8%
RETURN ON SALES BEFORE EXCEPTIONAL ITEMS........... 1.0% 9.7% 6.9% 12.2%
NET INCOME......................................... (183) 534 823 1,567
Change........................................... -- 23.9% -47.5% -27.1%
GROSS CASH FLOW.................................... 440 984 2,276 3,153
Change........................................... -55.3% 26.0% -27.8% 28.4%
CAPITAL EXPENDITURES IN CONTINUING OPERATIONS...... 611 605 1,753 1,855
Domestic companies............................... 335 237 887 753
Foreign companies................................ 276 368 866 1,102
NUMBER OF EMPLOYEES IN CONTINUING OPERATIONS AS OF
SEPTEMBER 30..................................... -- -- 117,100 116,500
Personnel expenses............................... 1,961 1,906 5,858 5,503
Change........................................... 2.9% 7.1% 6.5% 8.3%
119
SUMMARY CONSOLIDATED INTERIM FINANCIAL INFORMATION, FIRST THREE QUARTERS 2001
AND 2000 (UNAUDITED)
INCOME STATEMENT DATA
THREE-MONTH PERIOD NINE-MONTH PERIOD
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
2001 2000 2001 2000
-------- -------- -------- --------
(EUROS IN MILLIONS, EXCEPT PER SHARE DATA)
(UNAUDITED)
NET SALES............................................ 6,931 7,680 22,903 22,918
Net sales from discontinuing operations.............. (63) (378) (417) (1,117)
Net sales from continuing operations................. 6,868 7,302 22,486 21,801
Cost of goods sold................................... (4,240) (3,913) (12,704) (11,466)
------ ------ ------- -------
GROSS PROFIT......................................... 2,628 3,389 9,782 10,335
Selling expenses..................................... (1,810) (1,716) (5,393) (4,840)
Research and development expenses.................... (637) (600) (1,847) (1,705)
General administration expenses...................... (298) (156) (852) (688)
Other operating expenses -- net...................... (190) (231) (641) (495)
------ ------ ------- -------
OPERATING RESULT FROM CONTINUING OPERATIONS.......... (307) 686 1,049 2,607
Operating result from discontinuing operations....... (9) 38 306 111
------ ------ ------- -------
OPERATING RESULT..................................... (316) 724 1,355 2,718
NON-OPERATING RESULT................................. (187) 48 (417) (170)
INCOME BEFORE INCOME TAXES........................... (503) 772 938 2,548
Income taxes......................................... 321 (231) (116) (963)
------ ------ ------- -------
INCOME AFTER TAXES................................... (182) 541 822 1,585
Minority stockholders' interest...................... (1) (7) 1 (18)
------ ------ ------- -------
NET INCOME........................................... (183) 534 823 1,567
====== ====== ======= =======
EARNINGS PER SHARE (E)............................... (0.25) 0.73 1.13 2.15
120
BALANCE SHEET DATA
SEPTEMBER 30, DECEMBER 31,
---------------- ------------
2001 2000 2000
------ ------ ------------
(EUROS IN MILLIONS)
(UNAUDITED)
ASSETS
NON-CURRENT ASSETS......................................... 20,794 19,176 20,344
Inventories................................................ 6,098 5,957 6,095
Receivables................................................ 8,573 8,662 8,895
Liquid assets.............................................. 1,371 1,178 704
------ ------ ------
CURRENT ASSETS............................................. 16,042 15,797 15,694
DEFERRED TAXES............................................. 500 430 413
------ ------ ------
TOTAL ASSETS............................................... 37,336 35,403 36,451
====== ====== ======
Of which: discontinuing operations......................... 229 1,114 1,156
STOCKHOLDERS' EQUITY AND LIABILITIES
Capital stock and reserves................................. 4,812 4,812 4,812
Retained earnings.......................................... 10,137 9,019 9,047
Net income................................................. 823 1,567 1,816
Translation differences.................................... 533 863 465
------ ------ ------
STOCKHOLDERS' EQUITY....................................... 16,305 16,261 16,140
------ ------ ------
MINORITY STOCKHOLDERS' INTEREST............................ 102 210 237
------ ------ ------
Long-term liabilities...................................... 8,602 9,043 8,461
Short-term liabilities..................................... 11,060 8,568 10,018
------ ------ ------
LIABILITIES................................................ 19,662 17,611 18,479
------ ------ ------
Of which: discontinuing operations......................... 66 526 574
DEFERRED TAXES............................................. 1,267 1,321 1,595
------ ------ ------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY................. 37,336 35,403 36,451
====== ====== ======
SUMMARY CHANGES IN STOCKHOLDERS' EQUITY DATA
CAPITAL
STOCK AND RETAINED TRANSLATION
RESERVES EARNINGS NET INCOME DIFFERENCES TOTAL
--------- -------- ---------- ----------- ------
(EUROS IN MILLIONS)
(UNAUDITED)
DECEMBER 31, 1999.......................... 4,812 7,966 2,002 226 15,006
----- ------ ------ --- ------
Dividend payment........................... (949) (949)
Allocation to retained earnings............ 1,053 (1,053) 0
Exchange differences....................... 637 637
Income after taxes......................... 1,567 1,567
------ ------
SEPTEMBER 30, 2000......................... 4,812 9,019 1,567 863 16,261
----- ------ ------ --- ------
DECEMBER 31, 2000.......................... 4,812 9,047 1,816 465 16,140
----- ------ ------ --- ------
Dividend payment........................... (1,022) (1,022)
Allocation to retained earnings............ 794 (794) 0
Exchange differences....................... 68 68
Other changes in stockholders' equity...... 296 296
Income after taxes......................... 823 823
SEPTEMBER 30, 2001......................... 4,812 10,137 823 533 16,305
===== ====== ====== === ======
121
SALES AND OPERATING RESULTS BY BUSINESS SEGMENT AND REGION
BUSINESS SEGMENT DATA -- 3RD QUARTER
CONSUMER
PHARMA- CARE & CROP ANIMAL PLASTICS &
CEUTICALS DIAGNOSTICS PROTECTION HEALTH RUBBER
--------------- --------------- --------------- ------------- ---------------
3RD QUARTER 2001 2000 2001 2000 2001 2000 2001 2000 2001 2000
----------- ------ ------ ------ ------ ------ ------ ----- ----- ------ ------
(EUROS IN MILLIONS; UNAUDITED)
NET SALES (EXTERNAL)........ 1,143 1,527 1,024 991 526 463 261 259 1,343 1,476
Change in E................. -25.1% 22.3% 3.3% 17.6% 13.6% -0.9% 0.8% 8.8% -9.0% 28.7%
Change in local
currencies................. -23.3% 10.3% 3.5% 5.7% 15.1% -11.3% 1.4% -3.1% -9.2% 21.3%
INTERSEGMENT SALES.......... 15 10 1 1 19 20 0 1 29 30
OPERATING RESULT BEFORE
EXCEPTIONAL ITEMS.......... (100) 254 124 80 (11) 35 58 51 44 148
Change...................... -- -6.3% 55.0% 50.9% -- -28.6% 13.7% 21.4% -70.3% 60.9%
RETURN ON SALES BEFORE
EXCEPTIONAL ITEMS.......... -8.7% 16.6% 12.1% 8.1% -2.1% 7.6% 22.2% 19.7% 3.3% 10.0%
EXCEPTIONAL ITEMS........... (301) (4) (6) (6) -- 6 -- 25 (22) (14)
OPERATING RESULT............ (401) 250 118 74 (11) 41 58 76 22 134
GROSS CASH FLOW............. (194) 244 174 107 63 87 53 62 144 209
POLYURETHANES,
COATINGS &
COLORANTS CHEMICALS
--------------- ---------------
3RD QUARTER 2001 2000 2001 2000
----------- ------ ------ ------ ------
(EUROS IN MILLIONS; UNAUDITED)
NET SALES (EXTERNAL)........ 1,307 1,332 1,083 1,056
Change in E................. -1.9% 35.2% 2.6% 18.7%
Change in local
currencies................. -1.6% 26.9% 3.6% 11.8%
INTERSEGMENT SALES.......... 34 42 103 115
OPERATING RESULT BEFORE
EXCEPTIONAL ITEMS.......... 37 105 27 104
Change...................... -64.8% -35.2% -74.0% 25.3%
RETURN ON SALES BEFORE
EXCEPTIONAL ITEMS.......... 2.8% 7.9% 2.5% 9.8%
EXCEPTIONAL ITEMS........... (41) (27) (2) (5)
OPERATING RESULT............ (4) 78 25 99
GROSS CASH FLOW............. 90 163 195 139
CONTINUING DISCONTINUING
RECONCILIATION OPERATIONS OPERATIONS BAYER GROUP
--------------- ----------------- --------------- -----------------
NET SALES (EXTERNAL).................................. 181 198 6,868 7,302 63 378 6,931 7,680
Change in E........................................... -5.9% 22.5% -9.8% 22.4%
Change in local currencies............................ -5.2% 13.3% -9.2% 13.6%
INTERSEGMENT SALES.................................... (201) (219) -- -- -- -- -- --
OPERATING RESULT BEFORE EXCEPTIONAL ITEMS............. (113) (66) 66 711 (7) 39 59 750
Change................................................ -90.7% 11.1% -92.1% 5.5%
RETURN ON SALES BEFORE EXCEPTIONAL ITEMS.............. 1.0% 9.7% 0.9% 9.8%
EXCEPTIONAL ITEMS..................................... (1) 0 (373) (25) (2) (1) (375) (26)
OPERATING RESULT...................................... (114) (66) (307) 686 (9) 38 (316) 724
GROSS CASH FLOW....................................... (84) (82) 441 929 (1) 55 440 984
BUSINESS SEGMENT DATA -- FIRST THREE QUARTERS
CONSUMER
PHARMA- CARE & CROP ANIMAL PLASTICS &
CEUTICALS DIAGNOSTICS PROTECTION HEALTH RUBBER
--------------- --------------- --------------- ------------- ---------------
SEPT. 30 2001 2000 2001 2000 2001 2000 2001 2000 2001 2000
-------- ------ ------ ------ ------ ------ ------ ----- ----- ------ ------
(EUROS IN MILLIONS; UNAUDITED)
NET SALES (EXTERNAL)........ 4,075 4,388 3,021 2,877 2,135 2,042 744 773 4,332 4,288
Change in E................. -7.1% 23.1% 5.0% 17.0% 4.6% 15.4% -3.8% 14.2% 1.0% 28.5%
Change in local
currencies................. -7.8% 11.8% 3.6% 6.4% 4.2% 6.1% -4.5% 3.5% -0.5% 22.1%
INTERSEGMENT SALES.......... 33 30 16 1 96 76 5 6 90 88
OPERATING RESULT BEFORE
EXCEPTIONAL ITEMS.......... 215 850 254 210 359 423 141 150 360 409
Change...................... -74.7% 36.1% 21.0% 59.1% -15.1% 4.3% -0.6% 50.1% -12.0% 26.2%
RETURN ON SALES BEFORE
EXCEPTIONAL ITEMS.......... 5.3% 19.4% 8.4% 7.3% 16.8% 20.7% 19.0% 19.4% 8.3% 9.5%
EXCEPTIONAL ITEMS........... (293) 10 (18) (46) 0 0 0 25 (44) (29)
OPERATING RESULT............ (78) 860 236 164 359 423 141 175 316 380
GROSS CASH FLOW............. 58 769 399 276 408 376 126 143 573 578
POLYURETHANES,
COATINGS &
COLORANTS CHEMICALS
--------------- ---------------
SEPT. 30 2001 2000 2001 2000
-------- ------ ------ ------ ------
(EUROS IN MILLIONS; UNAUDITED)
NET SALES (EXTERNAL)........ 3,989 3,738 3,579 3,160
Change in E................. 6.7% 28.7% 13.3% 17.9%
Change in local
currencies................. 5.5% 21.6% 12.7% 11.6%
INTERSEGMENT SALES.......... 120 131 348 354
OPERATING RESULT BEFORE
EXCEPTIONAL ITEMS.......... 153 441 320 352
Change...................... -65.3% -16.0% -9.1% 3.2%
RETURN ON SALES BEFORE
EXCEPTIONAL ITEMS.......... 3.8% 11.8% 8.9% 11.1%
EXCEPTIONAL ITEMS........... (59) (35) (75) (6)
OPERATING RESULT............ 94 406 245 346
GROSS CASH FLOW............. 438 584 480 440
122
CONTINUING DISCONTINUING
RECONCILIATION OPERATIONS OPERATIONS BAYER GROUP
--------------- ----------------- --------------- -----------------
NET SALES (EXTERNAL).................................. 611 535 22,486 21,801 417 1,117 22,903 22,918
Change in E........................................... -- -- 3.1% 22.1% -- -- -0.1% 11.8%
Change in local currencies............................ -- -- 2.1% 12.9% -- -- -1.1% 3.9%
INTERSEGMENT SALES.................................... (708) (686) -- -- -- -- -- --
OPERATING RESULT BEFORE EXCEPTIONAL ITEMS............. (245) (181) 1,557 2,654 7 117 1,564 2,771
Change................................................ -- -- -41.3% 21.8% -- -- -43.6% -16.4%
RETURN ON SALES BEFORE EXCEPTIONAL ITEMS.............. -- -- 6.9% 12.2% -- -- 6.8% 12.1%
EXCEPTIONAL ITEMS..................................... (19) 34 (508) (47) 299 (6) (209) (53)
OPERATING RESULT...................................... (264) (147) 1,049 2,607 306 111 1,355 2,718
GROSS CASH FLOW....................................... (221) (164) 2,261 3,002 15 151 2,276 3,153
REGIONAL DATA -- 3RD QUARTER
LATIN AMERICA/
EUROPE NORTH AMERICA ASIA/PACIFIC AFRICA/MIDDLE EAST
---------------- ----------------- ---------------- -------------------
2001 2000 2001 2000 2001 2000 2001 2000
------ ------ ------- ------ ------ ------ ------- --------
(EUROS IN MILLIONS; UNAUDITED)
NET SALES (EXTERNAL) BY MARKET...... 2,666 2,777 2,262 2,397 1,128 1,225 812 903
Change in E......................... -4.0% 13.0% -5.6% 27.3% -7.9% 33.3% -10.1% 29.0%
NET SALES (EXTERNAL) BY POINT OF
ORIGIN............................ 3,002 3,237 2,324 2,459 916 976 626 630
Change in E......................... -7.3% 14.6% -5.5% 25.7% -6.1% 41.7% -0.6% 28.8%
Change in local currencies.......... -7.4% 14.0% -6.5% 7.7% 1.1% 24.9% -2.3% 13.6%
INTERREGIONAL SALES................. 762 824 458 446 54 63 28 34
OPERATING RESULT BEFORE EXCEPTIONAL
ITEMS............................. 104 465 -2 158 12 112 75 66
Change.............................. -77.6% -5.7% -101.3% -8.1% -89.3% -- 13.6% 112.9%
RETURN ON SALES BEFORE EXCEPTIONAL
ITEMS............................. 3.5% 14.4% -0.1% 6.4% 1.3% 11.5% 12.0% 10.5%
EXCEPTIONAL ITEMS................... (200) (12) (166) (5) (4) (7) (3) (1)
OPERATING RESULT.................... (96) 453 (168) 153 8 105 72 65
GROSS CASH FLOW..................... 325 483 130 385 35 103 73 63
CONTINUING DISCONTINUING
RECONCILIATION OPERATIONS OPERATIONS BAYER GROUP
---------------- ---------------- ---------------- ----------------
NET SALES (EXTERNAL) BY MARKET......... -- -- 6,868 7,302 63 378 6,931 7,680
Change in E............................ -- -- -5.9% 22.5% -- -- -9.8% 22.4%
NET SALES (EXTERNAL) BY POINT OF
ORIGIN............................... -- -- 6,868 7,302 63 378 6,931 7,680
Change in E............................ -- -- -5.9% 22.5% -- -- -9.8% 22.4%
Change in local currencies............. -- -- -5.2% 13.3% -- -- -9.2% 13.6%
INTERREGIONAL SALES.................... (1,302) (1,367) -- -- -- -- -- --
OPERATING RESULT BEFORE EXCEPTIONAL
ITEMS................................ (123) (90) 66 711 (7) 39 59 750
Change................................. -- -- -90.7% 11.1% -- -- -92.1% 5.5%
RETURN ON SALES BEFORE EXCEPTIONAL
ITEMS................................ -- -- 1.0% 9.7% -- -- 0.9% 9.8%
EXCEPTIONAL ITEMS...................... 0 0 (373) (25) (2) (1) (375) (26)
OPERATING RESULT....................... (123) (90) (307) 686 (9) 38 (316) 724
GROSS CASH FLOW........................ (122) (105) 441 929 (1) 55 440 984
123
REGIONAL DATA -- FIRST THREE QUARTERS
LATIN AMERICA/
EUROPE NORTH AMERICA ASIA/PACIFIC AFRICA/MIDDLE EAST
---------------- ----------------- ---------------- -------------------
2001 2000 2001 2000 2001 2000 2001 2000
------ ------ ------- ------ ------ ------ ------- --------
(EUROS IN MILLIONS; UNAUDITED)
NET SALES (EXTERNAL) BY MARKET..... 9,212 8,693 7,141 7,054 3,637 3,602 2,496 2,452
Change in E........................ 6.0% 11.1% 1.2% 29.5% 1.0% 39.1% 1.8% 22.2%
NET SALES (EXTERNAL) BY POINT OF
ORIGIN........................... 10,311 10,003 7,397 7,244 2,965 2,835 1,813 1,719
Change in E........................ 3.1% 11.6% 2.1% 30.7% 4.6% 47.0% 5.5% 20.4%
Change in local currencies......... 3.0% 11.0% -2.4% 15.4% 9.8% 28.5% 2.8% 7.5%
INTERREGIONAL SALES................ 2,513 2,345 1,426 1,201 195 168 100 83
OPERATING RESULT BEFORE EXCEPTIONAL
ITEMS............................ 1,441 1,851 (30) 533 228 332 200 179
Change............................. -22.2% 0.9% -- 43.3% -31.3% 159.4% 11.7% 58.4%
RETURN ON SALES BEFORE EXCEPTIONAL
ITEMS............................ 14.0% 18.5% -0.4% 7.4% 7.7% 11.7% 11.0% 10.4%
EXCEPTIONAL ITEMS.................. (226) 14 (256) (53) (4) (8) (3) 0
OPERATING RESULT................... 1,215 1,865 (286) 480 224 324 197 179
GROSS CASH FLOW.................... 1,704 1,789 416 1,004 241 303 201 186
CONTINUING DISCONTINUING
RECONCILIATION OPERATIONS OPERATIONS BAYER GROUP
---------------- ---------------- ---------------- ----------------
NET SALES (EXTERNAL) BY MARKET......... -- -- 22,486 21,801 417 1,117 22,903 22,918
Change in E............................ -- -- 3.1% 22.1% -- -- -0.1% 11.8%
NET SALES (EXTERNAL) BY POINT OF
ORIGIN............................... -- -- 22,486 21,801 417 1,117 22,903 22,918
Change in E............................ -- -- 3.1% 22.1% -- -- -0.1% 11.8%
Change in local currencies............. -- -- 2.1% 12.9% -- -- -1.1% 3.9%
INTERREGIONAL SALES.................... (4,234) (3,797) -- -- -- -- -- --
OPERATING RESULT BEFORE EXCEPTIONAL
ITEMS................................ (282) (241) 1,557 2,654 7 117 1,564 2,771
Change................................. -- -- -41.3% 21.8% -- -- -43.6% -16.4%
RETURN ON SALES BEFORE EXCEPTIONAL
ITEMS................................ -- -- 6.9% 12.2% -- -- 6.8% 12.1%
EXCEPTIONAL ITEMS...................... (19) 0 (508) (47) 299 (6) (209) (53)
OPERATING RESULT....................... (301) (241) 1,049 2,607 306 111 1,355 2,718
GROSS CASH FLOW........................ (301) (280) 2,261 3,002 15 151 2,276 3,153
RESEARCH AND DEVELOPMENT
The following table sets forth our total research and development
expenditures during the last three full years.
CHANGE FROM CHANGE FROM
PREVIOUS PREVIOUS
2000 YEAR (%) 1999 YEAR (%) 1998
----- ----------- ----- ----------- -----
Research and development expenditure:
Amount (in millions of euros)............... 2,393 6.3 2,252 10.1 2,045
As a percentage of sales.................... 7.7 -- 8.2 -- 7.3
We typically allocate the largest portion of our research and development
expenses to our Health Care businesses, primarily in the Pharmaceuticals
segment. In 2000, Pharmaceuticals accounted for 45.8 percent of our total
research and development spending (1999: 42.3 percent; 1998: 37.5 percent).
For a more detailed discussion of our research and development activities
and policies, see Item 4, Information on the Company -- Research and Development
as well as the descriptions of each business group's research and development
activities in Item 4, Information on the Company -- Business Overview. We
discuss our patents and other intellectual property protection in Item 4,
Information on the Company -- Intellectual Property Protection.
124
BASIS OF PRESENTATION
We prepared the consolidated financial statements that appear elsewhere in
this registration statement in accordance with the International Accounting
Standards, or IAS, issued by the International Accounting Standards Committee
(IASC). See Note 44 to our consolidated financial statements for a
reconciliation of the significant differences between IAS and U.S. GAAP.
NEW ACCOUNTING STANDARDS
IAS
The following new or revised accounting standards and interpretations will
be implemented in 2001:
IAS 12 (revised 2000) Income Taxes
IAS 19 (revised 2000) Employee Benefits
IAS 39 Financial Instruments: Recognition and Measurement
IAS 40 Investment Property
SIC 17 Equity-Cost of an Equity Transaction
SIC 19 Reporting Currency: Measurement and Presentation
IAS 12 (revised 2000) "Income Taxes" requires that current and deferred
income taxes be measured at the tax rates applicable to undistributed earnings.
The income tax consequences of dividends should be recognized when the related
dividend is recognized in the financial statements. We believe that this revised
standard will not have a material effect on our financial statements. This
standard is effective for periods beginning on or after January 1, 2001.
IAS 19 (revised 2000) "Employee Benefits" requires that plan assets should
include certain assets for insurance policies that satisfy the same conditions
as other plan assets, and that have economic effects similar to those other plan
assets. We do not expect that this revised standard will have a material effect
on our consolidated financial statements. This standard is effective for periods
beginning on or after January 1, 2001.
IAS 39 "Financial Instruments: Recognition and Measurement" requires that
all financial assets and financial liabilities, including derivatives, be
recognized on the balance sheet. This will involve recording on the balance
sheet the unrealized gains on the available-for-sale and derivative portfolios.
As of the adoption of IAS 39 on January 1, 2001, the after tax amount added to
stockholders' equity was E0.9 billion. We do not expect that IAS 39 will have a
material impact on our results of operations.
IAS 40 "Investment Property" prescribes the accounting treatment for
investment property and related disclosure requirements. We do not believe that
the adoption of IAS 40 will have a material impact on our consolidated financial
statements.
SIC 17 "Equity -- Cost of an Equity Transaction" requires that we account
for transaction costs of an equity transaction as a deduction from equity, net
of any related income tax benefit, unless the transaction fails to be completed,
in which case it should be expensed. We do not believe this will have a material
impact on our consolidated financial statements.
SIC 19 "Reporting Currency -- Measurement and Presentation of Financial
Statements under IAS 21 and IAS 29" provides additional guidance on determining
the reporting currencies of foreign subsidiaries. We do not believe this will
have a material impact on our consolidated financial statements.
U.S. GAAP
In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101"). SAB 101 provides guidance on the application of U.S. generally accepted
accounting principles to revenue recognition issues in financial statements. SAB
101 outlines the criteria that must be met to recognize revenue and provides
guidance for disclosures related to
125
revenue recognition policies. Bayer's adoption of SAB 101 in calendar 2000 did
not have a material effect on the Group's financial position, results of
operations or cash flows.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44 ("FIN 44"), "Accounting for Certain Transactions Involving
Stock Compensation -- An Interpretation of Accounting Principles Board Opinion
No. 25 ("APB 25")." FIN 44 clarifies the definition of an employee for purposes
of applying APB 25, the criteria for determining whether a plan qualifies as a
noncompensatory plan; the accounting consequences of various modifications to
the terms of the previously fixed stock options or awards and the accounting for
an exchange of stock compensation awards in a business combination. Bayer's
adoption of FIN 44 in calendar 2000 had no effect on the Group's financial
position, results of operations or cash flows.
Statement of Financial Accounting Standards ("SFAS") No. 133 "Accounting
for Derivative Instruments and Hedging Activities," as amended by SFAS No. 137
and No. 138, requires all derivative instruments be recorded on the balance
sheet at their fair value. Changes in the fair value of derivatives are recorded
each period in current earnings or other comprehensive income. The adoption of
SFAS No. 133 as of January 1, 2001 did not have a material effect on the Group's
financial position, results of operations or cash flows.
In June 2001, the Financial Accounting Standards Board approved SFAS 141
"Business Combinations" and SFAS 142 "Goodwill and Other Intangible Assets".
SFAS 141 requires the purchase method of accounting to be used for all business
combinations initiated after June 30, 2001, establishes specific criteria for
the recognition of intangible assets separately from goodwill, and requires
unallocated negative goodwill to be written off immediately as an exceptional
gain. Bayer will apply SFAS 141 to all business combinations for which purchase
agreements are signed after June 30, 2001. SFAS 142 addresses the accounting for
goodwill and identifiable intangible assets subsequent to their acquisition.
Amortization of goodwill will discontinue upon adoption of SFAS 142. In
addition, goodwill recorded as a result of business combinations completed
during the six-month period ended December 31, 2001 will not be amortized. All
goodwill and intangible assets will be tested for impairment in accordance with
the provision of this statement. The Group will apply the provisions of SFAS 142
beginning January 1, 2002. Bayer has not completed its analysis of these
standards and, accordingly, has not determined what effect the adoption of SFAS
141 and 142 will have on the Group's financial position, results of operations
or cash flows.
In June 2001, the Financial Accounting Standards Board approved SFAS 143
"Accounting for Asset Retirement Obligations". SFAS 143 requires that the fair
value of a liability for an asset retirement obligation be recognized in the
period in which it is incurred if a reasonable estimate of fair value can be
made. The associated asset retirement costs are capitalized as part of the
carrying amount of the long-lived asset. SFAS 143 is effective for fiscal
periods beginning after June 15, 2002. Early adoption is encouraged and initial
application of this Statement shall be as of the beginning of an entity's fiscal
year. The Group will apply SFAS 143 beginning January 1, 2003. Bayer has not
completed its analysis of this standard and, accordingly, has not determined
what effect the adoption of SFAS 143 will have on the Group's financial
position, results of operations or cash flows.
In August 2001, the Financial Accounting Standards Board approved SFAS 144
"Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS 144
retains the requirements of SFAS 121 to recognize an impairment loss only if the
carrying amount of a long-lived asset is not recoverable from its undiscounted
cash flows and measure an impairment loss as the difference between the carrying
amount and fair value of the asset. SFAS 144 requires a probability-weighted
cash flow estimation approach and establishes a "primary-asset" approach to
determine the cash flow estimation period for groups of assets and liabilities.
SFAS 144 is effective for fiscal years beginning after December 15, 2001, and
interim periods within those fiscal years, with early application encouraged.
The Group will apply SFAS 144 beginning January 1, 2002. Bayer has not completed
its analysis of this standard and, accordingly, has not determined what effect
the adoption of SFAS 144 will have on the Group's financial position, results of
operations or cash flows.
CURRENCY OF PRESENTATION
On January 1, 1999, the euro became the common currency of the 11 member
states of the European Union (including Germany) participating in the European
Monetary Union. The conversion rates between the euro and the national "legacy"
currencies are irrevocably fixed; the official German mark/euro rate is DM
1.95583 per
126
E1.00. Legacy currency banknotes and coins remain in circulation during an
initial transition period. Beginning on January 1, 2002, new euro-denominated
notes and coins will be issued and the legacy currencies will be withdrawn from
circulation. From July 1, 2002 euro notes and coins will become the sole legal
tender in these countries.
Beginning January 1, 1999, we have presented our financial statements in
euro. For financial information from earlier dates and periods, we have
translated German mark values into euro at the official rate. Because we
originally prepared this financial information using the German mark, you should
not assume that you can accurately compare this financial information with that
of other companies that have translated a non-DM European currency into euro.
127
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
DIRECTORS AND SENIOR MANAGEMENT
In accordance with the German Stock Corporation Act (Aktiengesetz ), Bayer
AG has both a Board of Management (Vorstand ) and a Supervisory Board
(Aufsichtsrat ). The Board of Management is responsible for the management of
our business; the Supervisory Board appoints and supervises the members of the
Board of Management. The two boards are separate, and no individual may
simultaneously be a member of both boards.
Members of both the Board of Management and the Supervisory Board owe a
duty of loyalty and care to Bayer AG. In exercising their duties, the applicable
standard of care is that of a diligent and prudent businessperson. Members of
both boards must take into account a broad range of considerations when making
decisions, including the interests of Bayer AG and its shareholders as well as
of employees and creditors.
The members of the Board of Management and the Supervisory Board may be
held personally liable to Bayer AG for breaches of their duties of loyalty and
care. Bayer AG must bring an action for breach of duty against the Board of
Management or Supervisory Board upon a resolution of the shareholders' meeting
passed by a simple majority of votes cast, or upon the request of shareholders
holding, as a group, at least 10 percent of the outstanding share capital. With
the exception of shareholders of companies that (unlike Bayer AG) are under the
control of another company, individual shareholders of German companies cannot
sue directors on behalf of the company in a manner analogous to a shareholder's
derivative action under U.S. law. Under German law, directors may be liable for
breach of duty to shareholders (as opposed to a duty to the company itself) only
where a breach of duty to the company also constitutes a breach of a statutory
provision enacted specifically for the protection of shareholders. As a
practical matter, shareholders are able to assert liability against directors
for breaches of this sort only in unusual circumstances.
BOARD OF MANAGEMENT
The Board of Management is responsible for managing the business of Bayer
AG in accordance with the German Stock Corporation Act and Bayer AG's Articles
of Association. It also represents Bayer AG in its dealings with third parties
and in court. According to the Articles of Association the Board of Management
consists of a minimum of two members. The Supervisory Board determines the
number of and appoints the members of the Board of Management. Members of the
Board of Management are appointed by the Supervisory Board for a maximum term of
five years and are eligible for reappointment after the completion of their term
in office.
Bayer AG is legally represented by two members of the Board of Management
acting together, or by one member of the Board of Management together with a
person possessing a special power of attorney (Prokura ).
The Board of Management must report regularly to the Supervisory Board,
particularly on proposed business policy and strategy, profitability and on the
current business of Bayer AG, as well as on any exceptional matters which may
arise from time to time. If not otherwise required by law, the Board of
Management decides with a simple majority of the votes cast. In case of
deadlock, the vote of the chairman is the relevant vote.
Under certain circumstances, such as a serious breach of duty or a vote of
no confidence by the shareholders in an annual meeting, a member of the Board of
Management may be removed by the Supervisory Board prior to the expiration of
his term. A member of the Board of Management may not deal with, or vote on,
matters relating to proposals, arrangements or contracts between him/herself and
the Company.
Committees of the Board of Management oversee various aspects of the
management of Bayer as a whole, with the committee chairmen holding primary
responsibility. Individual Board members serve as representatives with primary
responsibility for our various business segments and as representatives for the
various geographic regions in which we operate.
128
The following table shows the members of the Board of Management, their
ages, positions and the years in which their current terms expire.
NAME AND AGE POSITION CURRENT TERM EXPIRES
------------ -------- --------------------
Dr. Manfred Schneider (62).................................. Chairman 2002
Dr. Attila Molnar (52)...................................... Director 2004
Dr. Frank Morich (47)....................................... Director 2005
Dr. Udo Oels (57)........................................... Director 2006
Werner Spinner (52)......................................... Director 2003
Werner Wenning (53)......................................... Director 2007
Dr. Gottfried Zaby (50)..................................... Director 2005
Dr. Manfred Schneider joined the Board of Management in 1987 and has served
as chairman since 1992. He currently chairs the Corporate Coordination Committee
and is a member of the Finance Committee. In addition to his responsibilities at
Bayer AG, he is also the president of the German Chemical Industry Association
and a vice-president of the Confederation of German Industry, as well as a
member of the supervisory boards of Allianz AG, DaimlerChrysler AG, Metro AG,
and RWE Aktiengesellschaft.
Dr. Attila Molnar has served on the Board of Management since 1999.
Currently, he chairs the Human Resources Committee and is a member of the
Technology and Environment Committee. He is the representative of the Board of
Management responsible for the North America and Mexico regions. Dr. Molnar also
represents the Agriculture businesses. Prior to joining the Board, Dr. Molnar
was the general manager of Bayer's former Organic Chemicals business group from
1996 to 1999 and became the general manager of the Basic and Fine Chemicals
business group in 1999 before joining the Board of Management later that year.
Dr. Frank Morich has been a member of the Board of Management since 2000.
He is chairman of the Research and Development Committee and a member of the
Marketing and Logistics and the Technology and Environment Committees. He
represents the Health Care businesses on the Board. Dr. Morich served as head of
product development for our Pharmaceuticals segment from 1995 to February 1998
and then, until he joined the Board, as head of our Consumer Care business
group.
Dr. Udo Oels joined the Board of Management in 1996 and currently chairs
the Technology and Environment Committee. He is also a member of the Research
and Development and the Corporate Coordination Committees. He is the
representative for the China region.
Werner Spinner has been a member of the Board of Management since 1998. He
currently chairs the Marketing and Logistics Committee and is a member of the
Finance Committee. He also represents the Polymers businesses as well as the Far
East region. Prior to joining the Board, Mr. Spinner was the general manager of
the Consumer Care business group from 1994 to 1998.
Werner Wenning has served on the Board of Management since 1997. He
currently chairs the Finance Committee and is a member of the Corporate
Coordination and Human Resources Committees. He represents the Central and South
America, Africa and Middle East regions. From 1996 until he joined the Board in
1997, Mr. Wenning was head of Corporate Planning and Controlling. In addition to
his responsibilities on the Board, he is a member of the board of directors of
Agfa-Gevaert N.V. and the supervisory boards of Dresdner Bank Lateinamerika AG,
Gerling-Konzern Allgemeine Versicherungs-AG and Rheinhyp Rheinische
Hypothekenbank AG. He is also the vice president of the Deutsches Aktieninstitut
e.V. and a member of the Presidium of the Cologne Chamber of Industry and
Commerce. The Supervisory Board announced in September 2001 that Mr. Wenning
would be nominated to succeed Dr. Schneider as Chairman of the Board of
Management from the date of our next Annual General Meeting in April 2002.
Dr. Gottfried Zaby joined the Board of Management in 2000. He is a member
of the Marketing and Logistics, Human Resources and Research and Development
Committees. He also represents the Chemicals business segment and the European
region. In 1995, Dr. Zaby became head of the Production and Technology
department of our Plastics business group. In July 1997 he became head of this
business group, a position in which he served until joining the Board.
129
SUPERVISORY BOARD
Under the German Stock Corporation law, the German Co-Determination Act
(Mitbestimmungsgesetz ) of 1976 and our Articles of Association, the Supervisory
Board consists of 20 members. The principal function of the Supervisory Board is
to appoint and supervise the Board of Management. The Supervisory Board may not
make management decisions, but the Board of Management's standard operating
procedures (Geschaftsordnung ) may require the prior consent of the Supervisory
Board for specified transactions, including:
- the acquisition or disposition of investments above a specified
threshold;
- the acquisition, disposition or encumbrance of real property;
- the creation of new business units, or the disposition of existing
units;
- the issuance of bonds, entering into of credit agreements, or grant of
guaranties, sureties (Burgschaften ) and loans, except to subsidiaries;
and
- the establishment of branch offices (Zweigniederlassungen ).
Our shareholders elect 10 members of the Supervisory Board at the annual
meeting of shareholders. Pursuant to the Co-Determination Act of 1976, our
employees elect the remaining 10 members. The term of a Supervisory Board member
expires at the end of the annual meeting of shareholders in which the
shareholders discharge Supervisory Board members for the fourth fiscal year
following the year in which the member was elected. There is no compulsory
retirement age for members of the Supervisory Board.
Any member elected by the shareholders in the annual meeting of
shareholders may be removed by a majority of three quarters of the votes cast by
the shareholders in such meeting. Any member elected by the employees may be
removed by a majority of three quarters of the votes cast by the relevant class
of employees. Unless not required by law or by the Articles of Association of
Bayer AG, resolutions of the Supervisory Board are passed by simple majority of
the votes cast. According to the Articles of Association, in the case of a
deadlock, a second vote is held and in such vote the chairman of the Supervisory
Board has a second vote. In order to constitute a quorum at least half of the
total members of the Supervisory Board must be present in the meeting or
participate in the voting by giving a written vote.
All of the current shareholder representatives on the Supervisory Board
were elected by the shareholders at the annual meeting of shareholders held on
April 30, 1997.
130
The following table shows the current members of the Supervisory Board,
their principal occupations and the year in which they were first elected or
appointed. Employee representatives are identified by an asterisk.
NAME POSITION PRINCIPAL OCCUPATION FIRST ELECTED
---- -------- -------------------- -------------
Hermann Josef Strenger....................... Chairman Former Chairman, Board of 1992
Management
*Erhard Gipperich............................ Vice Chairman Lathe operator 1998
*Petra Brayer................................ Member Chemical laboratory assistant 1999
*Karl-Josef Ellrich.......................... Member Business administrator, 2000
health insurance fund
Dr. h.c. Martin Kohlhaussen.................. Member Chairman of the management 1992
board, Commerzbank AG
Hilmar Kopper................................ Member Chairman of the supervisory 1988
board, Deutsche Bank AG
*Petra Kronen................................ Member Chemical Laboratory Assistant 2000
Dr.-Ing. Manfred Lennings.................... Member Management consultant 1978
Dr. h.c. Andre Leysen........................ Member Chairman of the board of 1987
directors, Gevaert N.V.
Dr. h.c. Helmut Oswald Maucher............... Member Honorary Chairman, Nestle 1997
S.A.
*Rolf Nietzard............................... Member Chemical Laboratory 1996
Technician
Dr. Heinrich von Pierer...................... Member Chairman of the management 1993
board, Siemens AG
*Waltraud Schlaefke.......................... Member Chemical laboratory 1992
technician
*Hubertus Schmoldt........................... Member Chairman, German Mine, 1995
Chemical and Power Workers'
Union
*Dieter Schulte.............................. Member Chairman, German Unions 1997
Federation
*Dr. Eugen Velker............................ Member Chemist 2000
Lodewijk C. van Wachem....................... Member Chairman of the supervisory 1997
board, Royal Dutch Petroleum
Company
*Siegfried Wendlandt......................... Member North Rhine District 2001
Secretary, German Mine,
Chemical and Power Workers'
Union
Prof. Dr. Ernst-L. Winnacker................. Member President, German Research 1997
Association
Dr. Hermann Wunderlich....................... Member Former Vice Chairman, Board 1996
of Management
SUPERVISORY BOARD COMMITTEES
Currently, the Supervisory Board has the following committees:
- The committee (Vermittlungsausschuss ) established pursuant to sec. 27
(3) of the Co-Determination Act, which consists of the chairman and vice
chairman of the Supervisory Board as well as one shareholder
representative and one employee representative. The purpose of this
committee is to nominate members of the Board of Management for election
by a simple majority of the votes of the Supervisory Board in the event
that the Supervisory Board is unable to appoint members of the Board of
Management with the votes of at least a two thirds majority of the
Supervisory Board. The current members of the Vermittlungsausschuss are
Mr. Strenger, Mr. Gipperich, Mr. Kopper and Mr. Schmoldt.
Pursuant to sec. 5 (1) of the Standard Operating Procedures
(Geschaftsordnung ) of the Supervisory Board, the Vermittlungsausschuss
also serves as the Presidium, i.e. a sub-body of the Supervisory Board to
131
which the Supervisory Board may delegate some of its functions. Among the
Presidium's responsibilities in this capacity is to serve as the
Supervisory Board's audit committee.
- The personnel committee (Personalausschuss) established pursuant to
sec. 5 (2) of the Standard Operating Procedures of the Supervisory
Board. The personnel committee consists of four members of the
Supervisory Board. The chairman of the Supervisory Board acts as
chairman of the personnel committee. The main responsibility of the
personnel committee is the determination of the salary and further
conditions of the employment of Board of Management members, the legal
representation of the Company in affairs with Board of Management
members pursuant to sec. 112 of the German Stock Corporation Act, the
approval of agreements with Supervisory Board members pursuant to
sec. 114 of the German Stock Corporation Act and the approval of loans
granted to Supervisory Board and Board of Management members and other
persons pursuant to sec. 89 and sec. 115 of the German Stock Corporation
Act. The current members of the personnel committee are Mr. Strenger,
Mr. Kohlhaussen, Mr. Nietzard and Ms. Schlaefke.
- The investment committee (Beteiligungsausschuss) established pursuant to
sec. 5 (3) of the Standard Operating Procedures of the Supervisory
Board. This committee consists of four members of the Supervisory Board;
its primary purpose is to make recommendations to the Supervisory Board
with respect to the acquisition or disposal of investments, where the
Standard Operating Procedures of the Board of Management condition these
transactions on the Supervisory Board's approval. The investment
committee may grant preliminary approval to such transactions, thereby
permitting the Board of Management to proceed with a transaction subject
to final approval by the Supervisory Board. The current members are Mr.
Strenger, Mr. Gipperich, Mr. Schmoldt and Mr. Wunderlich.
- The social policy committee (sozialpolitischer Ausschuss) established
pursuant to sec. 5 (6) of the Standard Operating Procedures of the
Supervisory Board. The social policy committee advises the Supervisory
Board on developments in social policy in Germany and abroad that could
be important for Bayer. The current members of the committee are Mr.
Strenger, Ms Brayer, Mr. Kohlhaussen, Ms Kronen, Mr. Lennings, Mr.
Schulte, Mr. Velker and Mr. Wunderlich.
SHARE OWNERSHIP
Because the shares of Bayer AG are in bearer form, we cannot obtain precise
information as to their holders. To the best of our knowledge, however, no
member of the Supervisory Board or the Board of Management who beneficially owns
shares of Bayer AG owns one percent or more of all outstanding shares.
COMPENSATION
In 2000 we paid salary and bonus compensation totalling E10,387,801 (1999:
E8,219,011) to the members of our Board of Management. Of this amount,
E3,729,776 represented base salary and fixed bonus and E6,658,025 represented
variable bonus. The variable bonus for a given year is tied to the amount of
Bayer AG's dividend for that year. Emoluments to retired members of the Board of
Management and their surviving dependents amounted to E8,923,934 (1999:
E7,069,509). We paid E2,078,680 (1999: E1,811,250) in compensation to the
members of the Supervisory Board.
In 2000, we implemented our Stock Option Program, under which we may grant
"option rights" to members of the Board of Management. The number of shares that
these option rights entitle holders to receive will vary substantially depending
on certain performance benchmarks; if minimum benchmarks are not reached, the
holder is not entitled to exercise the option rights. See below, "-- Employee
Option Plans -- Stock Option Program".
There were no loans to members of the Board of Management or Supervisory
Board outstanding as of December 31, 2000.
We pay retired former members of the Board of Management a monthly pension
equal to 80 percent of the monthly base salary received while in service. If we
increase the base salary of current Board members, we adjust the pension
payments to retired members accordingly.
132
BOARD OF MANAGEMENT SEVERANCE PLAN
Beginning in 2001, we established a severance plan for the members of Bayer
AG's Board of Management. This plan provides for payments for Board members if
their relationship with Bayer AG is terminated following a change of control.
"Change of control", for the purposes of this plan, is defined as the
acquisition by a third party of 25 percent or more of Bayer AG's outstanding
shares or transactions that would have a similar effect. A Board member is
generally eligible for payment under the plan if his or her relationship with
Bayer AG ends within 12 months of the change of control, other than in the case
of termination for cause or termination of a Board member aged 62 or more at the
time of termination.
Under the plan, former Board members are entitled to receive the discounted
present value of the compensation they would have received through the normal
expiration date of their employment contracts. In addition, they would receive a
severance payment equal to their annual compensation for a period of from two to
four years. The basic amount of these severance payments is equal to two years'
compensation. If the former Board member is 50 or older at the time of
termination, the payment increases by one year's compensation or by two years'
compensation if, in addition, the former Board member's length of service with
the company was at least 30 years or his or her tenure on the Board was at least
ten years. Total payments under the plan are, however, capped at an amount equal
to five times the former Board member's annual compensation. In addition, the
former Board member would retain full pension rights.
EMPLOYEE OPTION PLANS
In May 2000 we implemented a three-tier program to provide employees and
management an opportunity to earn Bayer AG shares. We offer the stock option
program for members of the Board of Management and senior executives, the stock
incentive program for middle management and equivalent employees and the stock
participation program for junior management and other employees. To be eligible
for the stock option and stock incentive programs and for Module 1 of the stock
participation program, participants must place Bayer AG shares of their own into
a special deposit account. Participants do not pay an exercise price for the
shares they receive under these programs. Rather, they receive the shares as
bonus shares or, in the case of Module 2 of the stock participation program,
have the opportunity to purchase shares at a discounted price.
Stock Option Program
Members of the Board of Management and senior executives who wish to
participate in the stock option program must place Bayer AG shares of their own
in a special deposit account. We determine on an individual basis the maximum
number of shares each participant may deposit; the participant receives one
option right for each 20 shares deposited. These deposited shares are "locked
up"; the participant may not sell them during the following three years. After
the end of these three years, a two-year exercise period begins. During this
period, the participant may exercise the option rights if he or she has
fulfilled the performance criteria. Any unexercised option rights expire at the
end of this two-year period.
To determine whether the participant is eligible to exercise option rights
and, if so, the number of shares received upon exercise, we apply three
criteria. Two of these measure the relative performance of the Bayer AG share;
the third measures the individual contribution of the participant.
- If the Bayer AG share's total return has been at least 30 percent from
the beginning of the program, each option right entitles the participant
to one share for each three percentage points of total return, up to a
maximum of 50 shares. This number may be modified by the application of
the third, individual performance-based criterion.
- If the Bayer AG share's total return exceeds the total return of the Dow
Jones Euro Stoxx 50(SM) performance index from the beginning of the
program, each option right entitles the participant to one share for
each percentage point by which the Bayer AG share has outperformed the
index, up to a maximum of 50 shares. Again, this number is subject to
modification by the third criterion.
- We calculate the cash value the participant has added to the business
operations for which he or she is responsible. We do this by comparing
the average growth in cash value for these operations with the
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average growth in cash value for the Bayer Group as a whole. The result
of this calculation is a factor between 0 and 2.
We multiply the number of the participant's option rights by the number of
shares to which he is or she is entitled under each the first two criteria. We
then multiply the result by the factor produced by the third criterion. If the
participant is not entitled to any shares under the first and second criteria,
or if the factor produced by the third criterion is 0, the participant receives
no shares under the program.
As of December 31, 2000, participants in our stock option program have
received a total of 1,678 option rights. The number of shares that these
participants may receive upon exercise of their option rights would vary between
a minimum of zero shares and, assuming maximum results for all participants on
all three performance criteria described above, a maximum of 335,600 shares.
German law generally requires specific shareholder approval for the
issuance of shares to members of a corporation's board of management. To the
extent that we are unable to issue shares under the stock option program to
participating members of our Board of Management at the time they are entitled
to exercise their option rights, therefore, the option rights would function as
share appreciation rights. Instead of shares, the participant would receive the
cash value of the shares to which the option rights would otherwise entitle him
or her, based on the trading price of the Bayer AG share at the time of
exercise.
Stock Incentive Program
Like the stock option program, our stock incentive program for middle
management requires participants to deposit Bayer AG shares in a special deposit
account. Each participant may deposit Shares with a maximum aggregate value of
half his or her performance-related bonus for the preceding fiscal year. The
number of incentive shares the participant receives depends on the number of
Bayer AG shares deposited at the launch of the program as well as on the total
return of the Bayer AG share. Unlike the stock option program, the stock
incentive program does not "lock up" deposited shares. Participants may sell
their deposited shares during the term of the program, but any deposited shares
they sell are no longer counted in calculating the number of incentive shares
for subsequent distribution dates.
The stock incentive program has a ten-year term. There are three incentive
share distribution dates during this period. On these dates, the participant
receives incentive shares as follows:
INCENTIVE SHARES RECEIVED
DISTRIBUTION DATE AT END OF (PER 10 DEPOSITED SHARES)
--------------------------- -------------------------
Second year.......................................... 2
Sixth year........................................... 4
Tenth year........................................... 4
Participants receive incentive shares only if the total return of the Bayer
AG share has outperformed the Dow Jones Euro Stoxx 50(SM) performance index on
the relevant distribution date, as calculated from the beginning of the program.
Based on the number of Bayer AG shares that participants in the stock
incentive program have deposited as of December 31, 2000, participants are
eligible to receive a total of 91,740 shares on the future distribution dates,
assuming satisfaction of the performance criterion on each such date and
assuming that these participants do not remove any shares from deposit during
the term of the program.
Stock Participation Program
Our stock participation program has two components, Module 1 and Module 2.
Employees not covered by the stock option program or stock incentive program may
generally participate in both Module 1 and Module 2.
The Module 1 program, like the stock incentive program, requires
participants to deposit Bayer AG shares in a special account. As with the stock
incentive program, participants in the stock participation program may sell
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their deposited Bayer AG shares during the term of the program; any shares they
sell are no longer counted in calculating the number of bonus shares on
subsequent distribution dates.
At the time we launched the stock participation program, employees governed
by collective bargaining agreements were permitted to deposit shares with a
maximum aggregate value equal to the performance-related bonus they received in
the year they entered the program. The maximum value of shares deposited by all
other participants was half of their performance-related bonus. From 2001, all
participants may deposit shares in a total value equal to half of the
performance-related bonus for the previous year.
Module 1 has a term of ten years and entitles the participant to receive
incentive shares on three distribution dates based on the number of shares he or
she has deposited. Unlike the stock incentive program, Module 1 does not impose
a share performance criterion. The participant receives incentive shares as
follows on the distribution dates:
INCENTIVE SHARES RECEIVED
DISTRIBUTION DATE AT END OF (PER 10 DEPOSITED SHARES)
--------------------------- -------------------------
Second year.......................................... 1
Sixth year........................................... 2
Tenth year........................................... 2
Based on the number of Bayer AG shares that participants in Module 1 of the
stock participation program have deposited as of December 31, 2000, participants
are eligible to receive a total of 275,720 shares on the future distribution
dates, assuming that these participants do not remove any shares from deposit
during the term of the program.
In addition, under Module 2 each participant may purchase 10 Bayer AG
shares per year at a tax-free discount of DM 30.00 (E15.33) per share under the
then market price. For income tax reasons, the participants must hold these
shares for a minimum period of six years after purchase. Participants may not
include shares that they purchase under Module 2 among the shares they deposit
under Module 1.
EMPLOYEES
The following tables set forth the average number of employees in
continuing operations during 2000, 1999 and 1998 by area of primary activity and
an approximate breakdown of employees as of December 31, 2000, 1999 and 1998 by
geographical region:
EMPLOYEES BY ACTIVITY BREAKDOWN BY REGION
-------------------------------------------------- ----------------------------------------------
AVERAGE FOR AS OF DECEMBER 31,
--------------------------- ------------------------
2000 1999 1998 2000 1999 1998
------- ------- ------- ------ ------ ------
Technology........... 61,403 61,117 61,476 Europe.............. 68,100 68,200 69,500
Marketing............ 34,355 34,474 33,142 North America....... 24,800 23,700 24,500
Administration....... 9,996 9,905 9,920 Asia/Pacific........ 12,400 11,500 11,000
Latin America/
Research............. 11,535 12,015 11,622 Africa/Middle 12,000 12,000 12,700
East................
------- ------- -------
Total................ 117,289 117,511 116,160 Corporate........... 600 700 700
======= ======= ======= ------ ------ ------
LABOR RELATIONS
Bayer has traditionally enjoyed an excellent relationship with its
workforce. Throughout our history, there has never been an organized work
stoppage at any of our German facilities. In addition, turnover is low (5.2
percent in 2000, 5.5 percent in 1999 for Bayer AG).
The union-organized workers at our German facilities belong to several
unions, the most important of which is IG BCE, the German Mine, Chemical and
Power Workers' Union. We do not negotiate collective bargaining agreements with
these unions to cover our workers. Instead, in accordance with German practice,
unions
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negotiate agreements with industry-wide employers' associations, in our case the
German Chemical Industry Association. Negotiations between German employers'
associations and labor unions have generally been constructive and open; in
recent years, unions have cooperated with industry, agreeing to concessions to
improve operating efficiency.
In Germany, employers and unions generally negotiate collective bargaining
agreements annually. The agreement that currently covers our workers has a term
of 21 months, beginning June 2000. It grants workers a 2.2 percent pay increase
on June 1, 2000 and calls for a second increase of 2.0 percent effective June 1,
2001. A German collective bargaining agreement governs the employment of all
workers of the categories organized in the relevant union, whether or not the
individual worker is a union member.
There are 13 pay grades, based on job description, for our employees in
positions governed by collective bargaining agreements. Our management
employees, who have individual employment contracts, are organized in six pay
grades.
Each Bayer facility in Germany has a works council (Betriebsrat), elected
by all non-management employees. Members serve a four-year term; the next
elections are scheduled for Spring 2002. The works councils facilitate
communications between us and our staff at the facility level. A joint works
council (Gesamtbetriebsrat) serves a similar purpose at the company-wide level.
The rights and responsibilities of works councils are set forth in the German
Works Council Constitution Act (Betriebsverfassungsgesetz). Members of our works
councils share responsibility with us for managing staff-related issues as well
as such working conditions as:
- working hours;
- vacation guidelines;
- employee facilities (e.g., subsidized cafeterias); and
- distribution guidelines for performance-related bonuses.
A works council has no authority, however, to negotiate with an employer on
wage and salary compensation or other issues covered by the collective
bargaining agreements between employers' associations and labor unions. Under
German labor law, employees may legally strike only in an effort to obtain more
favorable terms in the collective bargaining process. Accordingly, works
councils have no legal authority to call a work stoppage.
On December 12, 2000, we entered into an agreement
(Standortsicherungsvereinbarung) with our joint works council to further job
stability at several of our most important German sites. This agreement became
effective on January 1, 2001. Under the agreement, the joint works council
agreed to the reduction or elimination of certain social benefits that we
previously provided. These included additional vacation days, additional
payments and paid breaks. The council also granted us increased flexibility in
setting working hours. In exchange, we agreed that we would not, except in
exceptional circumstances, lay off employees at our Leverkusen, Dormagen,
Uerdingen, Elberfeld and Brunsbuttel sites for operational reasons before
December 31, 2004. If exceptional circumstances arise that are beyond our
control and lead to employee overcapacity, we have agreed to negotiate with the
joint works council to create a solution that will serve the interests of
company and employees to the greatest possible extent.
EMPLOYEE PENSION PLAN
All employees who have not reached the age of 55 before entering into
employment with Bayer AG must join Bayer AG's pension fund
(Bayer-Pensionskasse). As a member of the Pensionskasse, an employee makes a
monthly contribution to the pension fund. These contributions are withheld from
the member's salary. Bayer AG also contributes to the Pensionskasse. Upon
retirement, the employee is entitled to receive a monthly basic pension payment
(Grundrente) from the Pensionskasse if the employee was employed by Bayer AG, or
was a member of the Pensionskasse, for at least five years. Employees whose
annual salary exceeds the annual salary threshold for statutory pension
insurance (gesetzliche Rentenversicherung) is entitled to receive an additional
monthly pension payment (Zusatzrente). As of December 2000, this salary
threshold was DM 103,200. Bayer AG finances these additional pension payments in
total by pension reserves.
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ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
MAJOR SHAREHOLDERS
Under our Articles of Association, each of our ordinary shares represents
one vote. Major shareholders do not have different voting rights.
Under the German Securities Trading Act (Wertpapierhandelsgesetz), holders
of voting securities of a listed German company must notify that company of the
level of their holding whenever it reaches, exceeds or falls below specified
thresholds. These thresholds are 5, 10, 25, 50 and 75 percent of the company's
outstanding voting securities. One shareholder, Allianz
Versicherungs-Aktiengesellschaft, has informed us that it holds 5.7 percent of
Bayer AG's outstanding shares. No other shareholder has notified us that it has
crossed any of the Securities Trading Acts thresholds.
Because the shares of Bayer AG are in bearer form, we cannot obtain precise
information as to the identity of shareholders or the distribution of the shares
among them. From time to time, however, we conduct surveys, using the assistance
of banks, to form estimates as to Bayer AG's shareholder base. Our last such
survey measured our shareholder structure as of June 1, 2001. The survey
recorded responses with respect to 95.6 percent of our approximately 500,000
shareholders. Of this number, 94 percent were individuals, who together owned 24
percent of the shares. Approximately 55,000, or 12 percent, of the individual
shareholders were Bayer employees, who together held approximately 2 percent of
Bayer AG's outstanding shares. Institutional investors (e.g., banks, insurance
companies and investment funds) held another 67 percent of the shares.
Shareholders in Germany numbered approximately 437,000 and owned 61 percent of
the shares. Approximately 59,000 shareholders in 135 other countries held 39
percent of the shares. Of this group, British shareholders held approximately 10
percent, and U.S. shareholders about 8 percent, of the shares.
To our knowledge, we are not directly or indirectly owned or controlled by
another corporation or by any government, and there are no arrangements which
may result in a change in control.
See also "Share Ownership" in Item 6, Directors, Senior Management and
Employees.
RELATED PARTY TRANSACTIONS
In the ordinary course of business, we purchase materials, supplies and
services from numerous companies throughout the world. Members of Bayer AG's
Supervisory Board are affiliated with some of these companies. We conduct our
transactions with such companies on an arm's length basis. We do not consider
the amounts involved in such transactions to be material to our business and
believe that these amounts are not material to the business of the companies
involved.
During our three most recent complete financial years and through the date
of this registration statement, we have not been involved in, and we do not
currently anticipate becoming involved in, any transactions that are material to
us or any of our related parties and that are unusual in their nature or
conditions. We have not made any outstanding loans to or for the benefit of:
- enterprises that, directly or indirectly, control or are controlled by,
or are under common control with us;
- enterprises in which we have significant influence or which have
significant influence over us;
- shareholders beneficially owning a 10 percent or greater interest in our
voting power;
- key management personnel; or
- enterprises in which persons described above own, directly or
indirectly, a substantial interest in the voting power.
INTERESTS OF EXPERTS AND COUNSEL
Not applicable.
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ITEM 8. FINANCIAL INFORMATION
CONSOLIDATED FINANCIAL STATEMENTS AND OTHER FINANCIAL INFORMATION
See Item 18.
LEGAL PROCEEDINGS
Bayer is involved in a number of legal proceedings. As a global company
active in a wide range of life sciences and chemical activities, we may in the
normal course of our business become involved in proceedings relating to such
matters as:
- product liability;
- patent validity and infringement disputes;
- tax assessments;
- competition and antitrust; and
- past waste disposal practices and release of chemicals into the
environment.
We cannot predict with certainty the outcome of any proceedings in which we
are or may become involved. An adverse decision in a lawsuit seeking damages
from us could result in a monetary award to the plaintiff and, to the extent not
covered by our insurance policies, could significantly harm our business or the
result of our operations. If we lose a case in which we seek to enforce our
patent rights, we could sustain a loss of future revenue as other manufacturers
begin to market products we developed.
In the remainder of this subsection, we describe what we believe to be the
most significant of the proceedings in which Bayer AG or its subsidiaries are
currently involved.
PATENT VALIDITY CHALLENGES AND INFRINGEMENT PROCEEDINGS; PATENT-RELATED
ANTITRUST ACTIONS
In the United States, Bayer AG and its U.S. subsidiary Bayer Corporation
are plaintiffs or co-plaintiffs in a number of patent infringement actions
against generic drug manufacturers. The lawsuits arose because these
manufacturers filed applications in the United States for regulatory approval of
generic versions of products containing the active ingredients ciprofloxacin or
nifedipine marketed by Bayer or its licensees. Some of these actions have, in
turn, given rise to lawsuits alleging that Bayer AG, Bayer Corporation and other
parties had violated federal and state antitrust and similar statutes.
Generic drug manufacturers may receive approval to market formerly patented
products after all applicable patent protections have expired. A generic drug
manufacturer may, however, attempt to avoid a patent prior to its scheduled
expiry by attacking its validity or enforceability. In the United States, the
Federal Food, Drug, and Cosmetics Act enables generic manufacturers wishing to
market a bio-equivalent version of another manufacturer's product to seek
regulatory approval by filing an Abbreviated New Drug Application (ANDA). In its
ANDA, the applicant must state the basis on which it seeks to avoid any
applicable patents.
One basis for seeking approval is a claim that the applicant's product does
not infringe existing patent rights or that the patent is invalid or
unenforceable. This claim is commonly known as a "paragraph IV certification" or
"ANDA (IV)". Under the Act, the filing of a paragraph IV certification is deemed
an infringement of patent rights. The Act permits the holder of the patent
rights to file an infringement action against the ANDA applicant within 45 days
of receiving notice of the paragraph IV certification. If the holder of the
patent rights chooses not to file suit within this period, the FDA may approve
the ANDA immediately. The filing of a suit, however, stays final FDA approval of
the ANDA for a period of 30 months. The court may shorten or extend this period.
If the court rules that the applicant's product will not infringe the patent or
that the patent is invalid or unenforceable, the FDA may grant approval
immediately. If, on the other hand, the court rules that the product will
infringe the patent, the FDA may not grant final approval until the original
patent has expired.
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Ciprofloxacin-related actions
Patent-related actions. In January 1997, Bayer AG and Bayer Corporation
settled a patent infringement suit against Barr Laboratories, Inc. This suit
arose when Barr filed an ANDA (IV) seeking regulatory approval of a generic form
of Bayer's ciprofloxacin anti-infective product, which we sell in the United
States under the trademark Cipro(R). Under the settlement agreement, Barr and
Rugby Laboratories Inc., another generic manufacturer that supported Barr during
the infringement suit, agreed to dismiss the litigation, acknowledging the
validity and enforceability of Bayer's patent rights, and we agreed to pay each
company $24.5 million. The agreement gave us the option, until our patent
expires in 2003, to supply Barr and Rugby's then parent company Hoechst Marion
Roussel Inc. with ciprofloxacin products which they could then market under a
license from Bayer using a single trade name, or else to make quarterly cash
payments. Since concluding the settlement agreement, we have opted to make
payments. Shortly after settling this suit, we applied to the U.S. Patent and
Trademark Office for a reexamination of our patent. The Patent and Trademark
Office reissued the patent in February 1999.
In April 1999, Danbury Pharmacal Inc., an affiliate of Schein
Pharmaceutical, Inc., filed an ANDA (IV) alleging that our ciprofloxacin patent
was invalid. Mylan Pharmaceuticals, Inc., an affiliate of Mylan Laboratories,
Inc., filed an ANDA (IV) challenging our ciprofloxacin patent in September 1999.
To protect and enforce our patent rights, Bayer AG together with Bayer
Corporation as licensee filed two lawsuits against Danbury Pharmacal and Schein
Pharmaceutical and one lawsuit against Mylan Pharmaceuticals and Mylan
Laboratories in 1999, and a second lawsuit against Mylan Pharmaceuticals and
Mylan Laboratories in 2000. Reddy Cheminor, Inc. intervened as an additional
defendant in the Danbury/Schein suits. All these suits were consolidated for
pre-trial proceedings and trial before the U.S. federal District Court for the
District of New Jersey.
In their responses, the defendants alleged the invalidity and
unenforceability of our reexamined patent on several grounds. They then moved
for summary judgment on the invalidity issue, and we filed a cross-motion for
partial summary judgment. In February 2001, the district court denied the
defendants' motion and granted our cross-motion. The court subsequently entered
a final judgment in our favor, confirming the validity and enforceability of the
patent. The defendants have appealed this judgment to the Court of Appeals for
the Federal Circuit. Oral argument for the appeal has been set on January 7,
2002.
In addition, Bayer AG and Bayer Corporation filed a patent infringement
action in May 2001 against Carlsbad Technology, Inc., arising from Carlsbad's
ANDA (IV) filing seeking regulatory approval of its generic version of Cipro(R).
Carlsbad filed two motions for summary judgment. The first motion alleged as a
matter of patent procedure that Bayer's patent as it relates to ciprofloxacin
should expire in October 2002 and not, as determined by the Patent and Trademark
Office, in December 2003. Bayer filed a cross-motion for summary judgment that
the expiration date is in December 2003. In its second motion, Carlsbad alleged
that ciprofloxacin was obvious in light of the prior art. The federal District
Court for the Southern District of California denied both Carlsbad motions in
October, 2001 and granted summary judgment to Bayer on its cross-motion.
Carlsbad has appealed the decision denying the first motion to the Court of
Appeals for the Federal Circuit. A trial regarding the arguments of obviousness
raised in Carlsbad's second motion is currently scheduled to begin on April 30,
2002. Carlsbad has since withdrawn all other defenses it had originally raised
challenging the validity and enforceability of Bayer AG's ciprofloxacin patent.
If we lost our patent protection for ciprofloxacin, or if the expiration of
the patent were accelerated to October 2002, we believe that we would forego
significant revenue. We intend to continue taking vigorous action to maintain
our ciprofloxacin patent rights in the United States through their normal expiry
in December 2003.
Antitrust actions. Bayer Corporation has been named as a defendant in 38
putative class action lawsuits, one individual lawsuit and one consumer
protection group lawsuit filed in a number of state and federal courts in the
United States. Bayer AG has also been named as defendant in twenty of these
cases, including the individual lawsuit and the consumer protection group
lawsuit; it has been served with process in the individual lawsuit and twelve of
the putative class action lawsuits. In addition, Barr Laboratories, Aventis
S.A., Hoechst Marion Roussel, Inc., Rugby Laboratories, Inc. and Watson
Pharmaceuticals, Inc. have each been named as defendant in one or more of these
lawsuits. The plaintiffs in these suits allege that they are direct or indirect
purchasers of Cipro(R) who were damaged because Bayer's settlement of the Barr
ANDA (IV) litigation prevented generic
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manufacturers from selling a generic version of Cipro(R). The plaintiffs allege
that the defendants violated various federal antitrust and state business,
antitrust, unfair trade practices and consumer protection statutes, and seek
treble damages and injunctive relief.
These proceedings are at an early stage. None of the relevant courts has
certified a class. The Judicial Panel for Multidistrict Litigation, or MDL
Panel, transferred 35 of these cases to the U.S. federal District Court for the
Eastern District of New York for coordinated pre-trial proceedings. The federal
court ordered nine of those cases remanded to various state courts in October
2001. Four cases are currently pending in a California state court, where they
were originally filed. With the remand decision five cases are currently being
remanded to California state court. All nine California cases should be
coordinated under state law rules. Bayer will also have state court proceedings
occurring in Florida, New York, Kansas, Tennessee and Wisconsin.
The Barr settlement is also the subject of ongoing antitrust investigations
by the U.S. Federal Trade Commission and a number of state attorneys general.
Because these cases in the aggregate allege substantial unquantified
damages and also seek treble and punitive damages and penalties, it is possible
that the ultimate liability could be material to our results of operations and
cash flows. Although we cannot predict the outcome of these cases with
certainty, we believe that we have meritorious defenses to the antitrust
allegations and intend to defend them vigorously.
Nifedipine-related actions
Patent-related actions. Since 1997 Bayer AG and Bayer Corporation have
been involved in a number of patent infringement actions arising from ANDA (IV)s
filed by generic manufacturers seeking regulatory marketing approval for
allegedly bio-equivalent versions of our brand-name product Adalat(R) CC and
Pfizer, Inc.'s brand-name product Procardia(R) XL. The active ingredient of
these products is nifedipine. We own patent rights related to nifedipine drug
product formulations. In addition, because Pfizer markets Procardia(R) XL under
a license from Bayer, Bayer AG and Bayer Corporation became Pfizer's
co-plaintiffs in the infringement actions relating to that product.
In August 1997 Bayer AG and Bayer Corporation filed a patent infringement
suit against Elan Pharmaceutical Research Corp. and Elan's parent company, Elan
Corp., plc, arising from Elan's ANDA (IV) for a drug product containing
nifedipine. In March 1999, the U.S. federal District Court for the Northern
District of Georgia granted summary judgment against us, holding that the
particular generic product for which Elan sought marketing approval as described
in its ANDA would not violate our patent. In May 2000, the U.S. Court of Appeals
for the Federal Circuit affirmed this decision.
In March 2001 the same district court granted summary judgment against
Bayer AG and Bayer Corporation in a second ANDA (IV) related suit that we had
filed against Elan and later in another action that we had filed against Elan,
Biovail Labs, Inc., Biovail Corp. International and Teva Pharmaceuticals USA,
Inc., arising from these parties' commercial sale of an allegedly bio-equivalent
nifedipine product. Our appeal against the decisions in these two cases is
currently pending before the Federal Circuit.
Bayer AG and Bayer Corporation have also filed four ANDA (IV) related
lawsuits against Biovail and two lawsuits arising from the commercial sale of
nifedipine products by Biovail and Teva. These suits are currently pending
before the U.S. federal District Court for the District of Puerto Rico. The
court has stayed these suits pending resolution of the appeals before the
Federal Circuit.
Because defendants have prevailed in some of these lawsuits, it is possible
that they may also prevail in the trials and appeals currently pending. We
believe, however, that we have meritorious claims in the pending cases, and
intend to prosecute these claims vigorously. Because some of our nifedipine
dosages have already begun to face generic competition, we do not believe that
an adverse result in the pending cases would result in a material amount of
additional foregone revenue.
Antitrust actions. Biovail has filed an antitrust lawsuit against Bayer
AG, Bayer Corporation and Pfizer in the U.S. federal District Court for the
District of Western Pennsylvania. Biovail is seeking a declaratory judgment that
Bayer's nifedipine patents are invalid. Biovail also seeks damages under federal
and state antitrust statutes
140
alleging, among other things, that Bayer illegally asserted its patent rights.
The district court has stayed this litigation pending resolution of the
nifedepine-related patent infringement actions against Biovail.
This proceeding is at an early stage. However, we believe that we have
meritorious defenses to the antitrust allegations, and we intend to defend this
case vigorously.
PRODUCT LIABILITY PROCEEDINGS
HIV-related actions. During the past decade, our U.S. subsidiary Bayer
Corporation, as well as other fractionators of plasma products, have been
involved in lawsuits alleging that hemophiliacs became infected with the human
immunodeficiency virus (HIV), or ultimately developed AIDS, by using clotting
factor concentrates derived from human plasma. Plaintiffs have brought actions
on these grounds in the United States, Ireland, Italy, Taiwan, Argentina,
Canada, Japan, and Germany.
In the United States, a class action against Bayer Corporation and three
other defendants consolidated the HIV-related claims of more than 6,000
claimants and claimant groups. The parties resolved this class action through a
$600 million settlement. Bayer Corporation's share of this settlement was
approximately $290 million. Bayer Corporation has also satisfactorily settled
nearly 400 lawsuits by plaintiffs who opted out of the class action.
Approximately 20 suits remain pending in the United States. Although Bayer
Corporation has prevailed in the majority of cases that have proceeded to trial,
plaintiffs were successful in three cases. The juries in each of these cases
awarded damages not exceeding $2 million. In addition, in 1999 a Louisiana jury
awarded a plaintiff damages of $35 million. However, the trial court set this
award aside, and an appellate court upheld this decision. Bayer Corporation has
since settled this matter in the context of a group settlement of nearly 100
Louisiana cases, of which Bayer Corporation's share was less than $50 million.
Although Bayer Corporation intends to defend aggressively the remaining
HIV-related lawsuits in various countries, we have made what we believe to be
appropriate provisions should these suits result in judgments in favor of the
plaintiffs. These provisions are not material to the Bayer Group.
Cerivastatin-related actions. In August 2001, we voluntarily ceased
marketing our cerivastatin anticholesterol products in response to reports of
serious side effects in some patients. See Item 4, Information about the Company
-- Health Care -- Pharmaceuticals -- Products. Since this withdrawal, more than
277 lawsuits, many of them putative class actions, have been initiated in the
United States against Bayer Corporation and Bayer AG. The actions in the United
States have been primarily on theories of product liability, consumer fraud,
medical monitoring, predatory pricing and unjust enrichment. These lawsuits seek
remedies including compensatory and punitive damages, disgorgement of funds
received from the marketing and sale of cerivastatin and the establishment of a
trust fund to finance the medical monitoring of former cerivastatin users. We
expect the MDL Panel to consolidate the federal court cases before a single
judge for coordinated discovery and other pre-trial proceedings. In addition,
several actions have been initiated against other companies of the Bayer Group
in other countries. We expect additional lawsuits to be filed in the United
States and elsewhere. If the plaintiffs in these actions were to be successful,
it is possible that the ultimate liability could be material to our results of
operations and cash flows. We believe that we have meritorious defenses in these
actions, and intend to defend them vigorously.
Phenylpropanolamine (PPA) actions. In late 2000, Bayer Corporation
discontinued marketing Alka-Seltzer Plus effervescent medicines containing PPA
in the United States, Canada and various Latin American countries in response to
a recommendation from the U.S. Food and Drug Administration to all manufacturers
of drugs and medicines containing PPA. The FDA issued this recommendation after
one epidemiological study of a small number of patients suggested a possible
association between PPA and hemorrhagic stroke in women of certain ages. Over
319 class and individual lawsuits have been initiated in the United States
against Bayer Corporation. Bayer AG has also been named a defendant in some of
the cases, but has not been served with process. The MDL Panel has assigned
management of the federal court cases to the U.S. federal District Court for the
Western District of Washington. It is probable that additional actions will be
initiated there or in other jurisdictions where products containing PPA were
marketed. Bayer Corporation believes it has meritorious defenses to these
actions and intends to defend them vigorously.
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PROCEEDINGS RELATING TO THE WORLD WAR II ERA
Bayer AG was one of a number of defendants in ten class actions filed in
recent years before various U.S. federal courts and consolidated in 2000 before
the federal District Court for the District of New Jersey. These suits sought
class certification on behalf of persons -- primarily residents of Eastern
European countries -- alleging that these persons were victims of forced labor
during World War II or medical experiments during the period of national
socialist rule prior to and during the war. In addition, one suit related to
medical experiments named Bayer AG as sole defendant. The plaintiffs sought
unspecified amounts of damages. No class was certified.
In July 2000, the United States, Germany, Israel and several Eastern
European states concluded an Executive Agreement providing for the establishment
of a federal German foundation to serve as the exclusive source of remedies for
all present and future claims that have been or may be asserted against German
companies arising out of the national socialist era and World War II. This
foundation, called "Remembrance, Responsibility, and the Future", was
established by German law in August 2000. Its founders are the German government
and a number of German companies, among them Bayer AG. The foundation
administers a fund in the amount of DM 10 billion, made available by the German
public sector and by German companies, including Bayer AG. The portion of the
fund to be contributed by German companies totals DM 5 billion.
In 2000, we transferred Bayer's DM 100 million contribution to the fund to
the foundation's escrow account. In 2001, we increased this contribution by DM
10 million. In addition, the founding members of the foundation initiative,
including Bayer, committed themselves jointly to cover any shortfall if German
companies failed to contribute their full DM 5 billion portion of the fund. On
the basis of this commitment, we made a final contribution to the fund of DM
26.1 million in August 2001. The foundation is now fully funded.
It is a central element of the Executive Agreement that the foundation may
begin payments only when all pending lawsuits are voluntarily dismissed with
prejudice, thereby creating legal certainty (Rechtssicherheit). Accordingly, the
federal District Court for the District of New Jersey dismissed the suits
described above in November 2000. Other courts followed in 2001, dismissing
World War II era related suits in which Bayer AG was not involved. On May 30,
2001, the German parliament passed a resolution recognizing the achievement of
adequate legal certainty, thereby enabling the foundation to begin making
payments to victims. Payments began in the summer of 2001.
Under the Executive Agreement, the government of the United States has
committed itself to file a "statement of interest" in any new lawsuits filed
before a U.S. court against German companies in connection with national
socialist era and World War II-related claims, recommending that the court
dismiss the suit. Although the doctrine of separation of powers prevents the
U.S. government from compelling the court to comply with its statement of
interest, we believe that the probability of any future suit progressing beyond
the filing stage is therefore remote.
DIVIDEND POLICY AND LIQUIDATION PROCEEDS
Our shareholders may declare dividends at an ordinary general shareholders'
meeting, which must be held within the first eight months of each fiscal year.
Under German law, Bayer AG may pay dividends only from balance sheet
profits reflected in its unconsolidated financial statements (as opposed to the
consolidated financial statements of the Bayer Group), as adopted and approved
by the Board of Management and the Supervisory Board. In determining the balance
sheet profits that may be distributed as dividends, the Board of Management may
under German law allocate to retained earnings (Gewinnrucklagen) up to 50
percent of the net income of Bayer AG for the fiscal year that remains after
deducting amounts to be allocated to legal and statutory reserves and losses
carried forward. The Board of Management may also increase balance sheet profits
when preparing the financial statements with funds withdrawn from retained
earnings.
Our shareholders, in their resolution on the appropriation of balance sheet
profits, may carry forward balance sheet profits in part or in full and may
allocate additional amounts to retained earnings. Profits carried forward will
be automatically incorporated in the balance sheet profits of the next fiscal
year and may be used in their
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entirety to pay dividends in the next fiscal year. Amounts allocated to the
retained earnings are available for dividends only if and to the extent the
retained earnings have been dissolved by the Board of Management when preparing
the financial statements, thereby increasing the balance sheet profits.
Dividends approved at an ordinary general shareholders' meeting are payable
promptly after the meeting, unless otherwise decided at the meeting. Because all
of Bayer AG's shares are in book-entry form represented by a global certificate
deposited with Clearstream Banking AG in Frankfurt am Main, Germany,
shareholders receive dividends through Clearstream for credit to their deposit
accounts.
We expect to continue to pay dividends, although we can give no assurance
as to the payment of a dividend for any particular year or as to the particular
amounts that we may pay from year to year.
Apart from liquidation as a result of insolvency proceedings, Bayer AG may
be liquidated only with a combined majority of the votes cast and three-quarters
of the share capital present or represented at a shareholders' meeting at which
the vote is taken. In accordance with the German Stock Corporation Act, upon a
liquidation of Bayer AG, any liquidation proceeds remaining after paying off all
of Bayer AG's liabilities would be distributed among the shareholders in
proportion to the total number of shares held by each shareholder.
See also "Dividends" in Item 3, Key Information.
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ITEM 9. THE LISTING
LISTING DETAILS
Bayer AG's shares will trade on the New York Stock Exchange under the
symbol BAY in the form of American Depositary Shares, or ADSs. Each ADS
represents one share. The ADSs are evidenced by American Depositary Receipts
(ADRs) issued by The Bank of New York, as Depositary, under a Deposit Agreement
dated as of -- , among us, the Depositary and the registered holders of
ADRs from time to time.
The primary market for trading in Bayer AG shares has previously been the
Frankfurt Stock Exchange. The shares are also listed on the other seven German
stock exchanges as well as most European stock exchanges and the Tokyo Stock
Exchange.
The table below sets forth, for the periods indicated, the reported high
and low quoted prices per Bayer AG share on the Frankfurt Stock Exchange.
HIGH LOW
----- -----
(IN EUROS)
1997........................................................ 41.16 28.12
1998........................................................ 49.80 29.40
1999:
First quarter............................................. 38.90 29.74
Second quarter............................................ 41.64 34.22
Third quarter............................................. 43.87 36.26
Fourth quarter............................................ 47.65 34.20
2000:
First quarter............................................. 49.40 39.51
Second quarter............................................ 47.63 38.52
Third quarter............................................. 49.17 40.20
Fourth quarter............................................ 56.50 41.82
2001:
First quarter............................................. 58.00 44.79
Second quarter............................................ 50.15 42.42
Third quarter............................................. 47.25 23.90
Fourth quarter............................................ -- --
PREVIOUS SIX MONTHS:
July 2001................................................. 47.25 42.69
August 2001............................................... 47.24 32.50
September 2001............................................ 36.98 23.90
October 2001.............................................. 37.32 29.41
November 2001............................................. 39.00 32.40
December 2001............................................. -- --
The average daily volumes traded on the Frankfurt Stock Exchange for the
years 2000, 1999 and 1998 were 2,549,929, 2,182,661 and 2,681,918, respectively.
The average daily trading volume during the six months ended September 30, 2001
was 3,906,083.
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ITEM 10. ADDITIONAL INFORMATION
DESCRIPTION OF SHARE CAPITAL
In the section following we describe the material rights and restrictions
that apply to Bayer AG's shares and includes a brief description of certain
provisions of Bayer AG's Articles of Association and of German law. This
description is a summary and does not purport to be complete. For a description
of the dividend and liquidation rights of holders of Bayer AG's shares, see Item
8, Financial Information -- Dividend Policy and Liquidation Proceeds.
SHARE CAPITAL AND FORM OF SHARES
At December 31, 2000, the subscribed and outstanding share capital
(Grundkapital ) of Bayer AG amounted to E1,869,675,315.20, consisting of
730,341,920 shares of no par value.
All shares of Bayer AG are of a single class and have been issued in bearer
form. The shares are represented by a global certificate deposited with
Clearstream Banking AG (formerly Deutsche Borse Clearing AG) in Frankfurt am
Main, Germany. The Articles of Association exclude the right of shareholders to
obtain individual share certificates (Einzelverbriefung). All shares are freely
transferable.
Under German law and its Articles of Association, Bayer AG may issue
preferred stock. An issuance of preferred stock, like any share issuance, would
require either a resolution by the shareholders' meeting to increase the
company's capital or the authorization of the Management Board by the
shareholders' meeting to increase the company's capital with the consent of the
Supervisory Board. Bayer AG does not currently have any shares of preferred
stock outstanding.
At a general shareholders' meeting, our shareholders can resolve a capital
increase by issuing new shares against contributions in cash or in kind. The
resolution directing the issuance of shares and increase of share capital must
be passed by a combined majority of the votes cast and a majority of three
quarter of the share capital taking part in the vote. As discussed below,
shareholders generally have pre-emptive rights entitling them to subscribe to
any new issue of shares. To exclude pre-emptive rights in connection with a
particular capital increase and share issuance, the shareholders must pass a
resolution by a combined majority of the votes cast and three quarters of the
share capital taking part in the vote.
Our shareholders may also resolve with a combined majority of the votes
cast and three quarters of the share capital taking part in the vote to
authorize the Board of Management with the approval of the Supervisory Board to
increase the share capital in one or several times up to a specified amount and
issue new shares against contribution in cash or in kind, thus creating
authorized capital (genehmigtes Kapital ). The authorization may provide the
exclusion of pre-emptive rights and is limited for a period of five years upon
registration of the authorized capital in the commercial register. The amount of
the authorized capital may not exceed in aggregate 50 percent of the outstanding
share capital at the time of the shareholders' resolution.
Furthermore, our shareholders may resolve a conditional capital increase up
to a specified amount only for certain limited purposes, such as granting
conversion or pre-emptive rights to holders of convertible bonds or bonds with
warrants attached, issuing shares as consideration in a merger with another
company or offering stock options to the management and employees of Bayer AG or
its affiliates (bedingtes Kapital ). The resolution requires a combined majority
of the votes cast and three quarters of the share capital taking part in the
vote. The nominal amount of a conditional capital increase may not exceed 50
percent of the share capital outstanding at the time the shareholders resolve
the conditional capital increase. If the shareholders create conditional capital
to cover the issuance of stock options to management and employees, the nominal
value of the conditional capital may not exceed 10 percent of the share capital
outstanding at the time the conditional capital increase is resolved.
Bayer AG currently has unissued authorized capital totaling
E629,581,003.64. This amount represents three separate amounts of authorized
capital resolved by shareholders. The Board of Management, with the approval of
the Supervisory Board, may use the amount of authorized capital I and II until
April 30, 2002, to increase the capital of Bayer AG in one or more stages by
issuing new shares against cash contributions. The Board of Management, with the
approval of the Supervisory Board, may use the amount of authorized capital III
until
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April 27, 2006, to increase the capital in one or more stages by issuing new
shares against contributions in kind. The authorized capital amounts are as
follows:
- Authorized Capital I in the amount of E153,387,564.36. The Board of
Management may exclude shareholders' pre-emptive rights with respect to
any shares issued out of this authorized capital to the extent necessary
to grant subscription rights to the holders of warrants attached to
bonds that Bayer AG has issued or holders of convertible bonds or bonds
with warrants attached that Bayer AG or its subsidiaries may issue in
the future.
- Authorized Capital II in the amount of E102,258,376.24. The Board of
Management may exclude pre-emptive rights with respect to the shares
issued out of this authorized capital. If the Board of Management
excludes these rights with respect to shares issued out of this
authorized capital, the issue price may not be substantially lower than
the then market price of Bayer AG shares. If the Board of Management
does not exclude pre-emptive rights with respect to new shares issued
out of this authorized capital, it may exclude these rights only to the
extent necessary to grant subscription rights to the holders of warrants
attached to bonds that Bayer AG has issued or holders of convertible
bonds or bonds with warrants attached that Bayer AG or its subsidiaries
may issue in the future.
- Authorized Capital III in the amount of E373,935,063.04. The
shareholders' pre-emptive rights are excluded. The Board of Management
is authorized to determine the further conditions of the capital
increase with the consent of the Supervisory Board.
On April 30, 1999, the shareholders of Bayer AG resolved a conditional
capital in the amount of E83,200,000. The share capital is only increased to the
extent that the holders of convertible bonds or warrants issued by Bayer AG or a
wholly-owned subsidiary on or before April 29, 2004, exercise the exchange
rights attached to these securities.
The following table describes developments in Bayer AG's share capital
during the past five fiscal years.
AMOUNT OF SHARE CAPITAL
YEAR(1) CAPITAL INCREASE AFTER INCREASE REASON FOR CAPITAL INCREASE
------- ---------------- -------------- ---------------------------
(IN EUROS) (IN EUROS)
1996.......................... 48,273,700 1,851,490,160 Share issuance upon exercise of warrants
1997.......................... 15,599,311 1,867,089,471 Share issuance upon exercise of warrants
1998.......................... -- 1,867,089,471 (None)
1999.......................... 2,585,844 1,869,675,315 Transfer from capital reserves
2000.......................... -- 1,869,675,315 (None)
---------------
(1) The shareholders of Bayer AG resolved the conversion of Bayer AG's capital
stock to euros on April 30, 1999. German mark figures for periods prior to
this resolution have been restated in euros at the irrevocably fixed
DM/euro exchange rate of DM 1.95583 = E1.00.
VOTING RIGHTS AND SHAREHOLDERS' MEETINGS
Each share entitles its holder to cast one vote at general shareholders'
meetings. According to the German Stock Corporation Act and the Articles of
Association, resolutions at a general shareholders' meeting, including those for
the amendment of the Articles of Association, require a simple majority of the
votes cast, unless a greater majority is required by law. Under the German Stock
Corporation Act, the following significant resolutions require a majority of the
votes cast and of at least three quarters of the share capital represented with
respect to the vote taken on such resolution:
- share capital increases that exclude shareholder pre-emptive rights;
- the creation of authorized capital or conditional capital increases;
- changes in the Articles of Association;
- capital decreases;
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- the dissolution of Bayer AG;
- a merger of Bayer AG into or a consolidation of Bayer AG with another
stock corporation;
- a split, spin-off, or transfer of all or substantially all of Bayer AG's
assets;
- a change in Bayer AG's corporate form; and
- the execution of enterprise agreements (Unternehmensvertrage), including
corporate control and profit and loss absorption agreements and
agreements for the integration (Eingliederung) of another company into
Bayer AG.
Under the German Stock Corporation Act the Board of Management must call,
within the first eight months of each fiscal year, an ordinary general
shareholders' meeting to provide shareholders with the annual financial
statements and management report and to decide on the appropriation of balance
sheet profits. An extraordinary shareholders' meeting may otherwise be called
by:
- the Board of Management,
- the Supervisory Board, or
- shareholders representing, in the aggregate, at least 5 percent of the
issued share capital of Bayer AG.
To be eligible to attend and vote at a general shareholders' meeting, a
shareholder must deposit his shares (or certificates of deposit of a bank
serving as a depositary for the shares) not later than the seventh day prior to
the date of the meeting with:
- Bayer AG,
- a German notary,
- a securities depositary bank (Wertpapiersammelbank), or
- a bank specified in the notice calling the general shareholders'
meeting.
Shares are also deemed "deposited" if the shareholder arranges for them to
be locked (gesperrt) in the bank account in which they are held until the end of
the general shareholders' meeting. Bayer AG must publish notice of a general
shareholders' meeting in the German Federal Gazette (Bundesanzeiger) and in one
other major daily German newspaper at least one month prior to the date by which
shareholders must deposit their shares, stating the time, place, agenda and
conditions for participation at the meeting.
Neither the German Stock Corporation Act nor the Articles of Association
requires any minimum quorum for a general shareholders' meeting.
PRE-EMPTIVE RIGHTS
Under the German Stock Corporation Act, a shareholder of a corporation has
a preferential right to subscribe to any issue by the corporation of new shares,
bonds convertible into shares, bonds with warrants to purchase shares or
instruments granting a profit participation right. The proportional share of the
issue to which the shareholder may subscribe is equal to the proportional share
of existing capital of the corporation that the shareholder holds. Subscription
rights may be transferred during the exercise period for these rights and are
generally traded on the German stock exchanges.
When authorizing a capital increase and a new issue of shares, the
shareholders of Bayer AG may exclude pre-emptive rights, in whole or in part, by
a resolution passed by a three-quarters majority of the share capital taking
part in the vote. In addition, when creating authorized capital, shareholders
may, by this same majority, authorize the Board of Management to exclude the
pre-emptive rights attaching to any shares issued pursuant to the authorized
capital. See above, "-- Share Capital and Form of Shares" for a description of
the Board of Management's authority to exclude pre-emptive rights with respect
to the Bayer AG's three current components of authorized capital.
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ACQUISITION BY BAYER AG OF ITS OWN SHARES
Under the German Stock Corporation Act, a stock corporation may acquire its
own shares in a limited number of exceptional cases, including if so authorized
by a shareholder resolution adopted at a general shareholders' meeting. At the
general shareholders' meeting of Bayer AG held on April 27, 2001, the
shareholders authorized the Board of Management to buy back shares representing
up to 10 percent of Bayer AG's outstanding share capital. The Board of
Management may either cancel the shares so re-bought, reducing the company's
outstanding share capital, or re-sell the shares subject to a further resolution
adopted at a general shareholders' meeting. This resolution requires a majority
of three quarters of the share capital taking part in the vote.
DIFFERENCES BETWEEN U.S. AND GERMAN LAW
You should be aware that the rights of shareholders under German law and
Bayer AG's historical practice differ in some important respects from those of
shareholders of a U.S. corporation. In addition to the differences described in
the preceding sub-sections of this Item 10, these differences include the
following:
- Shareholders of a German corporation cannot use "cumulative voting" in
electing members of the supervisory board.
- German law does not provide for the adoption of resolutions by
shareholders through written consent in lieu of a meeting.
- Like most German companies, Bayer AG does not "stagger" the terms of
office of the members of their supervisory boards.
- German law does not provide for the use of "poison pill" rights plans.
- With the exception of such information as annual reports that German
corporations are required by law to publish, shareholders of German
corporations are entitled to demand information from the company only in
the framework of the shareholders' meeting, and then only with respect
to items on the meeting's agenda.
In addition, as a non-U.S. company, Bayer AG is not subject to some of the
provisions of U.S. securities law that apply to U.S. issuers. Bayer AG is not
subject to the proxy rules promulgated under Section 14 of the Securities
Exchange Act of 1934. Furthermore, the short-swing profit and recovery
provisions under Section 16 of the Exchange Act do not apply to Bayer AG or its
directors.
Neither German law nor the U.S. Exchange Act require Bayer AG to file
quarterly reports of the type that U.S. issuers file on Form 10-Q. Bayer AG's
historical practice, however, has been to publish its three-, six- and
nine-month interim financial information. We expect to continue this practice,
and to file this information with the Securities and Exchange Commission in the
United States on Form 6-K.
MATERIAL CONTRACTS
For a description of certain contracts that we regard as material to our
research and development efforts, see Item 4, Information on the Company --
Research and Development. We are not otherwise party to any contracts that we
regard as material to our business or financial position.
EXCHANGE CONTROLS
There are currently no German foreign exchange control restrictions on the
payment of dividends on the shares or the conduct of our operations.
TAXATION
The following is a discussion of the material U.S. federal income and
German tax consequences to you as a Qualified Holder of Bayer AG shares. This
discussion is based upon existing U.S. federal income and German tax
148
law, including legislation, regulations, administrative rulings and court
decisions, as in effect on the date of this registration statement, all of which
are subject to change, possibly with retroactive effect.
For the purposes of this discussion, you are a "Qualified Holder" if you
are the beneficial owner of ordinary Bayer AG shares and (1) are a resident of
the United States for purposes of the Convention Between the United States of
America and the Federal Republic of Germany for the Avoidance of Double Taxation
and the Prevention of Fiscal Evasion with Respect to Taxes on Income and
Capital, as amended (the "Income Tax Treaty"), which generally includes an
individual U.S. resident, a corporation created or organized under the laws of
the United States, any state thereof or the District of Columbia and a
partnership, estate or trust, to the extent its income is subject to taxation in
the United States as the income of a U.S. resident, either in its hands or in
the hands of its partners or beneficiaries, (2) do not hold Bayer AG shares as
part of the business property of a permanent establishment located in Germany or
as part of a fixed base located in Germany and used for the performance of
independent personal services and (3) if you are not an individual, are not
subject to the limitation on benefits restrictions in the Income Tax Treaty.
This discussion assumes that you hold Bayer AG shares as a capital asset. This
discussion does not address all aspects of U.S. federal income and German
taxation that may be relevant to you in light of your particular circumstances.
For example, this discussion does not apply to Qualified Holders whose shares
were acquired pursuant to the exercise of an employee share option or otherwise
as compensation or who are subject to special treatment under U.S. federal
income tax laws such as financial institutions, insurance companies, tax-exempt
organizations, holders of 10 percent or more of Bayer AG shares, broker-dealers
in securities or/currencies, persons that hold Bayer AG shares as part of a
"hedging" or a "conversion" transaction or as a position in a "straddle", and
persons whose functional currency is other than the U.S. dollar. This discussion
also does not address any aspects of state, local or non-U.S. (other than
certain German) tax law. If a partnership holds Bayer AG shares, the tax
treatment of a partner generally will depend upon the status of the partner and
the activities of the partnership. If a Qualified Holder is a partner in a
partnership that holds Bayer AG shares, the Holder is urged to consult its own
tax advisor regarding the specific tax consequences of the purchase, ownership
and disposition of the Bayer AG shares.
In general, for U.S. federal income tax purposes, if you are a Qualified
Holder of ADRs evidencing ADSs, you will be treated as the owner of the Bayer AG
shares represented by such ADSs. Unless the context requires otherwise, all
references in this section to Bayer "shares" are deemed to refer likewise to
ADSs evidencing an ownership interest in Bayer AG shares.
WE URGE YOU TO CONSULT YOUR TAX ADVISOR AS TO THE U.S. FEDERAL INCOME AND
GERMAN TAX CONSEQUENCES OF HOLDING BAYER AG SHARES, INCLUDING THE PARTICULAR
FACTS AND CIRCUMSTANCES THAT MAY BE UNIQUE TO YOU, AND AS TO ANY OTHER TAX
CONSEQUENCES OF HOLDING BAYER AG SHARES.
TAXATION OF DIVIDENDS
As of January 1, 2002, we are required to withhold tax on dividends in
respect of the 2001 fiscal year an amount equal to 20 percent of the gross
amount paid to resident and non-resident shareholders. As a Qualified Holder,
you are eligible to receive a partial refund of this withholding tax under the
Income Tax Treaty (subject to certain limitations), effectively reducing the
withholding tax to 15 percent of the gross amount of the dividend. In addition,
so long as the German imputation system provides German resident individual
shareholders with a tax credit in respect of dividends paid by German
corporations, under the Income Tax Treaty, you will be entitled to an additional
refund equal to 5 percent of the gross amount of the dividend. For U.S. federal
income tax purposes, the benefit resulting from this additional 5 percent treaty
refund is treated as a refund received by you with respect to German corporate
taxes equal to 5.88 percent of the gross amount of the dividend, subject to a
German withholding tax of 0.88 percent (15 percent of 5.88 percent). Thus, for
each $100 of gross dividend paid by Bayer AG to you, the dividend will be
subject to a German withholding tax of $15 under the Income Tax Treaty. The cash
received per $100 of gross dividend will thus be $85. For U.S. federal income
tax purposes, the gross amount of the dividend, including German withholding
tax, will be includible in your gross income.
For U.S. federal income tax purposes, you will be treated as receiving a
total dividend of $105.88 (to the extent paid out of our current or accumulated
earnings and profits as determined for U.S. federal income tax purposes),
consisting of the $100 gross dividend and the deemed refund of German corporate
tax of $5.88. The
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notional $105.88 dividend is deemed to have been subject to German withholding
tax of $15.88. Thus, for each $100 of gross dividend, you will include $105.88
in gross income and may be entitled to a foreign tax credit of $15.88. You will
not be entitled to the dividends received deduction with respect to any
dividends we pay.
A surtax on the German withholding tax is currently levied on dividend
distributions paid by a German resident company. The rate of this surtax is 5.5
percent. The surtax amounts to 1.375 percent (5.5 percent x 25 percent) of the
gross dividend amount. The surtax will equal 1.1 percent (5.5 percent x 20
percent) of the gross dividend paid out in 2002 and thereafter. Under the Income
Tax Treaty, you will be entitled to a full refund of this surtax.
Dividends paid to you in euros will be included in income in a U.S. dollar
amount, calculated by reference to the exchange rate in effect on the date the
dividends are received or treated as received by you. If you convert dividends
paid in euros into U.S. dollars on the date received or treated as received, you
generally should not be required to recognize foreign currency gain or loss in
respect of such dividend.
Under Section 904(g) of the U.S. Internal Revenue Code of 1986, as amended
(the "Code"), dividends paid by a foreign corporation that is treated as more
than 50 percent owned by U.S. persons may be treated as U.S. source income
(rather than foreign source income). Such treatment may adversely affect
Qualified Holders' ability to use foreign tax credits. It is possible that we
may be treated as more than 50 percent owned by United States persons for the
purposes of Section 904(g) of the Code.
The United States Treasury has expressed concerns that parties to whom ADSs
are released may be taking actions that are inconsistent with the claiming of
foreign tax credits for Qualified Holders of ADSs. Accordingly, the
creditability of German withholding tax on dividends could be affected by future
actions that may be taken by the United States Treasury.
REFUND PROCEDURES
To claim the refund reflecting the reduction of the German withholding tax
from 25 percent to 15 percent and the refund of the 5.5 percent German surtax,
when applicable, you must submit (either directly, or, as described below,
through our U.S. transfer agent or the Depository Trust Company) a claim for
refund to the German tax authorities, with the original bank voucher (or a
certified copy thereof) issued by the paying entity documenting the tax withheld
within four years from the end of the calendar year in which the dividend is
received. Claims for refunds are made on a special form, which must be filed
with the German tax authorities at the following address: Bundesamt fur
Finanzen, 53221 Bonn-Beuel, Germany. A refund claim form may be obtained from
the German tax authorities at the same address as where applications are filed,
from the Embassy of the Federal Republic of Germany, 4645 Reservoir Road, N.W.,
Washington, D.C. 20007-1998 or from the Office of International Operations,
Internal Revenue Service, 1325 K Street, N.W., Washington, D.C. 20225,
Attention: Taxpayer Service Division, Room 900.
You must also submit to the German tax authorities certification of your
last filed U.S. federal income tax return (IRS Form 6166). You can obtain this
certification from the office of the Director of the Internal Revenue Service
Center by filing a request for certification with the Internal Revenue Service
Center in Philadelphia, Pennsylvania, Foreign Certificate Request, P.O. Box
16347, Philadelphia, PA 19114-0447. Requests for certification must be made in
writing and must include your name, social security number or employer
identification number, tax return form number and tax period for which you are
requesting certification. The Internal Revenue Service will send the
certification directly to the German tax authorities. This certification is
valid for three years and need only be resubmitted in a fourth year in the event
of a subsequent application for refund.
Our U.S. transfer agent will perform administrative functions necessary to
claim the refund reflecting the reduction in German withholding tax from 20
percent to 15 percent and the refund of the 5.5 percent German surtax, when
applicable, for you. However, these arrangements may be amended or revoked at
any time in the future. Under the current procedure, the U.S. transfer agent
will prepare the German claim for refund forms on your behalf and file them with
the German tax authorities. In order for the U.S. transfer agent to file the
claim for refund forms, the U.S. transfer agent will prepare and mail to you,
and will ask that you sign and return to the
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U.S. transfer agent, (1) a statement authorizing the U.S. transfer agent to
perform these procedures and agreeing that the German tax authorities may inform
the Internal Revenue Service of any refunds of German taxes and (2) a written
authorization to remit the refund of withholding to an account other than yours.
The U.S. transfer agent will also require certification of your last filed
United States federal income tax return (IRS Form 6166). The U.S. transfer agent
will attach the signed statement, the IRS Form 6166 and the documentation issued
by the paying agency documenting the dividend paid and the tax withheld to the
claim for refund form and file them with the German tax authorities.
A simplified refund procedure will be available to you if your Bayer AG
shares are registered with brokers participating in the Depository Trust
Company. Under this simplified refund procedure, the Depository Trust Company
will provide the German tax authorities with electronic certification of your
U.S. taxpayer status based on information it receives from its broker
participants, and will claim a refund on your behalf. If approved by the German
tax authorities, a similar simplified refund procedure may also be implemented
by the U.S. transfer agent in the future. Under such a simplified refund
procedure, following each dividend payment, the U.S. transfer agent would file a
claim for refund automatically on your behalf if you have instructed the U.S.
transfer agent in writing to file on your behalf.
The German tax authorities will issue refunds denominated in euro. The
refunds will be issued in the name of the U.S. transfer agent or the Depository
Trust Company, as the case may be, which will then convert the refunds to
dollars and make corresponding refund payments to you or your broker. This
broker, in turn, will remit corresponding refund amounts to you.
If you receive a refund attributable to reduced withholding taxes under the
Income Tax Treaty, you may be required to recognize foreign currency gain or
loss, which will be treated as ordinary income or loss to the extent that the
dollar value of the refund received or treated as received by you differs from
the U.S. dollar equivalent of the refund on the date the dividend on which such
withholding taxes were imposed was received or treated as received by you.
TAXATION OF CAPITAL GAINS
Under the Income Tax Treaty, you will not be liable for German tax on
capital gains realized or accrued on the sale or other disposition of Bayer AG
shares.
Upon a sale or other disposition of Bayer AG shares, you will recognize
capital gain or loss for U.S. federal income tax purposes equal to the
difference between the amount realized and your adjusted tax basis in the Bayer
AG shares. This gain or loss generally will be U.S. source gain or loss, and
will be treated as long-term capital gain or loss if your holding period in the
Bayer AG shares exceeds one year. The deductibility of capital losses is subject
to significant limitations. If you are an individual Qualified Holder of Bayer
AG shares, any capital gain generally will be subject to tax at preferential
rates, provided certain holding periods are met.
PASSIVE FOREIGN INVESTMENT COMPANY STATUS
We believe that we will not be classified as a passive foreign investment
company (a "PFIC") for U.S. federal income tax purposes for our current taxable
year or any future taxable year. However, as this is a factual matter that must
be determined annually at the close of each taxable year, there can be no
certainty as to our actual PFIC status in any particular year until the close of
the taxable year in question.
GERMAN GIFT AND INHERITANCE TAXES
The Convention between the United States of America and the Federal
Republic of Germany for the Avoidance of Double Taxation with Respect to Taxes
on Estates, Inheritances and Gifts, as amended (the "Estate Tax Treaty"),
provides that an individual whose domicile is determined to be in the United
States for purposes of such treaty will not be subject to German inheritance and
gift tax (the equivalent of the U.S. federal estate and gift tax) on the
individual's death or making of a gift unless the Bayer AG shares (1) are part
of the business property of a permanent establishment located in Germany or (2)
are part of the assets of a fixed base of an individual located in Germany and
used for the performance of independent personal services. An individual's
domicile in
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the United States, however, does not prevent imposition of German inheritance
and gift tax with respect to an heir, donee or other beneficiary who is
domiciled in Germany at the time the individual died or the gift was made.
The Estate Tax Treaty also provides a credit against U.S. federal estate
and gift tax liability for the amount of inheritance and gift tax paid in
Germany, subject to certain limitations, in a case where the shares are subject
both to German inheritance or gift tax and U.S. federal estate or gift tax.
GERMAN CAPITAL TAX (VERMOGENSTEUER)
The Income Tax Treaty provides that you will not be subject to German
capital tax (Vermogensteuer ) with respect to the Bayer AG shares. As a result
of a judicial decision, the German capital tax (Vermogensteuer ) presently is
not imposed.
OTHER GERMAN TAXES
There are no German transfer, stamp or other similar taxes that would apply
to you upon receipt, purchase, holding or sale of Bayer AG shares.
U.S. INFORMATION REPORTING AND BACKUP WITHHOLDING
Dividends on Bayer AG shares and payments of the proceeds of a sale of
Bayer AG shares paid within the United States or through certain U.S.-related
financial intermediaries are subject to information reporting and may be subject
to backup withholding at a current rate of up to 30.5 percent rate unless you
(1) are a corporation or other exempt recipient or (2) provide a taxpayer
identification number and certifies that no loss of exemption from backup
withholding has occurred. U.S. persons who are required to establish their
exempt status generally must file IRS Form W-9 (Request for Taxpayer
Identification Number and Certification). Non-U.S. holders generally will not be
subject to U.S. information reporting or backup withholding. However, these
holders may be required to provide certification of non-U.S. status (generally
on IRS Form W-8BEN) in connection with payments received in the United States or
through certain U.S.-related financial intermediaries.
Backup withholdings is not an additional tax. Amounts withheld as backup
withholding may be credited against your U.S. federal income tax liability. You
may obtain a refund of any excess amounts withheld under the backup withholding
rules by filing the appropriate claim for refund with the Internal Revenue
Service and furnishing any required information.
DIVIDENDS AND PAYING AGENTS
See Item 14, Description of Securities to Be Registered -- American
Depositary Shares.
STATEMENT BY EXPERTS
Not applicable.
DOCUMENTS ON DISPLAY
You can inspect the documents concerning Bayer AG mentioned in this
registration statement during normal business hours at Bayer AG's headquarters
at the Bayerwerk, 51368 Leverkusen, Germany, as well as at the headquarters of
Bayer AG's U.S. subsidiary, Bayer Corporation, 100 Bayer Road, Pittsburgh, PA
15205-9741.
SUBSIDIARY INFORMATION
Not applicable.
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ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK
The global nature of our business exposes our operations, financial results
and cash flows to a number of risks, including those listed below.
- Currency exchange rate fluctuations. We are exposed to fluctuations
between the euro and other major world currencies. The majority of our
currency fluctuation risk is between the euro and the U.S. dollar. In
addition, we are exposed to fluctuations between the euro and the
Japanese Yen and fluctuations between the euro and the British pound.
- Interest rate fluctuations. We are exposed to changes in interest
rates. Our primary interest rate exposure is to fluctuations in
short-term U.S. interest rates, especially commercial paper market
rates.
- Credit risk. We are exposed to credit risk with respect to the
counterparties in our transactions, and
- Raw material price fluctuations. We are exposed to possible increases
in raw material prices. We may not be able to pass any such increases on
to our customers.
Any of these risks could harm our operating results and financial
condition. These risks are similar to the risks to which we were exposed in the
prior year.
From time to time, we enter into hedging arrangements to mitigate our
exposure to currency and interest risks. Because we believe that the limited
liquidity of hedges against changes in raw materials prices makes these hedges
unreasonably expensive, we have used them in the past only to a limited extent.
If increasing liquidity and lower fees render these hedging arrangements less
costly, we would consider using them more often.
Our primary tools for hedging risks are over-the-counter derivative
instruments, particularly forward foreign exchange contracts, option contracts,
interest rate swaps, and interest and principal currency swaps. As a matter of
policy, we enter into these transactions only with counterparties of high credit
standing. We have established uniform guidelines and internal controls for the
use of derivatives. We use these instruments only to hedge risks arising from
our business operations and from related investments and financing transactions.
We do not use derivatives for trading or other speculative purposes. In 2000, we
began to manage foreign currency risks on anticipated or pending transactions.
SENSITIVITY ANALYSIS
The sensitivity analyses included in the risk sections below present the
hypothetical loss in pre-tax income, cash flows or fair value of the financial
instruments and derivative financial instruments that we held as of December 31,
2000, and were subject to changes in foreign exchange rates and interest rates.
The range of sensitivities that we chose for these analyses reflects our view of
changes reasonably possible over a one-year period.
INTEREST RATE RISK
Interest rate risk is the possibility that the total return of a financial
instrument will change due to movements in market rates of interest. This risk
primarily affects receivables and payables with maturities of more than one
year. Items with these long maturities are not of material significance to our
operations, but are relevant to our investments and financial obligations.
We sometimes make loans to employees. Although a small proportion of these
loans are interest-free, they generally bear interest at market-oriented, fixed
rates. More than three quarters of our loans to employees have terms of over
five years. Because their rates are fixed, these loans are exposed to interest
rate fluctuation risk. We do not make these loans for financial purposes,
however, and therefore do not hedge their interest rate risk.
153
Derivative financial instruments
Derivative financial instruments are our main method of interest rate
hedging. We use interest rate swaps to convert a small portion of our floating
rate investments into, in effect, fixed rate investments. The derivatives we use
to hedge interest rate risk are primarily over-the-counter instruments,
particularly forward rate agreements option and future contracts, interest rate
swaps, and interest and principal currency swaps.
The "notional amount" of these derivatives is the total nominal value of
the underlying transactions. The "fair value" of these derivatives is their
repurchase value, based on quoted prices or determined by standard methods, as
of a given closing date. The table below shows the notional amount and fair
value of the interest rate derivatives we held as of December 31, 2000; the fair
values quoted disregard any opposite movements in the values of the underlying
transactions.
NOTIONAL AMOUNT FAIR VALUE
---------------- ------------
DECEMBER 31,
--------------------------------
2000 1999 2000 1999
------ ------ ---- ----
(EUROS IN MILLIONS)
Interest rate hedging instruments........................... 3,495 2,664 (133) (49)
We generally offset gains and losses from changes in fair values against
corresponding losses and gains from the underlying transactions or operating
activities.
At December 31, 2000, the notional amount of our short-term interest rate
hedging contracts (including interest and principal currency swaps) totaled E0.3
billion (1999: E1.3 billion); those maturing after more than one year totaled
E3.2 billion (1999: E1.4 billion).
Sensitivity Analysis
An estimated hypothetical negative effect of 100 basis points, or one
percent per year, in interest rates would result in an increase in interest cost
per year of approximately E40 million based on our debt position at December 31,
2000.
CURRENCY RISK
Because we conduct our operations in many currencies, we face a variety of
risks associated with fluctuations in the relative values of these currencies.
Upon the introduction of the euro on January 1, 1999, however, the relative
values between the "legacy" currencies of the EU member states participating in
the third stage of European Monetary Union were irrevocably fixed. Although
these legacy currencies are scheduled to remain in circulation until July 2002,
we no longer face currency-related risks in relation to member currencies of the
Euro Zone.
Transaction Risk
We face transaction risk when our businesses generate revenue in one
currency but incur costs relating to that revenue in a different currency.
Because we enter into foreign exchange transactions for a significant portion of
our contracted and forecasted operational foreign exchange exposures, we believe
that a significant increase or decrease in the exchange rate of the euro
relative to other major world currencies would not, in the short term,
materially affect our cash flows. Over time, however, to the extent that we
cannot reflect these exchange rate movements in the pricing of our products in
local currency, they could harm our cash flows. In general, appreciation of the
euro in relation to another currency has an adverse effect on our reported
revenues and results, and depreciation of the euro has a positive effect as long
as prices remain unchanged.
Translation Risk
Many of the companies of the Bayer Group are located outside the euro zone.
Because the euro is our financial reporting currency, we translate the income
statements of these subsidiaries into euro for inclusion in our consolidated
financial statements. Period-to-period changes in the average exchange rate for
a particular
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country's currency can significantly affect the translation into euro of both
revenues and operating income denominated in that currency. Unlike the effect of
exchange rate fluctuations on transaction exposure, the effect of exchange rate
translation exposure does not affect our local currency cash flows. See Note 38
to the consolidated financial statements.
Outside the euro zone, we hold significant assets, liabilities and
operations denominated in local currencies, most importantly the U.S. dollar,
the British pound sterling and the Japanese yen. Although we regularly assess
and evaluate the long-term currency risk inherent in these investments, we
generally undertake foreign exchange transactions addressing this type of risk
only when we are considering withdrawal from a specific venture and repatriating
the funds that our withdrawal generates. However, we reflect effects from
currency fluctuations on the translation of net asset amounts into euro in our
equity position.
Derivative financial instruments
To mitigate the impact of currency exchange fluctuations, we regularly
assess our exposure to currency risks and hedge a portion of those risks with
derivative financial instruments. Our Corporate Treasury department has central
responsibility for managing our currency exposures and using currency
derivatives.
We relate the maturity dates of hedging contracts to the anticipated cash
flows of the Bayer Group. Our policy is to use a mixture of instruments, basing
the specific mix at any time on our technical and fundamental analysis of market
conditions.
The table below shows the notional amounts and fair values of the currency
derivatives we held as of December 31, 2000:
NOTIONAL AMOUNT FAIR VALUE
---------------- ------------
DECEMBER 31,
--------------------------------
2000 1999 2000 1999
------ ------ ---- ----
(EUROS IN MILLIONS)
Forward exchange contracts and currency swaps............... 3,415 2,337 133 (85)
Currency options............................................ 87 62 1 (1)
At December 31, 2000, we estimated that our aggregate annual direct
transaction risk from sales and purchases in foreign currencies was
approximately E2.9 billion, which consisted primarily of U.S. dollars ($1.8
billion), Japanese yen (Y70 billion) and British pounds sterling (L0.1 billion).
We do not anticipate a significant change in these levels of risk for 2001.
The following table shows the effective exchange rates (including hedging
cost and premium) between the euro and the major world currencies with respect
to which we contracted hedging transactions, compared with the market average
rates for these currencies for 2000 and 1999:
2000 1999
-------------------------------------------- --------------------
% CHANGE MARKET % CHANGE MARKET
CURRENCY VS. EURO EFFECTIVE VS. 1999 AVERAGE VS. 1999 EFFECTIVE AVERAGE
----------------- --------- -------- ------- -------- --------- -------
U.S. dollar................... 0.9359 14.0 0.9238 13.3 1.0882 1.0658
Japanese yen.................. 99.31 22.9 99.51 18.0 128.75 121.32
British pound sterling........ 0.6108 8.8 0.6096 7.5 0.6696 0.6587
Sensitivity Analysis
Applying a hypothetical adverse change of 10 percent in foreign currency
exchange rates, we estimate the hypothetical loss in cash flows of derivative
and non-derivative financial instruments and foreign currency denominated
balance sheet positions at December 31, 2000 to be approximately E120 million.
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CREDIT RISK
Credit risk is the possibility that the value of our assets may become
impaired if counterparties cannot meet their obligations in transactions
involving financial instruments. Since we do not conclude master netting
arrangements with our customers, the total of the amounts recognized in assets
represents our maximum exposure to credit risk.
RAW MATERIALS AND COMMODITY PRICE RISKS
We operate in markets in which economic cyclicality often affects raw
material and product prices. Fluctuations in prices of raw materials and
commodities affect some of our businesses. In order to secure our supply of raw
materials, we are party to long-term supply contracts, buying additional
quantities on the spot markets as needed. The most important of our raw
materials affected by price fluctuations are:
- Propylene oxide;
- Styrene;
- 1.3-butadiene;
- Phenol;
- Benzene;
- ACN;
- Toluene; and
- Cyclohexane
These products are derived from petroleum, therefore their prices affect
the market price of petroleum. We expect that increases in market price of
petroleum in 2001 could adversely affect the gross margins of some of our
business segments.
We typically use the following measures to avoid and manage pricing risk in
purchasing raw materials:
- Coverage of recurrent requirements with long-term contracts to reduce
the price volatility of purchases on the spot markets.
- Incorporating pricing formulas linked to economic indices and
pre-products into our contracts, rather than using published prices.
We did not hold any significant market risk sensitive commodity instruments
at December 31, 2000.
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ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
DEBT SECURITIES
As of December 31, 2000 the following debt securities, issued by our
wholly-owned subsidiaries, were outstanding:
INTEREST RATE
ISSUER(1) SECURITY CURRENCY AMOUNT (%) TERM
--------- -------- -------- ------------- ------------- ----
(IN MILLIONS)
Bayer Capital Corp. Bonds with warrants attached(2) Swiss francs 250 2.5 2002
B.V., Netherlands....
Bayer Corp............. Notes U.S. dollar 400 6.5 2002
Bayer Corp............. Notes U.S. dollar 200 7.125 2015
Bayer Corp............. Notes U.S. dollar 250 6.75 2001
Bayer Corp............. Bonds Swiss francs 200 Floating(3) 2002
Bayer Corp............. Revenue Bonds U.S. dollar 20.6 3.5 2009
Bayer Corp............. Revenue Bonds U.S. dollar 25 4.0 2027
Bayer Corp............. Notes U.S. dollar 350 6.65 2028
Bayer Corp............. Bonds U.S. dollar 250 6.2(4) 2028
Bayer Ltd., Japan...... Bonds Swiss francs 400 3.75 2005
Bayer AG(5)............ European Medium-Term Notes various 363(6) -- --
---------------
(1) Bayer AG guarantees the principal amount and interest payments of the debt
securities issued by Bayer Capital Corp. B.V. and Bayer Ltd. described in
the table above. Bayer AG and Bayer Corporation have entered into support
agreements with respect to the debt securities issued by Bayer Corporation.
Under these agreements, Bayer Corporation can obtain funds from Bayer AG to
make payments on these securities if unable to make the payments itself.
(2) The warrants entitling bondholders to exchange these bonds for shares of
Bayer AG expired on August 28, 1997.
(3) At December 31, 2000, these bonds bore interest at 6.56%.
(4) This interest rate will be reset after February 15, 2008.
(5) Under our European MTN program, Bayer AG as well as Bayer Corporation,
Bayer Capital Corp. B.V. and Bayer Ltd. (Japan) can issue a variety of debt
securities in all major currencies.
(6) The figure listed in the table above is the principal amount of securities
issued under our European MTN program outstanding at December 31, 2000. In
October 2001 we filed a registration statement with the Luxembourg exchange
in connection with the increase of the maximum outstanding principal amount
under this program from E2 billion to E8 billion. Under this program, Bayer
AG and the three subsidiaries named in Note 5 may issue debt securities in
tranches up to a maximum of E8 billion in principal amount outstanding (or
its equivalent in other currencies). To date, there have been no additional
debt securities issued under this program.
WARRANTS AND RIGHTS
For a description of the option and stock participation plans that we have
established for management and employees, see Item 6, Directors, Senior
Management and Employees -- Compensation -- Employee Option Plans. There are
otherwise no currently outstanding warrants, rights or other securities
convertible into or exchangeable for shares of Bayer AG.
OTHER SECURITIES
None.
157
AMERICAN DEPOSITARY SHARES
Bayer AG, The Bank of New York, as Depositary, and the registered holders
of American Depositary Receipts, or ADRs, and the owners of a beneficial
interest in book-entry ADRs, will enter into a Deposit Agreement under which the
ADSs are to be issued. The following section summarizes the material terms of
the Deposit Agreement. The following is only a summary and does not purport to
be complete and is subject to and qualified in its entirety by reference to the
Deposit Agreement, including the form of ADRs. Terms used in this summary and
not otherwise defined will have the meanings provided for in the Deposit
Agreement.
AMERICAN DEPOSITARY RECEIPTS
The Bank of New York will issue the ADSs. The ownership interest in each
share will be represented by one ADS. The shares (or the right to receive
shares) will be deposited by Bayer AG with Dresdner Bank AG, its Custodian in
Germany. Each ADS will also represent securities, cash or other property
deposited with The Bank of New York but not distributed to ADR holders. The
Deposit Agreement refers to the deposited shares together with these other
securities, cash or property as "deposited securities". The Bank of New York's
Corporate Trust Office is located at 101 Barclay Street, New York, NY 10286
(temporarily located at One Wall Street, New York, New York 10286). The
principal executive office of the Depositary is located at One Wall Street, New
York, NY 10286.
You may hold ADRs either directly or indirectly through your broker or
other financial institution. If you hold ADRs directly, you are an ADR holder.
This description assumes you hold your ADRs directly. If you hold the ADRs
indirectly, you must rely on the procedures of your broker or other financial
institution to assert the rights of ADR holders described in this section. You
should consult with your broker or financial institution to find out what those
procedures are.
Because The Bank of New York will actually hold the shares, you must rely
on it to exercise the rights of a shareholder. The obligations of Bayer AG and
The Bank of New York are set out in a deposit agreement among Bayer AG, The Bank
of New York and you, as an ADR holder. The agreement and the ADRs are generally
governed by New York law.
The following is a summary of the agreement. Because it is a summary, it
does not contain all the information that may be important to you. For more
complete information, you should read the entire agreement and the ADR. Copies
of these documents are available for inspection at the Corporate Trust Office of
the Depositary.
SHARE DIVIDENDS AND OTHER DISTRIBUTIONS
The Bank of New York has agreed to pay to you the cash dividends or other
distributions it or the custodian receives on shares or other deposited
securities after deducting its fees and expenses. You will receive these
distributions in proportion to the number of shares your ADRs represent.
Cash. The Bank of New York will convert any cash dividend or other cash
distribution Bayer AG pays on the shares into U.S. dollars, if it can do so on a
reasonable basis and can transfer the U.S. dollars to the United States. If that
is not possible or if any approval from any government is needed and can not be
obtained, the agreement allows The Bank of New York to distribute the foreign
currency only to those ADR holders to whom it is possible to do so. It will hold
the foreign currency it cannot convert for the account of the ADR holders who
have not been paid. It will not invest the foreign currency and it will not be
liable for the interest.
Before making a distribution, any withholding taxes that must be paid under
German law will be deducted. See Item 10, Additional Information -- Taxation --
Taxation of Dividends. The Bank of New York will distribute only whole U.S.
dollars and cents and will round fractional cents to the nearest whole cent. If
the exchange rates fluctuate during a time when The Bank of New York cannot
convert the foreign currency, you may lose some or all of the value of the
distribution.
Shares. The Bank of New York may distribute new ADRs representing any
shares Bayer AG may distribute as a dividend or free distribution, if Bayer AG
furnishes it promptly with satisfactory evidence that it is
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legal to do so. The Bank of New York will only distribute whole ADRs. It will
sell shares which would require it to use a fractional ADR and distribute the
net proceeds in the same way as it does with cash. If The Bank of New York does
not distribute additional ADRs, each ADR will also represent the new shares.
Rights to receive additional shares. If Bayer AG offers holders of its
ordinary shares any rights to subscribe for additional shares or any other
rights, The Bank of New York may, after consultation to the extent practicable
with Bayer AG, make these rights available to you. Bayer AG must first instruct
The Bank of New York to do so and furnish it with satisfactory evidence that it
is legal to do so. If Bayer AG does not furnish this evidence and/or give these
instructions, and The Bank of New York decides it is practical to sell the
rights, The Bank of New York will sell the rights and distribute the proceeds,
in the same way as it does with cash. The Bank of New York may allow rights that
are not distributed or sold to lapse. In that case, you will receive no value
for them.
If The Bank of New York makes rights available to you, upon instruction
from you, it will exercise the rights and purchase the shares on your behalf.
The Bank of New York will then deposit the shares and issue ADSs to you. It will
only exercise rights if you pay it the exercise price and any other charges the
rights require you to pay.
U.S. securities laws may restrict the sale, deposit, cancellation and
transfer of the ADRs issued after exercise of rights. For example, you may not
be able to trade the ADRs freely in the United States. In this case, The Bank of
New York may issue the ADRs under a separate restricted deposit agreement which
will contain the same provisions as the agreement, except for the changes needed
to put the restrictions in place.
Other Distributions. The Bank of New York will send to you anything else
Bayer AG distributes on deposited securities by any means it thinks is legal and
fair, as promptly as practicable and after consultation, to the extent
practicable, with Bayer AG. If it cannot make the distribution in that way, The
Bank of New York has a choice. It may decide to sell what Bayer AG distributed
and distribute the net proceeds in the same way as it does with cash or it may
decide to hold what Bayer AG distributed, in which case the ADSs will also
represent the newly distributed property.
The Bank of New York is not responsible if it decides that it is unlawful
or impractical to make a distribution available to any ADR holders. Bayer AG has
no obligation to register ADRs, shares, rights or other securities under the
Securities Act. Bayer AG also has no obligation to take any other action to
permit the distribution of ADSs, shares, rights or anything else to ADR holders.
This means that you may not receive the distribution Bayer AG makes on its
shares or any value for them if it is illegal or impractical for Bayer AG to
make them available to you.
DEPOSIT, WITHDRAWAL AND CANCELLATION
The Bank of New York will issue ADRs if you or your broker deposit shares
or evidence of rights to receive shares with the Custodian. Upon payment of its
fees and expenses and of any taxes or charges, such as stamp taxes or stock
transfer taxes or fees, The Bank of New York will register the appropriate
number of ADRs in the names you request and will deliver the ADRs at its
Corporate Trust Office to the persons you request.
You may turn in your ADRs at The Bank of New York's Corporate Trust Office.
Upon payment of its fees and expenses and of any taxes or charges, such as stamp
taxes or stock transfer taxes or fees, The Bank of New York will deliver (1) the
underlying shares to an account designated by you and (2) any other deposited
securities underlying the ADR at the office of the Custodian. Or, at your
request, risk and expense, The Bank of New York will deliver the deposited
securities at its Corporate Trust Office.
VOTING RIGHTS
Upon receipt of notice from Bayer AG, The Bank of New York will notify you
of the upcoming vote and arrange to deliver Bayer AG's voting materials to you.
The materials will (1) describe the matters to be voted on and (2) explain how
you, on a certain date, may instruct The Bank of New York to vote the shares or
other deposited securities underlying your ADRs as you direct. For instructions
to be valid, The Bank of New York must receive them on or before the date
specified. The Bank of New York will try, as far as practical, subject to German
law and the provisions of Bayer AG's Articles of Association, to vote or to have
its agents vote the
159
shares or other deposited securities as you instruct. The Bank of New York will
only vote or attempt to vote as you instruct. However, if The Bank of New York
does not receive your voting instructions, it will give a proxy to vote your
shares to a designated representative of Bayer AG.
Bayer AG cannot assure you that you will receive the voting materials in
time to ensure that you can instruct The Bank of New York to vote your shares.
In addition, The Bank of New York and its agents are not responsible for failing
to carry out voting instructions or for the manner of carrying out voting
instructions. This means that you may not be able to exercise your right to vote
and there may be nothing you can do if your shares are not voted as you
requested.
FEES AND EXPENSES
ADR holders must pay: For:
--------------------- ----
$5.00 (or less) per 100 ADSs Each issuance of an ADS, including as a
result of a distribution of shares or
rights or other property
Each cancellation of an ADS, including if
the agreement terminates
$.02 (or less) per ADS Any cash payment
Registration or Transfer Fees Transfer and registration of shares on the
share register of the Foreign Registrar
from your name to the name of The Bank of
New York or its agent when you deposit or
withdraw shares
Expenses of The Bank of New York Conversion of foreign currency to U.S.
dollars
Cable, telex and facsimile transmission
expenses
Taxes and other governmental charges The As necessary
Bank of New York or the Custodian have to
pay on any ADR or share underlying an ADR,
for example, stock transfer taxes, stamp
duty or withholding taxes
PAYMENT OF TAXES
You will be responsible for any taxes or other governmental charges payable
on your ADRs or on the deposited securities underlying your ADRs. The Bank of
New York may refuse to transfer your ADRs or allow you to withdraw the deposited
securities underlying your ADRs until such taxes or other charges are paid. It
may apply payments owed to you or sell deposited securities underlying your ADRs
to pay any taxes owed and you will remain liable for any deficiency. If it sells
deposited securities, it will, if appropriate, reduce the number of ADRs to
reflect the sale and pay to you any proceeds, or send to you any property,
remaining after it has paid the taxes.
160
RECLASSIFICATIONS, RECAPITALIZATIONS AND MERGERS
If Bayer AG: Then:
------------ -----
Changes the nominal or par value of its The cash, shares or other securities
shares received by
Reclassifies, splits up or consolidates any The Bank of New York will become deposited
of the deposited securities securities. Each ADR will automatically
Distributes securities on the shares that represent its equal share of the new
are not distributed to you deposited securities.
Recapitalizes, reorganizes, merges, The Bank of New York may, and will if Bayer
liquidate, sells all or substantially all of AG
its assets, or takes any similar action asks it to, distribute some or all of the
cash, shares or other securities it
received. It may also issue new ADRs or
ask you to surrender your outstanding ADRs
in exchange for new ADRs, identifying the
new deposited securities.
AMENDMENT AND TERMINATION
Bayer AG may agree with The Bank of New York to amend the agreement and the
ADRs without your consent for any reason. If the amendment adds or increases
fees or charges, except for taxes and other governmental charges or registration
fees, cable, telex or facsimile transmission costs, delivery costs or other such
expenses, or prejudices an important right of ADR holders, it will only become
effective 30 days after The Bank of New York notifies you of the amendment. At
the time an amendment becomes effective, you are considered, by continuing to
hold your ADR, to agree to the amendment and to be bound by the ADRs and the
agreement is amended.
The Bank of New York will terminate the agreement at the direction of Bayer
AG by mailing notice of termination to registered holders at least 30 days prior
to the date fixed for termination in the notice. The Bank of New York may also
terminate the agreement if The Bank of New York has told Bayer AG that it would
like to resign and Bayer AG has not appointed a new depositary bank within 60
days.
After termination, The Bank of New York and its agents will be required to
do only the following under the agreement: (1) collect distributions on the
deposited securities and (2) deliver shares and other deposited securities upon
cancellation of ADRs. At any time after the expiration of one year after the
date of termination, The Bank of New York may sell any remaining deposited
securities by public or private sale. After that, The Bank of New York will hold
the proceeds of the sale, as well as any other cash it is holding under the
agreement for the pro rata benefit of the ADR holders that have not surrendered
their ADRs. It will not invest the money and will have no liability for
interest. The Bank of New York's only obligations will be to account for the
proceeds of the sale and other cash. After termination our only obligations will
be with respect to indemnification and to pay certain amounts to The Bank of New
York.
LIMITATIONS ON OBLIGATIONS AND LIABILITY TO ADR HOLDERS
The agreement expressly limits Bayer AG's obligations and the obligations
of The Bank of New York, and it limits Bayer AG's liability and the liability of
The Bank of New York. Bayer AG and The Bank of New York:
- are only obligated to take the actions specifically set forth in the
agreement without negligence or bad faith;
- are not liable if either is prevented or delayed by law or circumstances
beyond their control from performing their obligations under the
agreement;
- are not liable if either exercises discretion permitted under the
agreement;
161
- have no obligation to become involved in a lawsuit or other proceeding
related to the ADRs or the agreement on your behalf or on behalf of any
other party; and
- may rely upon any documents they believe in good faith to be genuine and
to have been signed or presented by the proper party.
In the agreement, Bayer AG and The Bank of New York agree to indemnify each
other under certain circumstances.
REQUIREMENTS FOR DEPOSITARY ACTIONS
Before The Bank of New York will issue or register transfer of an ADR, make
a distribution on an ADR, or withdrawal of shares, The Bank of New York may
require:
- payment of stock transfer or other taxes or other governmental charges
and transfer or registration fees charged by third parties for the
transfer of any shares or other deposited securities;
- production of satisfactory proof of the identity and genuineness of any
signature or other information it deems necessary; and
- compliance with regulations it may establish, from time to time,
consistent with the agreement, including presentation of transfer
documents.
The Bank of New York may refuse to deliver, transfer, or register transfers
of ADRs generally when the books of The Bank of New York or Bayer AG are closed,
or at any time if The Bank of New York or Bayer AG thinks it advisable to do so.
You have the right to cancel your ADRs and withdraw the underlying shares
at any time except:
- when temporary delays arise due to closing of the transfer books of The
Bank of New York or Bayer AG or the deposit of Shares in connection with
voting at a shareholders' meeting, or the payment of dividends;
- when you or other ADR holders seeking to withdraw shares owe money to
pay fees, taxes and similar charges; or
- when it is necessary to prohibit withdrawals in order to comply with any
laws or governmental regulations that apply to ADRs or to the withdrawal
of shares or other deposited securities.
This right of withdrawal may not be limited by any other provision of the
agreement.
PRE-RELEASE OF ADRS
In certain circumstances, subject to the provisions of the agreement, The
Bank of New York may issue ADRs before deposit of the underlying shares. This is
called a pre-release of the ADR. The Bank of New York may also deliver shares
upon cancellation of pre-released ADRs (even if the ADRs are cancelled before
the pre-release transaction has been closed out). A pre-release is closed out as
soon as the underlying shares are delivered to The Bank of New York. The Bank of
New York may receive ADRs instead of shares to close out a pre-release. The Bank
of New York may pre-release ADRs only under the following conditions: (1) before
or at the time of the pre-release, the person to whom the pre-release is being
made must represent to The Bank of New York in writing that it or its customer
owns the shares or ADRs to be deposited; (2) the pre-release must be fully
collateralized with cash or other collateral that The Bank of New York considers
appropriate; and (3) The Bank of New York must be able to close out the
pre-release on not more than five business days' notice. In addition, The Bank
of New York will limit the number of ADRs that may be outstanding at any time as
a result of pre-release, although The Bank of New York may disregard the limit
from time to time, if it thinks it is appropriate to do so.
162
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
None.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS
Not applicable.
ITEM 15. [RESERVED]
ITEM 16. [RESERVED]
PART III
ITEM 17. FINANCIAL STATEMENTS
We have responded to Item 18 in lieu of responding to this item.
ITEM 18. FINANCIAL STATEMENTS
See pages F-1 through F-87, incorporated herein by reference.
ITEM 19. EXHIBITS
Index of Exhibits
Exhibit 1.1 Articles of Association (Satzung) of Bayer AG, as amended to
date, in English translation.
Exhibit 2.2 The total amount of long term debt securities Bayer AG
authorized under any instrument does not exceed 10 percent
of the total assets of the Company. We agree to furnish the
Securities and Exchange Commission, upon its request, a copy
of any instrument defining the rights of holders of
long-term debt of Bayer AG or its subsidiaries for which
consolidated or unconsolidated financial statements are
required to be filed.
Exhibit 8.1 Subsidiaries as of the end of the year covered by this
report: See "Organizational Structure" in Item 4,
Information on the Company. We agree to furnish to the
Securities and Exchange Commission upon request by the
Commission a list or diagram of our subsidiaries indicating
as to each subsidiary named: (a) its country or other
jurisdiction of incorporation or organization, (b) its
relationship to Bayer AG, and (c) the percentage of voting
securities owned or other basis of control by its immediate
parent if any.
Exhibit 10.1 Consent of PwC Deutsche Revision Aktiengesellschaft
Wirtschaftsprufungsgesellschaft, Essen, Germany, authorized
public accountants.
163
Pursuant to the requirements of Section 12 of the Securities and Exchange
Act of 1934, the registrant certifies that it meets all of the requirements for
filing on Form 20-F and has duly caused this Form 20-F to be signed on its
behalf by the undersigned, thereunto duly authorized.
BAYER AG
/s/ WERNER WENNING
-----------------------------------
Name: Werner Wenning
Title: Member of the Board of
Management and Chief
Financial Officer
/s/ ROLAND HARTWIG
-----------------------------------
Name: Dr. Roland Hartwig
Title: General Counsel
Date: December 20, 2001
164
BAYER GROUP
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report................................ F-2
Consolidated Financial Statements:
Consolidated Statements of Income for the years ended
December 31, 2000, 1999 and 1998....................... F-3
Consolidated Balance Sheets as of December 31, 2000 and
1999................................................... F-4
Consolidated Statements of Changes in Stockholders' Equity
for the years ended
December 31, 2000, 1999 and 1998....................... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 2000, 1999 and 1998....................... F-6
Notes to the Consolidated Financial Statements............ F-7
Unaudited Interim Consolidated Financial Statements:
Consolidated Statements of Income for the six-month
periods ended June 30, 2001 and 2000................... F-67
Consolidated Balance Sheets as of June 30, 2001 and
2000................................................... F-68
Consolidated Statements of Changes in Stockholders' Equity
for the six-month periods ended June 30, 2001 and
2000................................................... F-69
Consolidated Statements of Cash Flows for the six-month
periods ended June 30, 2001 and 2000................... F-70
Notes to the Unaudited Interim Consolidated Financial
Statements............................................. F-71
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
and Stockholders of Bayer AG
We have audited the accompanying consolidated balance sheet of Bayer AG and
its subsidiaries (the "Group") as of December 31, 2000 and 1999, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended December 31, 2000. These financial
statements are the responsibility of the Group's management. Our responsibility
is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with International Standards on
Auditing and auditing standards generally accepted in the United States of
America. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Bayer AG at
December 31, 2000 and 1999, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 2000 in conformity
with International Accounting Standards.
International Accounting Standards vary in certain significant respects
from accounting principles generally accepted in the United States. The
application of the latter would have affected the determination of consolidated
net income for the years ended December 31, 2000 and 1999, and the determination
of consolidated stockholders' equity as of December 31, 2000 and 1999, to the
extent summarized in Note 44 to the consolidated financial statements.
Essen, Germany
February 28, 2001
(December 18, 2001, as to paragraph 3 of Note 6 and Note 44)
PwC Deutsche Revision
Aktiengesellschaft
Wirtschaftsprufungsgesellschaft
/s/ ALBRECHT /s/ SCHILLING
------------------------------------------ ------------------------------------------
P. Albrecht J. Schilling
Wirtschaftsprufer Wirtschaftsprufer
F-2
BAYER GROUP CONSOLIDATED STATEMENTS OF INCOME
NOTE 2000 1999 1998
---- ------- ------- -------
(E MILLION)
NET SALES............................................... [1] 30,971 27,320 28,062
Net sales from discontinuing operations................. [6] (1,491) (2,973) (5,586)
Net sales from continuing operations.................... 29,480 24,347 22,476
Cost of goods sold...................................... (15,566) (12,910) (11,811)
------- ------- -------
GROSS PROFIT............................................ 13,914 11,437 10,665
------- ------- -------
Selling expenses........................................ [2] (6,834) (5,590) (5,250)
Research and development expenses....................... [3] (2,373) (2,131) (1,801)
General administration expenses......................... (924) (754) (745)
Other operating income.................................. [4] 429 676 676
Other operating expenses................................ [5] (1,080) (1,459) (793)
------- ------- -------
OPERATING RESULT FROM CONTINUING OPERATIONS............. 3,132 2,179 2,752
------- ------- -------
Operating result from discontinuing operations.......... [6] 155 148 403
Income from the Agfa divestiture........................ 1,030*
OPERATING RESULT........................................ [7] 3,287 3,357 3,155
------- ------- -------
Income (Expenses) from investments in affiliated
companies -- net...................................... [8] 283 (31) 21
Interest expense -- net................................. [9] (311) (196) (189)
Other non-operating expenses -- net..................... [10] (269) (294) (259)
------- ------- -------
NON-OPERATING RESULT.................................... (297) (521) (427)
------- ------- -------
INCOME BEFORE INCOME TAXES.............................. 2,990 2,836 2,728
------- ------- -------
Income taxes............................................ [11] (1,148) (818) (1,113)
------- ------- -------
INCOME AFTER TAXES...................................... 1,842 2,018 1,615
------- ------- -------
Minority stockholders' interest......................... [13] (26) (16) (1)
------- ------- -------
NET INCOME.............................................. 1,816 2,002 1,614
------- ------- -------
BASIC AND DILUTED EARNINGS PER SHARE (E)................ [14] 2.49 2.74 2.21
======= ======= =======
---------------
* The income from the sale of Agfa-Gevaert shares was tax-free.
F-3
BAYER GROUP CONSOLIDATED BALANCE SHEETS
NOTE DEC. 31, 2000 DEC. 31, 1999
---- ------------- -------------
(E MILLION)
ASSETS
NONCURRENT ASSETS
Intangible assets........................................... [18] 4,843 2,213
Property, plant and equipment............................... [19] 13,345 11,986
Investments................................................. [20] 2,156 1,415
------ ------
20,344 15,614
------ ------
CURRENT ASSETS
Inventories................................................. [21] 6,095 4,992
Receivables and other assets
Trade accounts receivable................................. [22] 6,244 5,333
Other receivables and other assets........................ [23] 2,414 1,576
------ ------
8,658 6,909
------ ------
LIQUID ASSETS............................................... [24]
Marketable securities and other instruments............... 213 328
Cash and cash equivalents................................. 491 2,812
------ ------
704 3,140
------ ------
15,457 15,041
------ ------
DEFERRED TAXES.............................................. [11] 413 407
------ ------
DEFERRED CHARGES............................................ [25] 237 217
------ ------
36,451 31,279
====== ======
of which discontinuing operations........................... [35] 1,157 950
STOCKHOLDERS' EQUITY AND LIABILITIES
STOCKHOLDERS' EQUITY
Capital stock of Bayer AG................................... 1,870 1,870
Capital reserves of Bayer AG................................ 2,942 2,942
Retained earnings........................................... 9,047 7,965
Net income.................................................. 1,816 2,002
Translation differences..................................... 465 227
------ ------
[26] 16,140 15,006
------ ------
MINORITY STOCKHOLDERS' INTEREST............................. [27] 237 176
------ ------
LIABILITIES
Long-term liabilities
Long-term financial obligations........................... [30] 2,803 2,359
Miscellaneous long-term liabilities....................... [32] 196 232
Provisions for pensions and other post-employment
benefits............................................... [28] 4,254 4,178
Other long-term provisions................................ [29] 1,208 1,192
------ ------
8,461 7,961
------ ------
Short-term liabilities
Short-term financial obligations.......................... [30] 3,862 2,107
Trade accounts payable.................................... [31] 2,016 1,556
Miscellaneous short-term liabilities...................... [32] 2,274 1,801
Short-term provisions..................................... [29] 1,701 1,344
------ ------
9,853 6,808
------ ------
18,314 14,769
------ ------
of which discontinuing operations........................... [35] 574 476
------ ------
DEFERRED TAXES.............................................. [11] 1,595 1,157
------ ------
DEFERRED INCOME............................................. [34] 165 171
------ ------
36,451 31,279
====== ======
F-4
BAYER GROUP CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
CAPITAL CAPITAL TOTAL
NUMBER OF STOCK OF RESERVES OF RETAINED NET TRANSLATION STOCKHOLDERS'
SHARES BAYER AG BAYER AG EARNINGS INCOME DIFFERENCES EQUITY
----------- -------- ----------- -------- ------ ----------- -------------
(E MILLION, EXCEPT SHARE DATA)
DEC. 31,1997................... 730,341,920 1,867 2,945 6,277 1,504 (584) 12,009
CHANGES IN STOCKHOLDERS' EQUITY
RESULTING FROM CAPITAL
CONTRIBUTIONS AND DIVIDEND
PAYMENTS
Capital contributions
Dividend payments............ (710) (710)
------ ------
(710) (710)
OTHER CHANGES IN STOCKHOLDERS'
EQUITY NOT RECOGNIZED IN
INCOME
Exchange differences......... (395) (395)
Other differences............ 50 50
----- ------
50 (395) (345)
CHANGES IN STOCKHOLDERS' EQUITY
RECOGNIZED IN INCOME
Allocation to retained
earnings................... 794 (794) 0
Income after taxes for
1998....................... 1,614 1,614
----------- ----- ----- ----- ------ ----- ------
DEC. 31, 1998.................. 730,341,920 1,867 2,945 7,121 1,614 (979) 12,568
CHANGES IN STOCKHOLDERS' EQUITY
RESULTING FROM CAPITAL
CONTRIBUTIONS AND DIVIDEND
PAYMENTS
Capital contributions........ 3 (3) 0
Dividend payments............ (747) (747)
------ ------
3 (3) (747) (747)
OTHER CHANGES IN STOCKHOLDERS'
EQUITY NOT RECOGNIZED IN
INCOME
Exchange differences......... 1,206 1,206
Other differences............ (23) (23)
----- ------
(23) 1,206 1,183
CHANGES IN STOCKHOLDERS' EQUITY
RECOGNIZED IN INCOME
Allocation to retained
earnings................... 867 (867) 0
Income after taxes for
1999....................... 2,002 2,002
----------- ----- ----- ----- ------ ----- ------
DEC. 31, 1999.................. 730,341,920 1,870 2,942 7,965 2,002 227 15,006
CHANGES IN STOCKHOLDERS' EQUITY
RESULTING FROM CAPITAL
CONTRIBUTIONS AND DIVIDEND
PAYMENTS
Capital contributions
Dividend payments............ (949) (949)
------ ------
(949) (949)
OTHER CHANGES IN STOCKHOLDERS'
EQUITY NOT RECOGNIZED IN
INCOME
Exchange differences......... 238 238
Other differences............ 29 29
----- ------
29 238 267
CHANGES IN STOCKHOLDERS' EQUITY
RECOGNIZED IN INCOME
Allocation to retained
earnings................... 1,053 (1,053) 0
Income after taxes for
2000....................... 1,816 1,816
----------- ----- ----- ----- ------ ----- ------
DEC. 31, 2000.................. 730,341,920 1,870 2,942 9,047 1,816 465 16,140
=========== ===== ===== ===== ====== ===== ======
F-5
BAYER GROUP CONSOLIDATED STATEMENTS OF CASH FLOWS
NOTE 2000 1999 1998
---- ------ ------ ------
(E MILLION)
Operating result.......................................... 3,287 3,357 3,155
Income taxes currently payable............................ (873) (834) (942)
Depreciation and amortization............................. 2,139 1,811 1,543
Change in long-term provisions............................ (316) (167) (335)
Gains on retirements of noncurrent assets................. (73) (975) (106)
------ ------ ------
GROSS CASH PROVIDED BY OPERATING ACTIVITIES............... 4,164 3,192 3,315
------ ------ ------
(Increase) Decrease in inventories........................ (750) 134 (376)
(Increase) in trade accounts receivable................... (548) (459) (135)
Increase (Decrease) in trade accounts payable............. 351 (11) 51
Changes in other working capital.......................... (126) 337 (86)
------ ------ ------
NET CASH PROVIDED BY OPERATING ACTIVITIES................. [39] 3,091 3,193 2,769
------ ------ ------
of which discontinuing operations......................... [42] 218 276 602
Cash outflows for additions to property, plant and
equipment............................................... (2,647) (2,632) (2,703)
Cash inflows from sales of property, plant and
equipment............................................... 322 63 536
Cash inflows and outflows related to investments.......... (45) 2,632 (25)
Cash outflows for acquisitions............................ (4,125) (347) (1,444)
Interest and dividends received........................... 191 146 247
Cash inflows from marketable securities................... 115 209 197
------ ------ ------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES....... [40] (6,189) 71 (3,192)
------ ------ ------
of which discontinuing operations......................... [42] (181) 2,473 (368)
Capital contributions..................................... 2 10 0
Bayer AG dividend and dividend payments to minority
stockholders............................................ (953) (770) (712)
Issuances of debt......................................... 3,952 1,222 1,697
Retirements of debt....................................... (1,893) (1,831) (822)
Interest paid............................................. (336) (300) (285)
------ ------ ------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES....... [41] 772 (1,669) (122)
------ ------ ------
of which discontinuing operations......................... [42] 18 (29) 34
------ ------ ------
CHANGE IN CASH AND CASH EQUIVALENTS DUE TO BUSINESS
ACTIVITIES.............................................. (2,326) 1,595 (545)
------ ------ ------
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR............ 2,812 1,184 1,746
------ ------ ------
Change in cash and cash equivalents due to changes in
scope of consolidation.................................. (3) 19 (18)
Change in cash and cash equivalents due to exchange rate
movements............................................... 8 14 1
------ ------ ------
CASH AND CASH EQUIVALENTS AT END OF YEAR.................. [43] 491 2,812 1,184
------ ------ ------
Marketable securities and other instruments............... 213 328 537
------ ------ ------
LIQUID ASSETS AS PER BALANCE SHEETS....................... 704 3,140 1,721
====== ====== ======
F-6
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP
ACCOUNTING POLICIES
The consolidated financial statements of the Bayer Group are prepared --
pursuant to Article 292a of the German Commercial Code -- in accordance with the
rules of the International Accounting Standards Committee (IASC), London, in
effect at the closing date. They comply with the European Union's guidelines on
consolidation of financial statements (Directive 83/349/EEC).
The financial statements of the consolidated companies are prepared
according to uniform recognition and valuation principles. Valuation adjustments
made for tax reasons are not reflected in the Group statements. The individual
companies' statements are prepared as of the closing date for the Group
statements.
The Group accrues for contingencies in accordance with the criteria of IAS
37 when available information indicates that an asset has been impaired or a
liability has been incurred and the amount of loss can be reasonably estimated.
Certain income statement and balance sheet items are combined for the sake
of clarity, as explained in the Notes. Income received such as royalties, rental
income, interest income or dividend income is recognized on an accrual basis. A
distinction is made in the balance sheet between long-term and short-term
liabilities in accordance with IAS 1 (Presentation of Financial Statements).
Liabilities are stated as short-term if they mature within one year.
Changes in recognition and valuation principles are explained in the Notes.
The previous years' figures are restated accordingly. Accounting policies for
individual categories of items in the income statement and balance sheet are
included in the relevant notes.
In a few instances, estimates and assumptions have to be made. These affect
the classification and valuation of assets, liabilities, income, expenses and
contingent liabilities. The actual values may vary from the estimates.
EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS
Bayer's 2000 financial statements reflect the requirements of the following
new or revised International Accounting Standards (IAS) and SICs that the Group
implemented in 2000:
IAS 10 (Revised 1999) Events after the Balance Sheet Date
IAS 22 (Revised 1998) Business Combinations
IAS 36 Impairment of Assets
IAS 37 Provisions, Contingent Liabilities and Contingent
Assets
IAS 38 Intangible Assets
SIC 12 Consolidation -- Special Purpose Entities (IAS 27)
SIC 18 Consistency -- Alternative Methods (adopted in
advance of the effective date)
SIC 20 Equity Accounting Method -- Recognition of Losses
(IAS 28)
SIC 22 Business Combinations -- Subsequent Adjustment of
Fair Values and Goodwill Initially Reported (IAS
22)
SIC 23 Property, Plant and Equipment -- Major Inspections
or Overhaul Costs
SIC 24 Earnings per Share -- Financial Instruments and
other Contracts that may be Settled in Shares
SIC 25 Income Taxes -- Changes in the Tax Status of an
Enterprise or its Shareholders (IAS 12)
F-7
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)
The adoption of these standards did not have any significant impact on
Bayer's financial position or its results of operations during 2000 or on the
comparability of its 2000 and 1999 consolidated financial statements.
The following new or revised accounting standards and interpretations will
be implemented in 2001:
IAS 12 (Revised 2000) Income Taxes
IAS 19 (Revised 2000) Employee Benefits
IAS 39 Financial Instruments: Recognition and Measurement
IAS 40 Investment Property
SIC 17 Equity -- Cost of an Equity Transaction
SIC 19 Reporting Currency -- Measurement and Presentation
of Financial Statements under IAS 21 and IAS 29
IAS 12 (revised 2000) "Income Taxes", requires that current and deferred
income taxes be measured at the tax rate applicable to undistributed earnings.
The income tax consequences of dividends should be recognized when the related
dividend is recognized in the financial statements. The adoption of IAS 12
(revised 2000) as of January 1, 2001 will not have a material effect on Bayer's
consolidated financial statements.
IAS 19 (revised 2000) "Employee Benefits" requires that plan assets should
include certain assets for insurance policies that satisfy the same conditions
as other plan assets and that have economic effects similar to those other plan
assets. Bayer does not expect that this revised standard will have a material
impact on its consolidated financial statements. The adoption of IAS 19 (revised
2000) as of 1 January 2001 will not have a material effect on Bayer's
consolidated financial statements.
IAS 39 "Financial Instruments: Recognition and Measurement" requires that
all financial assets and financial liabilities be recognized on the balance
sheet, including derivatives. This involves recording in the balance sheet the
unrealized gains on the available-for-sale and derivative portfolios. As of the
adoption of IAS 39 on January 1, 2001, the after tax amount added to
stockholders' equity was E0.9 billion. IAS 39 is not expected to have a material
impact on the consolidated statements of income.
IAS 40 "Investment Property" prescribes the accounting treatment for
investment property and related disclosure requirements. The Group expects that
the adoption of IAS 40 will not have a material impact on its consolidated
financial statements.
SIC 17 "Equity -- Cost of an Equity Transaction" requires that we account
for transaction costs of an equity transaction as a deduction from equity, net
of any related income tax benefit, unless the transaction fails to be completed,
in which case it should be expensed. The adoption of SIC 17 as of January 1,
2001 did not have a material effect on Bayer's consolidated financial
statements.
SIC 19 "Reporting Currency -- Measurement and Presentation of Financial
Statements under IAS 21 and IAS 29" provides additional guidance on determining
the reporting currencies of foreign subsidiaries. The adoption of SIC 19 as of
January 1, 2001 did not have a material effect on our consolidated financial
statements.
COMPANIES CONSOLIDATED
The financial statements of the Bayer Group as of December 31, 2000 include
Bayer AG and 37 German and 191 foreign consolidated subsidiaries in which Bayer
AG, directly or indirectly, has a majority of the voting rights. The number of
companies consolidated has risen by 41 from the previous year. Excluded from
consolidation are 93 subsidiaries that in aggregate are immaterial to the net
worth, financial position and earnings of the Bayer Group; they account for less
than 1 percent of Group sales.
We have included 41 joint ventures -- one fewer on aggregate than in the
previous year -- by proportionate consolidation in compliance with IAS 31
(Financial Reporting of Interests in Joint Ventures). The following
F-8
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)
summarized balance sheet and income statement information relating to the
Group's interest in joint ventures is presented prior to adjustments made on
consolidation:
E MILLION
---------
Noncurrent assets........................................... 547
Current assets.............................................. 815
Pension provisions.......................................... (81)
Other provisions............................................ (76)
Financial obligations....................................... (187)
Remaining liabilities....................................... (408)
-----
NET ASSETS.................................................. 610
=====
Income...................................................... 1,989
Expenses.................................................... 1,876
-----
INCOME AFTER TAXES.......................................... 113
=====
While 14 companies are stated at equity, 59 companies that in aggregate are
of minor importance are stated at their accounting values.
Included for the first time are 50 companies, 27 of which belonged to the
Sybron group, which we acquired in 2000, and six of which were acquired along
with the polyols business of Lyondell. As a consequence of divestiture and
mergers the number of consolidated companies was reduced by 10.
ACQUISITIONS/DIVESTITURES
Acquisitions have been accounted for under the purchase method of
accounting and accordingly the results of operations of the acquired businesses
have been included in the consolidated financial statements since the respective
dates of the acquisitions. The purchase prices of the foreign acquisitions are
translated at the exchange rates in effect at the respective dates of
acquisition. In 2000 a total of E4.2 billion was spent on ACQUISITIONS.
Acquisitions during 2000 were paid in cash and no shares of Bayer AG were
issued. These acquisitions resulted in total goodwill of E301 million which is
being amortized using the straight-line method over a period not exceeding 20
years.
Effective March 31, 2000 Bayer acquired the polyols business of Lyondell
Chemical Company, Houston, Texas, United States. The acquisition comprised U.S.
production facilities in Institute and South Charleston, West Virginia and
Channelview, Texas; European plants in Rieme, Belgium and Fos-sur-Mer, France;
companies in Indonesia, Singapore and Taiwan; and research facilities in Newtown
Square, Pennsylvania; South Charleston, West Virginia; Villers St. Paul, France;
and Singapore. The total purchase price was E2.6 billion. The net assets
acquired consisted of intangible assets (E1,308 million), tangible fixed assets
(E466 million), financial assets (E509 million), inventories (E144 million),
trade accounts receivable (E134 million), deferred tax assets (E1 million),
other assets (E61 million), deferred tax liabilities (E2 million) and other
liabilities (E37 million). The acquisition was accounted for under the purchase
method of accounting and the related goodwill was E38 million, which is being
amortized on a straight-line basis over its economic useful life of 20 years.
The Crop Protection Business Group acquired the FLINT(R) line of crop
fungicides from Novartis effective December 7, 2000. This E880 million
acquisition includes global ownership of all associated intellectual property
rights, registrations and trademarks, production and formulation know-how and
the production facilities in Muttenz, Switzerland, and inventories. At the same
time, Bayer acquired the exclusive right to market certain products based on the
active ingredient cyproconazole in the European Union. The intangible assets are
being amortized over their economic useful life of 12 years.
On October 21, 2000 Bayer Corporation, the U.S. subsidiary of Bayer AG,
purchased 99.6 percent of the approximately 5.7 million outstanding shares of
U.S. polymers and specialty chemicals producer Sybron
F-9
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)
Chemicals Inc., Birmingham, New Jersey, at a price of US$ 35 per share. The
total purchase price, including assumption of Sybron's financial liabilities,
was approximately E386 million. The acquisition provides Bayer's Coatings and
Colorants Business Group and Specialty Products Business Group with access to
new technologies and products. The acquired goodwill totaling E248 million is
being amortized over an estimated economic life of 15 and 20 years for the
Coatings and Colorants Business and the Specialty Products Business,
respectively.
Effective November 17, 2000 Bayer subsidiary H.C. Starck GmbH & Co. KG of
Goslar, Germany acquired the CSM group of companies, headquartered in Cleveland,
Ohio, United States for E146 million. CSM is a manufacturer of molybdenum and
tungsten mill products as well as machined components and fabrications made from
alloys of other refractory metals.
Our U.S. subsidiary Bayer Corporation acquired major parts of the paper
chemicals business -- including patents and know-how -- of the U.S. specialty
chemicals manufacturer Cytec Industries, Inc., West Paterson, New Jersey for
E107 million, effective November 1, 2000. The acquired goodwill of E24 million
will be amortized over its estimated economic life of 15 years.
On June 1, 2000 the Consumer Care Division of Bayer Corporation purchased
the complete RID(R) line of head lice treatments from Pfizer Inc. The E99
million acquisition includes all the related patents.
Effective January 1, 2000 we acquired for E27 million the remaining 50.1
percent of the shares of Misung Ltd., Pyongtaek, South Korea, which up till that
time had been a joint venture with Aventis S.A. Misung formulates and markets a
wide range of crop protection products in South Korea. The acquired goodwill of
E20 million will be amortized over a five-year period.
On December 15, 2000 Bayer Ltd., Japan, purchased a further 10 percent of
the shares of Sumitomo Bayer Urethane Co. Ltd., Japan, a joint venture with
Sumitomo Chemicals Co. Ltd., for E7 million, thereby raising Bayer's interest to
60 percent. Prior to acquisition of the additional shares, the company had been
proportionately consolidated. As from the date of acquisition the company has
been consolidated.
The Consumer Care Business Group strengthened its skin care products
business and improved its position in the British market through the acquisition
by U.K. subsidiary Bayer plc of the Germoloid(R) brand effective January 1,
2000. The purchase price paid to GlaxoSmithKline was E11 million. The acquired
goodwill of E10 million will be amortized over its estimated economic life of 10
years.
The pro forma impact of the aforementioned acquisitions on revenues and
income from the continuing operations for the year ended December 31, 2000 is
immaterial.
In 1999 a total of E356 million was spent on acquisitions. These
acquisitions have been accounted for under the purchase method and accordingly
the results of operations of the acquired businesses have been included in the
consolidated financial statements since the respective dates of the
acquisitions. These acquisitions were paid in cash and no shares of Bayer AG
were issued. The 1999 acquisitions resulted in total goodwill of E219 million
which is being amortized using the straight-line method over a period not
exceeding 20 years.
On April 1, 1999 Bayer purchased the global polycarbonate and polyester
plastic sheet business of the Dutch chemicals group DSM for E172 million. The
acquisition comprises two companies -- Axxis N.V. in Belgium and Sheffield
Plastics Inc. in the United States. These companies are consolidated as of the
date of acquisition. The purchase price includes goodwill of E108 million, which
is being amortized over its estimated economic life of 10 years.
The assets of the Australian company Laserlite, also a manufacturer of
plastic sheet, were acquired on March 15, 1999 for E15 million.
Effective October 31, 1999, our U.S. subsidiary Rhein Chemie Corporation
acquired the business and the assets of Elastochem, Inc., one of the leading
American suppliers of customized additives and specialties for the rubber
industry, for E61 million. The goodwill of E47 million is amortized over its
estimated economic life of 10 years.
F-10
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)
In 1999 we concluded a five-year research agreement with LION Bioscience AG
of Heidelberg, Germany, with the aim of applying modern genomics and information
technologies more efficiently to research and develop innovative drugs and
diagnostic markers for the Pharmaceuticals and Diagnostics business groups. As
part of this cooperation, Bayer purchased an 11.28 percent interest in LION on
August 26, 1999 for E28 million.
On December 17, 1999 we acquired the remaining 33.3 percent of the shares
of Bayer Polimeros S.A., Brazil. This manufacturer of
acrylonitrile-butadiene-styrene (ABS) plastics is now a wholly owned subsidiary.
Under the agreement reached when we first purchased an interest in 1997, the
price paid for the remainder of the shares was E19 million. The goodwill of E13
million was written off in 1999 due to a loss of value.
On February 1, 1999, our subsidiary Bayer plc purchased 100 percent of the
shares of pbi Home & Garden Limited, United Kingdom, from Sumitomo Corporation
of Japan for E13 million. The acquisition of this company, which supplies plant
protection products and fertilizers for amateur gardeners, marked our entry into
Europe's second largest market for home garden products. The goodwill of E13
million is being amortized over a 10-year period.
Our Diagnostics Business Group acquired the oncology diagnostics business
-- headquartered in Cambridge, Massachusetts -- of OSI Pharmaceuticals, Inc. on
December 2, 1999 for E11 million. The acquisition, effected through our U.S.
subsidiary Bayer Corporation, comprises mainly patents and know-how in the field
of cancer diagnostics.
The pro forma impact of the aforementioned acquisitions on revenues and
income from the continuing operations for the year ended December 31, 1999 is
immaterial.
Significant DIVESTITURES were as follows:
Effective July 31, 2000 Bayer sold its 25 percent interest in Schein
Pharmaceutical Inc., Florham Park, New Jersey, United States, to Watson
Pharmaceuticals Inc. for E170 million.
Also effective July 31, 2000 the Animal Health Division of Bayer
Corporation sold the U.S. livestock vaccines business to the animal health
company Intervet International, a subsidiary of Akzo Nobel, Arnhem, Netherlands,
for E81 million.
Bayer Corporation sold its 11 percent interest in Myriad Genetics of Salt
Lake City, Utah, United States, for E76 million.
Effective October 18, 2000 we sold the subsidiary Bayer Solar GmbH to the
SolarWorld group of Bonn, Germany in return for a cash payment of E38 million
and an approximately 9 percent interest in the photovoltaics company SolarWorld
AG. The total proceeds of this divestiture amounted to E56 million.
The most significant divestiture during 1999 was the sale of 70 percent of
the stock of Agfa-Gevaert N.V. of Belgium. On June 1, 1999, Bayer disposed of 70
million shares -- one half of its total holding -- to private and public
investors by way of an initial public offering at an offer price of E22 per
share. In addition, the Belgian holding company Gevaert N.V. acquired 20 percent
of the shares -- 15 percent at the time of the stock market listing and a
further 5 percent on August 31, 1999 -- also for E22 per share. It is the
intention to divest also the remaining 30 percent interest in Agfa-Gevaert N.V.
F-11
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)
In 2000 and 1999, acquisitions and divestitures of subsidiaries or
businesses affected the Group's assets and liabilities as of the dates of
acquisition or divestiture as follows:
ACQUISITIONS DIVESTITURES
------------ ------------
(E MILLION)
2000
Noncurrent assets........................................... 3,846 136
Current assets (excluding liquid assets).................... 728 90
Liquid assets............................................... 39 --
----- -----
ASSETS...................................................... 4,613(*) 226
===== =====
Pension provisions.......................................... 15 29
Other provisions............................................ 51 2
Financial obligations....................................... 188 --
Remaining liabilities....................................... 159 48
----- -----
LIABILITIES................................................. 413(**) 79
===== =====
ACQUISITIONS DIVESTITURES
------------ ------------
(E MILLION)
1999
Noncurrent assets........................................... 318 1,040
Current assets (excluding liquid assets).................... 67 3,561
Liquid assets............................................... 7 207
----- -----
ASSETS...................................................... 392 4,808
===== =====
Pension provisions.......................................... 1 663
Other provisions............................................ 0 333
Financial obligations....................................... 7 982
Remaining liabilities....................................... 28 643
----- -----
LIABILITIES................................................. 36 2,621
===== =====
---------------
(*) including E2,623 million from Lyondell
(**) including E39 million from Lyondell
Lists of Bayer AG's direct and indirect holdings have been included in the
Leverkusen commercial register. They also are available directly from Bayer AG
on request.
The principal companies included in the consolidated financial statements
are listed below:
BAYER'S STOCKHOLDERS'
COMPANY NAME AND PLACE OF BUSINESS INTEREST EQUITY SALES* NET INCOME* EMPLOYEES
---------------------------------- -------- ------------- ----------- ----------- ---------
(%) (E MILLION) (E MILLION) (E MILLION)
GERMANY
H. C. Starck GmbH & Co. KG, Goslar...... 100 139 478 43 1,660
Bayer Faser GmbH, Dormagen.............. 100 66 311 38** 885
Wolff Walsrode AG, Walsrode............. 100 118 404 17 1,902
Haarmann & Reimer GmbH, Holzminden...... 100 303 386 12 1,690
Rhein Chemie Rheinau GmbH, Mannheim..... 100 36 211 10 558
Bayer Vital GmbH & Co. KG, Cologne...... 100 115 1,009 38 1,620
Bayer Industrieprodukte GmbH & Co. KG,
Leverkusen............................ 100 3 2,053 13 214
F-12
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)
BAYER'S STOCKHOLDERS'
COMPANY NAME AND PLACE OF BUSINESS INTEREST EQUITY SALES* NET INCOME* EMPLOYEES
---------------------------------- -------- ------------- ----------- ----------- ---------
(%) (E MILLION) (E MILLION) (E MILLION)
OTHER EUROPEAN COUNTRIES
Bayer Hispania, S.A., Spain............. 100 256 391 39 1,098
Bayer S.p.A., Italy..................... 100 256 837 38 2,195
Quimica Farmaceutica Bayer, S.A.,
Spain................................. 100 158 344 35 1,027
Bayer Rubber N.V., Belgium.............. 100 135 211 23 492
Bayer plc, U.K.......................... 100 106 564 12 1,287
Bayer Antwerpen N.V., Belgium........... 100 1,113 1,190 8 2,523
Bayer Pharma S.A., France............... 99.9 56 313 8 690
Bayer International S.A., Switzerland... 100 69 601 66 84
Bayer S.A., France...................... 99.9 257 377 18 550
Bayer B.V., Netherlands................. 100 16 264 6 255
Bayer A/S, Denmark...................... 100 17 212 1 134
NORTH AMERICA
Bayer Corporation (group)............... 100 5,408 10,901 217 23,171
Bayer Inc., Canada...................... 100 450 1,118 15 2,248
ASIA/PACIFIC
Bayer Yakuhin Ltd., Japan............... 75.6 611 909 58 1,593
Sumika Bayer Urethane Co., Ltd.,
Japan................................. 60 71 279 9 148
Bayer Ltd., Japan....................... 100 141 289 8 273
Bayer Australia Ltd., Australia......... 99.9 58 213 6 598
Bayer (South East Asia), Singapore...... 100 20 184 4 228
Nihon Bayer Agrochem K.K., Japan........ 99.5 238 253 (5) 325
Bayer China Co., Ltd., Hong Kong........ 100 35 356 8 255
LATIN AMERICA/AFRICA/MIDDLE EAST
Bayer de Mexico, S.A. de C.V.,
Mexico***............................. 100 287 444 54 2,192
Bayer S.A., Argentina***................ 99.9 252 346 29 985
Bayer S.A., Brazil***................... 99.9 309 622 12 2,284
Bayer (Proprietary) Ltd., South
Africa................................ 100 72 240 11 1,138
---------------
* The figures are taken from the respective financial statements prepared in
line with local regulations. Foreign companies' figures are translated at
average rates of exchange.
** income before transfer
*** These figures are taken from the hard-currency statements used for the
consolidation.
FOREIGN CURRENCY TRANSLATION
The financial statements for 2000 are drawn up in euros (E).
As of January 1, 1999, Bayer AG adopted the euro as its reporting currency
in its consolidated financial statements. The 1998 figures have been restated
from the prior reporting currency (DM) into euro at the official fixed
conversion ratio on January 1, 1999 of E1 = DM 1.95583. Accordingly, our
consolidated financial statements for these periods translated into euro depict
the same trends that would have been presented if our consolidated financial
statements were presented in DM. However, our financial statements for these
periods may not be comparable to the consolidated financial statements of other
companies that are presented in euro but translated from a currency other than
the DM. For periods ending after December 31, 1998, we prepared our consolidated
financial statements in euro directly, rather than restating them from DM to
euro.
F-13
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)
Most foreign currency receivables and payables of the consolidated
companies are hedged, and are translated at the hedged rates in their financial
statements. The remaining foreign currency receivables and payables are
translated at closing rates.
The majority of foreign consolidated companies are to be regarded as
foreign entities since they are financially, economically and organizationally
autonomous. Their functional currencies according to IAS 21 (The Effects of
Changes in Foreign Exchange Rates) are thus the respective local currencies. The
assets and liabilities of these companies are therefore translated at closing
rates, income and expense items at average rates for the year.
Where the operations of a foreign company are integral to those of Bayer
AG, the functional currency is the euro.
Property, plant and equipment, intangible assets, investments in affiliated
companies and other securities included in investments are translated at the
historical exchange rate on the date of addition, along with any relevant
amortization, depreciation, and write-downs. All other balance sheet items are
translated at closing rates. Income and expense items (except amortization,
depreciation and write-downs) are translated at average rates for the year.
Exchange differences arising from the translation of foreign companies'
balance sheets are shown in a separate stockholders' equity item. In case of
divestiture, the respective exchange differences are reversed and recognized in
income.
The exchange rates for major currencies against the euro varied as follows:
CLOSING RATE AVERAGE RATE
------------------------ ------------------------
2000 1999 1998 2000 1999 1998
------ ------ ------ ------ ------ ------
(E1)
U.S.A. ............................ USD 0.93 1.00 1.17 0.93 1.07 1.11
U.K. .............................. GBP 0.62 0.62 0.70 0.61 0.66 0.67
Japan.............................. JPY 106.92 102.73 134.84 99.74 121.05 144.94
Canada............................. CAD 1.40 1.46 1.82 1.37 1.59 1.65
Switzerland........................ CHF 1.52 1.61 1.60 1.56 1.60 1.61
CONSOLIDATION METHODS
Capital consolidation is performed according to IAS 22 (revised 1998 --
Business Combinations) by offsetting investments in subsidiaries against the
underlying equities at the dates of acquisition. The identifiable assets and
liabilities of subsidiaries and joint ventures are included at their fair values
in proportion to Bayer's interest. Remaining differences are recognized as
goodwill.
The consolidated financial statements include the accounts of those
material subsidiaries in which Bayer AG has the ability to control the financial
interest, generally through an ownership interest greater than 50%. The equity
method is used to account for investments in material entities in which Bayer AG
exerts significant influence, generally through an ownership between 20 and 50
percent interest.
Where the statements of individual consolidated companies reflect
write-downs or write-backs of investments in other consolidated companies, these
are reversed for the Group statements.
Intragroup sales, profits, losses, income, expenses, receivables and
payables are eliminated.
Deferred taxes are recognized for temporary differences related to
consolidation entries.
Intercompany profits and losses on transactions with companies included at
equity were immaterial in 2000, 1999 and 1998.
F-14
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)
CASH FLOW STATEMENT
The cash flow statement shows how the liquidity of the Bayer group was
affected by the inflow and outflow of cash and cash equivalents during the year.
The effects of acquisitions, divestitures and other changes regarding the
companies consolidated are eliminated. Cash flows are classified by operating,
investing and financing activities in accordance with IAS 7 (Cash Flow
Statements). An adjustment is shown to reconcile cash and cash equivalents at
the end of the year to the liquid assets reflected in the balance sheet.
The amounts reported by foreign consolidated companies are translated at
average exchange rates for the year, with the exception of cash and cash
equivalents, which are translated at closing rates as in the balance sheet. The
effect of changes in exchange rates on cash and cash equivalents is shown
separately.
F-15
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)
NOTES TO THE STATEMENTS OF INCOME
[1] NET SALES
Sales are recognized on delivery to third parties and are reported net of
sales taxes and rebates. Provisions for rebates to customers are provided for in
the same period that the related sales are recorded based on the contract terms.
Revenues from contracts that contain customer acceptance provisions are deferred
until customer acceptance occurs or the contractual acceptance period has
lapsed.
2000 total reported sales rose by E3.7 billion compared with 1999, to E31
billion (1999: E27.3 billion; 1998: E28.1 billion). Sales from continuing
operations advanced by E5.2 billion, to E30 billion (1999: E24.7 billion; 1998:
E22.9 billion). The increase in 2000 comprised E1.7 billion from higher volumes,
E0.6 billion from improvements in selling prices, E2.2 billion from favorable
shifts in exchange rates and E0.7 billion from the net positive effect of
acquisitions and divestitures. Acquisitions and divestitures during 2000 and
1999 affected the comparison between the two years' sales figures by the
following amounts:
2000 E MILLION
---- ---------
ACQUISITIONS
Polyols business (from Lyondell)............................ 646
Plastic sheet business (from DSM on April 1, 1999).......... 80
Purchase of further interest in Misung Ltd., Pyongtaek,
South Korea............................................... 58
Sybron Chemicals Inc., Birmingham, New Jersey, United
States.................................................... 35
Paper chemicals business (from Cytec Industries)............ 14
------
833
------
DIVESTITURES
U.S. livestock vaccines business to Intervet
International............................................. (27)
Troponwerke GmbH & Co. KG................................... (24)
Other....................................................... (34)
------
(85)
------
NET EFFECT ON SALES FROM CONTINUING OPERATIONS.............. 748
------
Sale of 70 percent of the shares of the Agfa-Gevaert group
(May 31, 1999)............................................ (1,801)
------
(1,053)
======
1999 sales declined by E0.7 billion compared with 1998, to E27.3 billion.
Sales growth of E1.4 billion from higher volumes and E0.6 billion from exchange
rate fluctuations was offset by declines of E0.5 billion from price changes and
E2.2 billion from the net effect of acquisitions and divestitures, which is
comprised as follows:
F-16
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)
1999 E MILLION
---- ---------
ACQUISITIONS
Chiron Diagnostics (from Chiron in 1998).................... 504
Plastic sheet business (from DSM)........................... 72
Seed treatment business in U.S.A. and Canada (from Gustafson
in 1998).................................................. 49
pbi Home & Garden Limited, U.K. (from Sumitomo
Corporation).............................................. 18
Elastochem Inc., U.S.A...................................... 11
Other....................................................... 14
------
668
------
DIVESTITURES
Agfa-Gevaert group.......................................... (2,548)
Titanium dioxide (placed into joint venture with Kerr-McGee
in 1998).................................................. (131)
Silicones (placed into joint venture with GE Plastics in
1998)..................................................... (113)
Citric acid (to Tate & Lyle in 1998)........................ (102)
Other....................................................... (19)
------
(2,913)
------
OTHER CHANGES IN COMPANIES CONSOLIDATED..................... 78
------
(2,167)
======
1998 sales declined by E0.1 billion compared with 1997, to E28.1 billion.
Sales growth of E0.5 billion from higher volumes was offset by declines of E0.3
billion from price changes, E0.2 billion from exchange rate fluctuations and
E0.1 billion from the net effect of acquisitions and divestitures. The effects
on sales of the acquired or divested businesses and companies in the periods for
which they are consolidated are as follows:
1998 E MILLION
---- ---------
ACQUISITIONS
Offset printing plates and graphic films (from DuPont)...... 312
Chiron Diagnostics (group).................................. 46
Bayer Animal Health (Pty) Ltd., South Africa................ 25
ISL-Chemie GmbH, Kurten, Germany............................ 15
Polyurethane films (from Elf Atochem)....................... 7
Seed treatment business U.S./Canada (from Gustafson)........ 3
Other....................................................... 24
------
432
------
DIVESTITURES
Copying systems (to Lanier)................................. (119)
Titanium dioxide (placing into joint venture with
Kerr-McGee)............................................... (115)
Citric acid (to Tate & Lyle)................................ (109)
Silicones (placing into joint venture with GE Plastics)..... (109)
Enamels (to Advent International in 1997)................... (60)
Other....................................................... (12)
------
(524)
------
(92)
======
Breakdowns of net sales by business segment and by region are given in the
table on pages F-21 - F-24.
F-17
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)
[2] SELLING EXPENSES
Shipping and handling costs included in selling expenses were E811 million,
E622 million and E662 million in 2000, 1999 and 1998, respectively.
Advertising and promotion costs are expensed in the period incurred and
presented in the income statement in selling expenses. Advertising expenses were
E1,343 million, E1,090 million, and E1,195 million during 2000, 1999 and 1998,
respectively.
[3] RESEARCH AND DEVELOPMENT EXPENSES
According to IAS 38 (Intangible Assets), research costs cannot be
capitalized; development costs can only be capitalized if specific conditions
are fulfilled. Development costs must be capitalized if it is sufficiently
certain that the future economic benefits to the company will cover not only the
usual production, selling and administrative costs but also the development
costs themselves. There are also several other criteria relating to the
development project and the product or process being developed, all of which
have to be met to justify asset recognition. As in previous years, these
conditions are not satisfied.
[4] OTHER OPERATING INCOME
Among the items of other operating income from continuing operations for
2000 are E84 million (1999: E118 million; 1998: E79 million) from reversals of
unutilized provisions, E74 million (1999: E16 million; 1998: E148 million) from
retirements of noncurrent assets, and E25 million (1999: E35 million; 1998: E23
million) from sideline operations. The cost of goods sold incurred for sideline
operations has been offset against the corresponding revenues to more clearly
reflect the earnings position.
[5] OTHER OPERATING EXPENSES
Included in other operating expenses for continuing operations for 2000 are
E36 million (1999: E53 million; 1998: E34 million) in write-downs of
receivables, E98 million (1999: E160 million; 1998: E69 million) in amortization
of acquired goodwill and E26 million (1999: E54 million; 1998: E22 million) in
losses from the sale of property, plant and equipment.
In addition, E200 million (1999: E449 million; 1998: E242 million) was
spent on restructuring. These expenses related mainly to the integration of
Chiron Diagnostics, acquired in 1998, and the polyols business of Lyondell
Chemical Company, Houston, Texas, acquired on March 31, 2000, which accounted
for E61 million (1999: E111 million; 1998: E9 million) and E48 million,
respectively. The streamlining of the styrenics activities of the Plastics
Business Group accounted for E32 million (1999: E169 million; 1998: E24
million).
[6] DISCONTINUING OPERATIONS
Until June 1, 1999, Agfa-Gevaert N.V., a worldwide developer, manufacturer
and distributor of photographic and electronic imaging systems, was wholly-owned
by the Bayer Group. Following the sale of 70 percent of the shares of
Agfa-Gevaert N.V., the companies of the Agfa-Gevaert group ceased to be
consolidated. Bayer's remaining 30 percent interest in Agfa-Gevaert N.V. is
stated at equity. The operating result for 1999 shown in the table below
comprises that of the Agfa business up to the date of divestiture and the E1,030
million in income from the sale of the shares. Disposal of Bayer's remaining
interest in Agfa is expected to occur by 2002.
EC Erdolchemie GmbH, Cologne, until May 1, 2001 a joint venture between
Bayer and Deutsche BP AG, produces a variety of petrochemical feedstocks from
liquid hydrocarbons and natural gas. As of May 1, 2001 Bayer sold its 50 percent
interest in EC Erdolchemie GmbH, Cologne, to the joint venture partner Deutsche
BP AG, Hamburg. The E99 million (1999: E46 million; 1998: E75 million) operating
result of the Erdolchemie Business Group, which was formerly included in the
Chemicals segment, is reflected under discontinuing operations.
F-18
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)
In April 2001, the decision was made to divest the remaining activities of
the Fibers Business Group, including the production facilities for Dorlastan,
Spandex fibers and Perlon monofills. The operating results reflected under
discontinuing operations amounts to E51 million (1999: E23 million; 1998: E59
million).
The textile dyes business of our joint venture DyStar was combined with
that of BASF effective October 1, 2000. The operating result of the DyStar
Business Group, amounting to E5 million (1999: minus E24 million; 1998: E6
million), which was formerly included in the Chemicals segment, is reflected
under discontinuing operations.
The non-operating results and the income taxes attributable to Agfa, EC
Erdolchemie, DyStar and Fibers are reflected in the corresponding items of the
income statement.
A breakdown of the results of discontinuing operations is given below.
FIBERS ERDOLCHEMIE DYSTAR AGFA TOTAL
------------------ ------------------ ------------------ ---------------------- ------
2000 1999 1998 2000 1999 1998 2000 1999 1998 2000 1999 1998 2000
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ------ ------ ------
(E MILLION)
NET SALES.......................... 506 391 437 635 456 439 350 325 361 -- 1,801 4,349 1,491
Cost of goods sold................. (383) (307) (319) (481) (368) (311) (223) (241) (248) -- (1,098) (2,730) (1,087)
Selling expenses................... (50) (45) (46) (45) (44) (47) (68) (65) (69) -- (388) (928) (163)
Research and development
expenses.......................... (9) (9) (8) (2) (1) (2) (9) (10) (10) -- (101) (224) (20)
General administration expenses.... (8) (11) (7) (9) (8) (8) (21) (27) (14) -- (81) (203) (38)
Other operating income............. 10 9 7 7 17 5 6 4 13 -- 1,055 109 23
Other operating expenses........... (15) (5) (5) (6) (6) (1) (30) (10) (27) -- (55) (110) (51)
OPERATING RESULT FROM
DISCONTINUING OPERATIONS.......... 51 23 59 99 46 75 5 (24) 6 -- 1,133 263 155
Non-operating result............... 1 (4) (10) (1) (2) (1) (18) (7) (6) -- (6) (41) (18)
Equity-method income (loss)........ 72 (17) 72
INCOME (LOSS) BEFORE INCOME
TAXES............................. 52 19 49 98 44 74 (13) (31) 0 72 1,110 222 209
Income taxes....................... (16) -- (1) -- (10) (14) 1 (4) (3) (26) (24) (105) (41)
INCOME (LOSS) AFTER TAXES.......... 36 19 48 98 34 60 (12) (35) (3) 46 1,086 117 168
TOTAL
---------------
1999 1998
------ ------
(E MILLION)
NET SALES.......................... 2,973 5,586
Cost of goods sold................. (2,014) (3,608)
Selling expenses................... (542) (1,090)
Research and development
expenses.......................... (121) (244)
General administration expenses.... (127) (232)
Other operating income............. 1,085 134
Other operating expenses........... (76) (143)
OPERATING RESULT FROM
DISCONTINUING OPERATIONS.......... 1,178 403
Non-operating result............... (19) (58)
Equity-method income (loss)........ (17)
INCOME (LOSS) BEFORE INCOME
TAXES............................. 1,142 345
Income taxes....................... (38) (123)
INCOME (LOSS) AFTER TAXES.......... 1,104 222
[7] OPERATING RESULT
In accordance with IAS 14 (Segment Reporting), a breakdown of certain data
in the financial statements is given by business segment and geographical
region, generally based on location of assets. The aim is to provide users of
the financial statements with information regarding the profitability and future
prospects of the Group's various activities. To allow a more accurate appraisal
of continuing operations, the discontinuing operations are shown separately.
The Group is managed based upon business groups which are aggregated into
reportable business segments based upon economic characteristics, the nature of
products and production processes, types of customers, methods of distribution
and on nature of the regulatory environment. The business segment reporting in
these financial statements has been updated to reflect the Group's current
internal reporting and decisions taken in 2001, such as the decision to
discontinue certain business groups and planned changes in connection with the
holding company structure of the Group. Giving effect to these changes, the
Group operates 14 business groups, which have been aggregated into 7 reportable
business segments groups.
SEGMENT ACTIVITY
------- --------
HEALTHCARE
Pharmaceuticals Development and marketing of ethical pharmaceuticals
Consumer Care & Diagnostics Development and marketing of over-the-counter medications,
nutritional supplements, insecticides and insect repellants
and products for central laboratory, near patient testing,
and self-testing applications
F-19
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)
SEGMENT ACTIVITY
------- --------
AGRICULTURE
Crop Protection Development and marketing of chemical insecticides,
fungicides and herbicides
Animal Health Development and marketing of veterinary medicines,
environmental health products, and nutritionals for the
health care of companion animals and commercial
livestock/poultry
POLYMERS
Plastics & Rubber Manufacture and supply of engineered plastics and supplier
of raw materials, rubber chemicals and modifiers to the
rubber and tire industry
Polyurethanes, Coatings & Colorants Development, production and marketing of raw materials,
formulations and systems used in producing polyurethane
polymers, lacquers, coatings, sealants, adhesives and
colorants.
CHEMICALS Manufacture and marketing of bulk and specialty chemicals,
metal and ceramic powders, flavors and fragrances and
cellulose derivatives
The reconciliation line reflects intersegment items and income and expenses
not allocable to the segments, such as central R&D expenses, corporate costs,
and revenues and expenses from sideline operations. The intersegment sales
reflect intragroup transactions effected at transfer prices fixed on an
arm's-length basis. The reconciliation line also reflects those assets and
liabilities that cannot be allocated to the reportable segments.
Business activities which Bayer has already divested or intends to divest
are shown as discontinuing operations. These are the worldwide DyStar business
group; the Erdolchemie business group located in Europe, the worldwide Agfa
business segment and the worldwide Fibers business.
The business segment and regional data are calculated as follows:
- The intersegment and interregional sales reflect intragroup transactions
effected at transfer prices fixed on an arm's-length basis.
- The other operating income comprises that reflected in the income
statement, including such income from discontinuing operations.
- Comparability of the operating results of different years may be
restricted by exceptional items relating particularly to restructuring
measures and acquisitions or divestitures of companies or businesses.
For this reason the operating result before exceptional items is shown
in addition.
- The return on sales before exceptional items is the ratio of the
operating result before exceptional items to external sales.
- Expenses included in exceptional items mainly relate to restructuring
measures affecting the operating business.
- The return on sales including exceptional items is the ratio of the
operating result including exceptional items to external sales.
- Gross cash flow is the excess of cash receipts over cash disbursements
before application of funds.
- The capital invested comprises all the assets that serve a business
segment and are required to yield a return, less interest-free
liabilities. It is stated as of December 31.
- The CFROI is the ratio of the gross cash flow to the average capital
invested for the year.
F-20
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)
- The equity items are those reflected in the balance sheet and income
statement. They are allocated to the business segments where possible.
Equity-method income reconciles to the income statement line item
"Income (Expenses) from investments in affiliated companies -- net", as
follows:
2000 1999 1998
---- ---- ----
(E MILLION)
Equity-method income........................................ 71 (28) 9
Dividends and similar income.............................. 18 9 14
Income from profit and loss transfer agreements........... 1 1 2
Expenses from loss transfer................................. 0 0 (2)
Gains from the sale of investments in affiliated
companies.............................................. 204 0 10
Losses from the sale of investments in affiliated
companies.............................................. (1) (2) (10)
Write-downs of investments in affiliated companies........ (10) (11) (2)
--- --- ---
Income (Expenses) from investments in affiliated companies
(net)..................................................... 283 (31) 21
=== === ===
- Capital expenditures, amortization and depreciation relate to intangible
assets, property, plant and equipment.
- The research and development expenses are those reflected in the income
statement.
KEY DATA BY BUSINESS SEGMENT
CONSUMER
PHARMA- CARE & CROP ANIMAL PLASTICS &
CEUTICALS DIAGNOSTICS PROTECTION HEALTH RUBBER
--------------- --------------- --------------- ------------- ---------------
BUSINESS SEGMENTS 2000 1999 2000 1999 2000 1999 2000 1999 2000 1999
----------------- ------ ------ ------ ------ ------ ------ ----- ----- ------ ------
(E MILLION)
Net sales (external)............... 6,140 5,003 3,888 3,364 2,456 2,177 999 917 5,816 4,627
-- Change in E..................... 22.7% 15.3% 15.6% 25.1% 12.8% 6.5% 8.9% 3.5% 25.7% 6.8%
-- Change in local currencies...... 11.9% 11.2% 5.4% 21.7% 3.9% 3.5% (1.4%) 0.2% 19.5% 5.6%
Intersegment sales................. 39 51 0 1 97 83 6 6 122 114
Other operating income............. 90 105 51 33 38 98 41 12 28 116
Operating result before exceptional
items............................. 1,165 922 311 173 401 383 157 137 560 443
Return on sales before exceptional
items............................. 19.0% 18.4% 8.0% 5.1% 16.3% 17.6% 15.7% 14.9% 9.6% 9.6%
Exceptional items.................. (5) (90) (134) (157) 1 49 25 (36) (45) (189)
Operating result................... 1,160 832 177 16 402 432 182 101 515 254
Return on sales including
exceptional items................. 18.9% 16.6% 4.6% 0.5% 16.4% 19.8% 18.2% 11.0% 8.9% 5.5%
Gross cash flow.................... 1,048 826 371 244 397 395 160 133 802 551
Capital invested................... 5,502 4,950 4,192 3,824 3,977 2,664 764 826 6,937 6,552
CFROI.............................. 20.4% 18.4% 9.1% 6.4% 12.5% 15.4% 19.2% 16.8% 11.9% 9.0%
Equity-method income............... 0 (8) 0 0 0 2 0 0 (1) 0
Equity-method investments.......... 20 25 0 0 0 10 0 0 23 13
Total assets....................... 5,291 4,535 3,480 3,247 3,218 2,410 768 812 6,176 5,163
Capital expenditures............... 553 525 192 205 233 184 50 33 652 575
Amortization and depreciation...... 273 268 256 260 143 95 40 59 446 425
Liabilities........................ 2,202 1,661 1,158 1,090 947 744 337 208 1,696 1,535
Research and development
expenses.......................... 1,096 953 266 240 276 277 94 93 128 119
Number of employees (as of Dec.
31)............................... 27,200 27,100 15,100 15,200 11,000 10,700 3,900 4,100 18,500 18,100
POLYURETHANES,
COATINGS &
COLORANTS CHEMICALS
--------------- ---------------
BUSINESS SEGMENTS 2000 1999 2000 1999
----------------- ------ ------ ------ ------
(E MILLION)
Net sales (external)............... 5,076 3,904 4,275 3,630
-- Change in E..................... 30.0% 7.6% 17.8% (1.4%)
-- Change in local currencies...... 23.4% 5.5% 11.7% (3.2%)
Intersegment sales................. 462 482 466 478
Other operating income............. 42 84 49 117
Operating result before exceptional
items............................. 518 657 442 411
Return on sales before exceptional
items............................. 10.2% 16.8% 10.3% 11.3%
Exceptional items.................. (45) (38) 20 (63)
Operating result................... 473 619 462 348
Return on sales including
exceptional items................. 9.3% 15.9% 10.8% 9.6%
Gross cash flow.................... 794 681 600 440
Capital invested................... 8,621 5,078 6,304 5,881
CFROI.............................. 10.5% 14.0% 9.8% 7.8%
Equity-method income............... 0 0 5 0
Equity-method investments.......... 616 0 18 7
Total assets....................... 7,568 4,178 5,262 4,594
Capital expenditures............... 359 446 470 521
Amortization and depreciation...... 466 243 359 232
Liabilities........................ 1,737 1,337 2,035 1,998
Research and development
expenses.......................... 151 127 159 146
Number of employees (as of Dec.
31)............................... 16,100 15,300 24,500 24,100
F-21
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)
CONTINUING DISCONTINUING
RECONCILIATION OPERATIONS OPERATIONS BAYER GROUP
--------------- ----------------- --------------- -----------------
BUSINESS SEGMENTS 2000 1999 2000 1999 2000 1999 2000 1999
----------------- ------ ------ ------- ------- ------ ------ ------- -------
Net sales (external).................................. 830 725 29,480 24,347 1,491 2,973 30,971 27,320
-- Change in E........................................ 21.1% 8.3% 13.4% (2.6%)
-- Change in local currencies......................... 11.8% 5.8% 4.5% (4.7%)
Intersegment sales.................................... (466) (478)
Other operating income................................ 90 111 429 676 23 55 452 731
Operating result before exceptional items............. (273) (372) 3,281 2,754 175 1,180 3,456 3,934
Return on sales before exceptional items.............. 11.1% 11.2% 11.2% 14.4%
Exceptional items..................................... 34 (51) (149) (575) (20) (2) (169) (577)
Operating result...................................... (239) (423) 3,132 2,179 155 1,178 3,287 3,357
Return on sales including exceptional items........... 10.6% 8.9% 10.6% 12.3%
Gross cash flow....................................... (222) (378) 3,950 2,892 214 300 4,164 3,192
Capital invested...................................... 736 731 37,033 30,506 1,492 1,490 38,525 31,996
CFROI................................................. 11.4% 9.9% 11.5% 9.9%
Equity-method income.................................. (5) (5) (1) (11) 72 (17) 71 (28)
Equity-method investments............................. 182 210 859 265 487 448 1,346 713
Total assets.......................................... 3,539 5,388 35,302 30,327 1,149 952 36,451 31,279
Capital expenditures.................................. 23 30 2,532 2,519 115 113 2,647 2,632
Amortization and depreciation......................... 75 89 2,058 1,671 81 140 2,139 1,811
Liabilities........................................... 9,397 7,059 19,509 15,632 565 465 20,074 16,097
Research and development expenses..................... 203 176 2,373 2,131 20 121 2,393 2,252
Number of employees (as of Dec. 31)................... 1,600 1,500 117,900 116,100 4,200 4,300 122,100 120,400
KEY DATA BY BUSINESS SEGMENT
CONSUMER
PHARMA- CARE & CROP ANIMAL PLASTICS &
CEUTICALS DIAGNOSTICS PROTECTION HEALTH RUBBER
--------------- --------------- --------------- ------------- ---------------
BUSINESS SEGMENTS 1999 1998 1999 1998 1999 1998 1999 1998 1999 1998
----------------- ------ ------ ------ ------ ------ ------ ----- ----- ------ ------
(E MILLION)
Net sales (external)............... 5,003 4,340 3,364 2,688 2,177 2,045 917 886 4,627 4,331
-- Change in E..................... 15.3% 1.1% 25.1% 6.6% 6.5% 1.9% 3.6% 5.5% 6.8% 1.8%
-- Change in local currencies...... 11.2% 1.8% 21.7% 9.5% 3.5% 4.0% 0.2% 7.6% 5.6% 1.9%
Intersegment sales................. 51 34 1 1 83 76 6 1 114 93
Other operating income............. 105 85 33 49 98 45 12 48 116 81
Operating result before exceptional
items............................. 922 751 173 240 383 439 137 124 443 500
Return on sales before exceptional
items............................. 18.4% 17.3% 5.1% 8.9% 17.6% 21.5% 14.9% 14.0% 9.6% 11.5%
Exceptional items.................. (90) 24 (157) 8 49 (1) (36) (1) (189) (47)
Operating result................... 832 775 16 248 432 438 101 123 254 453
Return on sales including
exceptional items................. 16.6% 17.9% 0.5% 9.2% 19.8% 21.4% 11.0% 13.9% 5.5% 10.5%
Gross cash flow.................... 826 703 244 319 395 385 133 117 551 554
Capital invested................... 4,950 4,305 3,824 3,646 2,664 2,297 826 709 6,552 5,577
CFROI.............................. 18.4% 17.6% 6.4% 8.7% 15.4% 18.0% 16.8% 16.7% 9.0% 9.9%
Equity-method income............... (8) 0 0 0 2 2 0 0 0 0
Equity-method investments.......... 25 28 0 0 10 10 0 0 13 0
Total assets....................... 4,535 3,689 3,247 3,143 2,410 2,077 812 662 5,163 4,255
Capital expenditures............... 525 366 205 123 184 102 33 42 575 677
Amortization and depreciation...... 268 196 260 134 95 85 59 31 425 248
Liabilities........................ 1,661 1,417 1,090 778 744 791 208 208 1,535 1,600
Research and development
expenses.......................... 953 767 240 165 277 251 93 86 119 111
Number of employees (as of Dec.
31)............................... 27,100 28,300 15,200 15,800 10,700 10,700 4,100 4,200 18,100 17,000
POLYURETHANES,
COATINGS &
COLORANTS CHEMICALS
--------------- ---------------
BUSINESS SEGMENTS 1999 1998 1999 1998
----------------- ------ ------ ------ ------
(E MILLION)
Net sales (external)............... 3,904 3,629 3,630 3,682
-- Change in E..................... 7.6% (0.1%) (1.4%) (8.1%)
-- Change in local currencies...... 5.5% (0.2%) (3.2%) (7.8%)
Intersegment sales................. 482 546 478 531
Other operating income............. 84 144 117 127
Operating result before exceptional
items............................. 657 604 411 484
Return on sales before exceptional
items............................. 16.8% 16.6% 11.3% 13.1%
Exceptional items.................. (38) (46) (63) (76)
Operating result................... 619 558 348 408
Return on sales including
exceptional items................. 15.9% 15.4% 9.6% 11.1%
Gross cash flow.................... 681 604 440 455
Capital invested................... 5,078 4,427 5,881 5,585
CFROI.............................. 14.0% 13.4% 7.8% 7.9%
Equity-method income............... 0 0 0 0
Equity-method investments.......... 0 0 7 0
Total assets....................... 4,178 3,437 4,594 4,229
Capital expenditures............... 446 529 521 512
Amortization and depreciation...... 243 215 232 290
Liabilities........................ 1,337 1,543 1,998 2,065
Research and development
expenses.......................... 127 121 146 156
Number of employees (as of Dec.
31)............................... 15,300 15,700 24,100 25,200
F-22
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)
CONTINUING DISCONTINUING
RECONCILIATION OPERATIONS OPERATIONS BAYER GROUP
--------------- ----------------- --------------- -----------------
BUSINESS SEGMENTS 1999 1998 1999 1998 1999 1998 1999 1998
----------------- ------ ------ ------- ------- ------ ------ ------- -------
Net sales (external).................................. 725 875 24,347 22,476 2,973 5,586 27,320 28,062
-- Change in E........................................ 8.3% (0.7%) (2.6%) (0.2%)
-- Change in local currencies......................... 5.8% (0.1%) (4.7%) 0.5%
Intersegment sales.................................... (,478) (,531)
Other operating income................................ 111 97 676 676 55 134 731 810
Operating result before exceptional items............. (372) (343) 2,754 2,799 1,180 406 3,934 3,205
Return on sales before exceptional items.............. 11.2% 12.5% 14.4% 11.4%
Exceptional items..................................... (51) 92 (575) (47) (2) (3) (577) (50)
Operating result...................................... (423) (251) 2,179 2,752 1,178 403 3,357 3,155
Return on sales including exceptional items........... 8.9% 12.3% 12.3% 11.2%
Gross cash flow....................................... (378) (307) 2,892 2,830 300 485 3,192 3,315
Capital invested...................................... 731 430 30,506 26,976 1,490 5,167 31,996 32,143
CFROI................................................. 9.9% 10.9% 9.9% 10.6%
Equity-method income.................................. (5) 7 (11) 9 (17) 0 (28) 9
Equity-method investments............................. 210 210 265 248 448 3 713 251
Total assets.......................................... 5,388 3,103 30,327 24,595 952 4,782 31,279 29,377
Capital expenditures.................................. 30 48 2,519 2,399 113 304 2,632 2,703
Amortization and depreciation......................... 89 70 1,671 1,269 140 274 1,811 1,543
Liabilities........................................... 7,059 5,912 15,632 14,314 465 2,284 16,097 16,598
Research and development expenses..................... 176 144 2,131 1,801 121 244 2,252 2,045
Number of employees (as of Dec. 31)................... 1,500 1,500 116,100 118,400 4,300 26,700 120,400 145,100
KEY DATA BY REGION
EUROPE NORTH AMERICA ASIA/PACIFIC
------------------------ ------------------------ ------------------------
REGIONS 2000 1999 1998 2000 1999 1998 2000 1999 1998
------- ------ ------ ------ ------ ------ ------ ------ ------ ------
E MILLION
Net sales (external) -- by market........ 11,630 10,456 10,384 9,569 7,515 6,617 4,926 3,406 2,748
Net sales (external) -- by point of
origin.................................. 13,374 12,030 11,806 9,892 7,644 6,623 3,867 2,727 2,048
-- Change in E........................... 11.2% 1.9% 0.5% 29.4% 15.4% 2.1% 41.8% 33.2% (9.7%)
-- Change in local currencies............ 10.7% 1.9% 0.4% 13.9% 11.6% 0.3% 26.1% 18.0% 2.9%
Intersegment sales....................... 3,183 2,587 2,345 1,623 1,073 861 240 161 66
Other operating income................... 256 554 370 63 34 83 65 41 117
Operating result before exceptional
items................................... 2,263 2,211 2,224 725 578 624 411 215 113
Return on sales before exceptional
items................................... 16.9% 18.4% 18.8% 7.3% 7.6% 9.4% 10.6% 7.9% 5.5%
Exceptional items........................ 16 (241) (39) (144) (214) (114) (21) (12) (12)
Operating result......................... 2,279 1,970 2,185 581 364 510 390 203 101
Return on sales including exceptional
items................................... 17.0% 16.4% 18.5% 5.9% 4.8% 7.7% 10.1% 7.4% 4.9%
Gross cash flow.......................... 2,240 2,127 2,062 1,538 851 807 366 175 110
Capital invested......................... 18,369 15,533 14,362 14,350 11,109 9,595 2,822 2,356 1,723
CFROI.................................... 13.3% 13.8% 14.3% 11.3% 8.1% 9.3% 13.7% 8.7% 7.1%
Equity-method income..................... 0 (5) 7 0 (8) 0 (1) 2 2
Equity-method investments................ 255 197 192 582 39 30 2 11 10
Total assets............................. 16,386 15,623 12,295 13,115 9,566 7,993 3,162 2,759 1,982
Capital expenditures..................... 1,473 1,404 1,156 752 884 0,964 206 128 128
Amortization and depreciation............ 1,004 758 693 842 683 455 125 99 56
Liabilities.............................. 8,883 7,534 7,288 6,664 4,487 4,655 1,515 1,536 857
Research and development expenses........ 1,371 1,247 1,078 699 617 468 87 75 94
Number of employees (as of Dec. 31)...... 68,100 68,200 69,500 24,800 23,700 24,500 12,400 11,500 11,000
LATIN AMERICA/
AFRICA/MIDDLE EAST
------------------------
REGIONS 2000 1999 1998
------- ------ ------ ------
E MILLION
Net sales (external) -- by market........ 3,355 2,970 2,727
Net sales (external) -- by point of
origin.................................. 2,347 1,946 1,999
-- Change in E........................... 20.6% (2.7%) 0.5%
-- Change in local currencies............ 7.8% (5.0%) (1.4%)
Intersegment sales....................... 112 72 49
Other operating income................... 45 47 106
Operating result before exceptional
items................................... 235 149 207
Return on sales before exceptional
items................................... 10.0% 7.7% 10.4%
Exceptional items........................ 0 (57) 26
Operating result......................... 235 92 233
Return on sales including exceptional
items................................... 10.0% 4.7% 11.7%
Gross cash flow.......................... 245 163 214
Capital invested......................... 1,623 1,550 1,344
CFROI.................................... 15.4% 11.1% 16.4%
Equity-method income..................... 0 0 0
Equity-method investments................ 20 18 16
Total assets............................. 1,826 1,682 1,570
Capital expenditures..................... 101 102 150
Amortization and depreciation............ 85 128 65
Liabilities.............................. 691 750 663
Research and development expenses........ 13 16 17
Number of employees (as of Dec. 31)...... 12,000 12,000 12,700
F-23
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)
DISCONTINUING
RECONCILIATION CONTINUING OPERATIONS OPERATIONS
------------------------ --------------------------- ------------------------
REGIONS 2000 1999 1998 2000 1999 1998 2000 1999 1998
------- ------ ------ ------ ------- ------- ------- ------ ------ ------
E MILLION
Net sales (external) -- by
market............................ 29,480 24,347 22,476 1,491 2,973 5,586
Net sales (external) -- by point of
origin............................ 29,480 24,347 22,476 1,491 2,973 5,586
-- Change in E..................... 21.1% 8.3% (0.7%)
-- Change in local currencies...... 11.8% 5.8% (0.1%)
Interregional sales................ (5,158) (3,893) (3,321)
Other operating income............. 429 676 676 23 55 134
Operating result before exceptional
items............................. (353) (399) (369) 3,281 2,754 2,799 175 1,180 406
Return on sales before exceptional
items............................. 11.1% 11.2% 12.5%
Exceptional items.................. 0 (51) 92 (149) (575) (47) (20) (2) (3)
Operating result................... (353) (450) (277) 3,132 2,179 2,752 155 1,178 403
Return on sales including
exceptional items................. 10.6% 8.9% 12.3%
Gross cash flow.................... (439) (424) (363) 3,950 2,892 2,830 214 300 485
Capital invested................... (131) (42) (48) 37,033 30,506 26,976 1,492 1,490 5,167
CFROI.............................. 11.4% 9.9% 10.9%
Equity-method income............... (1) (11) 9 72 (17) 0
Equity-method investments.......... 859 265 248 487 448 3
Total assets....................... 813 697 755 35,302 30,327 24,595 1,149 952 4,782
Capital expenditures............... 1 1 2,532 2,519 2,399 115 113 304
Amortization and depreciation...... 2 3 2,058 1,671 1,269 81 140 274
Liabilities........................ 1,756 1,325 851 19,509 15,632 14,314 565 465 2,284
Research and development
expenses.......................... 203 176 144 2,373 2,131 1,801 20 121 244
Number of employees (as of Dec.
31)............................... 600 700 700 117,900 116,100 118,400 4,200 4,300 26,700
BAYER GROUP
---------------------------
REGIONS 2000 1999 1998
------- ------- ------- -------
E MILLION
Net sales (external) -- by
market............................ 30,971 27,320 28,062
Net sales (external) -- by point of
origin............................ 30,971 27,320 28,062
-- Change in E..................... 13.4% (2.6%) (0.2%)
-- Change in local currencies...... 4.5% (4.7%) 0.5%
Interregional sales................
Other operating income............. 452 731 810
Operating result before exceptional
items............................. 3,456 3,934 3,205
Return on sales before exceptional
items............................. 11.2% 14.4% 11.4%
Exceptional items.................. (169) (577) (50)
Operating result................... 3,287 3,357 3,155
Return on sales including
exceptional items................. 10.6% 12.3% 11.2%
Gross cash flow.................... 4,164 3,192 3,315
Capital invested................... 38,525 31,996 32,143
CFROI.............................. 11.5% 9.9% 10.6%
Equity-method income............... 71 (28) 9
Equity-method investments.......... 1,346 713 251
Total assets....................... 36,451 31,279 29,377
Capital expenditures............... 2,647 2,632 2,703
Amortization and depreciation...... 2,139 1,811 1,543
Liabilities........................ 20,074 16,097 16,598
Research and development
expenses.......................... 2,393 2,252 2,045
Number of employees (as of Dec.
31)............................... 122,100 120,400 145,100
[8] INCOME (EXPENSES) FROM INVESTMENTS IN AFFILIATED COMPANIES -- NET
This comprises the following items:
2000 1999 1998
---- ---- ----
(E MILLION)
Dividends and similar income................................ 18 9 14
- of which E8 million (1999: E2 million; 1998: E7 million)
from subsidiaries
Income from profit and loss transfer agreements............. 1 1 2
- of which E1 million (1999: E1 million; 1998: E2 million)
from subsidiaries
Expenses from loss transfer................................. 0 0 (2)
- of which E0 million (1999: E0 million; 1998: E2 million)
from subsidiaries
Income (Expense) from companies included at equity.......... 71 (28) 9
Gains from the sale of investments in affiliated
companies................................................. 204 0 10
Losses from the sale of investments in affiliated
companies................................................. (1) (2) (10)
Write-downs of investments in affiliated companies.......... (10) (11) (2)
---- ---- ----
283 (31) 21
==== ==== ====
As for the year 2000 the increase in this item is due to the gain from the
sale of the interests in Schein Pharmaceutical (E142 million) and Myriad
Genetics (E65 million) and the equity income from the Agfa-Gevaert group.
F-24
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)
[9] INTEREST EXPENSE -- NET
Interest income and expense comprises:
2000 1999 1998
---- ---- ----
(E MILLION)
Income from other securities and loans included in
investments............................................... 10 16 23
Other interest and similar income........................... 143 150 169
- of which E4 million (1999: E3 million; 1998: E4 million)
from subsidiaries
Interest and similar expenses............................... (464) (362) (381)
- of which E24 million (1999: E4 million; 1998: E11
million) to subsidiaries
---- ---- ----
(311) (196) (189)
==== ==== ====
Finance leases are capitalized under property, plant and equipment in
compliance with IAS 17 (Leases). The interest portion of the lease payments,
amounting to E13 million in 2000, is reflected in interest expense.
Interest expense incurred to finance the construction phase of major
investment projects is not included here. Such interest expense, amounting in
2000 to E28 million (1999: E32 million; 1998: E53 million), is capitalized as
part of the cost of acquisition or construction of the property, plant or
equipment concerned, based on an average capitalization rate of 5 percent.
[10] OTHER NON-OPERATING EXPENSE -- NET
This item comprises:
2000 1999 1998
---- ---- ----
(E MILLION)
Interest portion of interest-bearing provisions............. (272) (275) (309)
Exchange loss -- net........................................ (21) (27) (16)
Write-downs of investments and marketable securities........ 0 0 (3)
Miscellaneous non-operating expenses........................ (18) (13) (12)
Miscellaneous non-operating income.......................... 42 21 81
---- ---- ----
(269) (294) (259)
==== ==== ====
The net exchange loss pertaining to non-operating activities also reflects
hedging costs of E38 million (1999: E19 million; 1998: E18 million).
Miscellaneous non-operating income includes E18 million (1999: E9 million;
1998: E12 million) in gains from the sale of marketable securities.
[11] INCOME TAXES
This item comprises the income taxes paid or accrued in the individual
countries, plus deferred taxes. Deferred taxes arise from temporary differences
between the carrying amounts of assets or liabilities in the accounting and tax
balance sheets, from consolidation measures and from realizable loss
carry-forwards. Deferred taxes are calculated at the rates which -- on the basis
of the statutory regulations in force, or already enacted in relation to future
periods, as of the closing date -- are expected to apply in the individual
countries at the time of realization.
F-25
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)
The breakdown of income before income taxes and income taxes by origin is
as follows:
2000 1999 1998
----- ----- -----
(E MILLION)
Income before income taxes
-- Germany.................................................. 1,482 2,087 1,527
-- Other countries.......................................... 1,508 749 1,201
----- ----- -----
2,990 2,836 2,728
Income taxes paid or accrued
-- Germany.................................................. 442 71 444
-- Other countries.......................................... 321 429 419
----- ----- -----
763 500 863
Deferred taxes
-- from temporary differences............................... 383 305 245
-- from loss carry-forwards................................. 2 13 5
385 318 250
----- ----- -----
1,148 818 1,113
===== ===== =====
A valuation allowance is recognized against tax loss carry-forwards when it
is not sufficiently certain that this income will be realized.
Changes in tax rates diminished deferred tax expense for 2000 by E21
million; in 1999, such changes increased it by E41 million; in 1998, such
changes diminished it by E1 million.
Deferred taxes result primarily from temporary differences between the
accounting and tax balance sheets of individual consolidated companies with
regard to the recognition and/or valuation of certain items. The deferred taxes
are computed according to IAS 12 (Income Taxes).
The deferred taxes are allocable to the various balance sheet items as
follows:
DEC. 31, 2000 DEC. 31, 1999
---------------------------- ----------------------------
DEFERRED TAX DEFERRED TAX DEFERRED TAX DEFERRED TAX
ASSETS LIABILITIES ASSETS LIABILITIES
------------ ------------ ------------ ------------
(E MILLION)
Intangible assets........................ 87 72 101 28
Property, plant and equipment............ 68 1,745 18 1,409
Investments.............................. 2 79 10 40
Inventories.............................. 298 86 266 92
Receivables.............................. 116 51 76 28
Other current assets..................... 51 132 5 74
Pension provisions....................... 327 202 265 131
Other provisions......................... 144 46 210 26
Other liabilities........................ 163 40 150 32
Loss carry-forwards...................... 82 -- 76 --
Valuation allowances..................... (67) -- (67) --
Loss carry-forwards...................... 82 -- 76 --
----- ----- ----- -----
1,271 2,453 1,110 1,860
Set-off*................................. (858) (858) (703) (703)
----- ----- ----- -----
413 1,595 407 1,157
===== ===== ===== =====
F-26
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)
---------------
* According to IAS 12 (Income Taxes), deferred tax assets and deferred tax
liabilities should, under certain conditions, be offset if they relate to
income taxes levied by the same taxation authority.
Changes in companies consolidated in 2000 account for E122 million in
deferred tax assets and E167 million in deferred tax liabilities.
Utilization of tax loss carry-forwards from previous years diminished the
amount of income taxes paid or accrued in 2000 by E7 million (1999: E9 million;
1998: E9 million) and increased deferred tax expense by E2 million (1999: E13
million; 1998: E5 million).
The gross values of net operating loss carry forwards by expiry date are as
follows:
DEC. 31, 2000 DEC. 31, 1999
------------- -------------
(E MILLION)
One year.................................................... 3 --
Two years................................................... 20 3
Three years................................................. 11 20
Four years.................................................. 22 11
Five years & and thereafter................................. 196 174
--- ---
252 208
=== ===
In 2000 E48 million (1999: E27 million) of this amount was used as the
basis for computing deferred taxes. As a result, deferred taxes of E15 million
(1999: E9 million) have been recorded.
Deferred tax liabilities have not been recognized for temporary differences
associated with investments in foreign subsidiaries of E2,887 million (1999:
E2,617 million) as Bayer has determined that the profits concerned will not be
distributed in the foreseeable future.
If deferred taxes were recognized for these temporary differences, the
liability would be based on the respective withholding tax rates only. For most
countries, double taxation agreements ensure that any withholding taxes paid can
be deducted from the tax base or the tax to be paid in Germany.
The actual income tax expense of E1,148 million for 2000 (1999: E818
million; 1998: E1,113 million) is E31 million less (1999: E394 million less;
1998: E22 million more) than the E1,179 million (1999: E1,212 million; 1998:
E1,091 million) that would result from applying to the pre-tax income of the
Group a tax rate of 39.5 percent (1999: 42.7 percent; 1998: 40.8 percent), which
is the weighted average of the theoretical tax rates for the individual Group
companies. The reconciliation of theoretical to actual income tax expense for
the Group is as follows:
2000 1999 1998
--------------- --------------- ---------------
E MILLION % E MILLION % E MILLION %
--------- --- --------- --- --------- ---
Theoretical income tax expense................. 1,179 100 1,212 100 1,091 100
Lower taxes due to tax-free income............. (151) (13) (434) (36) (69) (6)
Higher taxes due to non-tax-deductible
expenses..................................... 93 8 90 7 155 14
Other tax effects.............................. 27 2 (50) (4) (64) (6)
----- --- ----- --- ----- ---
ACTUAL INCOME TAX EXPENSE...................... 1,148 97 818 67 1,113 102
----- --- ----- --- ----- ---
Effective tax rate in %........................ 38.4 28.8 40.8
----- ----- -----
The income tax expense for 2000 does not include any prior-period items.
The 1999 figure includes E1 million in prior-period income; 1998: E2 million.
F-27
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)
[12] OTHER TAXES
Other taxes amounting to E229 million (1999: E189 million; 1998: E179
million) are included in the cost of goods sold, selling expenses, research and
development expenses or general administration expenses. These are mainly
property-related taxes.
[13] MINORITY STOCKHOLDERS' INTEREST
Minority interest in income amounts to E29 million (1999: E16 million;
1998: E7 million), and minority interest in losses to E3 million (1999: E0
million; 1998: E6 million), yielding net minority interest of E26 million (1999:
E16 million; 1998: E1 million) in Group income after taxes.
[14] EARNINGS PER SHARE
Earnings per share are determined according to IAS 33 (Earnings Per Share)
by dividing the net income by the average number of shares.
In 2000, as in 1999 and 1998, the number of shares remained constant at
730,341,920. Earnings per share were E2.49 (1999: E2.74; 1998: E2.21).
There were no subscription rights outstanding in 2000, 1999 or 1998, and
therefore no dilutive potential shares.
[15] COST OF MATERIALS
The total cost of materials for continuing operations amounted to E10,284
million (1999: E7,374 million; 1998: E7,273 million), comprising E9,763 million
(1999: E6,824 million; 1998: E6,741 million) in expenses for raw materials,
supplies and goods purchased for resale, and E670 million (1999: E550 million;
1998: E532 million) in expenses for purchased services.
The cost of materials for the discontinuing operations was E775 million
(1999: E1,768 million; 1998: E2,264 million). While Erdolchemie incurred costs
of E545 million (1999: E371 million; 1998: E312 million) entirely for raw
materials and supplies, DyStar accounted for E104 million (1999: E125 million;
1998: E187 million), including E1 million (1999: E1 million; 1998: E1 million)
for purchased services. Fibers accounted for E126 million (1999: E92 million;
1998: E102 million), including E23 million (1999: E20 million; 1998: E24
million) for purchased services. In 1999 Agfa accounted for E1,180 million
(1998: E1,663 million), which included E14 million (1998: E46 million) for
purchased services.
[16] PERSONNEL EXPENSES
The breakdown of personnel expenses is as follows:
DISCONTINUING OPERATIONS
CONTINUING ---------------------------------------------------------------------------
OPERATIONS FIBERS EC DYSTAR AGFA
--------------------- ------------------ ------------------ ------------------ ------------
2000 1999 1998 2000 1999 1998 2000 1999 1998 2000 1999 1998 1999 1998
----- ----- ----- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- -----
Wages and salaries.......... 5,998 5,374 5,151 54 54 55 55 56 56 67 64 62 417 1,038
Social expenses............. 1,520 1,377 1,356 13 12 12 15 22 17 13 12 12 161 347
of which pension expenses... [405] [354] [348] [3] [1] [2] [5] [12] [7] [3] [3] [3] [76] [141]
----- ----- ----- --- --- --- --- --- --- --- --- --- --- -----
7,518 6,751 6,507 67 66 67 70 78 73 80 76 74 578 1,385
===== ===== ===== === === === === === === === === === === =====
F-28
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)
[17] NUMBER OF EMPLOYEES
The average number of employees in continuing operations, classified by
corporate functions, was as follows:
2000 1999 1998
------- ------- -------
Marketing................................................... 34,355 34,474 33,142
Technology.................................................. 61,403 61,117 61,476
Research.................................................... 11,535 12,015 11,622
Administration.............................................. 9,996 9,905 9.920
------- ------- -------
117,289 117,511 116,160
------- ------- -------
Of which trainees........................................... 2,759 2,618 2,872
======= ======= =======
The employees of joint ventures are included in the above figures in
proportion to Bayer's interests in the respective companies. The total number of
people employed by our joint ventures in 2000 was 1,103 (1999: 1,121; 1998:
1,097).
The figures in the above table do not include people employed in
discontinuing operations. In 2000, DyStar employed on average 3,788 people
(1999: 3,216; 1998: 3,106), Erdolchemie on average 2,131 people (1999: 2,247;
1998: 2,220), while Fibers employed on average 1,643 people (1999: 1,645; 1998:
1,690).
NOTES TO THE BALANCE SHEETS
[18] INTANGIBLE ASSETS
Acquired intangible assets other than goodwill are recognized at cost and
amortized over a period of 4 to 15 years, depending on their estimated useful
lives. Write-downs are made for any declines in value that are expected to be
permanent. Assets are written back if the reasons for previous years'
write-downs no longer apply.
Goodwill is capitalized in accordance with IAS 22 and amortized on a
straight-line basis over a maximum estimated useful life of 20 years. The value
of goodwill is reassessed regularly based on impairment indicators and written
down if necessary. Since the adoption of IAS 36, such write-downs are measured
by comparison to the discounted cash flows expected to be generated by the
assets to which the goodwill can be ascribed. In 1999 before the adoption of IAS
36, the group recorded a write-down of goodwill of E68 million within the
Plastics & Rubber segment. This write down, which was measured by comparison to
expected cash flows, discounted at 6%, was indicated by changes in production
methods that made acquired production technology obsolete.
The group capitalizes certain development costs relating to the application
development stage of internally-developed software. These costs are amortized
over their useful life from the date they are placed in service.
F-29
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)
Changes in intangible assets in 2000 were as follows:
ACQUIRED
CONCESSIONS,
INDUSTRIAL PROPERTY
RIGHTS, SIMILAR
RIGHTS AND ASSETS,
AND LICENSES ACQUIRED ADVANCE
THEREUNDER GOODWILL PAYMENTS TOTAL
------------------- -------- -------- -----
(E MILLION)
Gross carrying amounts, Dec. 31, 1999........ 1,903 944 84 2,931
Exchange differences......................... 126 22 6 154
Changes in companies consolidated............ 5 36 -- 41
Acquisitions................................. 2,268 301 -- 2,569
Capital expenditures......................... 293 5 56 354
Retirements.................................. (95) (28) -- (123)
Transfers.................................... 66 9 (75) --
----- ----- -- -----
GROSS CARRYING AMOUNTS, DEC. 31, 2000........ 4,566 1,289 71 5,926
----- ----- -- -----
Accumulated amortization and write-downs,
Dec. 31, 1999.............................. 479 239 -- 718
Exchange differences......................... 39 5 -- 44
Changes in companies consolidated............ 1 (3) -- (2)
Amortization and write-downs in 2000......... 344 98 -- 442
- of which write-downs....................... [--] [1] [--] [1]
Retirements.................................. (91) (28) -- (119)
Transfers.................................... -- -- -- --
Accumulated amortization and write-downs,
Dec. 31, 2000.............................. 772 311 -- 1,083
----- ----- -- -----
NET CARRYING AMOUNTS, DEC. 31, 2000.......... 3,794 978 71 4,843
----- ----- -- -----
Net carrying amounts, Dec. 31, 1999.......... 1,424 705 84 2,213
===== ===== == =====
The exchange differences are the differences between the carrying amounts
at the beginning and the end of the year that result from translating foreign
companies' figures at the respective different exchange rates and changes in
their assets during the year at the average rate for the year.
[19] PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is carried at the cost of acquisition or
construction. Assets subject to depletion are depreciated over their estimated
useful lives. Write-downs are made for any declines in value that are expected
to be permanent, aside from those reflected in depreciation. Assets are written
back if the reasons for previous years' write-downs no longer apply.
The cost of construction of self-constructed property, plant and equipment
comprises the direct cost of materials, direct manufacturing expenses,
appropriate allocations of material and manufacturing overheads, and an
appropriate share of the depreciation and write-downs of assets used in
construction. It includes the shares of expenses for company pension plans and
discretionary employee benefits that are attributable to construction.
If the construction phase of property, plant or equipment extends over a
long period, the interest incurred on borrowed capital up to the date of
completion is capitalized as part of the cost of acquisition or construction.
Expenses for the repair of property, plant and equipment are normally
charged against income, but they are capitalized if they result in an
enlargement or substantial improvement of the respective assets.
F-30
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)
Property, plant and equipment is depreciated by the straight-line method,
except where the declining-balance method is more appropriate in light of the
actual utilization period.
When assets are retired, sold, or abandoned, the difference between the net
proceeds and the net book value of the asset is recognized as a gain or loss and
is presented in other operating income or expense in the income statement.
The following depreciation periods, based on the estimated useful lives of
the respective assets, are applied throughout the Group:
Buildings.................................................. 20 to 50 years
Outdoor infrastructure..................................... 10 to 20 years
Plant installations........................................ 6 to 20 years
Machinery and apparatus.................................... 6 to 12 years
Laboratory and research facilities......................... 3 to 5 years
Storage tanks and pipelines................................ 10 to 20 years
Vehicles................................................... 4 to 8 years
Computer equipment......................................... 3 to 5 years
Furniture and fixtures..................................... 4 to 10 years
In accordance with IAS 17 (Leases), assets leased on terms equivalent to
financing a purchase by a long-term loan (finance leases) are capitalized at the
lower of their fair value or the present value of the minimum lease payments.
The leased assets are depreciated over their estimated useful life except where
subsequent transfer of title is uncertain, in which case they are depreciated
over their estimated useful life or the respective lease term, whichever is
shorter. The future lease payments are recorded as financial obligations.
F-31
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)
Changes in property, plant and equipment in 2000 were as follows:
CONSTRUCTION IN
PROGRESS AND
FURNITURE, ADVANCE
MACHINERY AND FIXTURES AND PAYMENTS TO
LAND AND TECHNICAL OTHER VENDORS AND
BUILDINGS EQUIPMENT EQUIPMENT CONTRACTORS TOTAL
--------- ------------- ------------ --------------- ------
(E MILLION)
Gross carrying amounts, Dec. 31, 1999... 7,529 17,860 2,360 1,458 29,207
Exchange differences.................... 129 399 28 49 605
Changes in companies consolidated....... (32) 98 1 -- 67
Acquisitions............................ 57 207 10 317 591
Capital expenditures.................... 115 522 295 1,361 2,293
Retirements............................. (142) (589) (276) (17) (1,024)
Transfers............................... 322 1,489 95 (1,906) --
----- ------ ----- ------ ------
GROSS CARRYING AMOUNTS, DEC. 31, 2000... 7,978 19,986 2,513 1,262 31,739
----- ------ ----- ------ ------
Accumulated depreciation and
write-downs, Dec. 31, 1999............ 3,867 11,742 1,605 7 17,221
Exchange differences.................... 42 122 17 -- 181
Changes in companies consolidated....... (18) 77 1 -- 60
Depreciation and write-downs in 2000.... 238 1,172 283 -- 1,693
- of which write-downs................. [5] [11] [--] [--] [16]
Retirements............................. (37) (530) (194) -- (761)
Transfers............................... -- -- -- -- --
ACCUMULATED DEPRECIATION AND
WRITE-DOWNS, DEC. 31, 2000............ 4,092 12,583 1,712 7 18,394
----- ------ ----- ------ ------
NET CARRYING AMOUNTS, DEC. 31, 2000..... 3,886 7,403 801 1,255 13,345
----- ------ ----- ------ ------
Net carrying amounts, Dec. 31, 1999..... 3,662 6,118 755 1,451 11,986
===== ====== ===== ====== ======
The exchange differences are as defined for intangible assets.
Capitalized property, plant and equipment includes assets with a total net
value of E199 million (1999: E188 million) held under finance leases. The gross
carrying amounts of these assets total E277 million (1999: E245 million). These
assets are mainly furniture and fixtures where the present value of the minimum
lease payments covers substantially all of the cost of acquisition, or buildings
where title passes to the lessee on expiration of the lease.
For property leased to other parties and accounted for as an operating
lease, the capitalized property includes assets with a total net book value of
E247 million (1999: E223 million) and gross carrying amounts of E717 million
(1999: E652 million).
[20] INVESTMENTS
Investments in non-consolidated subsidiaries, other affiliated companies
and other securities are carried individually at cost. Write-downs are made for
any declines in value that are expected to be permanent. Investments are written
back if the reasons for previous years' write-downs no longer apply.
The cost of acquisition of investments in companies included at equity is
adjusted annually in line with any changes in these companies' total
stockholders' equity.
F-32
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)
In the first-time consolidation, differences between the cost of
acquisition and the underlying equities at the dates of acquisition of the
investments are allocated to assets or liabilities by the same method applied to
fully consolidated subsidiaries.
Loans receivable that are interest-free or bear low rates of interest are
carried at present value; other loans receivable are carried at nominal value.
Changes in investments in 2000 were as follows:
INVESTMENTS IN OTHER
AFFILIATED COMPANIES LOANS TO
---------------------- OTHER
INVESTMENTS IN LOANS TO ASSOCIATED OTHER AFFILIATED OTHER OTHER
SUBSIDIARIES SUBSIDIARIES COMPANIES COMPANIES COMPANIES SECURITIES LOANS TOTAL
-------------- ------------ ---------- --------- ---------- ---------- ----- -----
(E MILLION)
Gross carrying amounts, Dec.
31, 1999..................... 186 7 820 147 10 121 239 1,530
Exchange differences........... 5 -- (1) 2 (1) 6 (2) 9
Changes in companies
consolidated................. (47) (3) (39) (10) -- 1 (10) (108)
Acquisitions................... 69 2 563 5 -- -- -- 639
Other additions................ 21 -- 147 13 5 35 51 272
Retirements.................... (2) (3) (21) -- -- (13) (35) (74)
Transfers...................... -- -- -- -- -- -- -- --
---- ---- ----- ---- ---- ---- ---- -----
GROSS CARRYING AMOUNTS, DEC.
31, 2000..................... 232 3 1,469 157 14 150 243 2,268
Accumulated write-downs, Dec.
31, 1999..................... 22 -- 77 -- -- 1 15 115
Exchange differences........... -- -- -- -- -- -- -- --
Changes in companies
consolidated................. (8) -- 2 -- -- -- -- (6)
Write-downs in 2000............ -- -- 4 -- -- -- 3 7
Write-backs.................... -- -- -- -- -- -- (3) (3)
Retirements.................... -- -- -- -- -- -- (1) (1)
Transfers...................... -- -- -- -- -- -- -- --
ACCUMULATED WRITE-DOWNS, DEC.
31, 2000..................... 14 -- 83 -- -- 1 14 112
NET CARRYING AMOUNTS, DEC. 31,
2000......................... 218 3 1,386 157 14 149 229 2,156
---- ---- ----- ---- ---- ---- ---- -----
Net carrying amounts, Dec. 31,
1999......................... 164 7 743 147 10 120 224 1,415
==== ==== ===== ==== ==== ==== ==== =====
The exchange differences are as defined for intangible assets.
The investments in associated companies comprise mainly the 30 percent
interest in Agfa-Gevaert N.V., Belgium. The additions to investments in
associated companies relate mainly to the joint venture with Lyondell. The
difference between the equity interest in the underlying net assets and the
carrying value of the Group's associates is E91 million and E93 million as of
December 31, 2000 and 1999, respectively, and primarily relates to goodwill. The
fair value of other securities included in investments exceeds their carrying
amount by E4 million (1999: E7 million).
[21] INVENTORIES
Raw materials, supplies, and goods purchased for resale are valued at the
cost of acquisition; work in process and finished goods are valued at the cost
of production. If the inventory values are lower at the closing date because of
a drop in market prices, for example, the lower amounts are shown. Of the E6,095
million (1999: E4,992 million) in inventories carried as of December 31, 2000,
E431 million (1999: E439 million) represents those included at their net
realizable value.
Inventories are normally valued by the weighted-average method.
The cost of production comprises the direct cost of materials, direct
manufacturing expenses, appropriate allocations of material and manufacturing
overheads, and an appropriate share of the depreciation and write-downs of
assets used for production.
F-33
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)
It also includes the shares of expenses for company pension plans and
discretionary employee benefits that are attributable to production.
Administrative costs are included where they are attributable to production.
Work in process and finished goods are grouped together in light of the
production sequences characteristic of the chemical industry.
Inventories are comprised as follows:
DEC. 31, 2000 DEC. 31, 1999
------------- -------------
(E MILLION)
Raw materials and supplies.................................. 1,041 978
Work in process, finished goods and goods purchased for
resale.................................................... 5,046 4,006
Advance payments............................................ 8 8
----- -----
6,095 4,992
===== =====
Changes in inventory reserves are as follows:
DEC. 31, 2000 DEC. 31, 1999
------------- -------------
(E MILLION)
Balance at the beginning of the year........................ (248) (328)
Additions charged to expense................................ (218) (242)
Exchange differences........................................ (9) (20)
Changes to consolidated companies........................... -- 34
Deductions due to utilization............................... 234 308
----- -----
BALANCE AT THE END OF THE YEAR.............................. (241) (248)
===== =====
[22] TRADE ACCOUNTS RECEIVABLE
Trade accounts receivable are stated at nominal value, less write-downs of
E204 million (1999: E173 million) for amounts unlikely to be recovered.
Trade accounts receivable as of December 31, 2000 include E6,235 million
(1999: E5,325 million) maturing within one year and E8 million (1999: E8
million) maturing after one year. Of the total, E11 million (1999: E25 million)
is receivable from subsidiaries, E87 million (1999: E77 million) from other
affiliated companies and E6,146 million (1999: E5,231 million) from other
customers.
[23] OTHER RECEIVABLES AND OTHER ASSETS
Other receivables and other assets are stated at nominal value, less any
necessary write-downs of E4 million (1999: E11 million) for amounts unlikely to
be recovered.
DEC. 31, 2000 DEC. 31, 1999
------------- -------------
(E MILLION)
Other receivables........................................... 1,346 839
Claims for tax refunds...................................... 662 451
Short-term loans-other...................................... 153 64
Leases payments receivable.................................. 96 93
Short-term loans............................................ 87 65
Payroll-receivable.......................................... 47 30
Interest receivable on loans................................ 23 34
----- -----
2,414 1,576
===== =====
F-34
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)
Total other receivables and other assets include E149 million (1999: E85
million) pertaining to subsidiaries and E44 million (1999: E50 million)
pertaining to other affiliated companies.
Total other receivables and other assets in the amount of E442 million
(1999: E297 million) mature in more than one year; of this amount, E31 million
(1999: E32 million) pertains to subsidiaries.
Changes in provision for doubtful receivables are as follows:
DEC. 31, 2000 DEC. 31, 1999
------------- -------------
(E MILLION)
Balance at the beginning of the year........................ (173) (240)
Additions charged to expense................................ (42) (60)
Exchange differences........................................ (5) (18)
Changes to consolidated companies........................... -- 81
Deductions due to utilization............................... 16 64
----- -----
BALANCE AT THE END OF THE YEAR.............................. (204) (173)
===== =====
Lease agreements in which the other party, as lessee, is to be regarded as
the economic owner of the leased assets (finance leases) give rise to accounts
receivable in the amount of the discounted future lease payments. These
receivables amount to E96 million (1999: E93 million), while the interest
portion pertaining to future years amounts to E23 million (1999: E29 million).
The lease payments associated with finance leases are due as follows:
DEC. 31, 2000
-------------
(E MILLION)
Fiscal year
2001....................................................... 25
2002....................................................... 20
2003....................................................... 16
2004....................................................... 13
2005....................................................... 10
After 2005................................................. 35
Total minimum lease payments............................... 119
Of which interest portion.................................. (23)
---
96
Current portion............................................ 21
---
Long-term portion.......................................... 75
===
[24] LIQUID ASSETS
DEC. 31, 2000 DEC. 31, 1999
------------- -------------
(E MILLION)
Marketable securities and other instruments................. 213 328
Cash and cash equivalents................................... 491 2.812
--- -----
704 3,140
=== =====
Marketable securities are shown at the lower of cost of acquisition or fair
value as of the closing date. The fair values of marketable securities and other
instruments as of December 31, 2000 amount to E247 million (1999: E376 million).
The Company considers all highly liquid investments purchased with original
maturities of three months or less to be cash equivalents.
F-35
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)
[25] DEFERRED CHARGES
Deferred charges as of December 31, 2000 include unamortized debt discounts
of E17 million (1999: E22 million). The debt discounts are amortized annually
over the lives of the underlying liabilities.
Total deferred charges include E179 million that is expected to be used up
in 2001.
[26] STOCKHOLDERS' EQUITY
The capital stock of Bayer AG amounts to E1,870 million and is divided into
730,341,920 no-par bearer shares of a single class.
Authorized capital totaling E256 million was approved by the Annual
Stockholders' Meeting on April 30, 1997. It expires on April 30, 2002. The
authorized capital can be used to increase the capital stock through the
issuance of new shares against cash contributions.
Conditional capital of E83 million existed at December 31, 2000. This
capital may only be utilized to the extent necessary to issue the requisite
number of shares as and when conversion or subscription rights are exercised by
the holders of convertible bonds or of warrants conferring subscription rights,
respectively, that may be issued by Bayer AG or a wholly owned direct or
indirect subsidiary through April 29, 2004.
Capital reserves include the paid-in surplus from the issuance of shares
and subscription rights by Bayer AG.
The retained earnings contain prior years' undistributed income of
companies included in the consolidation.
The changes in the various components of stockholders' equity during 2000,
1999 and 1998 are shown in the statements of changes in stockholders' equity.
The dividend per share amount for 2000, 1999 and 1998 were E1.40, E1.30 and
E1.02, respectively.
[27] MINORITY INTEREST
Minority interest mainly comprises third parties' shares in the equity of
the consolidated subsidiaries Bayer Yakuhin Ltd., Japan; Sumitomo Bayer Urethane
Co., Ltd., Japan; the Makroform GmbH group; Bayer (India) Ltd.; and Bayer ABS
Ltd., India.
[28] PROVISIONS FOR PENSIONS AND OTHER POST-EMPLOYMENT BENEFITS
Group companies provide retirement benefits for most of their employees,
either directly or by contributing to independently administered funds. The way
these benefits are provided varies according to the legal, fiscal and economic
conditions of each country, the benefits generally being based on the employees'
remuneration and years of service. The obligations relate both to existing
retirees' pensions and to pension entitlements of future retirees.
Group companies provide retirement benefits under defined contribution
and/or defined benefit plans.
In the case of DEFINED CONTRIBUTION PLANS, the company pays contributions
to publicly or privately administered pension insurance plans on a mandatory,
contractual or voluntary basis. Once the contributions have been paid, the
company has no further payment obligations. The regular contributions constitute
net periodic costs for the year in which they are due and as such are included
in the cost of goods sold, selling expenses, research and development expenses
or general administration expenses, and thus in the operating result. In 2000,
these expenses totaled E437 million (1999: E491 million).
F-36
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)
All other retirement benefit systems are defined benefit plans, which may
be either unfunded, i.e. financed by provisions (accruals), or funded, i.e.
financed through pension funds. In 2000, expenses for defined benefit plans
amounted to E326 million (1999: E359 million). These net periodic costs --
except for the interest portion -- are included in the cost of goods sold,
selling expenses, research and development expenses, general administration
expenses or other operating income. For the most important defined benefit plans
they are comprised as follows:
DEC. 31, 1999 DEC. 31, 2000
------------- -------------
(E MILLION)
Service cost................................................ 210 200
Past service cost........................................... 1 9
Interest cost............................................... 589 543
Return on plan assets....................................... (526) (470)
Settlement of Agfa.......................................... -- (32)
Amortization of actuarial amounts........................... (14) 41
------ ------
260 291
====== ======
The pension provisions for defined benefit plans are calculated in
accordance with IAS 19 (Employee Benefits -- revised 1998) using the projected
unit credit method. The future benefit obligations are valued by actuarial
methods on the basis of appropriate assessment of the relevant parameters.
Benefits expected to be payable after retirement are spread over each employee's
entire period of employment, allowing for future changes in remuneration. The
legally independent fund "Bayer Pensionskasse VVaG" (Bayer Pensionskasse) is a
private insurance company and therefore subject to German law on the Supervision
of Private Insurance Companies. Bayer guarantees the commitments of the Bayer
Pensionskasse. For IAS and U.S. GAAP purposes Bayer Pensionskasse is classified
as a defined benefit plan.
All defined benefit plans necessitate actuarial computations and
valuations. These are based not only on life expectancy but also on the
following parameters, which vary from country to country according to economic
conditions:
PARAMETERS
--------------------------------
DEC. 31, 2000 DEC. 31, 1999
-------------- --------------
Discount rate............................................... 6.5%-7.0% 6.5%-6.75%
Projected future remuneration increases..................... 3.0%-4.5% 3.0%-4.5%
Projected future pension increases.......................... 2.0%-4.5% 2.0%-4.5%
Projected employee turnover (according to age and gender)... Empirical data Empirical data
Projected return on plan assets............................. 6.5%-8.5% 6.5%-8.5%
The status of unfunded and funded defined benefit obligation, computed
using the appropriate parameters, is as follows:
DEC. 31, 2000 DEC. 31, 1999
------------- -------------
(E MILLION)
Defined benefit obligation.................................. (9,535) (9,102)
Fair value of plan assets................................... 7,847 7,514
FUNDED STATUS............................................... (1,688) (1,588)
Unrecognized transition liability (asset)................... (11) (17)
Unrecognized actuarial (gains) losses....................... (203) (325)
Asset limitation due to uncertainty of obtaining future
benefits.................................................. (1,249) (1,261)
------ ------
NET RECOGNIZED LIABILITY.................................... (3,151) (3,191)
====== ======
F-37
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)
The adjustments, as yet unrecognized in the income statement, represent the
difference between the defined benefit obligation -- after deducting the fair
value of plan assets -- and the net liability recognized in the balance sheet.
They arise mainly from actuarial gains or losses caused by differences between
actual and previously assumed trends in employee turnover and remuneration.
Pension assets in excess of the obligation are recorded in other receivables and
assets. In accordance with IAS 19 (Employee Benefits), these amounts are
reflected in the balance sheet and will be recognized in the income statement
over the expected remaining working lives of existing employees (currently 15
years in Germany and 14 years in the USA).
The net liability under these defined benefit plans changed as follows:
DEC. 31, 2000 DEC. 31, 1999
------------- -------------
Net liability recognized at the beginning of the year....... (3,191) (3,615)
Pension benefit (cost) income............................... (260) (291)
Employer contributions...................................... 255 255
Divestitures................................................ 20 281
Change in asset limitation.................................. 12 168
Change in companies consolidated............................ 11 10
Change in currency translation.............................. 2 1
------ ------
NET LIABILITY RECOGNIZED AT THE END OF THE YEAR............. (3,151) (3,191)
====== ======
Funds and benefit obligations are valued on a regular basis at least every
three years. For all major funds, comprehensive actuarial valuations are
performed annually.
Provisions are also set up under this item for the obligations of Group
companies to provide health care. For health care costs, the valuation is based
on the assumption that they will increase at an annual rate of 5 percent in the
long term. Early retirement and certain other benefits to their retirees are
also included, since these obligations are similar in character to pension
obligations. Like pension obligations, they are valued in line with IAS 19. In
2000 such obligations amounted to E637 million (1999: E593 million). The
resulting expenses for 2000 amounted to E214 million (1999: E165 million),
comprising E192 million (1999: E176 million) for service cost, E52 million
(1999: E46 million) for interest cost, E30 million (1999: E23 million) for
expected return on plan assets, a settlement gain on the Agfa divestiture of E32
million in 1999 and an immaterial amount of actuarial gains.
[29] OTHER PROVISIONS
Other provisions are valued in accordance with IAS 19 (Employee benefits)
or with IAS 37 (Provisions, Contingent Liabilities and Contingent Assets), as
appropriate. Generally, the best estimate of the extent of the related
obligations is used. Long term-portion of provisions are discounted to their
present value.
The Group sets up and maintains adequate reserves for probable and on-going
litigation cases when a reasonable estimate can be made. Reserves include all
estimated legal fees and costs of settlement. The amounts reserved are based
upon written notification and reasonable settlement cost estimates provided by
the Group's attorneys. Periodically, but at least quarterly, the reserves are
reviewed and updated with the Group's attorneys.
F-38
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)
DEC. 31, 2000 DEC. 31, 1999
------------------- -------------------
MATURING IN MATURING IN
TOTAL 2001 TOTAL 2000
----- ----------- ----- -----------
(E MILLION)
Provisions for taxes................................... 537 370 493 254
Provisions for personnel commitments................... 1,044 555 947 456
Provisions for environmental remediation............... 230 12 246 32
Provisions for trade-related commitments............... 411 397 254 254
Miscellaneous provisions............................... 687 367 596 348
----- ----- ----- -----
2,909 1,701 2,536 1,344
===== ===== ===== =====
Personnel commitments mainly include annual bonus payments, service awards
and other personnel costs. Reimbursements from the German government under the
pre-retirement-part-time work program are recorded as income and as a receivable
when the Company has fulfilled the criteria to receive such reimbursements.
Trade related commitments mainly include rebates, as well as obligations
relating to services already received but not invoiced. The miscellaneous
provisions include E131 million for restructuring (1999: E106 million).
Changes in provisions were as follows:
CHANGES IN
JAN. 1, COMPANIES CURRENCY DEC. 31,
2000 CONSOLIDATED EFFECTS ALLOCATION UTILIZATION REVERSAL 2000
------- ------------ -------- ---------- ----------- -------- --------
(E MILLION)
Provisions for taxes...... 493 2 5 738 (688) (13) 537
Provisions for personnel
commitments............. 947 11 12 579 (480) (25) 1,044
Provisions for
environmental
remediation............. 246 10 5 51 (78) (4) 230
Provisions for
trade-related
commitments............. 254 1 8 564 (400) (16) 411
Miscellaneous
provisions.............. 596 10 15 558 (461) (31) 687
----- --- --- ----- ------ --- -----
2,536 34 45 2,490 (2,107) (89) 2,909
===== === === ===== ====== === =====
STOCK COMPENSATION PROGRAM
In 2000, the Group implemented a three-tier program consisting of a Stock
Option Program for the members of the Board of Management and senior executives,
a Stock Incentive Program for middle management and equivalent employees, and a
Stock Participation Program for junior management and other employees. To be
eligible for the stock option and stock incentive programs and for Module 1 of
the stock participation program, participants must place Bayer AG shares of
their own into a special deposit account. Participants do not pay an exercise
price for the shares they receive under these programs. Rather, they receive the
shares as bonus shares or, in the case of Module 2 of the stock participation
program, have the opportunity to purchase shares at a discounted price.
Stock Option Program
Members of the Board of Management and senior executives who wish to
participate in the stock option program must place Bayer AG shares of their own
in a special deposit account. We determine on an individual basis the maximum
number of shares each participant may deposit; the participant receives one
option right for each 20 shares deposited. These deposited shares are "locked
up"; the participant may not sell them during the following three years. After
the end of these three years, a two-year exercise period begins. During this
period, the participant may exercise the option rights if he or she has
fulfilled the performance criteria. Any unexercised
F-39
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)
option rights expire at the end of this two-year period. To determine whether
the participant is eligible to exercise option rights and, if so, the number of
shares received upon exercise, we apply three performance criteria. Two of these
measure the relative performance of the Bayer AG share; the third measures the
individual contribution of the participant. If the participant fails to meet
minimum standards under these criteria, the participant receives no shares under
the program. At December 31, 2000, there were no option rights exercisable and
there were no cancellations or expiry of options during fiscal 2000. No stock
options were granted during the year ended December 31, 2000.
German law generally requires specific shareholder approval for the
issuance of shares to members of a corporation's board of management. To the
extent that we are unable to issue shares under the stock option program to
participating members of our Board of Management at the time they are entitled
to exercise their option rights, therefore, the option rights would function as
share appreciation rights. Instead of shares, the participant would receive the
cash value of the shares to which the option rights would otherwise entitle him
or her, based on the trading price of the Bayer AG share at the time of
exercise.
Stock Incentive Program
Like the stock option program, our stock incentive program for middle
management requires participants to deposit Bayer AG shares in a special deposit
account. Each participant may deposit shares with a maximum aggregate value of
half his or her performance-related bonus for the preceding fiscal year. The
number of incentive shares the participant receives depends on the number of
Bayer AG shares deposited at the launch of the program as well as on the total
return of the Bayer AG share. Unlike the stock option program, the stock
incentive program does not "lock up" deposited shares. Participants may sell
their deposited shares during the term of the program, but any deposited shares
they sell are no longer counted in calculating the number of incentive shares
for subsequent distribution dates. The stock incentive program has a ten-year
term. There are three incentive share distribution dates during this period. On
these dates, the participant receives incentive shares as follows:
INCENTIVE SHARES RECEIVED
DISTRIBUTION DATE AT END OF (PER 10 DEPOSITED SHARES)
--------------------------- -------------------------
Second year.......................................... 2
Sixth year........................................... 4
Tenth year........................................... 4
Participants receive incentive shares only if the total return of the Bayer
AG share has outperformed the Dow Jones Euro Stoxx 50(SM) performance index on
the relevant distribution date, as calculated from the beginning of the program.
Stock Participation Program
Our stock participation program has two components, Module 1 and Module 2.
Employees not covered by the stock option program or stock incentive program may
generally participate in both Module 1 and Module 2.
The Module 1 program, like the stock incentive program, requires
participants to deposit Bayer AG shares in a special account. Each participant
may deposit shares with a maximum aggregate value of half his or her
performance-related bonus in the year they enter the program. As with the stock
incentive program, participants in the stock participation program may sell
their deposited Bayer AG shares during the term of the program; any shares they
sell are no longer counted in calculating the number of bonus shares on
subsequent distribution dates. Module 1 has a term of ten years and entitles the
participant to receive incentive shares on three distribution dates based on the
number of shares he or she has deposited. Unlike the stock incentive program,
Module 1 does not impose a share performance criterion. The participant receives
incentive shares as follows on the distribution dates:
F-40
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)
INCENTIVE SHARES RECEIVED
DISTRIBUTION DATE AT END OF (PER 10 DEPOSITED SHARES)
--------------------------- -------------------------
Second year.......................................... 1
Sixth year........................................... 2
Tenth year........................................... 2
In addition, under Module 2 each participant may purchase 10 Bayer AG
shares per year at a tax-free discount of DM 30.00 (E15.33) per share under the
then market price. For income tax reasons, the participants must hold these
shares for a minimum period of six years after purchase. Participants may not
include shares that they purchase under Module 2 among the shares they deposit
under Module 1.
The Group accounts for its share incentive programs under IAS as follows.
For the Stock Option Program, the Stock Incentive Program and Module 1 of the
Stock Participation Program, participants are entitled to receive shares of
Bayer AG stock bought in the capital market, subject to certain performance
criteria. The Group records compensation for potential share distributions when
there is a reasonable basis on which to estimate whether the performance
criteria will ultimately be met. Compensation expense is recorded at each
balance sheet date by estimating the number of rights outstanding multiplied by
the current quoted market price of Bayer AG shares. The Group recorded
compensation expense and personnel provision of E8 million during the year ended
December 31, 2000. For Module 2 of the Stock Participation Program, the Group
records compensation for the spread between the quoted market price of the Bayer
AG share and the discounted price paid by participants at the date of purchase.
During the year ended December 31, 2000, the Group sold 275,368 shares to
participants for a total price of E7.4 million, and recorded compensation
expense of E4.2 million under this program. The percentage discount to the price
of Bayer AG stock was 36.2%.
ENVIRONMENTAL PROVISIONS
The Group's business is subject to extensive laws and regulations in the
jurisdictions in which it does business and maintains properties. The Group's
compliance with environmental laws and regulations may require us to remove or
mitigate the effects of the disposal or release of chemical substances at
various sites. Under some of these laws and regulations, a current or previous
owner or operator of property may be held liable for the costs of removal or
remediation of hazardous substances on, under, or in its property, without
regard to whether the owner or operator knew of, or caused the presence of the
contaminants, and regardless of whether the practices that resulted in the
contamination were legal at the time they occurred. As many of our production
sites have an extended history of industrial use, it is impossible to predict
precisely what effect these laws and regulations will have on us in the future.
As is typical for companies involved in the chemical and related industries,
soil and groundwater contamination has occurred in the past at some of our
sites, and might occur or be discovered at other sites.
We are subject to claims brought by United States Federal or State
regulatory agencies and other private entities and individuals regarding the
cleanup of sites that we own, formerly owned or operated, where materials were
produced specifically for us by third party tollers or where waste from our
operations was treated, stored or disposed. In particular, we have a potential
liability under the U.S. Federal Comprehensive Environmental Response,
Compensation, and Liability Act, commonly known as "Superfund", the U.S.
Resource Conservation and Recovery Act and related state laws for investigation
and clean-up costs at a number of sites. At most of these sites, numerous
companies, including Bayer, have been notified that the U.S. Environmental
Protection Agency, state governing body or private individuals consider such
companies to be potentially responsible parties under Superfund or related laws.
At other sites, Bayer is the sole responsible party. The proceedings relating to
these sites are in various stages. The clean-up process at most sites is
ongoing.
As of December 31, 2000 and 1999, we had reserved E230 million and E246
million, respectively, for environmental matters. The material components of the
provisions for environmental remediation costs primarily relate to land
reclamation, rehabilitating contaminated sites, recultivating landfills, and
redevelopment and water protection measures. The provisions for environmental
remediation costs are recorded on a discounted basis when
F-41
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)
environmental assessments or clean-ups are probable, the costs can be reasonably
estimated and no future economic benefit is expected. These provisions represent
future remediation payments totaling E304 million which have been discounted at
risk free rates of 0.5 percent to 5.5 percent to a recorded liability of E230
million. These discounted amounts will be paid out over the period of
remediation for the application sites, which is expected to be 15 years. Costs
are estimated based on significant factors such as: experience to date regarding
corresponding environmental matters, environmental assessments, development of
current costs and new circumstances with major influences on expenses, our
understanding of current environmental laws and regulations, the number of other
potentially responsible parties at each site and the identity and financial
position of such parties in light of the joint and several nature of the
liability, and the remediation methods expected to be employed.
It is difficult to estimate the future costs of environmental protection
and remediation because of many uncertainties, including uncertainties about the
status of laws, regulations and information related to individual locations and
sites. Subject to the foregoing, but taking into consideration our experience to
date regarding environmental matters of a similar nature and facts currently
known, the Group believes that its reserves are adequate based upon currently
available information. However, given the inherent difficulties in estimating
liabilities in this area, it cannot be guaranteed that additional costs will not
be incurred beyond the amounts accrued. It is possible that final resolution of
these matters may require the Group to make expenditures in excess of
established reserves, over an extended period of time and in a range of amounts
that cannot be reasonably estimated. Management believes that such additional
amounts, if any, would not have a material adverse effect on the Group's
financial position, results of operations or cash flows.
LEGAL PROCEEDINGS
Bayer is involved in a number of legal proceedings. As a global company
active in a wide range of life sciences and chemical activities, we may in the
normal course of our business become involved in proceedings relating to such
matters as:
- product liability;
- patent validity and infringement disputes;
- tax assessments;
- competition and antitrust; and
- past waste disposal practices and release of chemicals into the
environment.
We cannot predict with certainty the outcome of any proceedings in which we
are or may become involved. An adverse decision in a lawsuit seeking damages
from us could result in a monetary award to the plaintiff and, to the extent not
covered by our insurance policies, could significantly harm our business or the
results of our operations. If we lose a case in which we seek to enforce our
patent rights, we could sustain a loss of future revenue as other manufacturers
begin to market products we developed.
In the remainder of this subsection, we describe what we believe to be the
most significant of the proceedings in which Bayer AG or its subsidiaries are
currently involved.
PATENT VALIDITY CHALLENGES AND INFRINGEMENT PROCEEDINGS; PATENT-RELATED
ANTITRUST ACTIONS
In the United States, Bayer AG and its U.S. subsidiary Bayer Corporation
are plaintiffs or co-plaintiffs in a number of patent infringement actions
against generic drug manufacturers. The lawsuits arose because these
manufacturers filed applications in the United States for regulatory approval of
generic versions of products containing the active ingredients ciprofloxacin or
nifedipine marketed by Bayer or its licensees. Some of these actions have, in
turn, given rise to lawsuits alleging that Bayer AG, Bayer Corporation and other
parties had violated federal and state antitrust and similar statutes.
F-42
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)
Generic drug manufacturers may receive approval to market formerly patented
products after all applicable patent protections have expired. A generic drug
manufacturer may, however, attempt to avoid a patent prior to its scheduled
expiry by attacking its validity or enforceability. In the United States, the
Federal Food, Drug, and Cosmetics Act enables generic manufacturers wishing to
market a bio-equivalent version of another manufacturer's product to seek
regulatory approval by filing an Abbreviated New Drug Application (ANDA). In its
ANDA, the applicant must state the basis on which it seeks to avoid any
applicable patents.
One basis for seeking approval is a claim that the applicant's product does
not infringe existing patent rights or that the patent is invalid or
unenforceable. This claim is commonly known as a "paragraph IV certification" or
"ANDA (IV)". Under the Act, the filing of a paragraph IV certification is deemed
an infringement of patent rights. The Act permits the holder of the patent
rights to file an infringement action against the ANDA applicant within 45 days
of receiving notice of the paragraph IV certification. If the holder of the
patent rights chooses not to file suit within this period, the FDA may approve
the ANDA immediately. The filing of a suit, however, stays final FDA approval of
the ANDA for a period of 30 months. The court may shorten or extend this period.
If the court rules that the applicant's product will not infringe the patent or
that the patent is invalid or unenforceable, the FDA may grant approval
immediately. If, on the other hand, the court rules that the product will
infringe the patent, the FDA may not grant final approval until the original
patent has expired.
Ciprofloxacin-related actions
Patent-related actions. In January 1997, Bayer AG and Bayer Corporation
settled a patent infringement suit against Barr Laboratories, Inc. This suit
arose when Barr filed an ANDA (IV) seeking regulatory approval of a generic form
of Bayer's ciprofloxacin anti-infective product, which we sell in the United
States under the trademark Cipro(R). Under the settlement agreement, Barr and
Rugby Laboratories Inc., another generic manufacturer that supported Barr during
the infringement suit, agreed to dismiss the litigation, acknowledging the
validity and enforceability of Bayer's patent rights, and we agreed to pay each
company $24.5 million. The agreement gave us the option, until our patent
expires in 2003, to supply Barr and Rugby's then parent company Hoechst Marion
Roussel Inc. with ciprofloxacin products which they could then market under a
license from Bayer using a single trade name, or else to make quarterly cash
payments. Since concluding the settlement agreement, we have opted to make
payments. Shortly after settling this suit, we applied to the U.S. Patent and
Trademark Office for a reexamination of our patent. The Patent and Trademark
Office reissued the patent in February 1999.
In April 1999, Danbury Pharmacal Inc., an affiliate of Schein
Pharmaceutical, Inc., filed an ANDA (IV) alleging that our ciprofloxacin patent
was invalid. Mylan Pharmaceuticals, Inc., an affiliate of Mylan Laboratories,
Inc., filed an ANDA (IV) challenging our ciprofloxacin patent in September 1999.
To protect and enforce our patent rights, Bayer AG together with Bayer
Corporation as licensee filed two lawsuits against Danbury Pharmacal and Schein
Pharmaceutical and one lawsuit against Mylan Pharmaceuticals and Mylan
Laboratories in 1999, and a second lawsuit against Mylan Pharmaceuticals and
Mylan Laboratories in 2000. Reddy Cheminor, Inc. intervened as an additional
defendant in the Danbury/Schein suits. All these suits were consolidated for
pre-trial proceedings and trial before the U.S. federal District Court for the
District of New Jersey.
In their responses, the defendants alleged the invalidity and
unenforceability of our reexamined patent on several grounds. They then moved
for summary judgment on the invalidity issue, and we filed a cross-motion for
partial summary judgment.
If we lost our patent protection for ciprofloxacin, or if the expiration of
the patent were accelerated to October 2002, we believe that we would forego
significant revenue. We cannot predict the appellate court's decision in these
cases with certainty. We intend to continue taking vigorous action to maintain
our ciprofloxacin patent rights in the United States through their normal expiry
in December 2003.
Antitrust actions. Bayer Corporation has been named as a defendant in 38
putative class action lawsuits, one individual lawsuit and one consumer
protection group law suite filed in a number of state and federal courts
F-43
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)
in the United States. Bayer AG has also been named as defendant in 20 of these
cases, including the individual lawsuit and the consumer protection group
lawsuit; it has been served with process in the individual lawsuit and twelve of
the putative class action lawsuits. In addition, Barr Laboratories, Aventis
S.A., Hoechst Marion Roussel, Inc., Rugby Laboratories, Inc. and Watson
Pharmaceuticals, Inc. have each been named as defendant in one or more of these
lawsuits. The plaintiffs in these suits allege that they are direct or indirect
purchasers of Cipro(R) who were damaged because Bayer's settlement of the Barr
ANDA (IV) litigation prevented generic manufacturers from selling a generic
version of Cipro(R). The plaintiffs allege that the defendants violated various
federal antitrust and state business, antitrust, unfair trade practices and
consumer protection statutes, and seek treble damages and injunctive relief.
These proceedings are at an early stage. None of the relevant courts has
certified a class. The Judicial Panel for Multidistrict Litigation, or MDL
Panel, transferred 35 of these cases to the U.S. federal District Court for the
Eastern District of New York for coordinated pre-trial proceedings.
The Barr settlement is also the subject of ongoing antitrust investigations
by the U.S. Federal Trade Commission and a number of state attorneys general.
Because these cases in the aggregate allege substantial unquantified
damages and also seek treble and punitive damages and penalties, it is possible
that the ultimate liability could be material to our results of operations and
cash flows. Although we cannot predict the outcome of these cases with
certainty, we believe that we have meritorious defenses to the antitrust
allegations and intend to defend them vigorously.
Nifedipine-related actions
Patent-related actions. Since 1997 Bayer AG and Bayer Corporation have
been involved in a number of patent infringement actions arising from ANDA (IV)s
filed by generic manufacturers seeking regulatory marketing approval for
allegedly bio-equivalent versions of our brand-name product Adalat(R) CC and
Pfizer, Inc.'s brand-name product Procardia(R) XL. The active ingredient of
these products is nifedipine. We own patent rights related to nifedipine drug
product formulations. In addition, because Pfizer markets Procardia(R) XL under
a license from Bayer, Bayer AG and Bayer Corporation became Pfizer's
co-plaintiffs in the infringement actions relating to that product.
In August 1997 Bayer AG and Bayer Corporation filed a patent infringement
suit against Elan Pharmaceutical Research Corp. and Elan's parent company, Elan
Corp., plc, arising from Elan's ANDA (IV) for a drug product containing
nifedipine. In March 1999, the U.S. federal District Court for the Northern
District of Georgia granted summary judgment against us, holding that the
particular generic product for which Elan sought marketing approval as described
in its ANDA would not violate our patent. In May 2000, the U.S. Court of Appeals
for the Federal Circuit affirmed this decision.
Bayer AG and Bayer Corporation have also filed four ANDA (IV) related
lawsuits against Biovail and two lawsuits arising from the commercial sale of
nifedipine products by Biovail and Teva. These suits are currently pending
before the U.S. federal District Court for the District of Puerto Rico. The
court has stayed these suits pending resolution of the appeals before the
Federal Circuit.
Because defendants have prevailed in some of these lawsuits, it is possible
that they may also prevail in the trials and appeals currently pending. We
believe, however, that we have meritorious claims in the pending cases, and
intend to prosecute these claims vigorously. Because some of our nifedipine
dosages have already begun to face generic competition, we do not believe that
an adverse result in the pending cases would result in a material amount of
additional foregone revenue.
Antitrust actions. Biovail has filed an antitrust lawsuit against Bayer
AG, Bayer Corporation and Pfizer in the U.S. federal District Court for the
District of Western Pennsylvania. Biovail is seeking a declaratory judgment that
Bayer's nifedipine patents are invalid. Biovail also seeks damages under federal
and state antitrust statutes alleging, among other things, that Bayer illegally
asserted its patent rights. The district court has stayed this litigation
pending resolution of the nifedepine-related patent infringement actions against
Biovail.
F-44
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)
This proceeding is at an early stage. However, we believe that we have
meritorious defenses to the antitrust allegations, and we intend to defend this
case vigorously.
PRODUCT LIABILITY PROCEEDINGS
HIV-related actions. During the past decade, our U.S. subsidiary Bayer
Corporation, as well as other fractionators of plasma products, have been
involved in lawsuits alleging that hemophiliacs became infected with the human
immunodeficiency virus (HIV), or ultimately developed AIDS, by using clotting
factor concentrates derived from human plasma. Plaintiffs have brought actions
on these grounds in the United States, Ireland, Italy, Taiwan, Argentina,
Canada, Japan, and Germany.
In the United States, a class action against Bayer Corporation and three
other defendants consolidated the HIV-related claims of more than 6,000
claimants and claimant groups. The parties resolved this class action through a
$600 million settlement. Bayer Corporation's share of this settlement was
approximately $290 million. Bayer Corporation has also satisfactorily settled
nearly 400 lawsuits by plaintiffs who opted out of the class action.
Approximately 20 suits remain pending in the United States. Although Bayer
Corporation has prevailed in the majority of cases that have proceeded to trial,
plaintiffs were successful in three cases. The juries in each of these cases
awarded damages not exceeding $2 million. In addition, in 1999 a Louisiana jury
awarded a plaintiff damages of $35 million. However, the trial court set this
award aside, and an appellate court upheld this decision. Bayer Corporation has
since settled this matter in the context of a group settlement of nearly 100
Louisiana cases, of which Bayer Corporation's share was less than $50 million.
Although Bayer Corporation intends to defend aggressively the remaining
HIV-related lawsuits in various countries, we have made what we believe to be
appropriate provisions should these suits result in judgments in favor of the
plaintiffs. These provisions are not material to the Bayer Group.
PROCEEDINGS RELATING TO THE WORLD WAR II ERA
Bayer AG was one of a number of defendants in ten class actions filed in
recent years before various U.S. federal courts and consolidated in 2000 before
the federal District Court for the District of New Jersey. These suits sought
class certification on behalf of persons -- primarily residents of Eastern
European countries -- alleging that these persons were victims of forced labor
during World War II or medical experiments during the period of national
socialist rule prior to and during the war. In addition, one suit related to
medical experiments named Bayer AG as sole defendant. The plaintiffs sought
unspecified amounts of damages. No class was certified.
In July 2000, the United States, Germany, Israel and several Eastern
European states concluded an Executive Agreement providing for the establishment
of a federal German foundation to serve as the exclusive source of remedies for
all present and future claims that have been or may be asserted against German
companies arising out of the national socialist era and World War II. This
foundation, called "Remembrance, Responsibility, and the Future", was
established by German law in August 2000. Its founders are the German government
and a number of German companies, among them Bayer AG. The foundation
administers a fund in the amount of DM 10 billion, made available by the German
public sector and by German companies, including Bayer AG. The portion of the
fund to be contributed by German companies totals DM 5 billion.
In 2000, we transferred Bayer's DM 100 million contribution to the fund to
the foundation's escrow account. In addition, the founding members of the
foundation initiative, including Bayer, committed themselves jointly to cover
any shortfall if German companies failed to contribute their full DM 5 billion
portion of the fund.
It is a central element of the Executive Agreement that the foundation may
begin payments only when all pending lawsuits are voluntarily dismissed with
prejudice, thereby creating legal certainty (Rechtssicherheit). Accordingly, the
federal District Court for the District of New Jersey dismissed the suits
described above in November 2000.
F-45
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)
Under the Executive Agreement, the government of the United States has
committed itself to file a "statement of interest" in any new lawsuits filed
before a U.S. court against German companies in connection with national
socialist era and World War II-related claims, recommending that the court
dismiss the suit. Although the doctrine of separation of powers prevents the
U.S. government from compelling the court to comply with its statement of
interest, we believe that the probability of any future suit progressing beyond
the filing stage is therefore remote.
In addition to the specific items discussed above, the Group is involved in
various other legal proceedings and claims that have arisen in the ordinary
course of business, such as matters relating to product liability, patent
validity and infringement, tax assessments, competition and antitrust and past
waste disposal practices and release of chemicals into the environment.
These cases and claims raise difficult and complex legal issues and are
subject to many uncertainties and complexities, including, but not limited to,
the facts and circumstances of each particular case and claim, the jurisdiction
in which each suit is brought, and differences in applicable law. Upon
resolution of any pending legal matters, Bayer may incur charges in excess of
presently established provisions and related insurance coverage. It is possible
that the Group's results of operations and cash flows could be materially
affected by an ultimate unfavorable outcome of certain pending litigation.
Management believes that it is unlikely that the ultimate outcome of such
pending litigation will be decided unfavorably to the Group. Accordingly, in the
opinion of Management the outcome of legal proceedings will not have a material
adverse effect on Bayer's financial position, profitability or liquidity.
RESTRUCTURING CHARGES
The Group recorded restructuring charges in conjunction with the
reorganization of the Styrenics business and the integration of the acquired
Chiron group in the Diagnostic business. Charges concerning Styrenics were
primarily related to intangible and tangible fixed asset write-offs, for which
the Group directly reduced the value of the assets in the consolidated balance
sheet. Charges for the Chiron restructuring plan were related to continuing
operations, including the reduction of excess staffing, the streamlining of
facilities and operations and other restructuring measures.
The total charges incurred for restructuring programs during 1999 were E449
million of which E76 million were accrued and are expected to be used as the
related actions under the plans are completed. E255 million of the charges were
related to impairments of intangible assets and fixed assets for which the Group
directly reduced the value of the assets in the consolidated balance sheet. The
remaining E194 million of the charges were related to employee terminations with
E105 million and to other third party costs with E89 million where the Group
used the amounts during the same period in which they were charged to the income
statement.
Charges of E169 million were incurred during 1999 in conjunction with the
restructuring of our Styrenics business, mainly in Belgium and in the U.S.
Charges of E133 million were related to impairments of intangible and tangible
assets. The remaining E36 million of the charges were related to other third
party costs.
Further charges of E111 million were incurred during 1999 in conjunction
with the restructuring of the Diagnostics businesses worldwide. The charges
included employee termination costs of E57 million, tangible fixed assets
impairments of E45 million and other third party costs of E9 million.
Approximately 600 production, administration and sales employees were identified
in the original plan, 560 of whom have left the Group as of December 31, 2000.
Pharmaceutical resolved measures to increase efficiency by a worldwide
restructuring program incurring expenses of E38 million. These charges consist
of employee termination costs (E11 million), other third party costs (E19
million) and tangible fixed assets write-offs (E8 million).
Charges of E35 million were incurred during 1999 in conjunction with the
restructuring of the Elkhart Consumer Care operations in the U.S. The charges
included employee termination costs of E27 million, tangible fixed asset
impairments of E4 million and other third party costs of E4 million.
F-46
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)
The other charges of E96 million incurred during 1999 were attributable to
several smaller programs, the largest of which was a E28 million charge in
conjunction with the downsizing of our Animal Health facilities in the U.S.
The total charges incurred for restructuring programs during 2000 were E200
million of which E91 million were accrued and are expected to be used as the
related actions under the plans are completed. The total charges are related
with E59 million to employee termination, with E51 million to impairments of
intangible and tangible fixed assets and with E90 million to other third party
costs.
Charges of E61 million were incurred during 2000 in conjunction with the
ongoing restructuring of the Diagnostics businesses worldwide. The charges
included employee termination costs of E27 million, other third party costs of
E30 million and tangible fixed assets impairments of E4 million.
Charges of E48 million were incurred during 2000 in conjunction with the
acquisition of Lyondell. The charges included employee termination costs of E13
million, other third party costs of E29 million and tangible fixed assets
impairment of E6 million. Of the 2000 charges most of the employee termination
costs and other third party costs remain to be paid during 2001 and additional
restructuring charges will be incurred in 2001.
In conjunction with the further restructuring of our Styrenics business
additional charges of E32 million incurred in 2000 which related to depreciation
of fixed assets amounting to E23 million and to employee termination costs of E9
million.
The ongoing restructuring program of our Pharmaceutical business group to
increase efficiency caused further employee termination charges of E6 million,
other third party costs of E14 million and E6 million for impairment of fixed
assets.
Further accrued charges for restructuring of E33 million were attributable
to several smaller programs.
The movement in restructuring provisions is as follows:
EMPLOYEE TANGIBLE FIXED OTHER THIRD PARTY
TERMINATION COSTS ASSET IMPAIRMENT COSTS TOTAL
----------------- ---------------- ----------------- -----
(E MILLION)
BALANCE AT JANUARY 1, 1999............... 27 2 61 90
Additions................................ 105 255 89 449
Cash payments............................ (87) -- (109) (196)
Reclassification to fixed assets......... -- (249) -- (249)
Translation gain (loss), net............. 5 1 6 12
BALANCE AT DECEMBER 31, 1999............. 50 9 47 106
Additions................................ 59 51 90 200
Cash payments............................ (26) -- (108) (134)
Reclassification to fixed assets......... -- (47) -- (47)
Translation gain (loss), net............. 3 -- 3 6
--- ---- ---- ----
BALANCE AT DECEMBER 31, 2000............. 86 13 32 131
=== ==== ==== ====
TANGIBLE FIXED ASSET IMPAIRMENTS
Based on the review of the carrying values of tangible fixed assets,
write-downs are recorded for tangible fixed assets impaired or related to
activities to be restructured, divested or abandoned. The provision is
transferred to accumulated depreciation as the tangible fixed assets are
restructured, divested or abandoned.
OTHER THIRD PARTY COSTS
Other third party costs are mainly associated with other obligations due to
the abandonment of certain facilities.
F-47
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)
[30] FINANCIAL OBLIGATIONS
Financial obligations are carried at nominal or redemption value, whichever
is higher. They comprise the following:
DEC. 31, 2000 DEC. 31, 1999
---------------- ----------------
MATURING MATURING
TOTAL IN 2001 TOTAL IN 2000
----- -------- ----- --------
(E MILLION)
Debentures................................................. 2,168 283 1,809 10
Liabilities to banks....................................... 1,458 932 1,959 1,658
Liabilities under lease agreements......................... 199 34 181 23
Liabilities from the issuance of promissory notes.......... 2 2 1 1
Commercial paper........................................... 1,812 1,812 314 314
Other financial obligations................................ 1,026 799 202 101
----- ----- ----- -----
6,665 3,862 4,466 2,107
===== ===== ===== =====
As at December 31, 2000, scheduled maturities of financial obligations in
2002, 2003, 2004, 2005 and thereafter were E885 million, E94 million, E23
million, E288 million, and E1,513 million, respectively.
The financial obligations are predominantly in U.S. dollars, which account
for E4.0 billion (1999: E2.5 billion). U.S. dollar borrowings represent 61
percent (1999: 55 percent) of total financial obligations.
Short-term borrowings (excluding the short-term portion of debentures)
amounted to E3,579 million (1999: E2,097 million) with a weighted average
interest rate of 6.6 % (1999: 6.0 %). Bayer Group's financial obligations are
primarily unsecured and of equal priority.
EFFECTIVE STATED
RATE RATE VOLUME DEC. 31, 2000 DEC. 31, 1999
--------- ------ ----------------- ------------- -------------
(E MILLION)
BAYER CAPITAL CORPORATION B.V.
2,820%.. 2.500% Bonds with Warrants Attached CHF 250.0 million 164 156
1987/2002.....................
BAYER CORPORATION
6.585% 6.500% Notes 1995/2002............... USD 400.0 million 430 398
7.274% 7.125% Notes 1995/2015............... USD 200.0 million 215 199
6.784% 6.750% Notes 1996/2001............... USD 250.0 million 269 249
6.560% 2.250% Bonds 1997/2002............... CHF 200.0 million 131 125
3.500% 3.500% Revenue Bonds 1997/2009....... USD 20.6 million 22 20
4.000% 4.000% Revenue Bonds 1997/2027....... USD 25.0 million 27 25
6.745% 6.650% Notes 1998/2028............... USD 350.0 million 376 348
6.077% 6.200% Bonds 1998/2028............... USD 250.0 million 269 249
BAYER LTD., JAPAN
3.871% 3.750% Bonds 2000/2005............... CHF 400.0 million 239 0
OTHER DEBENTURES 26 40
----- -----
2,168 1,809
===== =====
Other debentures are due between 2000 and 2011; their average interest rate
is 10.9 percent.
In July 1987, Bayer Capital Corporation B.V. issued CHF 250 million of 2.50
% Bonds with warrants in Switzerland. The Bonds have a term of 15 years and
mature in July 2002. The issue price of the Bonds was 100%, and interest is paid
annually in July. The warrants attached expired on August 28, 1997.
F-48
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)
In October 1995, Bayer Corporation issued USD 400 million of 6.50% Notes to
qualified institutional buyers. The Notes have a term of 7 years and mature in
October 2002. Interest is paid semi-annually in April and October. The Group
recorded a discount of USD 2.7 million, which includes commissions paid to
underwriters.
In October 1995, Bayer Corporation issued USD 200 million of 7.125% Notes
to qualified institutional buyers. The Notes have a term of 20 years and mature
in October 2015. Interest is paid semi-annually in April and October. The Group
recorded a discount of USD 2.4 million, which includes commissions paid to
underwriters.
In October 1996, Bayer Corporation issued USD 250 million of 6.75% Notes to
non-U.S. institutional and retail buyers. The Notes have a term of 5 years and
mature in October 2001. Interest is paid annually in October 1. The Group
recorded a discount of USD 1.3 million, which includes dealer commissions.
In April 1997, Bayer Corporation issued CHF 200 million of 2.25% Bonds in
Switzerland. The Bonds have a term of 5 years and mature in April 2002. Interest
is paid annually in April. The Group recorded a discount of USD 0.4 million,
which includes commissions paid to underwriters. This debt was swapped into U.S.
Dollars at a floating interest rate. At December 31, 2000, the effective U.S.
dollar interest rate was 6.56%.
In March 1997, Bayer Corporation issued USD 20.6 million of Revenue Bonds
to U.S. institutional buyers. The interest rate is reset daily with monthly
interest payments. The Revenue Bonds have a term of 12 years and mature in May
2009.
In May 1997, Bayer Corporation issued USD 25 million of Revenue Bonds to
U.S. Institutional Buyers. The interest rate is reset daily with monthly
interest payments. The Revenue Bonds have a term of 20 years and mature in May
2027.
In February 1998, Bayer Corporation issued USD 350 million of 6.65% Notes
to qualified institutional buyers. The Notes have a term of 30 years and mature
in February 2028. Interest is paid semi-annually in August and February. The
Group recorded a discount of USD 1.9 million, which includes commissions paid to
underwriters. The Notes will be redeemable, in whole or in part, at the option
of Bayer Corporation at any time, upon less than 30 but not more than 60 days'
notice, at a redemption price equal to the greater of (i) 100% of the principal
amount or (ii) as determined by an independent investment banker.
In February 1998, Bayer Corporation issued USD 250 million of 6.20% Bonds
to qualified institutional buyers. The Bonds have combined call and put options
giving the lead manager the right to repurchase them, and the investors the
right to cash them, after 10 years. At that time the lead manager can reset the
interest rate and remarket the Bonds for a further period of 20 years such that
they would mature in 2028. If the lead manager does not exercise its call option
and the investors exercise their put option, the Bonds will be redeemed in 2008.
Interest is paid semi-annually in August and February. The Group recorded a
discount of USD 0.6 million which includes commissions paid to underwriters. The
redemption provision on the 1998 6.65% Notes also applies for these bonds.
In April 2000, Bayer Ltd. Japan issued CHF 400 million of 3.75% Bonds in
Switzerland. The Bonds have a term of 5 years and mature in April 2005. Interest
is paid annually in April. The Group recorded a discount of CHF 1.2 million.
At December 31, 2000, the Group had approximately E5.6 billion of total
lines of credit, of which E1.5 billion were used and E4.1 billion were unused
and available for borrowing on an unsecured basis.
F-49
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)
Liabilities under finance leases are recognized as financial obligations,
if the leased assets are capitalized under property, plant and equipment. They
are stated at present values. Lease payments totaling E285 million (1999: E277
million), including E86 million (1999: E96 million) in interest, are to be made
to the respective lessors in future years. The liabilities associated with
finance leases mature as follows:
AS OF
DECEMBER 31, 2000
-----------------
(E MILLION)
2001................................................... 44
2002................................................... 38
2003................................................... 28
2004................................................... 16
2005................................................... 18
After 2005............................................. 141
---
Total minimum lease payments........................... 285
Of which interest portion.............................. (86)
---
199
Current portion........................................ 34
Long-term portion...................................... 165
For operating leases, the Company incurred rent expense of E162 million,
E154 million, and E171 million during 2000, 1999 and 1998, respectively.
The other financial obligations include E42 million (1999: E43 million) to
non-consolidated subsidiaries.
[31] TRADE ACCOUNTS PAYABLE
Trade accounts are payable mainly to third parties; they are carried at
nominal or redemption value, whichever is higher.
Trade accounts payable as of December 31, 2000 include E2,013 million
(1999: E1,556 million) maturing within one year and E3 million (1999: E0
million) maturing after one year. Of the total, E8 million (1999: E6 million) is
payable to subsidiaries, E16 million (1999: E12 million) to other affiliated
companies and E1,992 million (1999: E1,538 million) to other suppliers.
[32] MISCELLANEOUS LIABILITIES
Miscellaneous liabilities are carried at nominal or redemption value,
whichever is higher. The individual items are as follows:
DEC. 31, 2000 DEC. 31, 1999
------------------- -------------------
MATURING IN MATURING IN
TOTAL 2001 TOTAL 2000
----- ----------- ----- -----------
(E MILLION)
Payroll liabilities.................................... 537 422 526 419
Tax liabilities........................................ 291 289 209 206
Liabilities for social expenses........................ 114 114 126 125
Accrued interest on liabilities........................ 73 46 79 54
Advance payments received.............................. 24 24 28 28
Liabilities from the acceptance of drafts.............. 14 14 10 10
License liabilities.................................... 32 32 26 26
Other miscellaneous liabilities........................ 1,385 1,333 1,029 933
----- ----- ----- -----
2,470 2,274 2,033 1,801
===== ===== ===== =====
F-50
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)
[33] FURTHER INFORMATION ON OTHER LIABILITIES
Other liabilities (financial obligations, trade accounts payable and
miscellaneous liabilities) include E1,636 million (1999: E1,071 million)
maturing in more than five years.
The amount secured -- mainly by mortgages -- is E283 million (1999: E43
million). The secured amounts included collateral of E256 million for land and
buildings.
Included is E123 million (1999: E85 million) in accrued interest,
representing expenses attributable to the fiscal year but not due to be paid
until after the closing date.
[34] DEFERRED INCOME
In accordance with IAS 20 (Accounting for Government Grants and Disclosure
of Government Assistance), grants and subsidies that serve to promote investment
are reflected in the balance sheet as deferred income. The amounts are gradually
reversed during the useful lives of the respective assets and recognized in
income.
The main component of deferred income as of December 31, 2000 comprises
E113 million (1999: E125 million) in such grants and subsidies received from
governments; the amount reversed and recognized in income in 2000 was E13
million (1999: E16 million).
[35] DISCONTINUING OPERATIONS
Assets and liabilities include the following amounts pertaining to the
discontinuing operations of Fibers, Erdolchemie and DyStar:
DECEMBER 31,
-------------------------------------------------------------
FIBERS ERDOLCHEMIE DYSTAR TOTAL
------------- ------------- ------------- -------------
2000 1999 2000 1999 2000 1999 2000 1999
----- ----- ----- ----- ----- ----- ----- -----
(E MILLION)
Noncurrent assets................ 143 149 200 121 89 91 432 361
Current assets (excluding liquid
assets)........................ 195 160 199 141 320 278 714 579
Liquid assets.................... -- -- -- -- 11 10 11 10
----- ----- ----- ----- ----- ----- ----- -----
ASSETS........................... 338 309 399 262 420 379 1,157 950
===== ===== ===== ===== ===== ===== ===== =====
Pension provisions............... 53 50 59 60 16 17 128 127
Other provisions................. 35 31 39 41 28 23 102 95
Financial obligations............ -- -- 5 6 76 122 81 128
Remaining liabilities............ 82 33 59 57 122 36 263 126
----- ----- ----- ----- ----- ----- ----- -----
LIABILITIES...................... 170 114 162 164 242 198 574 476
===== ===== ===== ===== ===== ===== ===== =====
[36] COMMITMENTS AND CONTINGENCIES
Contingent liabilities as of December 31, 2000 -- almost all of which exist
toward third parties -- amounted to E215 million. They result from:
DEC. 31, 2000 DEC. 31, 1999
------------- -------------
(E MILLION)
Issuance and endorsement of bills........................... 23 21
--- ---
Guarantees.................................................. 44 30
--- ---
Warranties.................................................. 148 161
--- ---
215 212
=== ===
F-51
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)
The respective items refer to potential future obligations where the
occurrence of the future events would create an obligation, the existence of
which is uncertain at the balance sheet date. The warranties mainly relate to
the terms customarily existing in the ordinary course of business.
In addition to provisions, other liabilities and contingent liabilities,
there are other financial commitments resulting primarily from long-term lease
and rental agreements.
Minimum non-discounted future lease payments associated with operating
leases total E598 million (1999: E574 million). The commitments under lease and
rental agreements mature as follows:
E MILLION
---------
2001........................................................ 189
2002........................................................ 114
2003........................................................ 81
2004........................................................ 65
2005........................................................ 56
after 2005.................................................. 93
---
598
===
Financial commitments resulting from orders already placed under purchase
agreements related to planned or ongoing capital expenditure projects total E446
million (1999: E391 million); the payments concerned are due almost entirely in
2001.
The Group has entered into long-term research agreements with various third
parties under which Bayer will fund various research projects (approximately
E349 million) and other commitments based upon the achievement of certain
milestones or other specific conditions (approximately E334 million). As of
December 31, 2000, the estimated payments to these parties, assuming the
milestones or other conditions are met are as follows:
E MILLION
---------
2001........................................................ 168
2002........................................................ 140
2003........................................................ 130
2004........................................................ 52
2005........................................................ 54
After 2005.................................................. 139
---
683
===
Further financial commitments result from possible future acceptances of
part-time work arrangements offered to older employees under collective
agreements.
[37] RELATED PARTIES
Related parties with whom Bayer AG and its affiliates had transactions
consist of unconsolidated subsidiaries and associates accounted for under the
equity method. These transactions mainly include sales and purchases performed
on an arm's length basis. These transactions also include long-term leases and
certain contractual and support arrangements with our equity investee Agfa. The
related receivables and payables have been included in the respective notes to
the financial statements as required by the German commercial code. The revenue
and expenses related to these transactions are immaterial to the consolidated
financial statements taken as a whole.
F-52
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)
[38] FINANCIAL INSTRUMENTS
Financial instruments entail contractual claims on financial assets. Under
IAS 32 (Financial Instruments: Disclosure and Presentation), financial
instruments include both primary instruments, such as trade accounts receivable
and payable, investments, and financial obligations; and derivative financial
instruments, which are used to hedge risks arising from changes in currency
exchange and interest rates.
PRIMARY FINANCIAL INSTRUMENTS
Primary financial instruments are reflected in the balance sheet. Those on
the asset side are recognized at nominal value less any necessary write-downs;
financial instruments constituting liabilities are carried at nominal or
redemption value, whichever is higher.
FAIR VALUE
The fair value of a primary financial instrument is the price at which it
could be exchanged in a current transaction between knowledgeable, willing
parties in an active market. The fair values of other affiliated companies
(E1,443 million, 1999: E637 million), other securities (E153 million; 1999: E127
million) included in investments and marketable securities (E247 million; 1999:
E376 million) are derived from their market prices. Financial obligations are
valued mainly on the basis of quoted prices, or in some cases by discounting
future cash flows. Their total fair value is E156 million (1999: E86 million)
less than their carrying value. The remaining receivables and liabilities and
the liquid assets have such short terms that there is no significant discrepancy
between their fair and carrying values.
CREDIT RISK
Credit risk arises from the possibility of asset impairment occurring
because counterparties cannot meet their obligations in transactions involving
financial instruments.
Since we do not conclude master netting arrangements with our customers,
the total of the amounts recognized in assets represents the maximum exposure to
credit risk.
CURRENCY RISK
Currency risk is the potential decline in the value of financial
instruments due to exchange rate fluctuations. Exposure to currency risk arises
mainly when receivables and payables are denominated in a currency other than
the company's local currency or will be denominated in such a currency in the
planned course of business.
Such risks may be naturally hedged, as when a receivable in a given
currency is matched, for example between Group companies, by one or more
payables in the same amount, and having an equivalent term, in the same
currency. They may also be hedged using derivative financial instruments.
All currency risks arising on financial transactions, including interest,
are generally fully hedged. The instruments used are mainly currency swaps,
interest and principal currency swaps and forward exchange contracts. Currency
risks relating to operating activities are systematically monitored and
analyzed. The level of hedging is regularly reviewed. At the end of 2000, the
situation was as follows:
DEC. 31, 2000 DEC. 31, 1999
------------- -------------
(E MILLION)
Primary asset instruments exposed to currency risk.......... 2,813 2,774
Primary liability instruments exposed to currency risk...... 2,159 913
Amount naturally hedged..................................... (1,102) (784)
Amount hedged through derivative financial instruments...... (2,205) (2,220)
------ ------
RESIDUAL UNHEDGED CURRENCY EXPOSURE......................... 1,665 683
====== ======
F-53
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)
As of 2000, some anticipated or pending transactions have also been hedged
to reduce the otherwise substantial exposure. At December 31, 2000 the total
notional amount of the contracts concerned -- mainly forward exchange contracts
for the sale of U.S. dollars or Japanese yen and all maturing before December
31, 2001 -- was E1,299 million, which is not included in the hedged amount of
E2.2 billion. The E95 million positive fair value of these contracts is not
recognized in income.
On the asset side, 60 percent (1999: 80 percent) of currency risks relate
to the U.S. dollar and 8 percent (1999: 8 percent) to the Japanese yen. On the
liabilities side, 51 percent (1999: 71 percent) of foreign currency risks relate
to the U.S. dollar, while only 3 percent (1999: 19 percent) now relate to
DM/euro risks of subsidiaries domiciled outside the euro zone; the remaining
exposure involves liabilities in British pounds (4 percent; 1999: 2 percent) and
a number of other currencies outside the dollar and euro zones. The U.S. dollar
accounts for 70 percent (1999: 82 percent) of the asset volume hedged through
derivative financial instruments, while the yen accounts for 15 percent (1999: 9
percent). Of the hedged liabilities, 73 percent (1999: 85 percent) are in U.S.
dollars, 3 percent (1999: 2 percent) in yen and 24 percent (1999: 13 percent) in
other currencies. The need for hedging within the euro zone ceased at the
beginning of 1999 due to the permanent fixing of exchange rates.
The other securities included in investments are almost exclusively
denominated in the currency used by the Group company making the investment, so
no currency risk is involved. Similarly, the other loans are made only to
borrowers in the same currency zone. Where intragroup loans exposed to currency
risk have no natural hedge, they are hedged through derivative financial
instruments.
INTEREST RATE RISK
An interest rate risk -- the possibility that the value of a financial
instrument will change due to movements in market rates of interest -- applies
mainly to receivables and payables with maturities of over one year.
Items with such long maturities are not of material significance on the
operating side but are relevant in the case of investments and financial
commitments. Here, derivative financial instruments are used as the main method
of interest rate hedging, though in some cases interest rate risk is not hedged
if attractive fixed interest rates can be obtained.
The other securities included in investments are mostly floating rate
investments at market rates of interest. Interest rate swaps are not used to
convert floating rate investments into fixed rate investments.
The other loans chiefly comprise loans to employees, generally at
market-oriented, fixed interest rates. Such loans are exposed to an interest
rate risk which, however, is not hedged since it was entered into for specific
reasons. More than three-quarters of employee loans are for terms of more than
five years.
DERIVATIVE FINANCIAL INSTRUMENTS
The derivatives we use are mainly over-the-counter instruments,
particularly forward exchange contracts, option contracts, interest rate swaps,
and interest and principal currency swaps. We deal only with banks of high
credit standing. The instruments are employed according to uniform guidelines
and are subject to strict internal controls. Their use is confined to the
hedging of the operating business and of the related investments and financing
transactions.
MARKET RISK
Market risk arises from the fact that the value of financial instruments
may be positively or negatively affected by fluctuating prices on the financial
markets. The fair values quoted are the current values of the derivative
financial instruments, disregarding any opposite movements in the values of the
respective hedged transactions. The fair value is the repurchase value of the
derivatives on the closing date, based on quoted prices or determined by
standard methods. The notional amount is the total value of the hedged purchase
and sale transactions.
F-54
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)
The notional amounts and fair values of the derivative financial
instruments held at the closing date were as follows:
NOTIONAL AMOUNT FAIR VALUE
----------------------------- -----------------------------
DEC. 31, 2000 DEC. 31, 1999 DEC. 31, 2000 DEC. 31, 1999
------------- ------------- ------------- -------------
(E MILLION)
Forward exchange contracts.................. 3,219 2,172 145 (90)
Currency options............................ 87 62 1 (1)
Currency swaps.............................. 196 165 (12) 5
Interest rate hedging contracts (including
interest and principal currency swaps).... 3,495 2,664 (133) (49)
----- ----- ----- -----
6,997 5,063 1 (135)
===== ===== ===== =====
Gains and losses from changes in fair values are offset -- wherever
possible -- against corresponding losses and gains from operating activities.
Provisions are established for excess losses from operating activities; excess
gains are not recognized.
CREDIT RISK
Credit risk exposure is E227 million (1999: E30 million), this amount being
the total of the positive fair values of derivatives that give rise to claims
against the other parties to the instruments. It represents the losses that
could result from non-performance of contractual obligations by these parties.
We minimize this risk by imposing a limit on the volume of business in
derivative financial instruments transacted with individual parties.
CURRENCY RISK
Exchange hedging instruments in the notional amount of E3.3 billion (1999:
E2.2 billion) mature within one year, while instruments in the amount of E0.2
billion (1999: E0.2 billion) have longer remaining terms.
INTEREST RATE RISK
Short-term interest rate hedging contracts (including interest and
principal currency swaps) total E0.3 billion (1999: E1.3 billion); those
maturing after more than one year total E3.2 billion (1999: E1.4 billion).
NOTES TO THE STATEMENTS OF CASH FLOWS
[39] NET CASH PROVIDED BY OPERATING ACTIVITIES
The cash flow statement starts from the operating result. The gross cash
flow of E4.2 billion (1999: E3.2 billion; 1998: E3.3 billion) is the cash
surplus from operating activities before any changes in working capital.
Breakdowns of the gross cash flow by business segment and by region are given in
the table on pages F22-F23. The net cash flow of E3.1 billion (1999: E3.2
billion; 1998: E2.8 billion) takes account of changes in working capital.
[40] NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
Additions to property, plant and equipment and intangible assets resulted
in a cash outflow of E2.6 billion in 2000 (1999: E2.6 billion; 1998: E2.7
billion). Cash outflows for acquisitions amounted to E4.1 billion (1999: E0.3
billion; 1998: E1.4 billion). Sales of property, plant and equipment led to a
cash inflow of E0.3 billion (1999: E0.1 billion; 1998: E0.5 billion), while that
from interest and dividend receipts and from marketable securities also amounted
to E0.3 billion (1999: E0.4 billion; 1998: E0.4 billion).
F-55
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)
[41] NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
The increase in the Group's net borrowings in 2000 resulted in a net cash
inflow of E2.1 billion (1999: cash outflow of E0.6 billion; 1998: cash inflow of
E0.9 billion). Our stockholders received a total dividend payment of E1.0
billion for the 1999 fiscal year (1999: E0.8 billion; 1998: E0.7 billion).
Interest paid in 2000 amounted to E0.3 billion (1999: E0.3 billion; 1998: E0.3
billion).
[42] DISCONTINUING OPERATIONS
Discontinuing operations affected the Group cash flow statements as
follows:
FIBERS ERDOLCHEMIE DYSTAR AGFA TOTAL
-------------------- -------------------- -------------------- ------------- ----
2000 1999 1998 2000 1999 1998 2000 1999 1998 1999 1998 2000
---- ---- ---- ---- ---- ---- ---- ---- ---- ----- ---- ----
(E MILLION)
Net cash provided by
operating
activities.......... 114 35 94 38 39 77 66 35 6 167 425 218
Net cash provided by
(used in) investing
activities.......... (29) (62) (67) (87) (62) (138) (65) (16) (19) 2,613 (144) (181)
Net cash provided by
(used in) financing
activities.......... * * (7) -- (1) -- 18 (28) 13 -- 28 18
--- --- --- --- --- ---- --- --- --- ----- ---- ----
CHANGE IN CASH AND
CASH EQUIVALENTS.... 85 (27) 20 (49) (24) (61) 19 (9) 0 2,780 309 55
=== === === === === ==== === === === ===== ==== ====
TOTAL
-------------
1999 1998
----- ----
(E MILLION)
Net cash provided by
operating
activities.......... 276 602
Net cash provided by
(used in) investing
activities.......... 2,473 (368)
Net cash provided by
(used in) financing
activities.......... (29) 34
----- ----
CHANGE IN CASH AND
CASH EQUIVALENTS.... 2,720 268
===== ====
---------------
* Less than E1 million.
[43] CASH AND CASH EQUIVALENTS
Cash and cash equivalents as of December 31, 2000 amounted to E0.5 billion
(1999: E2.8 billion; 1998: E1.2 billion). The liquid assets of E0.7 billion
(1999: E3.1 billion; 1998: E1.7 billion) shown in the balance sheet also include
marketable securities and other instruments.
[44] U.S. GAAP INFORMATION
The Group's consolidated financial statements have been prepared in
accordance with IAS, which as applied by the Group, differs in certain
significant respects from U.S. GAAP. The effects of the application of U.S. GAAP
to net income and stockholders' equity are set out in the tables below:
NOTES 2000 2000 1999
----- -------------- ----------- -----------
($ MILLION(1)) (E MILLION) (E MILLION)
NET INCOME REPORTED UNDER IAS...................... 1,539 1,816 2,002
Fair value of derivative financial instruments..... a 81 95 --
Available for sale securities...................... b -- -- --
Business combinations.............................. c (108) (128) (54)
Pensions........................................... d (20) (24) (24)
Other.............................................. e 28 33 54
Deferred tax effect on U.S. GAAP adjustments....... (8) (9) (11)
----- ----- -----
NET INCOME REPORTED UNDER U.S. GAAP................ 1,512 1,783 1,967
===== ===== =====
BASIC AND DILUTED EARNINGS PER SHARE UNDER U.S.
GAAP............................................. 2.07 2.44 2.69
===== ===== =====
F-56
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)
DECEMBER 31,
--------------------------------------------------
NOTES 2000 2000 1999
----- -------------- ----------- -----------
($ MILLION(1)) (E MILLION) (E MILLION)
STOCKHOLDERS' EQUITY REPORTED UNDER IAS.............. 13,677 16,140 15,006
Fair value of derivative financial instruments....... a 81 95 --
Available for sale securities........................ b 1,158 1,366 580
Business combinations................................ c 697 822 902
Pensions............................................. d 936 1,105 1,138
Other................................................ e 92 109 75
Deferred tax effect on U.S. GAAP adjustments......... (447) (527) (524)
------ ------ ------
STOCKHOLDERS' EQUITY REPORTED UNDER U.S. GAAP........ 16,194 19,110 17,177
====== ====== ======
DECEMBER 31,
------------------------------------------
2000 2000 1999
-------------- ----------- -----------
($ MILLION(1)) (E MILLION) (E MILLION)
COMPONENTS OF STOCKHOLDERS' EQUITY IN ACCORDANCE WITH U.S.
GAAP:
Capital stock of Bayer AG................................... 1,585 1,870 1,870
Capital reserves of Bayer AG................................ 2,493 2,942 2,942
Retained earnings........................................... 10,586 12,492 11,636
Accumulated other comprehensive income:
-- Unrealized market value adjustment on securities
available for sale (net of taxes of $12 million, E14
million, and E15 million)................................ 1,145 1,352 565
-- Additional minimum pension liability (net of taxes of $76
million, E90 million, and E92 million)................... (105) (124) (126)
-- Translation differences.................................. 490 578 290
------ ------ ------
TOTAL....................................................... 16,194 19,110 17,177
====== ====== ======
---------------
(1) The 2000 U.S. dollar figures have been translated at an exchange rate of
$0.8474 = E1.00. Such translations should not be construed as
representations that the euro amounts represent, or have been or could be
converted into, United States dollars at that or any other rate.
A. FAIR VALUE OF DERIVATIVE FINANCIAL INSTRUMENTS
Under IAS, the Group applies hedge accounting to derivative financial
instruments relating to currency risks on anticipated or pending transactions.
In accordance with the U.S. GAAP guidance applicable through December 31, 2000,
these instruments are marked to market through the income statement. The
difference between IAS and U.S. GAAP net income for the year ended December 31,
2000 arises from the recognition of a gain, and a corresponding asset, relating
to anticipated cash flow forward contracts under U.S. GAAP.
B. AVAILABLE FOR SALE SECURITIES
Investments in debt and certain equity securities are reflected in the
balance sheet at nominal value less any necessary write-downs under IAS. U.S.
GAAP requires these investments to be classified as either trading,
available-for-sale, or held-to-maturity, depending on management's intent and
ability with respect to holding such investments. All investments that have been
classified as available-for-sale are carried at fair value, with any unrealized
gains or losses recorded as a separate component of equity.
F-57
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)
C. BUSINESS COMBINATIONS
Prior to the adoption of IAS 22 (revised 1993) on January 1, 1995, the
Group wrote-off all goodwill directly to equity in accordance with IAS existing
at that time. The adoption of IAS 22 (revised 1993) did not require prior period
restatement. Accordingly, a U.S. GAAP difference exists with respect to the
recognition of goodwill and amortisation before January 1, 1995. For the purpose
of the reconciliation to U.S. GAAP, the pre-1995 goodwill is being amortized
through the income statement over the estimated useful lives between 20 and 40
years.
D. PENSION PROVISIONS
Under IAS, pension costs and similar obligations are accounted for in
accordance with IAS 19, "Employee Benefits". For purposes of U.S. GAAP, pension
costs for defined benefit plans are accounted for in accordance with SFAS No. 87
"Employers' Accounting for Pensions" and the disclosure is presented in
accordance with SFAS No. 132 "Employers' Disclosures about Pensions and Other
Post-retirement Benefits". Using an SEC accommodation to foreign private
issuers, the Group adopted SFAS No. 87 on January 1, 1994, for its non-U.S.
plans, which was also the date of adoption for IAS 19 for those plans. It was
not feasible to apply SFAS No. 87 on the effective date specified in the
standard. IAS 19 as applied by the Group from 1994 was substantially similar to
the methodology required under SFAS No. 87. The adjustment between IAS and U.S.
GAAP comprises amortization of the unrecognized transition obligation over the
remaining average service lives of employees from 1994 of E238 million, the
recognition of an asset limitation under IAS 19, which is not allowed under SFAS
No. 87, and the recognition of an additional minimum liability under SFAS No.
87, which is not required under IAS 19.
Following is a reconciliation of the balance sheet and income statement
amounts recognized for IAS and U.S. GAAP for both pension and post-retirement
benefit plans:
2000 1999
------ ------
(E MILLION)
PENSION BENEFITS:
Liability recognized for IAS................................ (3,151) (3,191)
Asset limitation under IAS 19............................... 1,249 1,261
Additional minimum liability under SFAS No. 87.............. (215) (218)
Difference in unrecognized transition obligation............ 71 95
------ ------
LIABILITY RECOGNIZED FOR U.S. GAAP.......................... (2,046) (2,053)
------ ------
Net periodic benefit cost recognized for IAS................ 260 291
Amortization of transition obligation....................... 24 24
------ ------
NET PERIODIC BENEFIT COST RECOGNIZED FOR U.S. GAAP.......... 284 315
====== ======
E. OTHER
There are also differences between IAS and U.S. GAAP in relation to (1)
asset impairments, (2) restructuring provisions, (3) equity compensation, (4)
other employee benefits and (5) in-process research and development. None of the
differences are individually significant and they are therefore shown as a
combined total.
F-58
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)
ADDITIONAL U.S. GAAP DISCLOSURES
DISCONTINUED OPERATIONS
Under IAS, the Group has classified Agfa, DyStar, EC Erdolchemie and the
Fibers business group as discontinuing operations. Under U.S. GAAP, Agfa and
DyStar do not meet the requirements for classification as a discontinued
operation, as the formal plan for disposal of these operations will not be
completed within one year. The following U.S. GAAP income statement excludes
Agfa and DyStar as discontinued operations.
2000 2000 1999
----------- ----------- -----------
($ MILLION) (E MILLION) (E MILLION)
NET SALES FROM CONTINUING OPERATIONS........................ 25,278 29,830 26,473
------- ------- -------
Cost of goods sold.......................................... (13,375) (15,784) (14,240)
------- ------- -------
GROSS PROFIT FROM CONTINUING OPERATIONS..................... 11,903 14,046 12,233
Selling expenses............................................ (5,849) (6,902) (6,043)
Research and development expenses........................... (2,019) (2,382) (2,242)
General administration expenses............................. (797) (940) (862)
Other operating income...................................... 368 434 726
Other operating expenses.................................... (1,049) (1,238) (1,578)
------- ------- -------
OPERATING RESULT FROM CONTINUING OPERATIONS................. 2,557 3,018 2,234
Income (Expenses) from investments in affiliated companies
-- net.................................................... 320 376 (33)
Interest expense -- net..................................... (264) (311) (192)
Other non-operating expenses -- net......................... (226) (267) (290)
Income from Agfa divestiture................................ -- -- 1,030
------- ------- -------
NON-OPERATING RESULT FROM CONTINUING OPERATIONS............. (170) (202) 515
INCOME FROM CONTINUING OPERATIONS BEFORE TAXES AND MINORITY
INTEREST.................................................. 2,387 2,816 2,749
Income taxes................................................ (967) (1,141) (819)
Minority stockholders' interest............................. (22) (26) (16)
------- ------- -------
INCOME FROM CONTINUING OPERATIONS........................... 1,398 1,649 1,914
Discontinued Operations -- net of tax....................... 114 134 53
------- ------- -------
NET INCOME REPORTED UNDER U.S. GAAP......................... 1,512 1,783 1,967
======= ======= =======
EARNINGS PER SHARE 2000 2000 1999
------------------ ----------- ----------- -----------
($ MILLION) (E MILLION) (E MILLION)
Basic and diluted:
Income from continuing operations......................... 1.91 2.26 2.62
Income from discontinued operations....................... 0.16 0.18 0.07
---- ---- ----
BASIC AND DILUTED EARNINGS PER SHARE........................ 2.07 2.44 2.69
==== ==== ====
FINANCIAL ASSETS AND LIABILITIES
Apart from the following exceptions, the U.S. GAAP carrying value of
financial assets and liabilities is equal to the IAS carrying values.
F-59
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)
The components of marketable securities under U.S. GAAP at December 31,
2000 and 1999 are the following:
GROSS GROSS CARRYING VALUE
UNREALIZED UNREALIZED AND ESTIMATED
COST GAINS LOSSES FAIR VALUE
----- ---------- ---------- --------------
(E MILLION)
AS OF DECEMBER 31, 2000
Available for sale securities:
Equity securities................................ 426 1,370 (6) 1,790
Debt securities.................................. 51 2 -- 53
----- ----- ----- -----
TOTAL.............................................. 477 1,372 (6) 1,843
===== ===== ===== =====
AS OF DECEMBER 31, 1999
Available for sale securities:
Equity securities................................ 499 584 (7) 1,076
Debt securities.................................. 60 3 -- 63
----- ----- ----- -----
TOTAL.............................................. 559 587 (7) 1,139
===== ===== ===== =====
Under IAS, unrealized holding gains on available for sale securities are
not recorded. Gross unrealized holding losses on available for sale securities
are recorded in the other financial expense component of financial income, net.
Under U.S. GAAP, unrealized holding gains and losses on
available-for-sale-securities are recorded as a component of other comprehensive
income.
Proceeds from sales of available for sale securities were E296 million and
E71 million in 2000 and 1999, respectively. Gross realized gains were E73
million and E13 million on those sales in 2000 and 1999, respectively. Gross
realized losses were E2 million on those sales in 1999. There were no gross
realized losses in 2000. The cost used to determine the gain or loss on these
sales was determined using the weighted average method.
The maturities of debt securities at December 31, 2000 are as follows:
AVAILABLE FOR
SALE
-------------
(E MILLION)
Within one year............................................. 41
Over one year through five years............................ 10
---
TOTAL....................................................... 51
===
DERIVATIVE FINANCIAL INSTRUMENTS
Under U.S. GAAP, the Group marks all of its derivative financial
instruments to fair value on an individual basis through the income statement.
Therefore, their carrying value is equal to their fair values. Our derivative
financial instruments do not qualify for hedge accounting under U.S. GAAP. The
estimated fair values of derivative financial instruments are provided in Note
38 to the Bayer Consolidated Financial Statements.
The use of derivatives is confined to the hedging of the operating business
and of the related investments and financing transactions.
NON-DERIVATIVE FINANCIAL INSTRUMENTS
The U.S. GAAP carrying values are equivalent to the IAS carrying values for
all non-derivative financial assets and liabilities, except for marketable
securities as described above. Non-derivative financial assets consist
F-60
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)
of cash and cash equivalents, time deposits, and marketable securities.
Non-derivative liabilities consist of commercial paper, bank or other short-term
financial debts, and long-term debt.
The carrying amount of cash and cash equivalents, time deposits, commercial
paper, and bank and other short-term financial debts approximates their
estimated fair values, due to the short-term nature of these instruments. The
fair value for marketable securities are estimated based on listed market prices
or broker or dealer price quotes. The fair value of long-term debt is estimated
based on the current quoted market rates available for debt with similar terms
and maturities.
The estimated fair values of the long and short-term financial debt is
provided in Note 38 to the Group Consolidated Financial Statements.
COMPREHENSIVE INCOME
SFAS No. 130 "Reporting Comprehensive Income" established standards for the
reporting and display of comprehensive income and its components. Comprehensive
income includes net income on all changes in equity during a period that arise
from non-owner sources, such as foreign currency items and unrealized gains and
losses on securities available-for-sale. The additional disclosures required
under U.S. GAAP are as follows:
2000 1999
----------- -----------
(E MILLION) (E MILLION)
Net income under U.S. GAAP.................................. 1,783 1,967
Other comprehensive income:
Unrealized market value adjustment on available-for-sale
securities (net of taxes of E3 million and E7 million,
respectively).......................................... 799 507
Reclassification adjustment:
Net realized gains on sales of securities (net of taxes
of E4 million and E5 million, respectively)........... (12) (7)
Additional minimum pension liability (net of taxes of E1
million and E19 million, respectively)................. 2 27
Foreign currency translation adjustment................... 288 1,304
----- -----
COMPREHENSIVE INCOME UNDER U.S. GAAP........................ 2,860 3,798
===== =====
F-61
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)
EMPLOYEE BENEFIT PLANS
Presented below are the disclosures required by U.S. GAAP that are
different from those provided under IAS. The following provides a reconciliation
of benefit obligations, plan assets and funded status of the plan:
OTHER POST-
PENSION BENEFITS EMPLOYMENT BENEFITS
---------------- --------------------
2000 1999 2000 1999
------ ------ -------- --------
(E MILLION)
BENEFIT OBLIGATION
At beginning of year.................................. 10,161 10,589 864 841
Service cost.......................................... 323 300 192 176
Interest cost......................................... 642 587 52 46
Spin-offs of subsidiaries............................. (91) (1,129) -- (91)
Acquisitions.......................................... -- 69 7 --
Plan settlements...................................... (12) (15) -- --
Actuarial (gain) loss................................. 51 (10) (13) 19
Foreign currency translation.......................... 128 370 50 91
Benefit payments...................................... (518) (600) (203) (218)
------ ------ ------ ------
BENEFIT OBLIGATION AT END OF YEAR..................... 10,684 10,161 949 864
------ ------ ------ ------
PLAN ASSETS AT FAIR VALUE
At beginning of year.................................. 8,407 7,751 337 252
Actual return on plan assets.......................... 355 1,115 24 39
Spin-offs of subsidiaries............................. (72) (838) -- --
Acquisitions.......................................... 51 87 -- --
Foreign currency translation.......................... 155 397 26 44
Employer contribution................................. 368 449 205 220
Employee contributions................................ 44 46 -- --
Benefit payments...................................... (518) (600) (203) (218)
------ ------ ------ ------
PLAN ASSETS AT FAIR VALUE AT END OF YEAR.............. 8,790 8,407 389 337
------ ------ ------ ------
F-62
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)
OTHER POST-
PENSION BENEFITS EMPLOYMENT BENEFITS
---------------- --------------------
2000 1999 2000 1999
------ ------ -------- --------
(E MILLION)
FUNDED STATUS......................................... (1,894) (1,754) (560) (527)
Unrecognized transition obligation.................... 79 101 -- --
Unrecognized prior service cost....................... 3 2 5 5
Unrecognized actuarial (gains) losses................. (130) (362) (82) (71)
ADDITIONAL MINIMUM LIABILITY.......................... (215) (218) -- --
------ ------ ------ ------
PREPAID (ACCRUED) BENEFIT COST........................ (2,157) (2,231) (637) (593)
------ ------ ------ ------
Amounts recognized in the balance sheet
Prepaid benefit cost.................................. 1,604 1,477 -- --
Accrued benefit liability............................. (3,761) (3,708) (637) (593)
------ ------ ------ ------
NET AMOUNT RECOGNIZED................................. (2,157) (2,231) (637) (593)
------ ------ ------ ------
BENEFIT COST
Service cost.......................................... 323 300 192 176
Flat-rate tax on employer contributions............... 7 8 -- --
Interest cost......................................... 642 587 52 46
Expected return on plan assets........................ (592) (517) (30) (22)
Spin-off of subsidiaries.............................. -- (32) -- (33)
Employee contributions................................ (42) (44) -- --
Amortisation of unrecognized past service cost........ 1 10 -- 1
Amortisation of transition obligation................. 20 20 -- --
Amortisation of actuarial (gains) losses.............. (9) 51 (1) (2)
------ ------ ------ ------
NET PERIODIC BENEFIT COST............................. 350 383 213 166
====== ====== ====== ======
OTHER POST-RETIREMENT BENEFIT PLANS WEIGHTED-AVERAGE ASSUMPTIONS AS OF DECEMBER 31, 2000 1999
----------------------------------------------------------------------------------- ----- -----
% %
Discount rate.......................................................... 7.00% 7.00%
Rate of compensation increase.......................................... N/A N/A
Expected return on plan assets......................................... 8.50% 8.50%
The assumed health care cost trend rate at December 31, 2000 was 6.0%
gradually declining to 5.0% by the year 2003. A one-percentage-point change in
the assumed health care cost trend rates compared to those used for 2000 would
have the following effects:
1% POINT INCREASE 1% POINT DECREASE
----------------- -----------------
(E MILLION)
Effects on total of service and interest cost
components.............................................. 11 (9)
Effect on post retirement benefit obligations............. 76 (65)
The Group applies Accounting Principles Board Opinion No. 25 "Accounting
for Stock Issued to Employees" and related interpretations in accounting for its
stock compensation program.
PRO FORMA NET INCOME
Statement of Financial Accounting Standards No. 123 "Accounting for
Stock-Based Compensation" would result in the same accounting treatment for the
Group's stock incentive plans as was applied under IAS. Hence the additional pro
forma discussions required under SFAS No. 123 do not apply.
F-63
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)
PROPORTIONAL CONSOLIDATION
The Group accounts for its investment in 41 joint ventures using the
proportional consolidation method, which is the benchmark treatment specified
under IAS 31. Under U.S. GAAP, investments in joint ventures generally are
accounted for under the equity method. The differences in accounting treatment
between proportionate consolidation and the equity method of accounting have no
impact on the Group's consolidated stockholders' equity or net income. Rather,
they relate solely to matters of classification and display. The United States
Securities and Exchange Commission (SEC) permits the omission of such
differences in classification and display in the reconciliation to U.S. GAAP
provided certain criteria have been met.
Condensed financial information relating to the Group's pro-rata interest
in joint ventures accounted for using the proportionate consolidation method is
as follows:
BALANCE SHEET INFORMATION DEC. 31, 2000 DEC. 31, 1999
------------------------- ------------- -------------
(IN MILLION E)
Current assets.............................................. 582 576
Noncurrent assets........................................... 791 674
Short-term liabilities...................................... (511) (487)
Long-term liabilities....................................... (189) (201)
STATEMENT OF INCOME INFORMATION DEC. 31, 2000 DEC. 31, 1999
------------------------------- ------------- -------------
(IN MILLION E)
Net sales................................................... 1,799 1,514
Operating result............................................ 132 56
Net income.................................................. 118 23
STATEMENT OF CASH FLOW INFORMATION DEC. 31, 2000 DEC. 31, 1999
---------------------------------- ------------- -------------
(IN MILLION E)
Net cash provided by operating activities................... 159 119
Net cash (used in) investing activities..................... (142) (79)
Net cash (used in) financing activities..................... (29) (57)
SELF-INSURANCE
Various different Group companies are self-insured to different degrees.
The maximum amount of any Group companies' self-insurance is for general
liability up to approximately E7 million per occurrence, and product liability
up to approximately E12 million per occurrence up to a maximum of approximately
E19 million per year. An estimate of the cost of settling existing claims is
included under accrued liabilities.
EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS
U.S. GAAP
In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101"). SAB 101 provides guidance on the application of U.S. generally accepted
accounting principles to revenue recognition issues in financial statements. SAB
101 outlines the criteria that must be met to recognize revenue and provides
guidance for disclosures related to revenue recognition policies. Bayer's
adoption of SAB 101 in calendar 2000 did not have a material effect on the
Group's financial position, results of operations or cash flows.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44 ("FIN 44"), "Accounting for Certain Transactions Involving
Stock Compensation -- An Interpretation of Accounting Principles Board Opinion
No. 25 ("APB 25")." FIN 44 clarifies the definition of an employee for purposes
of applying APB 25, the criteria for determining whether a plan qualifies as a
noncompensatory plan; the accounting consequences of various modifications to
the terms of the previously fixed stock options or awards and the
F-64
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)
accounting for an exchange of stock compensation awards in a business
combination. Bayer's adoption of FIN 44 in calendar 2000 had no effect on the
Group's financial position, results of operations or cash flows.
Statement of Financial Accounting Standards ("SFAS") No. 133 "Accounting
for Derivative Instruments and Hedging Activities," as amended by SFAS No. 137
and No. 138, requires all derivative instruments be recorded on the balance
sheet at their fair value. Changes in the fair value of derivatives are recorded
each period in current earnings or other comprehensive income. The adoption of
SFAS No. 133 as of January 1, 2001 did not have a material effect on the Group's
financial position, results of operations or cash flows.
In June 2001, the Financial Accounting Standards Board approved SFAS 141
"Business Combinations" and SFAS 142 "Goodwill and Other Intangible Assets".
SFAS 141 requires the purchase method of accounting to be used for all business
combinations initiated after June 30, 2001, establishes specific criteria for
the recognition of intangible assets separately from goodwill, and requires
unallocated negative goodwill to be written off immediately as an extraordinary
gain. Bayer will apply SFAS 141 to all business combinations for which purchase
agreements are signed after June 30, 2001. SFAS 142 addresses the accounting for
goodwill and identifiable intangible assets subsequent to their acquisition.
Amortization of goodwill will discontinue upon adoption of SFAS 142. In
addition, goodwill recorded as a result of business combinations completed
during the six-month period ended December 31, 2001 will not be amortized. All
goodwill and intangible assets will be tested for impairment in accordance with
the provision of this statement. The Group will apply the provisions of SFAS 142
beginning January 1, 2002. Bayer has not completed its analysis of these
standards and, accordingly, has not determined what affect the adoption of SFAS
141 and 142 will have on the Group's financial position, results of operations
or cash flows.
[45] SUBSEQUENT EVENTS
In January 2001, the Group further enhanced its position in the competitive
crop protection market by acquiring MIKADO(R), a leading corn herbicide in
Europe, from Syngenta for E115 million in cash.
Effective January 1, 2001, the Dralon(R) business of the Fibers Business
Group was sold to the Fraver group of Biella, Italy.
Effective May 1, 2001, the Group sold its 50 percent interest in EC
Erdolchemie GmbH to Deutsche BP, the other partner in the joint venture. In
addition, the Company concluded long-term supply contracts to secure access to
petrochemical feedstocks from EC Erdolchemie GmbH.
Effective January 1, 2001 the Company sold its 20 percent interest in
Kerr-McGee Pigments GmbH & Co. KG.
On May 2, 2001, the Company paid out a dividend of E1,022 million (E1.40
per share). This dividend was not included in accrued liabilities at December
31, 2000 as shareholders had not yet approved it until April 27, 2001.
TOTAL REMUNERATION OF THE BOARD OF MANAGEMENT AND THE SUPERVISORY BOARD,
ADVANCES AND LOANS
The remuneration of the Board of Management for 2000 amounted to
E10,387,801. Emoluments to retired members of the Board of Management and their
surviving dependents amounted to E8,923,934.
Pension provisions for these individuals, amounting to E58,849,572 are
reflected in the balance sheet of Bayer AG.
The remuneration of the Supervisory Board amounted to E2,078,680.
F-65
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)
There were no loans to members of the Board of Management or the
Supervisory Board outstanding as of December 31, 2000, nor any repayments of
such loans during the year.
Leverkusen,
Bayer Aktiengesellschaft
The Board of Management
F-66
BAYER GROUP CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
JUNE 30, JUNE 30,
2001 2000
-------- --------
(E MILLION)
NET SALES................................................... 15,972 15,238
------ ------
Net sales from discontinuing operations..................... (354) (739)
Net sales from continuing operations........................ 15,618 14,499
Cost of goods sold.......................................... (8,464) (7,553)
------ ------
GROSS PROFIT................................................ 7,154 6,946
------ ------
Selling expenses............................................ (3,583) (3,124)
Research and development expenses........................... (1,210) (1,105)
General administration expenses............................. (554) (532)
Other operating income...................................... 150 157
Other operating expenses.................................... (601) (421)
------ ------
OPERATING RESULT FROM CONTINUING OPERATIONS................. 1,356 1,921
------ ------
Operating result from discontinuing operations.............. 315 73
------ ------
OPERATING RESULT............................................ 1,671 1,994
------ ------
NON-OPERATING RESULT........................................ (230) (218)
------ ------
INCOME BEFORE INCOME TAXES.................................. 1,441 1,776
------ ------
Income taxes................................................ (437) (732)
------ ------
INCOME AFTER TAXES.......................................... 1,004 1,044
------ ------
Minority stockholders' interest............................. 2 (11)
------ ------
NET INCOME.................................................. 1,006 1,033
====== ======
BASIC AND DILUTED EARNINGS PER SHARE (E).................... 1.38 1.41
====== ======
F-67
BAYER GROUP CONSOLIDATED BALANCE SHEETS (UNAUDITED)
JUNE 30, JUNE 30,
2001 2000
-------- --------
(E MILLION)
ASSETS
NONCURRENT ASSETS
Intangible assets........................................... 5,245 4,072
Property, plant and equipment............................... 13,735 12,747
Investments................................................. 3,325 1,387
------ ------
22,305 18,206
------ ------
CURRENT ASSETS
Inventories................................................. 6,640 5,439
Receivables and other assets
Trade accounts receivable................................. 6,755 6,266
Other receivables and other assets........................ 2,616 2,081
------ ------
9,371 8,347
------ ------
LIQUID ASSETS
Marketable securities and other instruments............... 58 213
Cash and cash equivalents................................. 608 878
------ ------
666 1,091
------ ------
16,677 14,877
------ ------
DEFERRED TAXES.............................................. 47 425
------ ------
DEFERRED CHARGES............................................ 286 342
------ ------
39,315 33,850
====== ======
of which discontinuing operations........................... 243 1,002
STOCKHOLDERS' EQUITY AND LIABILITIES
STOCKHOLDERS' EQUITY
Capital stock of Bayer AG................................... 1,870 1,870
Capital reserves of Bayer AG................................ 2,942 2,942
Retained earnings........................................... 10,372 9,032
Net income.................................................. 1,006 1,033
Translation differences..................................... 1,106 279
------ ------
17,296 15,156
------ ------
MINORITY STOCKHOLDERS' INTEREST............................. 103 190
------ ------
LIABILITIES
Long-term liabilities
Long-term financial obligations........................... 3,240 3,015
Miscellaneous long-term liabilities....................... 184 187
Provisions for pensions and other post-employment
benefits............................................... 4,312 4,242
Other long-term provisions................................ 1,117 1,176
------ ------
8,853 8,620
------ ------
Short-term liabilities
Short-term financial obligations.......................... 5,041 2,684
Trade accounts payable.................................... 1,830 1,782
Miscellaneous short-term liabilities...................... 2,790 2,438
Short-term provisions..................................... 1,731 1,523
------ ------
11,392 8,427
------ ------
20,245 17,047
------ ------
of which discontinuing operations........................... 75 483
------ ------
DEFERRED TAXES.............................................. 1,481 1,271
------ ------
DEFERRED INCOME............................................. 190 186
------ ------
39,315 33,850
====== ======
F-68
BAYER GROUP CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
CAPITAL CAPITAL TOTAL
NUMBER STOCK OF RESERVES OF RETAINED NET TRANSLATION STOCKHOLDERS'
OF SHARES BAYER AG BAYER AG EARNINGS INCOME DIFFERENCES EQUITY
----------- -------- ----------- -------- ------ ----------- -------------
(E MILLION, EXCEPT SHARE DATA)
DEC. 31, 1999........................ 730,341,920 1,870 2,942 7,965 2,002 227 15,006
----------- ----- ----- ------ ------ ----- ------
CHANGES IN STOCKHOLDERS' EQUITY
RESULTING FROM CAPITAL
CONTRIBUTIONS AND DIVIDEND PAYMENTS
- Capital contributions..............
- Dividend payments.................. (949) (949)
------ ------
(949) (949)
------ ------
OTHER CHANGES IN STOCKHOLDERS' EQUITY
NOT RECOGNIZED IN INCOME
- Exchange differences............... 52 52
- Other differences.................. 14 14
------ ----- ------
14 52 66
------ ----- ------
CHANGES IN STOCKHOLDERS' EQUITY
RECOGNIZED IN INCOME
- Allocation to retained earnings.... 1,053 (1,053) 0
- Income after taxes for 2000........ 1,033 1,033
----------- ----- ----- ------ ------ ----- ------
JUNE 30, 2000........................ 730,341,920 1,870 2,942 9,032 1,033 279 15,156
----------- ----- ----- ------ ------ ----- ------
CHANGES IN STOCKHOLDERS' EQUITY
RESULTING FROM CAPITAL
CONTRIBUTIONS AND DIVIDEND PAYMENTS
- Capital contributions..............
- Dividend payments..................
OTHER CHANGES IN STOCKHOLDERS' EQUITY
NOT RECOGNIZED IN INCOME
- Exchange differences............... 186 186
- Other differences.................. 15 15
------ ----- ------
15 186 201
------ ----- ------
CHANGES IN STOCKHOLDERS' EQUITY
RECOGNIZED IN INCOME
- Allocation to retained earnings....
- Income after taxes for 2000........ 783 783
----------- ----- ----- ------ ------ ----- ------
DEC. 31, 2000........................ 730,341,920 1,870 2,942 9,047 1,816 465 16,140
----------- ----- ----- ------ ------ ----- ------
CHANGES IN STOCKHOLDERS' EQUITY
RESULTING FROM CAPITAL
CONTRIBUTIONS AND DIVIDEND PAYMENTS
- Capital contributions..............
- Dividend payments.................. (1,022) (1,022)
------ ------
(1,022) (1,022)
------ ------
OTHER CHANGES IN STOCKHOLDERS' EQUITY
NOT RECOGNIZED IN INCOME
- Exchange differences............... 641 641
- Other differences.................. 72 72
- Special item....................... 459 459
------ ----- ------
531 641 1,172
------ ----- ------
CHANGES IN STOCKHOLDERS' EQUITY
RECOGNIZED IN INCOME
- Allocation to retained earnings.... 794 (794) 0
- Income after taxes for 2000........ 1,006 1,006
----------- ----- ----- ------ ------ ----- ------
JUNE 30, 2001........................ 730,341,920 1,870 2,942 10,372 1,006 1,106 17,296
----------- ----- ----- ------ ------ ----- ------
F-69
BAYER GROUP CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
JUNE 30, JUNE 30,
2001 2000
-------- --------
(E MILLION)
Operating result............................................ 1,671 1,994
Income taxes currently payable.............................. (578) (675)
Depreciation and amortization............................... 1,222 1,039
Change in long-term provisions.............................. (155) (133)
Gains on retirements of noncurrent assets................... (324) (56)
------ ------
GROSS CASH PROVIDED BY OPERATING ACTIVITIES................. 1,836 2,169
------ ------
(Increase) Decrease in inventories.......................... (485) (157)
(Increase) in trade accounts receivable..................... (542) (709)
Increase (Decrease) in trade accounts payable............... (126) 153
Changes in other working capital............................ 148 (104)
------ ------
NET CASH PROVIDED BY OPERATING ACTIVITIES................... 831 1,352
------ ------
of which discontinuing operations........................... (9) (61)
Cash outflows for additions to property, plant and
equipment................................................. (1,146) (1,267)
Cash inflows from sales of property, plant and equipment.... 168 178
Cash inflows and outflows related to investments............ 473 23
Cash outflows for acquisitions.............................. (414) (2,545)
Interest and dividends received............................. 94 102
Cash inflows from marketable securities..................... 159 132
------ ------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES......... (666) (3,377)
------ ------
of which discontinuing operations........................... (14) (74)
Bayer AG dividend and dividend payments to minority
stockholders.............................................. (1,027) (952)
Issuances of debt........................................... 1,859 2,471
Retirements of debt......................................... (740) (1,300)
Interest paid............................................... (239) (185)
Taxes on financial result................................... 76 26
------ ------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES......... (71) 60
------ ------
of which discontinuing operations........................... (41) (11)
------ ------
CHANGE IN CASH AND CASH EQUIVALENTS DUE TO BUSINESS
ACTIVITIES................................................ 94 (1,965)
------ ------
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR.............. 491 2,812
------ ------
Change in cash and cash equivalents due to changes in scope
of consolidation.......................................... 21 28
Change in cash and cash equivalents due to exchange rate
movements................................................. 2 3
------ ------
CASH AND CASH EQUIVALENTS AT JUNE 30,....................... 608 878
------ ------
Marketable securities and other instruments................. 58 213
------ ------
LIQUID ASSETS AS PER BALANCE SHEETS......................... 666 1,091
====== ======
F-70
NOTES TO THE UNAUDITED INTERIM FINANCIAL STATEMENTS OF THE BAYER GROUP
ACCOUNTING POLICIES
The Unaudited Interim Financial Statements as of and for the six months
ended June 30, 2001 has been prepared in accordance with the accounting policies
set out in the Financial Report for the year ended December 31, 2000, except as
indicated below, and International Accounting Standard (IAS) 34 on interim
financial reporting.
EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS
Bayer's 2001 financial statements reflect the requirements of the following
new or revised IASs and SICs that the Group implemented in 2001:
IAS 12 (Revised 2000) Income Taxes
IAS 19 (Revised 2000) Employee Benefits
IAS 39 Financial Instruments: Recognition and Measurement
IAS 40 Investment Property
SIC 17 Equity -- Cost of an Equity Transaction
SIC 19 Reporting Currency -- Measurement and Presentation
of Financial Statements under IAS 21 and IAS 29
The adoption of these standards, with the exception of IAS 39, did not have
any significant impact on Bayer's financial position or its results of
operations during the first half of 2001 or on the comparability of the
consolidated financial statements for the first half of 2000. The adoption of
IAS 39 resulted in an increase to equity related to the fair market value of the
Group's investment portfolio. The Group also recognized an increase in equity
relating to unrealized gains in derivative instruments hedging future cash
flows.
On January 1, 2001, the Group adopted International Accounting Standard
(IAS) 39 "Financial Instruments: Recognition and Measurement." IAS 39 requires
that all financial assets and financial liabilities, including derivatives, be
recognized in the balance sheet at their fair values. The Group's investments in
debt and equity instruments are classified as available-for-sale; therefore,
changes in the fair value of these investments are recognized in a separate
component of equity. The Group does not hold trading investments or
held-to-maturity investments. For derivative instruments designated as fair
value hedges, changes in the fair values of derivative instruments will
generally be offset in the income statement by changes in the fair values of the
hedged items. For derivative instruments designated as cash flow hedges, the
effective portion of any hedge is reported in accumulated other comprehensive
income (loss) until it is cleared to earnings during the same period in which
the hedged item affects earnings. The ineffective portion of all hedges is
recognized in current period earnings. Derivative instruments that are not
designated as hedges are recognized at their fair values.
OBJECTIVES AND STRATEGIES FOR HOLDING DERIVATIVE INSTRUMENTS
Under the Group's Corporate Treasury Guidelines, the Group enters into
derivative hedging instruments in the ordinary course of business to reduce its
exposure to foreign currency and interest rate risks. The Guidelines establish a
variety of approved derivative instruments to be utilized in each risk
management program, as well as varying levels of exposure coverage and time
horizons based on an assessment of risk factors related to each program.
Derivative instruments utilized during the period include forwards, options and
swaps.
FAIR VALUE HEDGES
During the six months ended June 30, 2001, the Group has maintained a
number of interest rate swaps that involve the exchange of fixed for floating
rate interest payments that allow the Group to maintain a target range of
floating rate debt. During the period, the Group also maintained foreign
currency swaps that effectively modify
F-71
NOTES TO THE UNAUDITED INTERIM FINANCIAL STATEMENTS OF THE BAYER GROUP --
(CONTINUED)
the principal of debts denominated in foreign currencies into debts denominated
in the local currency of issuing subsidiary. The Group expects that its interest
rate and foreign currency swaps will be effective because the critical terms of
the hedging instruments and those of the entire hedged assets or liabilities are
the same. Changes in the fair value of derivatives that hedge interest rate risk
are recorded in interest expense-net each period. The offsetting changes in the
fair values of the related debt are also recorded in interest expense-net.
Changes in the fair value of derivatives that hedge foreign exchange rate risks
are recorded in other non-operating expense-net for each period. The offsetting
changes in the fair values of the related debt are also recorded in other non-
operating expense-net. The Group maintains no other fair value hedges.
CASH FLOW HEDGES
The Group maintains a number of cash flow hedging programs to reduce risks
related to foreign currency. Foreign currency programs involve hedging a portion
of foreign currency-denominated cash receipts and significant cash payments.
While each risk management program has a different time horizon, no program
currently extends beyond the next one-year period.
The effects of hedges of foreign currency-denominated cash receipts are
reported in other non-operating expense-net, and the effects of hedges of
payments are reported in the same line item of the underlying payment.
There was no hedge ineffectiveness reported in earnings in the six-months
ended June 30, 2001, and no amounts were reclassified to earnings for forecasted
transactions that did not occur.
EQUITY (CASH FLOW HEDGE PORTION ONLY) PRETAX TAX AFTER-TAX
------------------------------------- ------ ---- ---------
Balance at January 1, 2001 (upon adoption of IAS 39)........ E 95 E 38 E 57
Additions and revaluations of derivatives designated as cash
flow hedges............................................... (61) 24 (37)
Less: Clearance of hedge results to earnings during the
quarter................................................... (37) 15 (22)
---- ---- ----
Balance at June 30, 2001.................................... E (3) E 1 E (2)
==== ==== ====
Portion of ending balance expected to be reclassified into
earnings over the next twelve months...................... E (3) E 1 E (2)
==== ==== ====
Cash flow hedge results are reclassified into earnings during the same
period in which the related exposure impacts earnings. If it appears that a
forecasted transaction will not materialize, reclassifications are made sooner.
HEDGES OF NET INVESTMENT IN A FOREIGN ENTITY
The Group does not maintain any hedges of net investment in a foreign
entity.
NOTES TO THE STATEMENTS OF INCOME
[1] DISCONTINUING OPERATIONS
EC Erdolchemie GmbH, Cologne, until May 1, 2001 a joint venture between
Bayer and Deutsche BP AG, produces a variety of petrochemical feedstocks from
liquid hydrocarbons and natural gas. As of May 1, 2001 Bayer sold its 50 percent
interest in EC Erdolchemie, to the joint venture partner Deutsche BP AG. The
E334 million operating result shown in the table below comprises that of the
Erdolchemie Business Group up to the date of divestiture and the E317 million in
income from the sale of shares. The Erdolchemie Business Group, which was
formerly included in the Chemicals segment, is reflected under discontinuing
operations.
In 2001, the Group approved a plan to discontinue the Fibers business
group, which was formerly included in the Polymers division. Certain operation
within fibers were divested in January 2001 and the Group expects to divest of
the remaining operations by the end of 2001.
F-72
NOTES TO THE UNAUDITED INTERIM FINANCIAL STATEMENTS OF THE BAYER GROUP --
(CONTINUED)
The textile dyes business of our joint venture DyStar was combined with
that of BASF effective October 1, 2000. The operating result of the DyStar
Business Group, amounting to E5 million (2000: E6 million), which was formerly
included in the Chemicals segment, is reflected under discontinuing operations.
The non-operating results and the income taxes attributable to EC
Erdolchemie, DyStar and Fibers are reflected in the corresponding items of the
income statement.
ERDOLCHEMIE FIBERS DYSTAR TOTAL
----------- ----------- ----------- -----------
2001 2000 2001 2000 2001 2000 2001 2000
---- ---- ---- ---- ---- ---- ---- ----
(E MILLION)
June 30
NET SALES............................ 233 311 121 251 -- 177 354 739
---- ---- ---- ---- ---- ---- ---- ----
Cost of goods sold................... (196) (255) (101) (184) -- (111) (297) (550)
Selling expenses..................... (16) (21) (15) (24) -- (34) (31) (79)
Research and development expenses.... -- (1) (4) (4) -- (5) (4) (10)
General administration expenses...... (3) (3) (4) (5) -- (11) (7) (19)
Other operating income............... 317 4 1 -- -- 5 1 9
Other operating expenses............. (1) (2) (17) -- -- (15) (18) (17)
---- ---- ---- ---- ---- ---- ---- ----
OPERATING RESULT FROM DISCONTINUING
OPERATIONS......................... 334 33 (19) 34 -- 6 315 73
---- ---- ---- ---- ---- ---- ---- ----
Non-operating result................. (1) -- (1) 1 -- (7) (2) (6)
---- ---- ---- ---- ---- ---- ---- ----
Equity-method income................. -- -- -- -- 5 -- 5 --
INCOME (LOSS) BEFORE INCOME TAXES.... 333 33 (20) 35 5 (1) 318 67
---- ---- ---- ---- ---- ---- ---- ----
Income taxes......................... (6) -- (3) (8) (2) (1) (11) (9)
---- ---- ---- ---- ---- ---- ---- ----
INCOME (LOSS) AFTER TAXES............ 327 33 (23) 27 3 (2) 307 58
==== ==== ==== ==== ==== ==== ==== ====
[2] SEGMENT REPORTING
In accordance with IAS 14 (Segment Reporting), a breakdown of certain data
in the financial statements is given by business segment and geographical
region, generally based on location of assets. The aim is to provide users of
the financial statements with information regarding the profitability and future
prospects of the Group's various activities. To allow a more accurate appraisal
of continuing operations, the discontinuing operations are shown separately.
F-73
NOTES TO THE UNAUDITED INTERIM FINANCIAL STATEMENTS OF THE BAYER GROUP --
(CONTINUED)
The Group is managed based upon business groups which are aggregated into
reportable business segments based upon economic characteristics, the nature of
products and production processes, types of customers, methods of distribution
and on nature of the regulatory environment. The business segment reporting in
these financial statements has been updated to reflect the Group's current
internal reporting and decisions taken in 2001, such as the decision to
discontinue certain business groups and planned changes in connection with the
holding company structure of the Group. Giving effect to these changes, the
Group operates 14 business groups, which have been aggregated into 7 reportable
business segments groups.
SEGMENT ACTIVITY
------- --------
HEALTHCARE
Pharmaceuticals Development and marketing of ethical pharmaceuticals
Consumer Care & Diagnostics Development and marketing of over-the-counter
medications, nutritional supplements, insecticides and
insect repellants and products for central laboratory,
near patient testing, and self-testing applications
AGRICULTURE
Crop Protection Development and marketing of chemical insecticides,
fungicides and herbicides
Animal Health Development and marketing of veterinary medicines,
environmental health products, and nutritionals for the
health care of companion animals and commercial
livestock/poultry
POLYMERS
Plastics & Rubber Manufacture and supply of engineered plastics and
supplier of raw materials, rubber chemicals and
modifiers to the rubber and tire industry
Polyurethanes and Coatings & Colorants Development, production and marketing of raw materials,
formulations and systems used in producing polyurethane
polymers, lacquers, coatings, sealants, adhesives, and
colorants
CHEMICALS Manufacture and marketing of bulk and specialty
chemicals, metal and ceramic powders, flavors and
fragrances and cellulose derivatives
The reconciliation line reflects intersegment items and income and expenses
not allocable to the segments, such as central R&D expenses, corporate costs,
and revenues and expenses from sideline operations. The intersegment sales
reflect intragroup transactions effected at transfer prices fixed on an
arm's-length basis. The reconciliation line also reflects those assets and
liabilities that cannot be allocated to the reportable segments.
Business activities that Bayer has already divested or intends to divest
are shown as discontinuing operations. These are the worldwide DyStar business
group; the Erdolchemie business group located in Europe; the worldwide Agfa
business segment; and the worldwide Fibers business.
The reportable segment and geographical segment data is calculated as
follows:
- Comparability of the operating results of different years may be
restricted by exceptional items relating particularly to restructuring
measures and acquisitions or divestitures of companies or businesses.
For this reason, the operating result before exceptional items is also
shown.
- The return on sales before exceptional items is the ratio of the
operating result before exceptional items to external sales.
F-74
NOTES TO THE UNAUDITED INTERIM FINANCIAL STATEMENTS OF THE BAYER GROUP --
(CONTINUED)
- Expenses included in exceptional items mainly relate to restructuring
measures affecting the operating business.
- The return on sales including exceptional items is the ratio of the
operating result including exceptional items to external sales.
KEY DATA BY BUSINESS SEGMENT
CONSUMER POLYURETHANES,
PHARMA- CARE & PLASTICS & COATINGS &
CEUTICALS DIAGNOSTICS CROP PROTECTION ANIMAL HEALTH RUBBER COLORANTS
--------------- --------------- --------------- --------------- --------------- ---------------
JUNE 30,
---------------------------------------------------------------------------------------------------------
BUSINESS SEGMENTS 2001 2000 2001 2000 2001 2000 2001 2000 2001 2000 2001 2000
----------------- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
(E MILLION)
Net sales (external)... 2,932 2,861 1,997 1,886 1,609 1,579 483 514 2,989 2,812 2,682 2,406
-- Change in E......... 2.5% 23.5% 5.9% 16.7% 1.9% 21.2% (6.0%) 17.0% 6.3% 28.4% 11.5% 25.3%
-- Change in local
currencies............ 0.8% 12.7% 3.6% 6.8% 1.0% 12.2% (7.6%) 7.0% 4.2% 22.5% 9.5% 18.8%
Intersegment sales..... 18 20 15 0 77 56 5 5 61 58 86 89
Operating result before
exceptional items..... 315 596 130 130 370 388 83 99 316 261 116 336
-- Change.............. (47.1%) 68.4% 0.0% 64.6% (4.6%) 8.7% (16.2%) 67.8% 21.1% 12.5% (65.5%) (7.4%)
Return on sales before
exceptional items..... 10.7% 20.8% 6.5% 6.9% 23.0% 24.6% 17.2% 19.3% 10.6% 9.3% 4.3% 14.0%
Exceptional items...... 8 14 (12) (40) 0 (6) 0 0 (22) (15) (18) (8)
Return on sales
including exceptional
items................. 11.0% 21.3% 5.9% 4.8% 23.0% 24.2% 17.2% 19.3% 9.8% 8.7% 3.7% 13.6%
Operating result....... 323 610 118 90 370 382 83 99 294 246 98 328
Gross cash flow........ 252 525 225 169 345 289 73 81 429 369 348 421
Total assets........... 5,541 4,693 3,908 3,464 3,794 2,914 787 816 6,710 5,763 8,024 6,864
CHEMICALS
---------------
JUNE 30,
---------------
BUSINESS SEGMENTS 2001 2000
----------------- ------ ------
(E MILLION)
Net sales (external)... 2,496 2,104
-- Change in E......... 18.6% 17.5%
-- Change in local
currencies............ 17.3% 11.6%
Intersegment sales..... 245 239
Operating result before
exceptional items..... 293 248
-- Change.............. 18.1% (3.9%)
Return on sales before
exceptional items..... 11.7% 11.8%
Exceptional items...... (73) (1)
Return on sales
including exceptional
items................. 8.8% 11.7%
Operating result....... 220 247
Gross cash flow........ 285 301
Total assets........... 5,942 4,844
CONTINUING DISCONTINUING
RECONCILIATION OPERATIONS OPERATIONS BAYER GROUP
--------------- --------------- ------------- ---------------
BUSINESS SEGMENTS 2001 2000 2001 2000 2001 2000 2001 2000
----------------- ------ ------ ------ ------ ----- ----- ------ ------
Net sales (external)........................................ 430 337 15,618 14,499 354 739 15,972 15,238
-- Change in E.............................................. 7.7% 21.8% 4.8% 7.1%
-- Change in local currencies............................... 6.0% 14.8% 3.1% (0.3%)
Intersegment sales.......................................... (507) (467)
Operating result before exceptional items................... (132) (115) 1,491 1,943 14 78 1,505 2,021
-- Change................................................... (23.3%) 26.3%
Return on sales before exceptional items.................... 9.5% 13.4% 9.4% 13.3%
Exceptional items........................................... (18) 34 (135) (22) 301 (5) 166 (27)
Return on sales including exceptional items................. 8.7% 13.2% 10.5% 13.1%
Operating result............................................ (150) (81) 1,356 1,921 315 73 1,671 1,994
Gross cash flow............................................. (137) (82) 1,820 2,073 16 96 1,836 2,169
Total assets................................................ 4,366 3,490 39,072 32,848 243 1,002 39,315 33,850
F-75
NOTES TO THE UNAUDITED INTERIM FINANCIAL STATEMENTS OF THE BAYER GROUP --
(CONTINUED)
KEY DATA BY REGION
LATIN AMERICA/
AFRICA/ MIDDLE
EUROPE NORTH AMERICA ASIA/PACIFIC EAST RECONCILIATION
--------------- --------------- --------------- --------------- ---------------
JUNE 30,
---------------------------------------------------------------------------------------
REGIONS 2001 2000 2001 2000 2001 2000 2001 2000 2001 2000
------- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net sales (external) -- by market..... 6,546 5,916 4,879 4,657 2,509 2,377 1,684 1,549
-- Change............................. 10.6% 10.3% 4.8% 30.7% 5.6% 42.3% 8.7% 18.6%
Net sales (external) -- by point of
origin............................... 7,309 6,766 5,073 4,785 2,049 1,859 1,187 1,089
-- Change in E........................ 8.0% 10.2% 6.0% 33.4% 10.2% 49.9% 9.0% 16.0%
-- Change in local currencies......... 7.9% 9.6% (0.2%) 19.2% 14.4% 25.6% 4.8% 4.0%
Interregional sales................... 1,751 1,521 968 755 141 105 72 49 (2,932) (2,430)
Operating result before exceptional
items................................ 1,337 1,386 (28) 375 216 220 125 113 (159) (151)
-- Change (3.5%) 2.8% ...... 90.4% (1.8%) 139.1% 10.6% 41.3%
Return on sales before exceptional
items................................ 18.3% 20.5% (0.6%) 7.8% 10.5% 11.8% 10.5% 10.4%
Exceptional items..................... (26) 27 (90) (49) 0 0 0 0 (19) 0
Return on sales including exceptional
items................................ 17.9% 20.9% (2.3%) 6.8% 10.5% 11.8% 10.5% 10.4%
Operating result...................... 1,311 1,413 (118) 326 216 220 125 113 (178) (151)
Gross cash flow....................... 1,379 1,306 286 619 206 200 128 123 (179) (175)
Total assets.......................... 18,441 14,864 14,386 12,026 3,610 3,148 2,112 1,813 523 997
CONTINUING DISCONTINUING
OPERATIONS OPERATIONS BAYER GROUP
--------------- --------------- ---------------
JUNE 30,
---------------------------------------------------
REGIONS 2001 2000 2001 2000 2001 2000
------- ------ ------ ------ ------ ------ ------
Net sales (external) -- by market..... 15,618 14,499 354 739 15,972 15,238
-- Change............................. 7.7% 21.8%
Net sales (external) -- by point of
origin............................... 15,618 14,499 354 739 15,972 15,238
-- Change in E........................ 7.7% 21.8% 4.8% 7.1%
-- Change in local currencies......... 6.0% 14.8% 3.1% (0.3%)
Interregional sales...................
Operating result before exceptional
items................................ 1,491 1,943 14 78 1,505 2,021
-- Change (23.3%) (26.3%)
Return on sales before exceptional
items................................ 9.5% 13.4% 9.4% 13.3%
Exceptional items..................... (135) (22) 301 (5) 166 (27)
Return on sales including exceptional
items................................ 8.7% 13.2% 10.5% 13.1%
Operating result...................... 1,356 1,921 315 73 1,671 1,994
Gross cash flow....................... 1,820 2,073 16 96 1,836 2,169
Total assets.......................... 39,072 32,848 243 1,002 39,315 33,850
[3] EARNINGS PER SHARE
Earnings per share are determined according to IAS 33 (Earnings Per Share)
by dividing the net income by the average number of shares.
In the first half of 2001, as in the first half of 2000, the number of
shares remained constant at 730,341,920. Earnings per share were E1.38 (2000:
E1.41).
There were no subscription rights outstanding in either the first six
months of 2001 or 2000, and therefore no dilutive potential shares.
NOTES TO THE BALANCE SHEETS
[4] RESTRUCTURING CHARGES
During the first six months of 2001, the total charges incurred for
restructuring programs were E63 million, of which E40 million were accrued and
are expected to be used as the related actions under the plans are completed. E8
million of the charges were related to impairments of fixed assets. E5 million
of these charges related to impairments in conjunction with the restructuring of
the Elkhart Consumer Care operations in the U.S. for which the Group directly
reduced the value of the assets in the consolidated balance sheet.
The remaining E55 million of the charges were related to employee
terminations of E12 million and to other third party costs of E43 million. The
employee termination charges include E9 million for employee termination costs
in conjunction with the restructuring of our Sarnia facility in Canada as well
as E1 million of charges related to employee terminations in respect to the
continued integration of Lyondell into our Polyurethanes business in the U.S.
The other third party charges include E10 million of costs related to the
reorganization of the Styrenics business in Europe, E11 million of costs related
to the Lyondell integration and E15 million of costs related to continued
efficiency measures taken by our Pharmaceutical Business Group as a part of a
worldwide restructuring program. Other third party costs are mainly associated
with other obligations due to the streamlining of operations, dismantling and
abandonment of certain facilities, lease obligations as well as other
restructuring measures. Additional charges are expected to be incurred for each
of these programs in the second half 2001.
F-76
NOTES TO THE UNAUDITED INTERIM FINANCIAL STATEMENTS OF THE BAYER GROUP --
(CONTINUED)
The movement in restructuring provisions is as follows:
EMPLOYEE TANGIBLE FIXED OTHER THIRD
TERMINATION COSTS ASSET IMPAIRMENT PARTY COSTS TOTAL
----------------- ---------------- ----------- -----
(E MILLION)
BALANCE AT DECEMBER 31, 2000.............. 86 13 32 131
--- --- --- ---
Additions................................. 12 8 43 63
Cash payments............................. (32) -- (36) (68)
Reclassification to fixed assets.......... -- (14) -- (14)
Translation gain (loss), net.............. 5 1 (3) 3
--- --- --- ---
BALANCE AT JUNE 30, 2001.................. 71 8 36 115
=== === === ===
TANGIBLE FIXED ASSET IMPAIRMENTS
Based on the review of the carrying values of tangible fixed assets,
write-downs are recorded for tangible fixed assets impaired or related to
activities to be restructured, divested or abandoned. The provision is
transferred to accumulated depreciation as the tangible fixed assets are
restructured, divested or abandoned.
OTHER THIRD PARTY COSTS
Other third party costs are mainly associated with other obligations due to
the abandonment of certain facilities.
[5] COMMITMENTS AND CONTINGENCIES
COLLABORATIVE AGREEMENTS
The Group has entered into long-term research agreements with various third
parties under which Bayer will fund various research projects and other
commitments based upon the achievement of certain milestones or other specific
conditions. As of June 30, 2001, the estimated payments to these parties,
assuming the milestones or other conditions are met are as follows:
E MILLION
---------
2001........................................................ 127
2002........................................................ 135
2003........................................................ 140
2004........................................................ 55
2005........................................................ 62
After 2005.................................................. 206
---
793
===
LEGAL PROCEEDINGS
Bayer is involved in a number of legal proceedings. As a global company
active in a wide range of life sciences and chemical activities, we may in the
normal course of our business become involved in proceedings relating to such
matters as:
- product liability;
- patent validity and infringement disputes;
- tax assessments;
- competition and antitrust; and
F-77
NOTES TO THE UNAUDITED INTERIM FINANCIAL STATEMENTS OF THE BAYER GROUP --
(CONTINUED)
- past waste disposal practices and release of chemicals into the
environment.
We cannot predict with certainty the outcome of any proceedings in which we
are or may become involved. An adverse decision in a lawsuit seeking damages
from us could result in a monetary award to the plaintiff and, to the extent not
covered by our insurance policies, could significantly harm our business or the
results of our operations. If we lose a case in which we seek to enforce our
patent rights, we could sustain a loss of future revenue as other manufacturers
begin to market products we developed.
In the remainder of this subsection, we describe what we believe to be the
most significant of the proceedings in which Bayer AG or its subsidiaries are
currently involved.
PATENT VALIDITY CHALLENGES AND INFRINGEMENT PROCEEDINGS; PATENT-RELATED
ANTITRUST ACTIONS
In the United States, Bayer AG and its U.S. subsidiary Bayer Corporation
are plaintiffs or co-plaintiffs in a number of patent infringement actions
against generic drug manufacturers. The lawsuits arose because these
manufacturers filed applications in the United States for regulatory approval of
generic versions of products containing the active ingredients ciprofloxacin or
nifedipine marketed by Bayer or its licensees. Some of these actions have, in
turn, given rise to lawsuits alleging that Bayer AG, Bayer Corporation and other
parties had violated federal and state antitrust and similar statutes.
Generic drug manufacturers may receive approval to market formerly patented
products after all applicable patent protections have expired. A generic drug
manufacturer may, however, attempt to avoid a patent prior to its scheduled
expiry by attacking its validity or enforceability. In the United States, the
Federal Food, Drug, and Cosmetics Act enables generic manufacturers wishing to
market a bio-equivalent version of another manufacturer's product to seek
regulatory approval by filing an Abbreviated New Drug Application (ANDA). In its
ANDA, the applicant must state the basis on which it seeks to avoid any
applicable patents.
One basis for seeking approval is a claim that the applicant's product does
not infringe existing patent rights or that the patent is invalid or
unenforceable. This claim is commonly known as a "paragraph IV certification" or
"ANDA (IV)". Under the Act, the filing of a paragraph IV certification is deemed
an infringement of patent rights. The Act permits the holder of the patent
rights to file an infringement action against the ANDA applicant within 45 days
of receiving notice of the paragraph IV certification. If the holder of the
patent rights chooses not to file suit within this period, the FDA may approve
the ANDA immediately. The filing of a suit, however, stays final FDA approval of
the ANDA for a period of 30 months. The court may shorten or extend this period.
If the court rules that the applicant's product will not infringe the patent or
that the patent is invalid or unenforceable, the FDA may grant approval
immediately. If, on the other hand, the court rules that the product will
infringe the patent, the FDA may not grant final approval until the original
patent has expired.
CIPROFLOXACIN-RELATED ACTIONS
Patent-related actions. In January 1997, Bayer AG and Bayer Corporation
settled a patent infringement suit against Barr Laboratories, Inc. This suit
arose when Barr filed an ANDA (IV) seeking regulatory approval of a generic form
of Bayer's ciprofloxacin anti-infective product, which we sell in the United
States under the trademark Cipro(R). Under the settlement agreement, Barr and
Rugby Laboratories Inc., another generic manufacturer that supported Barr during
the infringement suit, agreed to dismiss the litigation, acknowledging the
validity and enforceability of Bayer's patent rights, and we agreed to pay each
company $24.5 million. The agreement gave us the option, until our patent
expires in 2003, to supply Barr and Rugby's then parent company Hoechst Marion
Roussel Inc. with ciprofloxacin products which they could then market under a
license from Bayer using a single trade name, or else to make quarterly cash
payments. Since concluding the settlement agreement, we have opted to make
payments. Shortly after settling this suit, we applied to the U.S. Patent and
Trademark Office for a reexamination of our patent. The Patent and Trademark
Office reissued the patent in February 1999.
F-78
NOTES TO THE UNAUDITED INTERIM FINANCIAL STATEMENTS OF THE BAYER GROUP --
(CONTINUED)
In April 1999, Danbury Pharmacal Inc., an affiliate of Schein
Pharmaceutical, Inc., filed an ANDA (IV) alleging that our ciprofloxacin patent
was invalid. Mylan Pharmaceuticals, Inc., an affiliate of Mylan Laboratories,
Inc., filed an ANDA (IV) challenging our ciprofloxacin patent in September 1999.
To protect and enforce our patent rights, Bayer AG together with Bayer
Corporation as licensee filed two lawsuits against Danbury Pharmacal and Schein
Pharmaceutical and one lawsuit against Mylan Pharmaceuticals and Mylan
Laboratories in 1999, and a second lawsuit against Mylan Pharmaceuticals and
Mylan Laboratories in 2000. Reddy Cheminor, Inc. intervened as an additional
defendant in the Danbury/Schein suits. All these suits were consolidated for
pre-trial proceedings and trial before the U.S. federal District Court for the
District of New Jersey.
In their responses, the defendants alleged the invalidity and
unenforceability of our reexamined patent on several grounds. They then moved
for summary judgment on the invalidity issue, and we filed a cross-motion for
partial summary judgment. In February 2001, the district court denied the
defendants' motion and granted our cross-motion. The court subsequently entered
a final judgment in our favor, confirming the validity and enforceability of the
patent. The defendants have appealed this judgment to the Court of Appeals for
the Federal Circuit. Oral argument for the appeal has been set on January 7,
2002.
In addition, Bayer AG and Bayer Corporation filed a patent infringement
action in May 2001 against Carlsbad Technology, Inc., arising from Carlsbad's
ANDA (IV) filing seeking regulatory approval of its generic version of Cipro(R).
Carlsbad filed two motions for summary judgment. The first motion alleged as a
matter of patent procedure that Bayer's patent as it relates to ciprofloxacin
should expire in October 2002 and not, as determined by the Patent and Trademark
Office, in December 2003. Bayer filed a cross-motion for summary judgment that
the expiration date is in December 2003. In its second motion, Carlsbad alleged
that ciprofloxacin was obvious in light of the prior art.
If we lost our patent protection for ciprofloxacin, or if the expiration of
the patent were accelerated to October 2002, we believe that we would forego
significant revenue. We cannot predict the appellate court's decision in these
cases with certainty. We intend to continue vigorous action to maintain our
ciprofloxacin patent rights in the United States through their normal expiry in
December 2003.
Antitrust actions. Bayer Corporation has been named as a defendant in 38
putative class action lawsuits, one individual lawsuit and one consumer
protection group lawsuit filed in a number of state and federal courts in the
United States. Bayer AG has also been named as defendant in 20 of these cases,
including the individual lawsuit and the consumer protection group lawsuit; it
has been served with process in the individual lawsuit and twelve of the
putative class action lawsuits. In addition, Barr Laboratories, Aventis S.A.,
Hoechst Marion Roussel, Inc., Rugby Laboratories, Inc. and Watson
Pharmaceuticals, Inc. have each been named as defendant in one or more of these
lawsuits. The plaintiffs in these suits allege that they are direct or indirect
purchasers of Cipro(R) who were damaged because Bayer's settlement of the Barr
ANDA (IV) litigation prevented generic manufacturers from selling a generic
version of Cipro(R). The plaintiffs allege that the defendants violated various
federal antitrust and state business, antitrust, unfair trade practices and
consumer protection statutes, and seek treble damages and injunctive relief.
These proceedings are at an early stage. None of the relevant courts has
certified a class. The Judicial Panel for Multidistrict Litigation, or MDL
panel, has transferred 35 of these cases to the U.S. federal District Court for
the Eastern District of New York for coordinated pre-trial proceedings. The Barr
settlement is also the subject of ongoing antitrust investigations by the U.S.
Federal Trade Commission and by a number of state attorneys general.
Because these cases in the aggregate allege substantial unquantified
damages and also seek treble and punitive damages and penalties, it is possible
that the ultimate liability could be material to our results of operations and
cash flows. Although we cannot predict the outcome of these cases with
certainty, we believe that we have meritorious defenses to the antitrust
allegations and intend to defend them vigorously.
F-79
NOTES TO THE UNAUDITED INTERIM FINANCIAL STATEMENTS OF THE BAYER GROUP --
(CONTINUED)
NIFEDIPINE-RELATED ACTIONS
Patent-related actions. Since 1997 Bayer AG and Bayer Corporation have
been involved in a number of patent infringement actions arising from ANDA (IV)s
filed by generic manufacturers seeking regulatory marketing approval for
allegedly bio-equivalent versions of our brand-name product Adalat(R) CC and
Pfizer, Inc.'s brand-name product Procardia(R) XL. The active ingredient of
these products is nifedipine. We own patent rights related to nifedipine drug
product formulations. In addition, because Pfizer markets Procardia(R) XL under
a license from Bayer, Bayer AG and Bayer Corporation became Pfizer's
co-plaintiffs in the infringement actions relating to that product.
In August 1997 Bayer AG and Bayer Corporation filed a patent infringement
suit against Elan Pharmaceutical Research Corp. and Elan's parent company, Elan
Corp., plc, arising from Elan's ANDA (IV) for a drug product containing
nifedipine. In March 1999, the U.S. federal District Court for the Northern
District of Georgia granted summary judgment against us, holding that the
particular generic product for which Elan sought marketing approval as described
in its ANDA would not violate our patent. In May 2000, the U.S. Court of Appeals
for the Federal Circuit affirmed this decision.
In March 2001 the same District Court granted summary judgment against
Bayer AG and Bayer Corporation in a second ANDA (IV) related suit that we had
filed against Elan and later in another action that we had filed against Elan
Pharmaceutical Research Corp., Biovail Labs, Inc., Biovail Corp. International
and Teva Pharmaceuticals USA, Inc., arising from these parties' commercial sale
of an allegedly bio-equivalent nifedipine product. Our appeal against the
decisions in these two cases is currently pending before the U.S. Court of
Appeals for the Federal Circuit.
Bayer AG and Bayer Corporation have also filed four ANDA (IV) related
lawsuits against Biovail and two lawsuits arising from the commercial sale of
nifedipine products by Biovail and Teva. These suits are currently pending
before the U.S. federal District Court for the District of Puerto Rico. The
court has stayed these suits pending resolution of the appeals before the
Federal Circuit.
Because defendants have prevailed in some of these lawsuits, it is possible
that they may also prevail in the trials and appeals currently pending. We
believe, however, that we have meritorious claims in the pending cases, and
intend to prosecute these claims vigorously. Because some of our nifedipine
dosages have already begun to face generic competition, we do not believe that
an adverse result in the pending cases would result in a material amount of
additional foregone revenue.
Antitrust actions. Biovail has filed an antitrust lawsuit against Bayer
AG, Bayer Corporation and Pfizer in the U.S. federal District Court for the
District of Western Pennsylvania. Biovail is seeking a declaratory judgment that
Bayer's nifedipine patents are invalid. Biovail also seeks damages under federal
and state antitrust statutes alleging, among other things, that Bayer illegally
asserted its patent rights. The district court has stayed this litigation
pending resolution of the nifedepine-related patent infringement actions against
Biovail.
This proceeding is at an early stage. However, we believe that we have
meritorious defenses to the antitrust allegations, and we intend to defend this
case vigorously.
PRODUCT LIABILITY PROCEEDINGS
HIV-related actions. During the past decade, our U.S. subsidiary Bayer
Corporation, as well as other fractionators of plasma products, have been
involved in lawsuits alleging that hemophiliacs became infected with the human
immunodeficiency virus (HIV), or ultimately developed AIDS, by using clotting
factor concentrates derived from human plasma. Plaintiffs have brought actions
on these grounds in the United States, Ireland, Italy, Taiwan, Argentina,
Canada, Japan, and Germany.
In the United States, a class action against Bayer Corporation and three
other defendants consolidated the HIV-related claims of more than 6,000
claimants and claimant groups. The parties resolved this class action through a
$600 million settlement. Bayer Corporation's share of this settlement was
approximately $290 million.
F-80
NOTES TO THE UNAUDITED INTERIM FINANCIAL STATEMENTS OF THE BAYER GROUP --
(CONTINUED)
Bayer Corporation has also satisfactorily settled nearly 400 lawsuits by
plaintiffs who opted out of the class action. Approximately 20 suits remain
pending in the United States. Although Bayer Corporation has prevailed in the
majority of cases that have proceeded to trial, plaintiffs were successful in
three cases. The juries in each of these cases awarded damages not exceeding $2
million. In addition, in 1999 a Louisiana jury awarded a plaintiff damages of
$35 million. However, the trial court set this award aside, and an appellate
court upheld this decision. Bayer Corporation has since settled this matter in
the context of a group settlement of nearly 100 Louisiana cases, of which Bayer
Corporation's share was less than $50 million.
Although Bayer Corporation intends to defend aggressively the remaining
HIV-related lawsuits in various countries, we have made what we believe to be
appropriate provisions should these suits result in judgments in favor of the
plaintiffs. These provisions are not material to the Bayer Group.
Phenylpropanolamine (PPA) actions. In late 2000, Bayer Corporation
discontinued marketing Alka-Seltzer Plus effervescent medicines containing PPA
in the United States, Canada and various Latin American countries in response to
a recommendation from the U.S. Food and Drug Administration to all manufacturers
of drugs and medicines containing PPA. The FDA issued this recommendation after
one epidemiological study of a small number of patients suggested a possible
association between PPA and hemorrhagic stroke in women of certain ages. Over
319 class and individual lawsuits have been initiated in the United States
against Bayer Corporation. Bayer AG has also been named a defendant in some of
the cases, but has not been served with process. The MDL Panel has assigned
management of the federal court cases to the U.S. federal District Court for the
Western District of Washington. It is probable that additional actions will be
initiated there or in other jurisdictions where products containing PPA were
marketed. Bayer Corporation believes it has meritorious defenses to these
actions and intends to defend them vigorously.
PROCEEDINGS RELATING TO THE WORLD WAR II ERA
Bayer AG was one of a number of defendants in ten class actions filed in
recent years before various U.S. federal courts and consolidated in 2000 before
the federal District Court for the District of New Jersey. These suits sought
class certification on behalf of persons -- primarily residents of Eastern
European countries -- alleging that these persons were victims of forced labor
during World War II or medical experiments during the period of national
socialist rule prior to and during the war. In addition, one suit related to
medical experiments named Bayer AG as sole defendant. The plaintiffs sought
unspecified amounts of damages. No class was certified.
In July 2000, the United States, Germany, Israel and several Eastern
European states concluded an Executive Agreement providing for the establishment
of a federal German foundation to serve as the exclusive source of remedies for
all present and future claims that have been or may be asserted against German
companies arising out of the national socialist era and World War II. This
foundation, called "Remembrance, Responsibility, and the Future", was
established by German law in August 2000. Its founders are the German government
and a number of German companies, among them Bayer AG. The foundation
administers a fund in the amount of DM 10 billion, made available by the German
public sector and by German companies, including Bayer AG. The portion of the
fund to be contributed by German companies totals DM 5 billion. In 2000, we
transferred Bayer's DM 100 million contribution to the fund to the foundation's
escrow account.
It is a central element of the Executive Agreement that the foundation may
begin payments only when all pending lawsuits are voluntarily dismissed with
prejudice, thereby creating legal certainty (Rechtssicherheit). Accordingly, the
federal District Court for the District of New Jersey dismissed the suits
described above in November 2000. Other courts followed in 2001, dismissing
World War II era related suits in which Bayer AG was not involved. On May 30,
2001, the German parliament passed a resolution recognizing the achievement of
adequate legal certainty, thereby enabling the foundation to begin making
payments to victims. Payments began in the summer of 2001.
Under the Executive Agreement, the government of the United States has
committed itself to file a "statement of interest" in any new lawsuits filed
before a U.S. court against German companies in connection
F-81
NOTES TO THE UNAUDITED INTERIM FINANCIAL STATEMENTS OF THE BAYER GROUP --
(CONTINUED)
with national socialist era and World War II-related claims, recommending that
the court dismiss the suit. Although the doctrine of separation of powers
prevents the U.S. government from compelling the court to comply with its
statement of interest, we believe that the probability of any future suit
progressing beyond the filing stage is therefore remote.
[6] SUBSEQUENT EVENTS
AVENTIS CROPSCIENCE ACQUISITION
On October 2, 2001, Bayer signed a purchase agreement to acquire Aventis
CropScience (ACS) from Aventis (76 percent) and Schering (24 percent) for E7.25
billion, including the assumption of debt of E1.9 billion. Bayer expects to
finance this purchase through new borrowings, without increasing equity capital.
Bayer plans to organize its Crop Science activities within a new, separate legal
entity to be named "Bayer CropScience". We expect a one-time restructuring
charge of approximately E500 million. The closing is expected in the first
quarter of 2002. Because we will neither acquire ownership of the StarLink
technology nor assume any potential related liabilities from Aventis, we do not
believe that we will be liable for any potential claims related to StarLink. As
of October 5, 2001, we increased the maximum outstanding principal amount under
our European Medium-Term Note program from E2 billion to E8 billion. We
anticipate using the proceeds from the sale of debt securities under this
expanded program to pay the cash portion of the purchase price for ACS, as well
as for general corporate purposes.
CERIVASTATIN-RELATED LEGAL ACTIONS
In August 2001, we voluntarily ceased marketing our cerivastatin
anticholesterol products, sold under the trade names Lipobay and Baycol, in
response to reports of serious side effects in some patients. The withdrawal of
Lipobay and Baycol caused E0.4 billion loss of revenue compared to budget.
Since this withdrawal, more than 277 lawsuits, many of them putative class
actions, have been initiated in the United States against Bayer Corporation and
Bayer AG. The actions in the United States have been primarily on theories of
product liability, consumer fraud, medical monitoring, predatory pricing and
unjust enrichment. These lawsuits seek remedies including compensatory and
punitive damages, disgorgement of funds received from the marketing and sale of
cerivastatin and the establishment of a trust fund to finance the medical
monitoring of former cerivastatin users. We expect the MDL Panel to consolidate
the federal court cases before a single judge for coordinated discovery and
other pre-trial proceedings. In addition, several actions have been initiated
against other companies of the Bayer Group in other countries. We expect
additional lawsuits to be filed in the United States and elsewhere. If the
plaintiffs in these actions were to be successful, it is possible that the
ultimate liability could be material to our results of operations and cash
flows. We believe that we have meritorious defenses in these actions, and intend
to defend them vigorously.
DEVELOPMENT IN PATENT INFRINGEMENT ACTION AGAINST CARLSBAD
In October 2001, the Federal District Court for the Southern District of
California denied Carlsbad Technology Inc.'s two motions for summary judgment in
our ciprofloxacin-related patent infringement lawsuit against Carlsbad. Carlsbad
has appealed the decision denying the first motion to the Court of Appeals for
the Federal Circuit. A trial regarding the arguments of obviousness that
Carlsbad raised in its second motion is currently scheduled to begin in April,
2002. Carlsbad has since withdrawn all other defenses it had originally raised
challenging the validity and enforceability of Bayer AG's ciprofloxacin patent.
DEVELOPMENTS IN CIPROFLOXACIN-RELATED ANTITRUST ACTIONS
In October 2001, the U.S. federal District Court for the Eastern District
of New York ordered that nine cases originally transferred to the federal system
by the MDL Panel be remanded to various state courts. Four cases are currently
pending in a California state court, where they were originally filed. With the
remand decision five cases are currently being remanded to California state
court. All nine California cases should be coordinated
F-82
NOTES TO THE UNAUDITED INTERIM FINANCIAL STATEMENTS OF THE BAYER GROUP --
(CONTINUED)
under state law rules. Bayer will also have state court proceedings occurring in
Florida, New York, Kansas, Tennessee and Wisconsin.
FUNDING OF FEDERAL GERMAN FOUNDATION FOR WORLD WAR II-RELATED CLAIMS
The founding members of the foundation initiative, including Bayer,
committed themselves jointly to cover any shortfall if German companies failed
to contribute their full DM 5 billion portion of the fund. On the basis of this
commitment, we made a final contribution to the fund of DM 26.1 million in
August 2001, adding to the original contribution of DM 100 million that we had
paid in 2000 and the increased contribution of DM 10 million paid in 2001. The
foundation is now fully funded.
PLANS TO DIVEST FROM CERTAIN ACTIVITIES
On December 6, 2001, our Supervisory Board approved a plan to divest
non-core businesses, including Haarmann & Reimer, Rhein Chemie and our 50%
interest in Polymer Latex GmbH.
[7] U.S. GAAP INFORMATION
The Group's consolidated financial statements have been prepared in
accordance with IAS, which as applied by the Group, differs in certain
significant respects from U.S. GAAP. The effects of the application of U.S. GAAP
to net income and stockholders' equity are set out in the tables below:
JUNE 30, JUNE 30, JUNE 30,
NOTES 2001 2001 2000
----- -------------- ----------- -----------
($ MILLION(1)) (E MILLION) (E MILLION)
NET INCOME REPORTED UNDER IAS...................... 852 1,006 1,033
Fair value of derivative financial instruments..... a (31) (37) (7)
Available for sale securities...................... b -- -- --
Business combinations.............................. c (41) (48) (28)
Pensions........................................... d (10) (12) (12)
Other.............................................. e 5 5 20
Deferred tax effect on U.S. GAAP adjustments....... 14 17 --
------ ------ ------
NET INCOME REPORTED UNDER U.S. GAAP................ 789 931 1,006
------ ------ ------
BASIC AND DILUTED EARNINGS PER SHARE UNDER U.S.
GAAP............................................. 1.08 1.28 1.38
====== ====== ======
STOCKHOLDERS' EQUITY REPORTED UNDER IAS............ 14,657 17,296 15,156
Fair value of derivative financial instruments..... a -- -- (7)
Available for sale securities...................... b -- -- 1,203
Business combinations.............................. c 711 839 905
Pensions........................................... d 926 1,093 1,126
Other.............................................. e 96 114 95
Deferred tax effect on U.S. GAAP adjustments....... (409) (483) (537)
------ ------ ------
STOCKHOLDERS' EQUITY REPORTED UNDER U.S. GAAP...... 15,981 18,859 17,941
====== ====== ======
F-83
NOTES TO THE UNAUDITED INTERIM FINANCIAL STATEMENTS OF THE BAYER GROUP --
(CONTINUED)
JUNE 30, JUNE 30, JUNE 30,
NOTES 2001 2001 2000
----- -------------- ----------- -----------
($ MILLION(1)) (E MILLION) (E MILLION)
COMPONENTS OF STOCKHOLDERS' EQUITY IN ACCORDANCE
WITH U.S. GAAP:
Capital stock of Bayer AG.......................... 1,585 1,870 1,870
Capital reserves of Bayer AG....................... 2,493 2,942 2,942
Retained earnings.................................. 10,569 12,473 11,707
Accumulated other comprehensive income:
Unrealized market value adjustment on securities
available for sale (net of taxes of $12
million, E14 million, and E28 million)........ 381 450 1,175
Unrealized market value adjustment on derivative
financial instruments designated as cash flow
hedges (net of taxes of $20 million, E24
million, and E nil)........................... (31) (37) --
Additional minimum pension liability (net of
taxes of $76 million, E90 million, and E92
million)...................................... (105) (124) (126)
Translation differences.......................... 1,089 1,285 373
------ ------ ------
TOTAL.............................................. 15,981 18,859 17,941
====== ====== ======
---------------
(1) The 2001 U.S. dollar figures have been translated at an exchange rate of
$0.8474 = E1.00. Such translations should not be construed as
representations that the euro amounts represent, or have been or could be
converted into, United States dollars at that or any other rate.
A. FAIR VALUE OF DERIVATIVE FINANCIAL INSTRUMENTS
Effective January 1, 2001, the Group began applying IAS 39 "Financial
Instruments: Recognition and Measurement" and Statement of Financial Accounting
Standard ("SFAS") 133, "Accounting for Derivative Instruments and Hedging
Activities". As a result, derivative financial instruments are recorded in the
balance sheet at their fair values under both IAS and US GAAP. Prior to the
adoption of IAS 39, the Group only recognized appreciation in the fair value of
derivative instruments relating to currency risks on anticipated or pending
transactions, effectively treating them like cash flow hedges. Prior to the
adoption of SFAS 133, these instruments were marked to market through the income
statement in accordance with U.S. GAAP applicable at the time. The difference
between IAS and U.S. GAAP equity and net income for the six months ended June
30, 2000 arises from the recognition of a loss, and a corresponding asset,
relating to anticipated cash flow forward contracts under U.S. GAAP. The
difference between IAS and U.S. GAAP net income for the six months ended June
30, 2001 arises from the realization of gains on cash flow hedges under IAS that
had already been recognized under U.S. GAAP prior to the adoption of SFAS 133.
As the fair value of cash flow hedges has been recognized under both IAS and
U.S. GAAP, there is no difference between total equity under the two bodies of
accounting principles at June 30, 2001. However, differences in the components
of equity remain as a result of the amounts previously recorded in income under
U.S. GAAP.
B. AVAILABLE FOR SALE SECURITIES
Effective January 1, 2001, the Group began applying IAS 39 "Financial
Instruments: Recognition and Measurement". As a result, investments in debt and
certain equity securities are classified as trading, available-for-sale, or
held-to-maturity, depending on management's intent and ability with respect to
holding such investments under IAS and U.S. GAAP. All investments that have been
classified as available-for-sale are carried at fair value, with any unrealized
gains or losses recorded as a separate component of equity.
F-84
NOTES TO THE UNAUDITED INTERIM FINANCIAL STATEMENTS OF THE BAYER GROUP --
(CONTINUED)
Prior to the adoption of IAS 39, investments in debt and certain equity
securities are reflected in the balance sheet at nominal value less any
necessary write-downs under IAS, resulting in a difference between total equity
under IAS and U.S. GAAP.
C. BUSINESS COMBINATIONS
Prior to the adoption of IAS 22 (revised 1993) on January 1, 1995, the
Group wrote-off all goodwill directly to equity in accordance with IAS existing
at that time. The adoption of IAS 22 (revised 1993) did not require prior period
restatement. Accordingly, a U.S. GAAP difference exists with respect to the
recognition of goodwill and amortization before January 1, 1995. For the purpose
of the reconciliation to U.S. GAAP, the pre-1995 goodwill is being amortized
through the income statement over the estimated useful lives between 20 and 40
years. During the first half of 2001, the Group wrote-off E27 million of
goodwill capitalized under U.S. GAAP. The write-off was due to the planned
disposal of the entity to which the goodwill relates.
D. PENSION PROVISIONS
Under IAS, pension costs and similar obligations are accounted for in
accordance with IAS 19, "Employee Benefits". For purposes of U.S. GAAP, pension
costs for defined benefit plans are accounted for in accordance with SFAS No. 87
"Employers' Accounting for Pensions" and the disclosure is presented in
accordance with SFAS No. 132 "Employers' Disclosures about Pensions and Other
Post-retirement Benefits". In accordance with the accounting treatment at
December 31, 2000, the adjustment between IAS and U.S. GAAP comprises
amortization of the unrecognized transition obligation over the remaining
average service lives of employees and the recognition of an additional minimum
liability.
E. OTHER
There are also differences between IAS and U.S. GAAP in relation to (1)
asset impairments, (2) restructuring provisions, (3) equity compensation, (4)
other employee benefits and (5) in-process research and development. None of the
differences are individually significant; therefore they are shown as a combined
total.
ADDITIONAL U.S. GAAP DISCLOSURES
DISCONTINUED OPERATIONS
Under IAS, the Group has classified DyStar, EC Erdolchemie and Fibers as
discontinuing operations. Under U.S. GAAP, DyStar does not meet the requirements
for classification as a discontinued operation, as the formal plan for disposal
of this operation will not be completed within one year. The following tables
present net income and earnings per share for continuing and discontinued
operations in accordance with U.S. GAAP.
JUNE 30, JUNE 30, JUNE 30,
2001 2001 2000
----------- ----------- -----------
($ MILLION) (E MILLION) (E MILLION)
INCOME FROM CONTINUING OPERATIONS........................... 531 627 946
Discontinued Operations -- net of tax....................... 258 304 60
----- ----- -----
NET INCOME REPORTED UNDER U.S. GAAP......................... 789 931 1,006
===== ===== =====
F-85
NOTES TO THE UNAUDITED INTERIM FINANCIAL STATEMENTS OF THE BAYER GROUP --
(CONTINUED)
2001 2001 2000
----------- ----------- -----------
($ MILLION) (E MILLION) (E MILLION)
EARNINGS PER SHARE
Basic and diluted:
Income from continuing operations......................... .73 .86 1.30
Income from discontinued operations....................... .35 .42 .08
----- ----- -----
BASIC AND DILUTED EARNINGS PER SHARE........................ 1.08 1.28 1.38
===== ===== =====
COMPREHENSIVE INCOME
SFAS No. 130 "Reporting Comprehensive Income" established standards for the
reporting and display of comprehensive income and its components. Comprehensive
income includes net income on all changes in equity during a period that arise
from non-owner sources, such as foreign currency items and unrealized gains and
losses on securities available-for-sale. The additional disclosures required
under U.S. GAAP are as follows:
JUNE 30, JUNE 30,
2001 2000
-------- --------
(E MILLION)
Net income under U.S. GAAP.................................. 931 1,006
Other comprehensive income:
Unrealized market value adjustment on available-for-sale
securities (net of taxes of E nil and E13 million,
respectively).......................................... (902) 610
Unrealized market value adjustment on derivative financial
instruments designated as cash flow hedges (net of
taxes of E24 million and E nil, respectively).......... (37) --
Foreign currency translation adjustment................... 707 83
----- -----
COMPREHENSIVE INCOME UNDER U.S. GAAP........................ 699 1,699
===== =====
EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS
U.S. GAAP
In June 2001, the Financial Accounting Standards Board approved SFAS 141
"Business Combinations" and SFAS 142 "Goodwill and Other Intangible Assets".
SFAS 141 requires the purchase method of accounting to be used for all business
combinations initiated after June 30, 2001, establishes specific criteria for
the recognition of intangible assets separately from goodwill, and requires
unallocated negative goodwill to be written off immediately as an extraordinary
gain. Bayer will apply SFAS 141 to all business combinations for which purchase
agreements are signed after June 30, 2001. SFAS 142 addresses the accounting for
goodwill and identifiable intangible assets subsequent to their acquisition.
Amortization of goodwill will discontinue upon adoption of SFAS 142. In
addition, goodwill recorded as a result of business combinations completed
during the six-month period ended December 31, 2001 will not be amortized. All
goodwill and intangible assets will be tested for impairment in accordance with
the provision of this statement. The Group will apply the provisions of SFAS 142
beginning January 1, 2002. Bayer has not completed its analysis of these
standards and, accordingly, has not determined what effect the adoption of SFAS
141 and 142 will have on the Group's financial position, results of operations
or cash flows.
In June 2001, the Financial Accounting Standards Board approved SFAS 143
"Accounting for Asset Retirement Obligations". SFAS 143 requires that the fair
value of a liability for an asset retirement obligation be recognized in the
period in which it is incurred if a reasonable estimate of fair value can be
made. The associated asset retirement costs are capitalized as part of the
carrying amount of the long-lived asset. SFAS 143 is effective for fiscal
periods beginning after June 15, 2002. Early adoption is encouraged and initial
application of this Statement shall be as of the beginning of an entity's fiscal
year. The Group will apply SFAS 143 beginning
F-86
NOTES TO THE UNAUDITED INTERIM FINANCIAL STATEMENTS OF THE BAYER GROUP --
(CONTINUED)
January 1, 2003. Bayer has not completed its analysis of this standard and,
accordingly, has not determined what effect the adoption of SFAS 143 will have
on the Group's financial position, results of operations or cash flows.
In August 2001, the Financial Accounting Standards Board approved SFAS 144
"Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS 144
retains the requirements of SFAS 121 to recognize an impairment loss only if the
carrying amount of a long-lived asset is not recoverable from its undiscounted
cash flows and measure an impairment loss as the difference between the carrying
amount and fair value of the asset. SFAS 144 requires a probability-weighted
cash flow estimation approach and establishes a "primary-asset" approach to
determine the cash flow estimation period for groups of assets and liabilities.
SFAS 144 is effective for fiscal years beginning after December 15, 2001, and
interim periods within those fiscal years, with early application encouraged.
The Group will apply SFAS 144 beginning January 1, 2002. Bayer has not completed
its analysis of this standard and, accordingly, has not determined what effect
the adoption of SFAS 144 will have on the Group's financial position, results of
operations or cash flows.
F-87
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
1.1 Articles of Association (Satzung) of Bayer AG, as amended to
date, in English translation.
2.2 The total amount of long term debt securities Bayer AG
authorized under any instrument does not exceed 10 percent
of the total assets of the Company. We agree to furnish the
Securities and Exchange Commission, upon its request, a copy
of any instrument defining the rights of holders of
long-term debt of Bayer AG or its subsidiaries for which
consolidated or unconsolidated financial statements are
required to be filed.
8.1 Subsidiaries as of the end of the year covered by this
report: See "Organizational Structure" in Item 4,
Information on the Company. We agree to furnish to the
Securities and Exchange Commission upon request by the
Commission a list or diagram of our subsidiaries indicating
as to each subsidiary named: (a) its country or other
jurisdiction of incorporation or organization, (b) its
relationship to Bayer AG, and (c) the percentage of voting
securities owned or other basis of control by its immediate
parent if any.
10.1 Consent of PwC Deutsche Revision Aktiengesellschaft
Wirtschaftsprufungsgesellschaft, Essen, Germany, authorized
public accountants.
(LOGO)
F00311