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
Bayer.
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.
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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
------------ -------- --------------------
Werner Wenning (55)......................................... Chairman 2007
Dr. Attila Molnar (53)...................................... Director 2002
Dr. Frank Morich (48)....................................... Director 2002
Dr. Udo Oels (58)........................................... Director 2006
Werner Spinner (53)......................................... Director 2008
Klaus Kuhn (50)............................................. Director 2007
Dr. Richard Pott (48)....................................... Director 2007
Werner Wenning became chairman of our Board of Management in April 2002. He
has served on the Board since 1997. Prior to becoming chairman, he served as
chief financial officer and was a member of the Corporate Coordination and Human
Resources Committees. 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 supervisory boards of
Dresdner Bank Lateinamerika AG, Gerling-Konzern Versicherungs-Beteiligungs AG
and Rheinhyp Rheinische Hypothekenbank AG. Until May 2001, he served as a member
of the supervisory board of Gerling-Konzern Allgemeine Versicherungs-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.
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.
We expect Dr. Molnar to leave the Board of Management in July 2002 in order to
become president of Bayer Corporation, our U.S. subsidiary, as well as Senior
Bayer Executive with responsibility for the United States.
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. We expect Dr. Morich to leave the Board of Management in July 2002 in
order to become chairman of the board of Bayer HealthCare AG, the new subsidiary
that we plan to incorporate to operate our Pharmaceuticals, Consumer Care,
Diagnostics, Biological Products and Animal Health businesses.
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.
Klaus Kuhn is Bayer's chief financial officer. Prior to joining the Board
in May 2002, Mr. Kuhn was head of Bayer's Finance Division. Prior to that
appointment, he oversaw the spin-off of Bayer's former Agfa division. Before
joining Bayer in 1998, Mr. Kuhn worked with Schering AG, most recently as head
of finance. Mr. Kuhn is also a member of the board of directors of Agfa-Gevaert
N.V.
Dr. Richard Pott joined the Board in May 2002. He had previously served as
General Manager of our Specialty Products business group. Before assuming
responsibility for Specialty Products, he served Bayer in a
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number of positions, most recently as head of the Strategic Planning Department
and then as head of Corporate Planning and Controlling. Dr. Pott is slated to
oversee strategy and human resources when Bayer makes the transition to its
planned holding company structure.
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 26, 2002.
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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
---- -------- -------------------- -------------
Dr. Manfred Schneider........... Chairman Former chairman of the 2002
management board, Bayer AG
*Erhard Gipperich............... Vice Chairman Lathe operator 1998
Dr. Paul Achleitner............. Member Member of the management board, 2002
Allianz AG
Dr. Josef Ackermann............. Member Chairman of the management 2002
board, Deutsche Bank AG
*Petra Brayer................... Member Chemical laboratory assistant 1999
*Karl-Josef Ellrich............. Member Business administrator, 2000
health insurance fund
Prof. Dr. Hans-Olaf Henkel...... Member President of the Leibniz 2002
Association
*Karl-Heinz Huchthausen......... Member Business administrator 2002
Dr. h.c. Martin Kohlhaussen..... Member Chairman of the supervisory 1992
board, Commerzbank AG
John Christian Kornblum......... Member Chairman of Lazard & Co. 2002
*Petra Kronen................... Member Chemical Laboratory Assistant 2000
*Rolf Nietzard.................. Member Chemical Laboratory Technician 1996
Dr. Heinrich von Pierer......... Member President and Chief Executive 1993
Officer of Siemens AG
Dr. Wolfgang Reitzle............ Member Member of the management board, 2002
Linde AG
*Wolfgang Schenk................ Member Engineer 2002
*Waltraud Schlaefke............. Member Chemical laboratory technician 1992
*Hubertus Schmoldt.............. Member Chairman of German Mine, 1995
Chemical and Power Workers'
Union
*Dieter Schulte................. Member Chairman of German Unions 1997
Federation
*Dr. Eugen Velker............... Member Chemist 2000
*Siegfried Wendlandt............ Member North Rhine District Secretary 2001
of German Mine, Chemical and
Power Workers' Union
*Reinhard Wendt................. Member Insurance administrator 2002
*Thomas de Win.................. Member Business administrator 2002
Prof. Dr. Ernst-L. Winnacker.... Member President of German Research 1997
Association
Dr. Hermann Wunderlich.......... Member Former Vice Chairman of 1996
management board
SUPERVISORY BOARD COMMITTEES
Currently, the Supervisory Board has the following committees:
- The nomination committee (Vermittlungsausschuss), established pursuant
to sec. 27 (3) of the Co-Determination Act, 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.
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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 which the Supervisory Board may delegate some of its functions. Among
the Presidium's responsibilities in this capacity is to advise the
Supervisory Board as a whole in connection with the Supervisory Board's
function as audit committee. The current members of the nomination
committee are Mr. Schneider, Mr. Gipperich, Mr. von Pierer and Mr.
Schmoldt.
- 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. Schneider,
Mr. Gipperich, Mr. Kohlhaussen and Mr. de Win.
- 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 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.
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 2001, we paid salary and bonus compensation totaling E8,153,562 (2000:
E10,387,801) to the members of our Board of Management. Of this amount,
E3,780,301 represented base salary and fixed bonus and E4,373,261 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 E8,355,270 (2000:
E8,923,934). We paid E1,293,750 (2000: E2,078,680) 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, 2001.
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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.
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.
We may implement our employee option programs in annual tranches. Each
tranche has separate terms, holding periods and other key parameters as
described below, in each case keyed to the starting date of that tranche.
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-year holding
period. 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.
We apply three criteria to determine whether the participant is eligible to
exercise option rights granted in any given tranche and, if so, the number of
shares received upon exercise. Two of these criteria 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 starting date of the tranche, each option right entitles the
participant to one share for each three percentage points of total
return, up
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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 since the starting date of the
tranche, 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 over that
tranche's holding period with the average growth in cash value for the
Bayer Group as a whole during the three years prior to the starting date
of the tranche. 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.
In 2001, participants in our stock option program have received a total of
1,639 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 327,800 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. In any given annual tranche, a 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 start of the tranche
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 tranche, but
any deposited shares they sell are no longer counted in calculating the number
of incentive shares for subsequent distribution dates.
Each tranche of 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 starting date of the
tranche.
Based on the number of Bayer AG shares that participants in the stock
incentive program deposited in the tranche for 2001, participants are eligible
to receive a total of 80,380 shares on the tranche's future distribution
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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 tranche.
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
their deposited Bayer AG shares during the term of the tranche; any shares they
sell are no longer counted in calculating the number of bonus shares on
subsequent distribution dates for that tranche. Participants may deposit shares
in a total value equal to half their performance-related bonus for the previous
year.
Each tranche of 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 in the tranche for 2001, participants
are eligible to receive a total of 322,180 shares on the future distribution
dates, assuming that these participants do not remove any shares from deposit
during the term of the tranche.
In addition, under Module 2 each participant may purchase 10 Bayer AG
shares per year at a tax-free discount of E15.34 per share under the then market
price. 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 2001, 2000 and 1999 by area of primary activity and
an approximate breakdown of employees as of December 31, 2001, 2000 and 1999 by
geographical region:
BREAKDOWN BY REGION
-----------------------------------------------
AS OF DECEMBER 31,
------------------------
2001 2000 1999
------ ------ ------
Europe............... 64,600 65,700 65,800
North America........ 23,200 24,100 23,100
Asia/Pacific......... 12,600 12,100 11,100
Latin America/
Africa/Middle East... 11,000 11,400 11,500
Corporate............ 600 600 700
LABOR RELATIONS
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.
In Germany, employers and unions generally negotiate collective bargaining
agreements annually. The current agreement that covers our workers has a term of
13 months, beginning April 2002. It grants workers a lump-sum payment of E85 in
the first month of the agreement and a subsequent 3.3 percent pay increase over
the life of the agreement. 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 last
elections took place in March 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) are entitled to receive an additional
monthly pension payment (Zusatzrente). As of December 2001, this salary
threshold was E53,378. 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 5.92 percent of
Bayer AG's outstanding shares. No other shareholder has notified us that it has
crossed any of the Securities Trading Act's 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 of 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 annual report, 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 appealed this judgment to the Court of Appeals for the
Federal Circuit, which heard oral arguments 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 was held in April and May 2002. The court has
not yet made a ruling. Carlsbad has 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 39
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 have
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. Nine cases are currently pending in a California state court. Bayer is
also involved in 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 a 30mg dosage form. 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 (60 mg dosage
form) 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. We appealed these decisions to the
Court of Appeals for the Federal Circuit. The Federal Circuit vacated these
decisions of the District Court and remanded the cases to the District Court for
further proceedings.
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 stayed before
the U.S. federal District Court for the District of Puerto Rico.
As defendants have prevailed in some of these lawsuits, it is possible that
they may also prevail in the trials and appeals that may take place in the
future. 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
93
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. Seven 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,
about 1,700 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. The federal cases are being transferred to the U.S. federal
District Court for the District of Minnesota 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 are defending them vigorously.
Without acknowledging any liability, we have settled a small number of these
cases in the past. We may, on a case-by-case basis, settle additional cases for
reasonable amounts when, in our judgment, settlement is economically feasible
given the risks and costs inherent in any litigation.
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. More
than 540 class and individual lawsuits have been initiated in the United States
against Bayer Corporation. 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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MEDICAID REBATE PROGRAM ALLEGATIONS
Our U.S. subsidiary, Bayer Corporation, is currently under investigation by
the U.S. Attorney's Office for the District of Massachusetts. The investigation,
which is assisted by the Department of Health & Human Services, focuses
primarily on allegations that Bayer Corporation improperly underpaid rebates
under the Medicaid Rebate Program during a period from 1995 to 2000.
These investigations could lead the government to bring criminal or civil
actions, or both, against Bayer Corporation. If the government brought such
actions and obtained a conviction or verdict against Bayer Corporation, we would
likely be required to reimburse the government the amount of the alleged
underpayment. We would also become liable to pay civil and/or criminal fines or
penalties, which could be substantial. Although we believe this outcome to be
unlikely, in the worst case a conviction or adverse verdict could result in the
exclusion of Bayer Corporation from participation in federal health programs.
Bayer Corporation is providing information to the government and otherwise
cooperating with the investigation. Bayer Corporation believes that its
practices complied in all material respects with all applicable laws and is
therefore seeking to persuade the government to discontinue its investigation.
If the government does bring civil or criminal charges against Bayer
Corporation, Bayer Corporation intends to defend itself vigorously.
AVERAGE WHOLESALE PRICE MANIPULATION PROCEEDINGS
Seven pending lawsuits allege that a number of pharmaceutical companies,
including Bayer Corporation, manipulated the average wholesale price of their
products. The suits allege that this manipulation resulted in overcharges to
Medicare beneficiaries, Medicaid recipients, state governmental health programs,
and private health plans. These suits generally seek damages, treble damages,
disgorgement of profits, restitution and attorney's fees. We expect that six of
these actions will be consolidated before the U.S. federal court for the
District of Massachusetts. The remaining case, in which the State of Nevada is
plaintiff, has been removed to federal court in Nevada but may be subject to
remand to a state court. Bayer Corporation has not yet responded to the
complaints in these actions, but intends to defend itself vigorously.
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 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.
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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 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
January 16, 2002, 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 and on
the New York Stock Exchange.
FRANKFURT STOCK NEW YORK STOCK
EXCHANGE EXCHANGE
--------------- ---------------
HIGH LOW HIGH LOW
------ ------ ------ ------
(IN EUROS) (IN DOLLARS)
1997........................................................ 41.16 28.12
1998........................................................ 49.80 29.40
1999........................................................ 47.65 29.74
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............................................ 39.00 29.41
2002:
First quarter(1).......................................... 40.80 33.90 36.00 28.91
PREVIOUS SIX MONTHS:
December 2001............................................. 37.30 34.42
January 2002(1)........................................... 38.60 35.30 34.50 30.75
February 2002............................................. 37.38 33.30 32.56 28.91
March 2002................................................ 40.80 37.35 36.00 32.00
April 2002................................................ 40.10 35.70 35.85 31.86
May 2002.................................................. 36.81 34.20 33.51 32.17
(1) From January 24, 2002 for New York Stock Exchange.
The average daily volume of Bayer shares traded on the Frankfurt Stock
Exchange for the years 2001, 2000 and 1999 was 3,495,113; 2,549,929 and
2,182,661, respectively. The average daily trading volume during the first
quarter of 2002 was 3,281,609 on the Frankfurt Stock Exchange and (from January
24) 36,987 on the New York Stock Exchange.
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ITEM 10. ADDITIONAL INFORMATION
DESCRIPTION OF SHARE CAPITAL
For a description of material provisions of Bayer AG's articles of
association (Satzung), including a discussion of the voting, dividend and other
rights of shareholders, see our Registration Statement on Form 20-F as filed
with the Securities and Exchange Commission on January 15, 2002.
Because the current authorized capital I and II as described in the
Registration Statement were scheduled to expire on April 30, 2002, our
shareholders created a new authorized capital I and II at their annual meeting
on April 26, 2002. The new authorized capital I is in the amount of E150,000,000
and the new authorized capital II is in the amount of E100,000,000. Both
authorizations are valid through April 26, 2007. The terms of the new authorized
capital I and II are otherwise substantially identical to those described in our
Registration Statement. The new authorized capital I and II will become
effective upon recordation of the shareholders' resolutions in the commercial
register. We expect that the district court (Amtsgericht) at Leverkusen, which
maintains the commercial register that includes Bayer, will effect the recording
of our authorized capital within approximately 8 to 10 weeks after the
shareholders' meeting.
At their April 26, 2002 annual meeting, the shareholders also extended
until October 25, 2003 the Board of Management's authorization to repurchase
Bayer AG shares. The Board of Management is authorized to repurchase shares for
such purposes as distribution to members of the management who are not Board
members and to employees of Bayer Group companies in connection with share
option programs. See "Employee option plans" in Item 6, Directors, Senior
Management and Employees -- Compensation.
MATERIAL CONTRACTS
In connection with our planned acquisition of Aventis CropScience, we
entered into two Stock Purchase Agreements, each dated October 2, 2001, with the
current shareholders of Aventis CropScience. The first agreement was with
Aventis S.A. and Hoechst AG. The second was with Schering AG and SCIC Holdings
LLC. Exhibits 4.1 and 4.2 to this Annual Report incorporate by reference these
agreements as previously filed with the Commission.
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 law,
including legislation, regulations, administrative rulings and court decisions,
as in effect on the date of this annual report, 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.
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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. 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. 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.
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REFUND PROCEDURES
To claim the refund reflecting the reduction of the German withholding tax
from 20 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. IRS Publication 686 describes the
certification procedure in more detail.
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 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
100
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, capital gains 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 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 percent 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
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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.
DOCUMENTS ON DISPLAY
You can inspect the documents concerning Bayer AG mentioned in this annual
report 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.
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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,
2001 and 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.
103
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, 2001 and 2000;
the fair values quoted disregard any opposite movements in the values of the
underlying transactions.
NOTIONAL AMOUNT FAIR VALUE
--------------- -----------
DECEMBER 31,
-----------------------------
2001 2000 2001 2000
------ ------ ---- ----
(EUROS IN MILLIONS)
Interest rate hedging contracts............................. 4,485 3,495 (60) (133)
At December 31, 2001, the notional amount of our short-term interest rate
hedging contracts (including interest and principal currency swaps) totaled E2.0
billion (2000: E0.3 billion); those maturing after more than one year totaled
E2.5 billion (2000: E3.2 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 E45 million (2000: E40 million) based on our debt
position at year-end.
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 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
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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, 2001 and 2000:
NOTIONAL AMOUNT FAIR VALUE
--------------- -------------
DECEMBER 31,
---------------------------------
2001 2000 2001 2000
----- ----- ---- ----
(EUROS IN MILLIONS)
Forward exchange contracts and currency swaps.............. 2,749 3,415 (28) 133
Currency options........................................... 279 87 * 1
* Less than E1 million
At December 31, 2001, we estimated that our aggregate annual direct
transaction risk from sales and purchases in foreign currencies was
approximately E3.4 billion, which consisted primarily of U.S. dollars ($2.3
billion), Japanese yen (Y70 billion) and British pounds sterling (L0.1 billion).
For 2002, we do not anticipate a significant change in these levels of risk with
respect to our current business operations. However, the businesses that we
would acquire upon consummation of the Aventis CropScience transaction could be
exposed to higher levels of risk associated with sales and purchases in foreign
currencies.
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 2001 and 2000:
2001 2000
----------------------------------------- -------------------
% CHANGE MARKET % CHANGE MARKET
CURRENCY VS. EURO EFFECTIVE VS. 2000 AVERAGE VS. 2000 EFFECTIVE AVERAGE
----------------- --------- -------- ------- -------- --------- -------
U.S. dollar.......................... 0.9014 (3.7) 0.8956 (3.0) 0.9359 0.9236
Japanese yen......................... 108.34 9.1 108.68 9.3 99.31 99.47
British pound sterling............... 0.6177 1.1 0.6219 2.0 0.6108 0.6095
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, 2001 to be approximately E50 million
(2000: 120 million).
105
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:
These products are derived from crude oil, therefore their prices are
affected by the market price of crude oil.
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, 2001.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
DEBT SECURITIES
As of December 31, 2001 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.
B.V., Netherlands... Bonds with warrants Swiss francs 250 2.5 2002
attached(2)
Bayer Corp............ Notes U.S. dollar 400 6.5 2002
Bayer Corp............ Notes U.S. dollar 200 7.125 2015
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 6.24 2028
Bayer Corp............ Money Market Puttable U.S. dollar 500 4.75 2011
Reset Securities
Bayer Ltd., Japan..... Bonds Swiss francs 400 3.75 2005
Bayer AG(5)........... European Medium-Term various 864(6) -- --
Notes
(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.
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(2) The warrants entitling bondholders to exchange these bonds for shares of
Bayer AG expired on August 28, 1997.
(3) At December 31, 2001, these bonds bore interest at 2.1663%. They matured
and were paid in April 2002.
(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 in euros of
securities issued under our European MTN (or EMTN) program outstanding at
December 31, 2001. 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).
On April 10, 2002, we issued two series of debt securities under our EMTN
program in total principal amounts of E3 billion and E2 billion. The first
series of securities is due April 10, 2007 and bears interest at an annual rate
of 5.375 percent. The second series is due April 10, 2012 and bears interest at
an annual rate of 6.000 percent. Including these two series, the total principal
amount outstanding under our EMTN program is E5.9 billion.
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.
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. 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 Bank of New York, 101 Barclay Street, New York, NY 10286 (temporarily
located at One Wall Street, New York, New York 10286).
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 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
107
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.
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 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.
108
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 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.
109
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 Bank As necessary
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.
RECLASSIFICATIONS, RECAPITALIZATIONS AND MERGERS
If Bayer AG: Then:
------------ -----
Changes the nominal or par value of its The cash, shares or other securities received
shares 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 are represent its equal share of the new
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 AG asks it to, distribute some or all of the
of its assets, or takes any similar action 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.
110
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;
- 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;
111
- 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.
112
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-66, incorporated herein by reference.
ITEM 19. EXHIBITS
Documents filed as exhibits to this Annual Report:
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 4.1 Stock Purchase Agreement dated October 2, 2001 among Aventis
S.A., Hoechst AG, and Bayer AG.**
Exhibit 4.2 Stock Purchase Agreement dated as of October 2, 2001, among
Schering Aktiengesellschaft, SCIC Holdings LLC and Bayer
AG.***
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.
* Incorporated by reference to Exhibit 1.1 to the Registration Statement on
Form 20-F of Bayer AG filed with the Commission on January 15, 2002.
** Incorporated by reference to Exhibit 2.3 to the Annual Report on Form 20-F
of Aventis, SEC File Number 001-10378, filed with the Commission on April 8,
2002, for which confidential treatment was requested.
*** Incorporated by reference to Exhibit 1 to the Report on Form 6-K of Schering
AG, SEC File Number 001-16143, filed with the Commission on March 13, 2002,
for which confidential treatment was requested.
113
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for
filing on Form 20-F and that it has duly caused and authorized the undersigned
to sign this annual report on its behalf.
BAYER AG
/s/ WERNER WENNING
-----------------------------------
Name: Werner Wenning
Title: Chairman of the Board of
Management
/s/ ROLAND HARTWIG
-----------------------------------
Name: Dr. Roland Hartwig
Title: General Counsel
Date: June 24, 2002
114
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, 2001, 2000 and 1999....................... F-3
Consolidated Balance Sheets as of December 31, 2001 and
2000................................................... F-4
Consolidated Statements of Changes in Stockholders' Equity
for the years ended
December 31, 2001, 2000 and 1999....................... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 2001, 2000 and 1999....................... F-6
Notes to the Consolidated Financial Statements............ F-7
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, 2001 and 2000, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended December 31, 2001. 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, 2001, and 2000, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2001 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, 2001, 2000 and 1999, and the
determination of consolidated stockholders' equity as of December 31, 2001 and
2000, to the extent summarized in Note 44 to the consolidated financial
statements.
Essen, Germany
February 26, 2002
(June 21, 2002, as to 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 2001 2000 1999
---- ------- ------- -------
(E MILLION)
NET SALES............................................... [1] 30,275 30,971 27,320
Net sales from discontinuing operations................. [6] (1,337) (2,356) (3,748)
Net sales from continuing operations.................... 28,938 28,615 23,572
Cost of goods sold...................................... (16,542) (15,077) (12,473)
------- ------- -------
GROSS PROFIT............................................ 12,396 13,538 11,099
------- ------- -------
Selling expenses........................................ [2] (6,980) (6,637) (5,433)
Research and development expenses....................... [3] (2,488) (2,319) (2,077)
General administration expenses......................... (988) (885) (710)
Other operating income.................................. [4] 480 425 659
Other operating expenses................................ [5] (1,178) (1,058) (1,399)
------- ------- -------
OPERATING RESULT FROM CONTINUING OPERATIONS............. 1,242 3,064 2,139
------- ------- -------
Operating result from discontinuing operations.......... [6] 369 223 188
Income from the Agfa divestiture........................ 1,030*
OPERATING RESULT........................................ [7] 1,611 3,287 3,357
------- ------- -------
Income (Expenses) from investments in affiliated
companies -- net...................................... [8] 54 283 (31)
Interest expense -- net................................. [9] (349) (311) (196)
Other non-operating expenses -- net..................... [10] (201) (269) (294)
------- ------- -------
NON-OPERATING RESULT.................................... (496) (297) (521)
------- ------- -------
INCOME BEFORE INCOME TAXES.............................. 1,115 2,990 2,836
------- ------- -------
Income taxes............................................ [11] (154) (1,148) (818)
------- ------- -------
INCOME AFTER TAXES...................................... 961 1,842 2,018
------- ------- -------
Minority stockholders' interest......................... [13] 4 (26) (16)
------- ------- -------
NET INCOME.............................................. 965 1,816 2,002
------- ------- -------
BASIC AND DILUTED EARNINGS PER SHARE (E)................ [14] 1.32 2.49 2.74
======= ======= =======
* The income from the sale of Agfa-Gevaert shares was tax-free.
BAYER GROUP CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
CAPITAL CAPITAL
NUMBER STOCK OF RESERVES OF RETAINED NET
OF SHARES BAYER AG BAYER AG EARNINGS INCOME
----------- -------- ----------- -------- ------
(E MILLION, EXCEPT SHARE DATA)
DEC. 31, 1998........................... 730,341,920 1,867 2,945 7,121 1,614
CHANGES IN STOCKHOLDERS' EQUITY
RESULTING FROM CAPITAL CONTRIBUTIONS
AND DIVIDEND PAYMENTS
Capital contributions................. 3 (3)
Dividend payments..................... (747)
----- ----- ------
3 (3) (747)
OTHER CHANGES IN STOCKHOLDERS' EQUITY
NOT RECOGNIZED IN INCOME
Exchange differences..................
Other differences..................... (23)
-----
(23)
CHANGES IN STOCKHOLDERS' EQUITY
RECOGNIZED IN INCOME
Allocation to retained earnings....... 867 (867)
Income after taxes for 1999........... 2,002
----- ------
867 1,135
----------- ----- ----- ----- ------
DEC. 31, 1999........................... 730,341,920 1,870 2,942 7,965 2,002
CHANGES IN STOCKHOLDERS' EQUITY
RESULTING FROM CAPITAL CONTRIBUTIONS
AND DIVIDEND PAYMENTS
Capital contributions.................
Dividend payments..................... (949)
------
(949)
OTHER CHANGES IN STOCKHOLDERS' EQUITY
NOT RECOGNIZED IN INCOME
Exchange differences..................
Other differences..................... 29
-----
29
CHANGES IN STOCKHOLDERS' EQUITY
RECOGNIZED IN INCOME
Allocation to retained earnings....... 1,053 (1,053)
Income after taxes for 2000........... 1,816
----- ------
1,053 763
----------- ----- ----- ----- ------
DEC. 31, 2000........................... 730,341,920 1,870 2,942 9,047 1,816
CHANGES IN STOCKHOLDERS' EQUITY
RESULTING FROM CAPITAL CONTRIBUTIONS
AND DIVIDEND PAYMENTS
Capital contributions.................
Dividend payments..................... (1,022)
------
(1,022)
OTHER CHANGES IN STOCKHOLDERS' EQUITY
NOT RECOGNIZED IN INCOME
Exchange differences..................
Other differences.....................
CHANGES IN STOCKHOLDERS' EQUITY
RECOGNIZED IN INCOME
Allocation to retained earnings....... 794 (794)
Income after taxes for 2001........... 965
----- ------
794 171
----------- ----- ----- ----- ------
DEC. 31, 2001........................... 730,341,920 1,870 2,942 9,841 965
=========== ===== ===== ===== ======
CURRENCY TOTAL
TRANSLATION MISCELLANEOUS STOCKHOLDERS'
ADJUSTMENT ITEMS EQUITY
----------- ------------- -------------
(E MILLION, EXCEPT SHARE DATA)
DEC. 31, 1998........................... (979) 0 12,568
CHANGES IN STOCKHOLDERS' EQUITY
RESULTING FROM CAPITAL CONTRIBUTIONS
AND DIVIDEND PAYMENTS
Capital contributions................. 0
Dividend payments..................... (747)
------
(747)
OTHER CHANGES IN STOCKHOLDERS' EQUITY
NOT RECOGNIZED IN INCOME
Exchange differences.................. 1,206 1,206
Other differences..................... 0 (23)
----- ------
1,206 1,183
CHANGES IN STOCKHOLDERS' EQUITY
RECOGNIZED IN INCOME
Allocation to retained earnings....... 0
Income after taxes for 1999........... 2,002
------
2,002
----- --- ------
DEC. 31, 1999........................... 227 0 15,006
CHANGES IN STOCKHOLDERS' EQUITY
RESULTING FROM CAPITAL CONTRIBUTIONS
AND DIVIDEND PAYMENTS
Capital contributions.................
Dividend payments..................... (949)
------
(949)
OTHER CHANGES IN STOCKHOLDERS' EQUITY
NOT RECOGNIZED IN INCOME
Exchange differences.................. 238 238
Other differences..................... 0 29
----- ------
238 267
CHANGES IN STOCKHOLDERS' EQUITY
RECOGNIZED IN INCOME
Allocation to retained earnings....... 0
Income after taxes for 2000........... 1,816
------
1,816
----- --- ------
DEC. 31, 2000........................... 465 0 16,140
CHANGES IN STOCKHOLDERS' EQUITY
RESULTING FROM CAPITAL CONTRIBUTIONS
AND DIVIDEND PAYMENTS
Capital contributions.................
Dividend payments..................... (1,022)
------
(1,022)
OTHER CHANGES IN STOCKHOLDERS' EQUITY
NOT RECOGNIZED IN INCOME
Exchange differences.................. 294 294
Other differences..................... 545 545
----- --- ------
294 545 839
CHANGES IN STOCKHOLDERS' EQUITY
RECOGNIZED IN INCOME
Allocation to retained earnings....... 0
Income after taxes for 2001........... 965
------
965
----- --- ------
DEC. 31, 2001........................... 759 545 16,922
===== === ======
F-5
BAYER GROUP CONSOLIDATED STATEMENTS OF CASH FLOWS
NOTE 2001 2000 1999
---- ------ ------ ------
(E MILLION)
Operating result........................................... 1,611 3,287 3,357
Income taxes currently payable............................. (637) (873) (834)
Depreciation and amortization.............................. 2,516 2,139 1,811
Change in long-term provisions............................. (193) (316) (167)
Gains on retirements of noncurrent assets.................. (374) (73) (975)
------ ------ ------
GROSS CASH PROVIDED BY OPERATING ACTIVITIES................ 2,923 4,164 3,192
------ ------ ------
(Increase) Decrease in inventories......................... 146 (750) 134
(Increase) Decrease in trade accounts receivable........... 638 (548) (459)
Increase (Decrease) in trade accounts payable.............. 73 351 (11)
Changes in other working capital........................... 79 (126) 337
------ ------ ------
NET CASH PROVIDED BY OPERATING ACTIVITIES.................. [39] 3,859 3,091 3,193
------ ------ ------
of which discontinuing operations.......................... [42] 159 302 318
Cash outflows for additions to property, plant and
equipment................................................ (2,617) (2,647) (2,632)
Cash inflows from sales of property, plant and equipment... 521 322 63
Cash inflows and outflows related to investments........... 109 (45) 2,632
Cash outflows for acquisitions............................. (502) (4,125) (347)
Interest and dividends received............................ 138 191 146
Cash inflows from marketable securities.................... 219 115 209
------ ------ ------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES........ [40] (2,132) (6,189) 71
------ ------ ------
of which discontinuing operations.......................... [42] 295 (298) 2,165
Capital contributions...................................... 0 2 10
Bayer AG dividend and dividend payments to minority
stockholders............................................. (1,028) (953) (770)
Issuances of debt.......................................... 2,514 3,952 1,222
Retirements of debt........................................ (2,551) (1,893) (1,831)
Interest paid after taxes.................................. (484) (336) (300)
------ ------ ------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES........ [41] (1,549) 772 (1,669)
------ ------ ------
of which discontinuing operations.......................... [42] 36 11 198
------ ------ ------
CHANGE IN CASH AND CASH EQUIVALENTS DUE TO BUSINESS
ACTIVITIES............................................... 178 (2,326) 1,595
------ ------ ------
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR............. 491 2,812 1,184
------ ------ ------
Change in cash and cash equivalents due to changes in scope
of consolidation......................................... 42 (3) 19
Change in cash and cash equivalents due to exchange rate
movements................................................ 8 8 14
------ ------ ------
CASH AND CASH EQUIVALENTS AT END OF YEAR................... [43] 719 491 2,812
------ ------ ------
Marketable securities and other instruments................ 52 213 328
------ ------ ------
LIQUID ASSETS AS PER BALANCE SHEETS........................ 771 704 3,140
====== ====== ======
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 Board (IASB), 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.
In compliance with IAS 37, provisions are established for contingent
liabilities if available information indicates that an asset has been impaired
or a liability has been incurred, and the amount of the impairment loss can be
estimated with sufficient reliability.
Certain income statement and balance sheet items are combined for the sake
of clarity, as explained in the Notes. 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. Income received such as royalties, rental income,
interest income or dividend income is recognized on an accrual basis.
Changes in recognition and valuation principles are explained in the Notes.
The previous year's 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.
EFFECTS OF NEW ACCOUNTING PRONOUNCEMENTS
The consolidated financial statements of the Bayer Group for the 2001
fiscal year comply with the following new or revised International Accounting
Standards (IAS) and interpretations of the Standing Interpretations Committee
(SIC) that the Group implemented for the first time 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 did not have any significant impact on
Bayer's financial position or its results of operations during 2001 or on the
comparability of its 2001 and 2000 consolidated financial statements.
The following new interpretations will be implemented in 2002. Those
applicable for the first time as of December 31, 2001 (marked *) did not have
any effect on the 2001 financial statements.
SIC-27 Evaluating the Substance of Transactions Involving
the Legal Form of a Lease*
SIC-28 Business Combinations -- "Date of Exchange" and
Fair Value of Equity Instruments*
SIC-29 Disclosure -- Service Concession Arrangements*
F-7
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)
SIC-30 Reporting Currency -- Translation from Measurement
Currency to Presentation Currency
SIC-31 Revenue -- Barter Transactions Involving
Advertising Services*
SIC-33 Consolidation and Equity Method -- Potential Voting
Rights and Allocation of Ownership Interests
A series of related transactions legally amounting to a lease contract
should be accounted for as a single transaction according to SIC-27 (Evaluating
the Substance of Transactions Involving the Legal Form of a Lease). This applies
particularly in cases where the substance of the transactions cannot be
adequately understood without reference to the series of transactions as a
whole.
If a company pays for an acquisition with its own shares, determination of
the "date of exchange" is crucial to valuation. According to SIC-28 (Business
Combinations -- "Date of Exchange" and Fair Value of Equity Instruments), the
"date of exchange" is the day on which the agreed transaction is executed and
the acquirer gains control over the net assets and business activities of the
acquired unit. The cost of acquisition is based on the publicly quoted price of
the equity instruments on that day.
The disclosure requirements for agreements under which the reporting
enterprise is granted a concession to provide public services such as drinking
water supplies are defined in SIC-29 (Disclosure -- Service Concession
Arrangements). All aspects of such concession arrangements should be disclosed.
Where a company's financial statements are published in a currency other
than the measurement currency, SIC-30 (Reporting Currency -- Translation from
Measurement Currency to Presentation Currency) provides that the statements be
translated by the method specified in IAS 21 for foreign companies whose
activities are not an integral part of those of the reporting enterprise
("foreign entities").
Rules for realizing revenues from advertising-related barter transactions
are given in SIC-31 (Revenue -- Barter Transactions Involving Advertising
Services).
According to SIC-33 (Consolidation and Equity Method -- Potential Voting
Rights and Allocation of Ownership Interests), potential voting rights that
currently can be exercised without restriction, such as those conferred by stock
subscription rights or stock purchase options, must be taken into account in
determining whether one company controls or significantly influences another.
However, the actual ownership interests held must continue to be used for the
consolidation.
The adoption of these new interpretations is not expected to have a
material effect on Bayer's financial statements.
COMPANIES CONSOLIDATED
The financial statements of the Bayer Group as of December 31, 2001 include
Bayer AG and 49 German and 189 foreign consolidated subsidiaries in which Bayer
AG, directly or indirectly, has a majority of the voting rights. The total
number of consolidated companies has risen by 10 from the previous year.
Excluded from consolidation are 85 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 12 joint ventures -- 29 fewer in total than in the
previous year -- by proportionate consolidation in compliance with IAS 31
(Financial Reporting of Interests in Joint Ventures). The decline in the number
of included joint ventures is due mainly to the inclusion of DyStar GmbH,
Frankfurt am Main, Germany,
F-8
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)
by the equity method starting in 2001. The effect of joint ventures on the Group
balance sheet and income statement is as follows:
E MILLION
---------
Noncurrent assets........................................... 230
Current assets.............................................. 184
Pension provisions.......................................... (7)
Other provisions............................................ (10)
Financial obligations....................................... (77)
Remaining liabilities....................................... (78)
---
NET ASSETS.................................................. 242
===
Income...................................................... 499
Expenses.................................................... 443
---
INCOME AFTER TAXES.......................................... 56
===
While 11 companies are stated at equity, 58 companies that in aggregate are
of minor importance are stated at their carrying amounts.
Consolidated for the first time are 27 companies, including those that
belonged to the Cleveland, Ohio-based CSM group, which we acquired at the end of
2000. As a consequence of divestitures and mergers the number of consolidated
companies was reduced by 47.
ACQUISITIONS/DIVESTITURES
Acquisitions are accounted for by the purchase method. Accordingly, the
results of operations of the acquired businesses are included in the
consolidated financial statements as of the respective dates of acquisition. The
purchase prices of the foreign acquisitions are translated at the exchange rates
in effect at the respective dates of acquisition.
In 2001 a total of E514 million was spent on acquisitions, which were paid
for in cash, not with shares of the company. These acquisitions led to goodwill
of E50 million, including E45 million in additional goodwill resulting from the
Lyondell polyols acquisition. The goodwill amounts are being amortized by the
straight-line method over periods not exceeding 20 years.
In June 2001, Bayer Corporation, United States, acquired at a cost of E116
million development, manufacturing and distribution rights for products to
detect antibodies to the hepatitis C virus (HCV) and HIV from the strategic
cooperation between Ortho-Clinical Diagnostics Inc., Raritan, New Jersey, and
Chiron Corporation, Emeryville, California. This acquisition expands the
Diagnostics Business Group's portfolio of immunodiagnostic agents, strengthening
its laboratory testing segment. The rights are being amortized over an estimated
useful life of 12 years.
Bayer expanded its crop protection business in Europe on February 1, 2001
by acquiring MIKADO(R), a leading corn herbicide, from Syngenta AG, Basel,
Switzerland, for E115 million. The transaction covers business in the European
Union and EFTA (European Free Trade Association) countries as well as patents,
registrations, trademark rights, and production and formulation expertise. The
acquired intangible assets are being amortized over an estimated useful life of
10 years.
Bayer AG has purchased a E93 million equity interest in CuraGen
Corporation, New Haven, Connecticut, a leading biotech company. The objective of
the collaboration agreement concluded with CuraGen in mid-January 2001 is to
jointly develop and market novel drugs to treat obesity and diabetes. The
intention is also to use special genomics-based technologies to evaluate
substances in Bayer's early pharmaceutical research pipeline regarding their
suitability for further clinical development.
F-9
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)
On May 1, 2001, Bayer Corporation, United States, increased its equity
ownership in PharmaNetics Inc., Raleigh, North Carolina, by a further E25
million for the Diagnostics Business Group. The existing distribution agreement
with PharmaNetics was expanded to cover Theranostic tests (rapid diagnostic
testing during drug therapy), a core component of the technology platform
offered by PharmaNetics Inc. The agreement includes non-exclusive rights in the
U.S. and exclusive rights elsewhere for the Diagnostics Business Group to
distribute Theranostic tests.
In February 2001, Bayer acquired a E17 million equity interest in PPL
Therapeutics plc, Edinburgh, United Kingdom. PPL Therapeutics is a biotech
company involved in the discovery, development, production and marketing of
genetically modified proteins for therapeutic purposes and food products. The
Pharmaceuticals Business Group and PPL Therapeutics have concluded an agreement
under which Bayer will pursue the clinical development of, and acquire, global
exclusive marketing rights to the company's major product, rAAT (recombinant
alpha-1-antitrypsin). PPL Therapeutics intends to manufacture the product in a
new facility currently scheduled for construction.
On February 12, 2001, the Pharmaceuticals Business Group purchased a E16
million equity interest in Avigen Inc., Alameda, California, a leading biotech
company. The investment gives Bayer global, exclusive marketing and distribution
rights to the gene therapy Coagulin-B(TM) developed by Avigen Inc. for the
treatment of hemophilia B by gene transfer. Avigen Inc. intends to meet global
demand for Coagulin-B(TM) from manufacture in a new production facility
scheduled for construction.
On March 15, 2001, Bayer Corporation concluded an agreement on HIV and
hepatitis C virus (HCV) tests with the biotech company Innogenetics N.V., Ghent,
Belgium, for the Diagnostics Business Group. For E12 million Bayer acquired
exclusive worldwide distribution and marketing rights, including rights to
further developments in the future, for the HIV and HCV product lines
manufactured by Innogenetics. These intangible assets are being amortized over
an estimated useful life of 10 years.
H.C. Starck GmbH, Goslar, Germany, a subsidiary of Bayer AG, acquired TeCe
Technical Ceramics GmbH & Co. KG, Selb, Germany from Deutsche Shell GmbH for E9
million effective January 1, 2001. The acquisition complements H.C. Starck's
activities in surface technology and ceramics. The very good manufacturing
conditions and geographical advantages support H.C. Starck's aim of expanding
its position in the U.S. market. The acquired goodwill of E4 million is being
amortized in the Bayer Group financial statements over an estimated useful life
of 5 years.
In December 2001, the Consumer Care Business Group of Bayer's Mexican
subsidiary Bayer de Mexico, S.A. de C.V. purchased the marketing rights to
Cevalin(R), a leading vitamin C brand, and the well-known disinfectant
Merthiolate(R) from Eli Lilly. The rights will be amortized over an estimated
useful life of 10 years.
Significant DIVESTITURES in 2001 were as follows:
Bayer sold its 50 percent interest in EC Erdolchemie GmbH, Cologne, Germany
to the other joint venture partner Deutsche BP AG, Hamburg, Germany, effective
May 1, 2001, following approval from the E.U. Commission. The proceeds of the
sale amounted to E476 million. Future raw material supplies from Erdolchemie to
Bayer are contractually assured, as is the provision of services by Bayer to
Erdolchemie.
Bayer Group company Wolff Walsrode AG sold its subsidiary Covexx Films,
Walsrode, Germany, a company specializing in high-performance films, to Wipak,
part of the Wihuri group of Finland, effective June 1, 2001.
Effective April 1, 2001, Bayer AG sold the H-acid production facilities on
its Brunsbuttel site to Rutgers Elbechemie GmbH, a subsidiary of Rutgers VTF AG.
Bayer sold its interest in ChemDesign Corporation, Fitchburg, Massachusetts, to
Chestnut Acquisition Corporation, Mendham, New Jersey, a subsidiary of Chestnut
Investments LLC, Mendham, New Jersey, effective November 30, 2001. ChemDesign
manufactures organic chemicals mainly for the agrochemical and photographic
industries.
F-10
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)
As part of the planned divestiture of Bayer's fibers activities, the
Dralon(R) business was sold to the Fraver group of Biella, Italy, at the
beginning of the year.
Acquisitions and divestitures of businesses affected the Group's assets and
liabilities as of the dates of acquisition or divestiture as follows:
(*) 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 in the following table:
BAYER'S INTEREST
COMPANY NAME AND PLACE OF BUSINESS (%)
---------------------------------- ----------------
GERMANY
H. C. Starck GmbH, Goslar................................... 100
Wolff Walsrode AG, Walsrode................................. 100
Bayer Chemie Service GmbH, Leverkusen....................... 100
Bayer Vital GmbH, Leverkusen................................ 100
Bayer Industrieprodukte GmbH & Co. KG, Leverkusen........... 100
Bayer Buna GmbH, Marl....................................... 100
F-11
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)
BAYER'S INTEREST
COMPANY NAME AND PLACE OF BUSINESS (%)
---------------------------------- ----------------
OTHER EUROPEAN COUNTRIES
Bayer Hispania, S.A., Spain................................. 100
Bayer S.p.A., Italy......................................... 100
Quimica Farmaceutica Bayer, S.A., Spain..................... 100
Bayer Rubber N.V., Belgium.................................. 100
Bayer plc, U.K.............................................. 100
Bayer Antwerpen N.V., Belgium............................... 100
Bayer Pharma S.A., France................................... 99.9
Bayer International S.A., Switzerland....................... 99.7
Bayer S.A., France.......................................... 99.9
Bayer B.V., Netherlands..................................... 100
Bayer A/S, Denmark.......................................... 100
NORTH AMERICA
Bayer Corporation, United States............................ 100
Bayer Inc., Canada.......................................... 100
ASIA/PACIFIC
Bayer (India) Ltd., India................................... 55.3
Bayer Yakuhin Ltd., Japan................................... 100
Sumika Bayer Urethane Co., Ltd., Japan...................... 60
Bayer Ltd., Japan........................................... 100
Bayer Australia Ltd., Australia............................. 99.9
Bayer (South East Asia) Pte Ltd., Singapore................. 100
Nihon Bayer Agrochem K.K., Japan............................ 99.5
Bayer Thai Co. Ltd., Thailand............................... 100
Bayer China Co., Ltd., Hong Kong............................ 99.3
LATIN AMERICA/AFRICA/MIDDLE EAST
Bayer de Mexico, S.A. de C.V., Mexico....................... 100
Bayer S.A., Argentina....................................... 99.9
Bayer S.A., Brazil.......................................... 99.9
Bayer (Proprietary) Ltd., South Africa...................... 100
FOREIGN CURRENCY TRANSLATION
The financial statements for 2001 are drawn up in euros (E).
In the financial statements of the individual consolidated companies,
foreign currency receivables and payables are translated at closing rates,
irrespective of whether they are exchange-hedged. Forward contracts that, from
an economic point of view, serve as a hedge against fluctuations in exchange
rates are stated at fair value.
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. Goodwill as well
as any fair value adjustments arising on the acquisition of entities located
outside the European Monetary Union are treated as assets and liabilities of
such entities and translated at closing rates.
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.
F-12
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)
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:
Capital consolidation is performed according to IAS 22 (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.
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.
Joint ventures are included by proportionate consolidation according to the
same principles.
The consolidated financial statements include the accounts of those
material subsidiaries in which Bayer AG is able to exercise operational control,
generally through an ownership interest greater than 50 percent.
The equity method is used to account for investments in material entities
in which Bayer AG exerts significant influence, generally through an ownership
interest between 20 and 50 percent.
Intercompany profits and losses on transactions with companies included at
equity were immaterial in 2001, 2000 and 1999.
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 in the scope of
consolidation 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-13
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)
NOTES TO THE STATEMENTS OF INCOME
[1] NET SALES
Sales are recognized upon delivery of goods or rendering of services to
third parties and are reported net of sales taxes and rebates. Revenues from
contracts that contain customer acceptance provisions are deferred until
customer acceptance occurs or the contractual acceptance period has lapsed.
Allocations to provisions for rebates to customers are recognized in the period
in which the related sales are recorded based on the contract terms. Payments
relating to the sale or outlicensing of technologies or technological expertise
-- once the respective agreements have become effective -- are immediately
recognized in income if all rights to the technologies and all obligations
resulting from them have been relinquished under the contract terms. However, if
rights to the technologies continue to exist or obligations resulting from them
have yet to be fulfilled, the payments received are recorded in line with the
actual circumstances.
While total reported sales declined 2001 by E0.7 billion, to E30.3 billion
(2000: E31.0 billion; 1999: E27.3 billion), sales from continuing operations
increased by E0.3 billion to E28.9 billion (2000: E28.6 billion; 1999: E23.6
billion). In 2001, a E0.9 billion decrease due to lower volumes was offset by
positive contributions of E0.3 billion from higher selling prices, E0.1 billion
from favorable shifts in exchange rates and E0.8 billion from the net effect of
acquisitions and divestitures. Acquisitions and divestitures during 2001 and
2000 affected the comparison between the two years' sales figures by the
following amounts:
2001 E MILLION
---- ---------
ACQUISITIONS
Sybron Chemicals Inc. (polymers and specialty chemicals)
(acquired in 2000)........................................ 206
Polyols business of Lyondell Chemical Company (acquired in
2000)..................................................... 202
CSM Group (acquired in 2000)................................ 133
Fungicide product lines, primarily FLINT (acquired in
2000)..................................................... 104
Full consolidation of Sumika Bayer Urethane Co. Ltd.,
Japan..................................................... 99
Paper chemicals business of Cytec Industries Inc. (acquired
in 2000).................................................. 83
MIKADO corn herbicide....................................... 46
Other....................................................... 110
----
983
----
DIVESTITURES
Covexx Films................................................ (61)
U.S. livestock vaccines business to Intervet International
(divested in 2000)........................................ (30)
Other....................................................... (33)
----
(124)
----
NET EFFECT ON SALES FROM CONTINUING OPERATIONS.............. 859
====
F-14
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)
2000 sales increased by E3.7 billion compared with 1999, to E31.0 billion.
Sales from continuing operations advanced by E5.0 billion, to E28.6 billion. The
increase in 2000 comprised E1.6 billion from higher volumes, E0.5 billion from
improvement in selling prices, E2.2 billion from favorable shifts in exchange
rates and E0.7 billion from the net positive effect of acquisitions and
investitures. Acquisition 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 0.7 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:
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)
======
F-15
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)
[2] SELLING EXPENSES
Selling expenses include E782 million (2000: E776 million; 1999: E609
million) in shipping and handling costs.
They also include advertising and promotion costs, expensed in the period
in which they are incurred. These costs amount to E1,389 million (2000: E1,331
million; 1999: E1,083 million).
[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
2001 are E68 million (2000: E83 million; 1999: E117) from reversals of
unutilized provisions, E74 million (2000: E74 million; 1999: E15 million) from
retirements of noncurrent assets, and E25 million (2000: E25 million; 1999: E34
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. Also included here is E45 million in income resulting from an
agreement concluded with Syngenta to settle a patent dispute over thiomethoxam.
[5] OTHER OPERATING EXPENSES
Included in other operating expenses for continuing operations in 2001 are
E90 million (2000: E35 million; 1999: E52 million) in write-downs of
receivables, E94 million (2000: E77 million; 1999: E139 million) in amortization
of acquired goodwill and E15 million (2000: E25 million; 1999: E53 million) in
losses from the sale of property, plant and equipment.
In addition, E214 million (2000: E200 million; 1999: E449 million) was
spent on restructuring. Further details of restructuring expenses are given in
Note 29.
[6] DISCONTINUING OPERATIONS
Bayer sold its 50 percent interest in EC Erdolchemie GmbH, Cologne, to the
joint venture partner Deutsche BP AG, Hamburg, effective May 1, 2001. The
operating result of Erdolchemie for 2001 shown in the following table comprises
the result of the business group's operations up to the date of divestiture and
the income from the sale of the 50 percent interest.
In April 2001 Bayer decided to divest the remaining activities of its
Fibers Business Group, including the production facilities for Dorlastan(R)
spandex fibers and Perlon(R) monofilaments.
In the course of its reorganization Bayer plans to divest the Haarmann &
Reimer business group, whose activities it now regards as non-core. It is
therefore intended to sell the wholly owned subsidiary Haarmann & Reimer GmbH, a
manufacturer of fragrances and flavors based in Holzminden, Germany.
The non-operating results and the income taxes attributable to Haarmann &
Reimer, Fibers, Erdolchemie, DyStar and Agfa are reflected in the corresponding
items of the income statement.
F-16
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)
A breakdown of the results of discontinuing operations is given below.
EC FS HR
------------------ ------------------ ------------------
2001 2000 1999 2001 2000 1999 2001 2000 1999
---- ---- ---- ---- ---- ---- ---- ---- ----
(E MILLION)
NET SALES................................ 233 635 456 232 506 391 872 865 775
Cost of goods sold....................... (196) (481) (368) (205) (383) (307) (481) (489) (437)
Selling expenses......................... (16) (45) (44) (26) (50) (45) (199) (197) (157)
Research and development expenses........ 0 (2) (1) (8) (9) (9) (63) (54) (54)
General administration expenses.......... (3) (9) (8) (11) (8) (11) (38) (39) (44)
Other operating income................... 316 7 17 1 10 9 23 14 17
Other operating expenses................. (1) (6) (6) (20) (15) (5) (41) (32) (60)
OPERATING RESULT FROM DISCONTINUING
OPERATIONS............................. 333 99 46 (37) 51 23 73 68 40
Non-operating result..................... (1) (1) (2) (1) 1 (4) (4) (6) (4)
Equity-method income (loss)..............
INCOME (LOSS) BEFORE INCOME TAXES........ 332 98 44 (38) 52 19 69 62 36
Income taxes............................. (6) 0 (10) (3) (2) 0 (35) (30) (20)
INCOME (LOSS) AFTER TAXES................ 326 98 34 (41) 50 19 34 32 16
DYSTAR AGFA TOTAL
------------------ ------------- -----------------------
2001 2000 1999 2000 1999 2001 2000 1999
---- ---- ---- ---- ------ ----- ------ ------
(E MILLION)
NET SALES................................. 350 325 1,801 1,337 2,356 3,748
Cost of goods sold........................ (223) (241) (1,098) (882) (1,576) (2,451)
Selling expenses.......................... (68) (65) (388) (241) (360) (699)
Research and development expenses......... (9) (10) (101) (71) (74) (175)
General administration expenses........... (21) (27) (81) (52) (77) (171)
Other operating income.................... 6 4 1,055 340 37 1,102
Other operating expenses.................. (30) (10) (55) (62) (83) (136)
OPERATING RESULT FROM DISCONTINUING
OPERATIONS.............................. 5 (24) 1,133 369 223 1,218
Non-operating result...................... (18) (7) (6) (6) (24) (23)
Equity-method income (loss)............... 6 72 (17) 6 72 (17)
INCOME (LOSS) BEFORE INCOME TAXES......... 6 (13) (31) 72 1,110 369 271 1,178
Income taxes.............................. (3) 1 (4) (26) (24) (47) (57) (58)
INCOME (LOSS) AFTER TAXES................. 3 (12) (35) 46 1,086 322 214 1,120
[7] OPERATING RESULT
In accordance with IAS 14 (Segment Reporting), a breakdown of certain data
in the financial statements is given by segment and geographical region. The
segments and regions are the same as those used for internal reporting. 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 Bayer Group is managed on the basis of business groups, which are
aggregated into reportable segments according to economic characteristics,
products, production processes, customer relationships and methods of
distribution. There are currently 14 business groups, which are aggregated here
into 7 reportable segments.
F-17
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)
The segments shown as CONTINUING OPERATIONS embrace the following
activities:
SEGMENT ACTIVITY
------- --------
HEALTHCARE
Pharmaceutical & Biological Development and marketing of ethical pharmaceuticals
Products
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 & Development, production and marketing of raw materials,
Colorants 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 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, the worldwide Fibers business and the worldwide Haarmann &
Reimer 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.
F-18
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)
- 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.
- 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:
2001 2000 1999
---- ---- ----
(E MILLION)
Equity-method income........................................ 26 71 (28)
Dividends and similar income................................ 15 18 9
Income from profit and loss transfer agreements............. * 1 1
Gains from the sale of investments in affiliated
companies................................................. 16 204 0
Losses from the sale of investments in affiliated
companies................................................. (3) (1) (2)
Write-downs of investments in affiliated companies.......... 0 (10) (11)
-- --- ---
Income (Expenses) from investments in affiliated companies
(net)..................................................... 54 283 (31)
== === ===
* less than E1 million
- 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.
F-19
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)
KEY DATA BY BUSINESS REGION
EUROPE NORTH AMERICA
-------------------------------- --------------------------------
REGIONS 2001 2000 1999 2001 2000 1999
------- ------ ------ ------ ------ ------ ------
(E MILLION)
Net sales (external) -- by
market........................ 11,659 11,299 10,116 9,473 9,352 7,338
Net sales (external) -- by
point of Origin............... 12,999 12,916 11,590 9,806 9,699 7,482
-- Change in E................. 0.6% 11.4% 2.1% 1.1% 29.6% 17.2%
-- Change in local
currencies.................... 0.5% 10.9% 2.1% (1.9%) 14.1% 13.4%
Interregional sales............ 3,154 3,018 2,452 1,927 1,603 1,062
Other operating income......... 312 256 547 70 62 33
Operating result before
exceptional Items............. 1,707 2,216 2,182 23 729 578
Return on sales before
exceptional Items............. 13.1% 17.2% 18.8% 0.2% 7.5% 7.7%
Exceptional items.............. (272) 20 (241) (278) (144) (203)
Operating result............... 1,435 2,236 1,941 (255) 585 375
Return on sales including
exceptional Items............. 11.0% 17.3% 16.7% (2.6%) 6.0% 5.0%
Gross cash flow................ 2,037 2,096 2,076 632 1,521 864
Capital invested............... 16,355 15,849 13,228 12,808 13,025 10,019
CFROI.......................... 12.5% 15.2% 16.0% 4.7% 12.2% 9.1%
Equity-method income........... 12 0 (5) 0 0 (8)
Equity-method investments...... 351 255 197 618 582 39
Total assets................... 17,298 15,988 15,248 12,652 12,859 9,331
Capital expenditures........... 1,620 1,440 1,363 560 749 874
Amortization and
depreciation.................. 1,227 971 736 918 818 659
Liabilities.................... 9,769 8,736 7,408 6,407 6,627 4,461
Research and development
expenses...................... 1,559 1,342 1,215 690 681 601
Number of employees (as of Dec.
31)........................... 64,600 65,700 65,800 23,200 24,100 23,100
LATIN AMERICA /
ASIA / PACIFIC AFRICA / MIDDLE EAST
-------------------------------- --------------------------------
REGIONS 2001 2000 1999 2001 2000 1999
------- ------ ------ ------ ------ ------ ------
(E MILLION)
Net sales (external) -- by
market........................ 4,660 4,819 3,531 3,146 3,145 2,587
Net sales (external) -- by
point of Origin............... 3,817 3,761 2,644 2,316 2,239 1,856
-- Change in E................. 1.5% 42.2% 32,4% 3.4% 20.6% (3.0%)
-- Change in local
currencies.................... 7.3% 26.5% 17,2% 2.5% 7.8% (6.2%)
Interregional sales............ 226 228 152 116 98 61
Other operating income......... 48 64 37 50 43 42
Operating result before
exceptional Items............. 241 404 209 219 213 133
Return on sales before
exceptional Items............. 6.3% 10.7% 7.9% 9.5% 9.5% 7.2%
Exceptional items.............. (14) (21) (12) (30) 0 (57)
Operating result............... 227 383 197 189 213 76
Return on sales including
exceptional Items............. 5.9% 10.2% 7.5% 8.2% 9.5% 4.1%
Gross cash flow................ 312 357 169 225 228 148
Capital invested............... 2,711 2,628 2,192 1,607 1,433 1,386
CFROI.......................... 11.3% 14.3% 9.0% 14.5% 16.4% 11.2%
Equity-method income........... 0 (1) 2 0 0 0
Equity-method investments...... 2 2 11 16 20 18
Total assets................... 3,132 3,085 2,683 1,834 1,723 1,588
Capital expenditures........... 255 199 127 118 98 94
Amortization and
depreciation.................. 150 118 94 104 83 124
Liabilities.................... 1,382 1,489 1,512 673 672 731
Research and development
expenses...................... 68 83 72 9 10 13
Number of employees (as of Dec.
31)........................... 12,600 12,100 11,100 11,000 11,400 11,500
RECONCILIATION CONTINUING OPERATIONS
------------------------ ---------------------------
REGIONS 2001 2000 1999 2001 2000 1999
------- ------ ------ ------ ------- ------- -------
(E MILLION)
Net sales (external) -- by Market................ 28,938 28,615 23,572
Net sales (external) -- by point of origin....... 28,938 28,615 23,572
-- Change in E................................... 1.1% 21.4% 8.9%
-- Change in local currencies.................... 0.8% 12.1% 6.4%
Interregional sales.............................. (5,423) (4,947) (3,727)
Other operating income........................... 480 425 659
Operating result before exceptional Items........ (335) (353) (399) 1,855 3,209 2,703
Return on sales before exceptional Items......... 6.4% 11.2% 11.5%
Exceptional items................................ (19) 0 (51) (613) (145) (564)
Operating result................................. (354) (353) (450) 1,242 3,064 2,139
Return on sales including exceptional items...... 4.3% 10.7% 9.1%
Gross cash flow.................................. (380) (355) (423) 2,826 3,847 2,834
Capital invested................................. (15) (56) 34 33,466 32,879 26,859
CFROI............................................ 8.3% 12.6% 11,0%
Equity-method income............................. 12 (1) (11)
Equity-method investments........................ 987 859 265
Total assets..................................... 1,074 796 680 35,990 34,451 29,530
Capital expenditures............................. 0 0 1 2,553 2,486 2,459
Amortization and depreciation.................... 4 0 3 2,403 1,990 1,616
Liabilities...................................... 1,481 1,729 1,297 19,712 19,253 15,409
Research and development expenses................ 162 203 176 2,488 2,319 2,077
Number of employees (as of Dec. 31).............. 600 600 700 112,000 113,900 112,200
DISCONTINUING
OPERATIONS BAYER GROUP
------------------------ ---------------------------
REGIONS 2001 2000 1999 2001 2000 1999
------- ------ ------ ------ ------- ------- -------
(E MILLION)
Net sales (external) -- by Market................ 1,337 2,356 3,748 30,275 30,971 27,320
Net sales (external) -- by point of origin....... 1,337 2,356 3,748 30,275 30,971 27,320
-- Change in E................................... (2.2%) 13.4% (2.6%)
-- Change in local currencies.................... (2.5%) 4.5% (4.7%)
Interregional sales..............................
Other operating income........................... 340 37 72 820 462 731
Operating result before exceptional Items........ 76 247 1,231 1,931 3,456 3,934
Return on sales before exceptional Items......... 6.4% 11.2% 14.4%
Exceptional items................................ 293 (24) (13) (320) (169) (577)
Operating result................................. 369 223 1,218 1,611 3,287 3,357
Return on sales including exceptional items...... 5.3% 10.6% 12.3%
Gross cash flow.................................. 97 317 358 2,923 4,164 3,192
Capital invested................................. 1,392 2,183 2,119 34,858 35,062 28,978
CFROI............................................ 8.2% 12.7% 11.3%
Equity-method income............................. 14 72 (17) 26 71 (28)
Equity-method investments........................ 179 487 448 1,166 1,346 713
Total assets..................................... 1,049 2,000 1,749 37,039 36,451 31,279
Capital expenditures............................. 64 161 173 2,617 2,647 2,632
Amortization and depreciation.................... 113 149 195 2,516 2,139 1,811
Liabilities...................................... 307 821 688 20,019 20,074 16,097
Research and development expenses................ 71 74 175 2,559 2,393 2,252
Number of employees (as of Dec. 31).............. 4,900 8,200 8,200 116,900 122,100 120,400
F-22
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)
[8] INCOME FROM INVESTMENTS IN AFFILIATED COMPANIES -- NET
This comprises the following items:
2001 2000 1999
---- ---- ----
(E MILLION)
Dividends and similar income................................ 15 18 9
- of which E12 million (2000: E8 million; 1999: E2 million)
from subsidiaries
Income from profit and loss transfer agreements............. * 1 1
- of which less than E1 million (2000: E1 million; 1999: E1
million) from subsidiaries
Income (Expense) from companies included at equity.......... 26 71 (28)
Gains from the sale of investments in affiliated
companies................................................. 16 204 0
Losses from the sale of investments in affiliated
companies................................................. (3) (1) (2)
Write-downs of investments in affiliated companies.......... 0 (10) (11)
---- ---- ----
54 283 (31)
==== ==== ====
* less than E1 million
In the previous year this item contained the E65 million gain from the sale
of the 11 percent interest in Myriad Genetics, Salt Lake City, Utah, E142
million gain from the sale of the 25 percent interest in Schein Pharmaceutical
Inc., Florham Park, New Jersey and the equity income from the Agfa-Gevaert
group.
[9] INTEREST EXPENSE -- NET
Interest income and expense comprises:
2001 2000 1999
---- ---- ----
(E MILLION)
Income from other securities and loans included in
investments............................................... 9 10 16
Other interest and similar income........................... 108 143 150
- of which E1 million (2000: E4 million; 1999: E3 million)
from subsidiaries
Interest and similar expenses............................... (466) (464) (362)
- of which E5 million (2000: E24 million; 1999: E4 million)
to subsidiaries
---- ---- ----
(349) (311) (196)
==== ==== ====
Finance leases are capitalized under property, plant and equipment in
compliance with IAS 17 (Leases). The interest portion of the lease payments,
amounting to E9 million in 2001, 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
2001 to E30 million (2000: E28 million; 1999: E32 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.
F-23
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)
Miscellaneous non-operating income includes E25 million (2000: E18 million;
1999: E9 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
carryforwards. 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.
The breakdown of pre-tax income and income tax expense by origin is as
follows:
2001 2000 1999
----- ----- -----
(E MILLION)
Income before income taxes
-- Germany.................................................. 971 1,482 2,087
-- Other countries.......................................... 144 1,508 749
----- ----- -----
1,115 2,990 2,836
===== ===== =====
Income taxes paid or accrued
-- Germany.................................................. 122 442 71
-- Other countries.......................................... 502 321 429
----- ----- -----
624 763 500
Deferred taxes
-- from temporary differences............................... (272) 383 305
-- from loss carry-forwards................................. (198) 2 13
----- ----- -----
(470) 385 318
----- ----- -----
154 1,148 818
===== ===== =====
A valuation allowance is recognized against tax loss carryforwards when it
is not sufficiently certain that this income will be realized.
Changes in tax rates diminished deferred tax expense for 2001 by E8 million
(2000: E21 million; 1999: E41 million increase).
Deferred taxes -- computed according to IAS 12 (Income Taxes) -- result
primarily from temporary differences between the accounting and tax balance
sheets of the individual consolidated companies with regard to the recognition
and/or valuation of certain items.
F-24
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)
The deferred tax assets and liabilities are allocable to the various
balance sheet items as follows:
* 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.
In 2001, deferred tax assets of E9 million and deferred tax liabilities of
E10 million relate to changes in the scope of consolidation. Utilization of tax
loss carryforwards from previous years diminished the amount of income taxes
paid or accrued in 2001 by E88 million (2000: E7 million; 1999: E9 million).
The value of existing loss carryforwards by expiration date is as follows:
DEC. 31, 2001 DEC. 31, 2000 DEC. 31, 1999
------------- ------------- -------------
(E MILLION)
One year............................................ 6 3 --
Two years........................................... 11 20 3
Three years......................................... 16 11 20
Four years.......................................... 50 22 11
Five years and thereafter........................... 653 196 174
--- --- ---
736 252 208
=== === ===
Deferred tax assets of E204 million (2000: E15 million; 1999: E9 million)
are recognized on the E540 million (2000: E48 million; 1999: E27 million) of
loss carryforwards that represent income likely to be realized in the future.
Recognition of these deferred tax assets results in deferred tax income of E198
million.
Deferred tax liabilities have not been recognized for temporary differences
associated with investments in foreign subsidiaries of E3,030 million (2000:
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.
F-25
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)
The actual income tax expense for 2001 of E154 million (2000: E1,148
million, 1999: E818 million) is E259 million (2000: E31 million, 1999: E394
million) less than the E413 million (2000: E1,179 million, 1999: E1,212 million)
that would result from applying to the pre-tax income of the Group a tax rate of
37.1 percent (2000: 39.5 percent, 1999: 42.7 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:
2001 2000 1999
--------------- --------------- ---------------
E MILLION % E MILLION % E MILLION %
--------- --- --------- --- --------- ---
Theoretical income tax expense................. 413 100 1,179 100 1,212 100
Lower taxes due to tax-free income............. (283) (68) (151) (13) (434) (36)
Higher taxes due to non-tax-deductible
expenses..................................... 47 11 93 8 90 7
Other tax effects.............................. (23) (5) 27 2 (50) (4)
---- --- ----- --- ----- ---
ACTUAL INCOME TAX EXPENSE...................... 154 38 1,148 97 818 67
==== === ===== === ===== ===
Effective tax rate in %........................ 13.8 38.4 28.8
---- ----- -----
[12] OTHER TAXES
Other taxes amounting to E247 million (2000: E229 million; 1999: E189
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 E6 million (2000: E29 million; 1999:
E16 million), and minority interest in losses to E10 million (2000: E3 million;
1999: E0 million), adding E4 million to (2000: subtracting E26 million from;
1999: subtracting E16 million from) 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 2001, in 2000 and in 1999 the number of shares remained constant at
730,341,920. Earnings per share were E1.32 (2000: E2.49; 1999: E2.74).
There were no subscription rights outstanding in 2001, in 2000 or in 1999,
and therefore no dilutive potential shares.
[15] COST OF MATERIALS
The total cost of materials for continuing operations amounted to E11,057
million (2000: E10,040 million; 1999: E7,041 million), comprising E10,361
million (2000: E9,380 million; 1999: E6,495 million) in expenses for raw
materials, supplies and goods purchased for resale, and E696 million (2000: E660
million; 1999: E546 million) in expenses for purchased services.
The cost of materials for the discontinuing operations was E533 million
(2000: E1,168 million; 1999: E2,101 million). While Erdolchemie incurred costs
of E153 million (2000: E545 million; 1999: E371 million) entirely for raw
materials and supplies, Haarmann & Reimer accounted for E344 million (2000: E393
million; 1999: E333 million), including E10 million (2000: E10 million; 1999: E4
million) for purchased services. Fibers accounted for E36 million (2000: E126
million; 1999: E92 million), including E10 million (2000: E23 million; 1999: E20
million) for purchased services. In 2000, DyStar accounted for E104 million
(1999: E125 mil-
F-26
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)
lion), which included E1 million (1999: E1 million) for purchased services. In
1999 Agfa accounted for E1,180 million, which included E14 million for purchased
services.
[16] PERSONNEL EXPENSES
Personnel expenses for continuing operations rose in 2001 by E281 million
to E7,576 million. Of the increase, E43 million is due to exchange rate
fluctuations.
The breakdown of personnel expenses is as follows:
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 2001 was 1,075 (2000: 1,048; 1999:
1,121).
The figures in the above table do not include people employed in
discontinuing operations. In 2001, Haarmann & Reimer employed on average 3,660
people (2000: 3,742; 1999: 3,882); Fibers employed on average 1,169 people
(2000: 1,643; 1999: 1,645).
[18] INTANGIBLE ASSETS
Acquired intangible assets other than goodwill are recognized at cost and
amortized by the straight-line method over a period of 4 to 15 years, depending
on their estimated useful lives. Write-downs are made for impairment losses.
Assets are written back if the reasons for previous years' write-downs no longer
apply.
Goodwill, including that resulting from capital consolidation, 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. In compliance with IAS 36 (Impairment of Assets), such write-downs of
goodwill are measured by comparison to the discounted cash flows expected to be
generated by the assets to which the goodwill can be ascribed.
Self-created intangible assets are not capitalized.
F-27
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)
Certain development costs relating to the application development stage of
internally developed software are capitalized in the Group balance sheet. These
costs are amortized over their useful life from the date they are placed in
service. Changes in intangible assets in 2001 were as follows:
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. Writedowns are made for any declines in value that go beyond the
depletion reflected in depreciation. In compliance with IAS 36 (Impairment of
Assets), such write-downs are measured by comparing the carrying amounts to the
discounted cash flows expected to be generated by the respective assets. Where
it is not possible to estimate the impairment loss for an individual asset, the
loss is assessed on the basis of the discounted cash flow for the
cash-generating unit to which the asset belongs. 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.
F-28
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)
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.
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 pattern.
When assets are retired, sold, or abandoned, the difference between the net
proceeds and the net carrying amount of the assets is recognized as a gain or
loss in other operating income or expenses, respectively.
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-29
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)
Changes in property, plant and equipment in 2001 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, 2000... 7,978 19,986 2,513 1,262 31,739
Exchange differences.................... 91 318 20 32 461
Changes in scope of consolidation....... (165) (991) (51) (60) (1,267)
Acquisitions............................ -- -- -- -- --
Capital expenditures.................... 78 373 250 1,510 2,211
Retirements............................. (144) (732) (349) (29) (1,254)
Transfers............................... 310 590 117 (1,017) --
----- ------ ----- ------ ------
GROSS CARRYING AMOUNTS, DEC. 31, 2001... 8,148 19,544 2,500 1,698 31,890
----- ------ ----- ------ ------
Accumulated depreciation and
write-downs, Dec. 31, 2000............ 4,092 12,583 1,712 7 18,394
Exchange differences.................... 31 153 12 -- 196
Changes in scope of consolidation....... (114) (811) (41) -- (966)
Depreciation and write-downs in 2001.... 274 1,276 286 11 1,847
- of which write-downs................. [--] [38] [1] [11] [50]
Retirements............................. (118) (710) (296) -- (1,124)
Transfers............................... 3 (5) 2 -- --
----- ------ ----- ------ ------
ACCUMULATED DEPRECIATION AND
WRITE-DOWNS, DEC. 31, 2001............ 4,168 12,486 1,675 18 18,347
----- ------ ----- ------ ------
NET CARRYING AMOUNTS, DEC. 31, 2001..... 3,980 7,058 825 1,680 13,543
----- ------ ----- ------ ------
Net carrying amounts, Dec. 31, 2000..... 3,886 7,403 801 1,255 13,345
===== ====== ===== ====== ======
The exchange differences are as defined for intangible assets.
Capitalized property, plant and equipment includes assets with a total net
value of E588 million (2000: E199 million) held under finance leases. The gross
carrying amounts of these assets total E1,229 million (2000: E277 million).
These assets are mainly machinery and technical equipment with a carrying amount
of E425 million (gross amount E975 million) and buildings with a carrying amount
of E106 million (gross amount E141 million). In the case of buildings, either
the present value of the minimum lease payments covers substantially all of the
cost of acquisition, or title passes to the lessee on expiration of the lease.
Also included are products leased to other parties under operating leases
with a carrying amount of E381 million (2000: E247 million), the gross carrying
amount of the assets concerned being E753 million (2000: E717 million). However,
if under the relevant agreements the lessee is to be regarded as the economic
owner of the assets and the lease therefore constitutes a finance lease as
defined in IAS 17 (Leases), a receivable is recognized in the balance sheet in
the amount of the discounted future lease payments.
[20] INVESTMENTS
Investments in non-consolidated subsidiaries and other affiliated companies
are generally carried individually at cost. Where other affiliated companies or
other securities included in investments are classified as held-to-maturity
investments or available-for-sale financial assets, they are recognized in
compliance with IAS 39 (Financial Instruments: Recognition and Measurement) at
amortized cost or fair value. Where evidence exists that
F-30
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)
such assets may be impaired, they are written down as necessary on the basis of
an impairment test. 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. 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.
The exchange differences are as defined for intangible assets.
The additions to investments in associated companies relate mainly to a
manufacturing company being established jointly with Lyondell and the first-time
inclusion of DyStar GmbH at equity. The difference between the equity interest
in the underlying net assets of companies included at equity and their at-equity
accounting values is E45 million (2000: E91 million). It relates primarily to
goodwill. Since Bayer no longer exerts significant influence over Agfa-Gevaert
N.V., Belgium, Bayer's 30 percent interest in this company, which was previously
valued at equity, is included at fair value under investments in other
companies.
[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 E5,818
million (2000: E6,095 million) in inventories carried as of December 31, 2001,
E824 million (2000: E431 million) represents those included at their net
realizable value.
Inventories are normally valued by the weighted-average method.
F-31
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)
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. 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, 2001 DEC. 31, 2000
------------- -------------
(E MILLION)
Raw materials and supplies.................................. 1,179 1,041
Work in process, finished goods and goods purchased for
resale.................................................... 4,626 5,046
Advance payments............................................ 13 8
----- -----
5,818 6,095
===== =====
The changes in inventory write-downs are as follows:
DEC. 31, 2001 DEC. 31, 2000
------------- -------------
(E MILLION)
Balance at the beginning of the year........................ (241) (248)
Additions charged to expense................................ (362) (218)
Exchange differences........................................ (2) (9)
Changes in scope of consolidation........................... 17 --
Deductions due to utilization............................... 154 234
---- ----
BALANCE AT THE END OF YEAR.................................. (434) (241)
==== ====
[22] TRADE ACCOUNTS RECEIVABLE
Trade accounts receivable are stated at nominal value, less write-downs of
E222 million (2000: E204 million) for amounts unlikely to be recovered.
Trade accounts receivable as of December 31, 2001 include E5,413 million
(2000: E6,236 million) maturing within one year and E2 million (2000: E8
million) maturing after one year. Of the total, E18 million (2000: E11 million)
is receivable from subsidiaries, E66 million (2000: E87 million) from other
affiliated companies and E5,331 million (2000: E6,146 million) from other
customers.
[23] OTHER RECEIVABLES AND OTHER ASSETS
Other receivables and other assets are stated at nominal value, less
write-downs of E4 million (2000: E4 million).
F-32
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)
They are comprised as follows:
DEC. 31, 2001 DEC. 31, 2000
------------- -------------
(E MILLION)
Claims for tax refunds...................................... 448 662
Short-term loans............................................ 102 153
Lease payments receivable................................... 94 96
Receivables from derivative financial instruments........... 72 --
Payroll-receivables......................................... 47 47
Short-term loans from clearing.............................. 41 87
Interest receivable on loans................................ 19 23
Other receivables........................................... 1,624 1,346
----- -----
2,447 2,414
===== =====
Interest receivable on loans consists mainly of interest earned in the
fiscal year but not due to be received until after the balance sheet date.
Total other receivables and other assets include E66 million (2000: E149
million) pertaining to subsidiaries and E124 million (2000: E44 million)
pertaining to other affiliated companies.
Total other receivables and other assets in the amount of E444 million
(2000: E442 million) mature in more than one year. Of this amount, E30 million
(2000: E31 million) pertains to subsidiaries.
Changes in write-downs of receivables are as follows:
DEC. 31, 2001 DEC. 31, 2000
------------- -------------
(E MILLION)
Balance at the beginning of year............................ (204) (173)
Additions charged to expenses............................... (94) (42)
Exchange differences........................................ (5) (5)
Changes in scope of consolidation........................... 5 --
Deductions due to utilization............................... 76 16
----- -----
BALANCE AT THE END OF YEAR.................................. (222) (204)
===== =====
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 E94 million (2000: E96 million), while the interest
portion pertaining to future years amounts to E29 million (2000: E23 million).
The lease payments are due as follows:
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)
[24] LIQUID ASSETS
DEC. 31, 2001 DEC. 31, 2000
------------- -------------
(E MILLION)
Marketable securities and other instruments................. 52 213
Cash and cash equivalents................................... 719 491
--- ---
771 704
=== ===
As of 2001, securities are recognized at fair value in compliance with IAS
39 (Financial Instruments: Recognition and Measurement). Their total fair value
at the closing date amounts to E52 million (2000: E247 million) and exceeds the
lower of cost and market by E13 million (2000: E34 million). Financial
instruments with original maturities of up to three months are recognized as
cash equivalents in view of their high liquidity.
[25] DEFERRED CHARGES
Deferred charges as of December 31, 2001 include unamortized debt discounts
of E9 million (2000: E17 million). The debt discounts are amortized annually
over the lives of the underlying liabilities.
Total deferred charges include E183 million that is expected to be used up
in 2002.
[26] STOCKHOLDERS' EQUITY
The capital stock of Bayer AG amounts to E1,870 million, as in the previous
year, 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 by issuing new
shares against cash contributions. Subscription rights for existing stockholders
are excluded with respect to E102 million of this authorized capital.
Further authorized capital in the amount of E374 million was approved by
the Annual Stockholders' Meeting on April 27, 2001. This authorized capital,
which expires on April 27, 2006, can be used to increase the capital stock by
issuing new shares against non-cash contributions. Subscription rights for
existing stockholders are excluded.
Conditional capital of E83 million existed at December 31, 2001. 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
consolidated companies.
The changes in the various components of stockholders' equity during 2001,
2000 and 1999 are shown in the statements of changes in stockholders' equity.
The dividend per share amounts paid for the 2000 and 1999 fiscal years were
E1.40 and E1.30, respectively.
[27] MINORITY INTEREST
Minority interest mainly comprises third parties' shares in the equity of
the consolidated subsidiaries Sumika Bayer Urethane Co. Ltd., Japan; the
Makroform GmbH group; Bayer (India) Ltd.; and Bayer ABS Ltd., India.
F-34
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)
[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 2001,
these expenses totaled E312 million (2000: E437 million; 1999: E491 million).
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 2001, expenses for defined benefit plans
amounted to E301 million (2000: E326 million; 1999: E359 million). These net
periodic costs -- except for the interest portion -- are generally 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, 2001 DEC. 31, 2000
------------- -------------
(E MILLION)
Service cost................................................ 265 210
Past service cost........................................... 10 1
Interest cost............................................... 669 589
Return on plan assets....................................... (640) (526)
Amortization of actuarial amounts........................... (34) (14)
---- ----
270 260
==== ====
The pension provisions for defined benefit plans are calculated in
accordance with IAS 19 (Employee Benefits) by the projected unit credit method.
The future benefit obligations are valued by actuarial methods on the basis of
an 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 is therefore subject to the
German Law on the Supervision of Private Insurance Companies. Since Bayer
guarantees the commitments of the Bayer Pensionskasse, it is classified as a
defined benefit plan for IAS and U.S. GAAP purposes.
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, 2001 DEC. 31, 2000
-------------- --------------
Discount rate............................................... 2.5%-7.0% 3.0%-7.3%
Projected future remuneration increases..................... 2.0%-4.8% 1.0%-7.0%
Projected future pension increases.......................... 2.0%-3.3% 1.0%-4.5%
Projected employee turnover (according to age and gender)... Empirical data Empirical data
Projected return on plan assets............................. 2.0%-8.5% 3.0%-8.5%
F-35
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)
The status of unfunded and funded defined benefit obligations, computed
using the appropriate parameters, is as follows:
DEC. 31, 2001 DEC. 31, 2000
------------- -------------
(E MILLION)
Defined benefit obligation.................................. (11,303) (9,535)
Fair value of plan assets................................... 8,126 7,847
------- ------
FUNDED STATUS............................................... (3,177) (1,688)
Unrecognized transition liability (asset)................... 3 (11)
Unrecognized actuarial (gain) loss.......................... 1,366 (203)
Asset limitation due to uncertainty of obtaining future
benefits.................................................. (1,249) (1,249)
------- ------
NET RECOGNIZED LIABILITY.................................... (3,057) (3,151)
======= ======
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 reflected in other receivables,
subject to the asset limitation specified in IAS 19 (Employee Benefits). In
accordance with IAS 19, the amounts reflected in the balance sheet will be
recognized in the income statement over the expected average remaining working
lives of existing employees. The portion of the net actuarial gain or loss to be
recognized in the income statement is determined by the corridor method. The
actual return on plan assets was a loss of E606 million for defined benefit
plans providing pension and healthcare benefits. The net liability under these
defined benefit plans changed as follows:
DEC. 31, 2001 DEC. 31, 2000
------------- -------------
(E MILLION)
Net liability recognized at the beginning of the year....... (3,151) (3,191)
Pension benefit (cost) income............................... (270) (260)
Employer contributions...................................... 313 255
Divestitures................................................ 54 20
Change in asset limitation.................................. -- 12
Change in scope of consolidation............................ * 11
Change in currency translation.............................. (3) 2
------ ------
NET LIABILITY RECOGNIZED AT END OF YEAR..................... (3,057) (3,151)
====== ======
* less than E1 million
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, particularly in the United States, to provide health care to their
retirees. 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 retirees are also included, since these
obligations are similar in character to pension obligations. Like pension
obligations, they are valued in line with international standards. In 2001,
provisions for early retirement and other post-retirement benefits amounted to
E635 million (2000: E637 million). The resulting expenses for 2001 amounted to
E63 million (2000: E214 million), comprising E23 million (2000: E192 million)
for service cost, E58 million (2000: E52 million) for interest cost, E31 million
(2000: E30 million) for expected return on plan assets and E13 million (2000: E0
million) for actuarial losses.
F-36
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)
[29] OTHER PROVISIONS
Other provisions are valued in accordance with IAS 37 (Provisions,
Contingent Liabilities and Contingent Assets) and, where appropriate, IAS 19
(Employee Benefits), using the best estimate of the extent of the obligation.
Long-term portions of provisions are discounted to their present value. The
Group sets up and maintains provisions for probable and on-going litigation
cases when a reasonable estimate can be made. These provisions include all
estimated legal fees and costs of settlement. The amounts are based upon written
notification and reasonable settlement cost estimates provided by the Group's
attorneys. Periodically, but at least quarterly, the provisions are reviewed
with the Group's attorneys and updated.
The breakdown of provisions is as follows:
DEC. 31, 2001 DEC. 31, 2000
---------------- ----------------
MATURING MATURING
TOTAL IN 2002 TOTAL IN 2001
----- -------- ----- --------
(E MILLION)
Provisions for taxes....................................... 524 151 537 370
Provisions for personnel commitments....................... 923 451 1,044 555
Provisions for environmental remediation................... 200 19 230 12
Provisions for restructuring............................... 145 79 131 69
Provisions for trade-related commitments................... 438 426 411 397
Miscellaneous provisions................................... 535 351 556 298
----- ----- ----- -----
2,765 1,477 2,909 1,701
===== ===== ===== =====
Personnel commitments mainly include annual bonus payments, service awards
and other personnel costs. Reimbursements to be received from the German
government under the pre-retirement part-time work program are recorded as
receivables and recognized in income as soon as the criteria for such
reimbursements are fulfilled. Trade-related commitments mainly include rebates,
as well as obligations relating to services already received but not yet
invoiced.
Bayer's three-tier stock compensation program was first launched in 2000.
It consists 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 Program, Stock
Incentive Program or 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
F-37
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)
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 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, he or she receives no shares under the program.
At December 31, 2001, no options were exercisable. No options expired, nor were
any options cancelled, during fiscal 2001.
If it is not possible to issue shares under the Stock Option Program to
participants at the time they are entitled to exercise their option rights, 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 of their own 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 deposited at the launch of the program as well as on the overall
performance of Bayer stock. 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:
Issuance of incentive shares to employees in the Stock Incentive Program
INCENTIVE SHARES RECEIVED
DISTRIBUTION DATE AT END OF (PER 10 DEPOSITED SHARES)
--------------------------- -------------------------
Second year.......................................... 2
Sixth year........................................... 4
Tenth year........................................... 4
---
Total................................................ 10
===
Participants receive incentive shares only if Bayer stock has outperformed
the Dow Jones EURO STOXX 50 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
participate in both Module 1 and Module 2. The Module 1 program, like the Stock
Incentive Program, requires participants to deposit Bayer AG shares of their
F-38
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)
own in a special account. As with the Stock Incentive Program, participants in
the Stock Participation Program may sell their deposited 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:
Issuance of incentive shares to employees in the Stock Participation Program
INCENTIVE SHARES RECEIVED
DISTRIBUTION DATE AT END OF (PER 10 DEPOSITED SHARES)
--------------------------- -------------------------
Second year.......................................... 1
Sixth year........................................... 2
Tenth year........................................... 2
---
Total................................................ 5
===
In addition, under Module 2 each participant may purchase 10 Bayer AG
shares per year at a tax-free discount of E15.34 (2000: E15.34) per share to the
market price. Participants may not include shares that they purchase under
Module 2 among the shares they deposit under Module 1. Each participant may take
up both modules up to a maximum aggregate value of half his or her
performance-related bonus in the year he or she enters the program.
The Stock Option Program, the Stock Incentive Program and Module 1 of the
Stock Participation Program are accounted for as follows: Since participants are
entitled to receive shares of Bayer AG stock bought in the capital market,
subject to certain performance criteria, compensation expense for potential
share distributions is recorded 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 related personnel provisions on December 31, 2001 amounted to E12
million.
For Module 2 of the Stock Participation Program, the difference between the
quoted market price of Bayer AG stock and the discounted price paid by
participants at the date of purchase is expensed immediately. During the year
ended December 31, 2001, participants in Module 2 received 252,652 shares at a
total price of E7.8 million, resulting in personnel expenses of E3.9 million.
The discount to the price of Bayer AG stock was 33.2 percent.
ENVIRONMENTAL PROVISIONS
The Group's activities are subject to extensive laws and regulations in the
jurisdictions in which it does business and maintains properties. Our 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 remediation of sites that we own,
formerly owned or operated, where materials were
F-39
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)
produced specifically for us by contract manufacturers 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 remediation 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. In most cases remediation measures have
already been initiated.
Provisions for environmental remediation as of December 31, 2001 amounted
to E200 million (2000: E230 million). The material components of the provisions
for environmental remediation costs primarily relate to land reclamation,
rehabilitation of contaminated sites, recultivation of landfills, and
redevelopment and water protection measures. The provisions for environmental
remediation costs are recorded on a discounted basis where environmental
assessments or clean-ups are probable, the costs can be reasonably estimated and
no future economic benefit is expected to arise from these measures. The above
amount of provisions represents anticipated future remediation payments totaling
E265 million (2000: E304 million), discounted at risk-free rates of 0.5 percent
to 5.5 percent.
These discounted amounts will be paid out over the period of remediation of
the relevant sites, which is expected to be 15 years. Costs are estimated based
on significant factors such as previous experience in similar cases,
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, particularly with regard to the
status of laws, regulations and the information available about conditions in
the various countries and at the individual sites. Subject to these factors, but
taking into consideration our experience to date regarding environmental matters
of a similar nature, we believe that the provisions 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 us to make expenditures in excess of
established provisions, over an extended period of time and in a range of
amounts that cannot be reasonably estimated. Management nevertheless 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 RISKS
As a global company with a heterogeneous business portfolio, Bayer is
exposed to numerous legal risks, particularly in the areas of product liability,
patent disputes, tax assessments, competition and antitrust law, and
environmental matters. We cannot predict with certainty the outcome of any
proceedings in which we are or may become involved. It is therefore possible
that legal judgments give rise to expenses that are not fully covered by
insurers' compensation payments and significantly affect our revenues and
earnings.
In the opinion of the management, however, currently pending litigation is
unlikely to result in judgments that would materially affect the Group's
financial position or results of operations.
RESTRUCTURING CHARGES
Charges incurred for restructuring programs during 2001 were E214 million,
including E98 million in provisions that are expected to be used as the related
actions under the plans are completed. The total charges comprise E57 million in
severance payments, E61 million in accelerated amortization/depreciation and
write-downs of intangible assets, property, plant and equipment, and E96 million
in other expenses.
F-40
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)
Of the restructuring charges in 2001, a total of E39 million is related to
the integration of the polyols business acquired from Lyondell, with severance
payments accounting for E13 million, other expenses for E19 million and asset
write-downs for E7 million. The greater part of the severance payments and other
expenses for 2001 will lead to disbursements in 2002.
The restructuring of our styrenics business in North America and Europe led
to a further E43 million in charges, including E19 million for write-downs and
E24 million for other expenses.
In the second half of 2001 we announced plans to restructure our styrenics
operations in Camacari, Brazil, resulting in charges of E22 million, comprising
E16 million in write-offs of assets no longer utilized and E6 million in other
expenses.
In 2001, a further E15 million in restructuring charges was incurred in the
U.S. for the restructuring of the Consumer Care Business Group in Elkhart,
Indiana, including E9 million in write-downs and E6 million in other expenses.
In the second half of 2001 we initiated restructuring measures to enhance
the efficiency of our U.S. production facilities in Baytown, Texas and New
Martinsville, West Virginia. The E35 million in charges comprises E21 million in
severance payments and E13 million in other expenses. We also announced plans to
close down a facility in West Virginia, resulting in E10 million in write-offs
of assets no longer utilized and E3 million in severance payments.
The ongoing restructuring programs to improve profitability in the
Pharmaceuticals Business Group gave rise to E26 million in charges, comprising
E7 million in severance payments and E19 million in other expenses.
Further charges relate to various small-scale restructuring programs.
Changes in provisions and expenses for restructuring were as follows:
EMPLOYEE TANGIBLE FIXED OTHER THIRD
TERMINATION COSTS ASSET IMPAIRMENT PARTY COSTS TOTAL
----------------- ---------------- ----------- -----
BALANCE AT JANUARY 1, 2000................... 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
Additions.................................... 57 61 96 214
Cash payments................................ (69) -- (64) (133)
Reclassification to fixed assets............. -- (74) -- (74)
Translation gain (loss), net................. 5 0 2 7
--- --- ---- ----
BALANCE AT DECEMBER 31, 2001................. 79 0 66 145
=== === ==== ====
The other costs are mainly demolition expenses and other charges related to
the abandonment of production facilities.
F-41
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)
[30] FINANCIAL OBLIGATIONS
Financial obligations that are not the hedged item in a permissible hedge
accounting relationship are carried at the higher of nominal and redemption
value. They comprise the following:
DEC. 31, 2001 DEC. 31, 2000
---------------- ----------------
MATURING MATURING
TOTAL IN 2002 TOTAL IN 2001
----- -------- ----- --------
(E MILLION)
Debentures................................................. 2,592 781 2,168 283
Liabilities to banks....................................... 1,122 829 1,458 932
Liabilities under lease agreements......................... 881 99 199 34
Liabilities from the issuance of promissory notes.......... 84 84 2 2
Commercial paper........................................... 1,365 1,365 1,812 1,812
Liabilities from derivative financial instruments.......... 180 169 -- --
Other financial obligations................................ 1,156 982 1,026 799
----- ----- ----- -----
7,380 4,309 6,665 3,862
===== ===== ===== =====
The maturities of financial obligations existing at December 31, 2001 were
as follows:
MATURING IN
E MILLION
---------
2002........................................................ 4,309
2003........................................................ 291
2004........................................................ 1,665
2005........................................................ 355
2006........................................................ 86
2007 or later............................................... 674
-----
7,380
=====
The financial obligations are predominantly in U.S. dollars, which account
for E5.1 billion (2000: E4.0 billion). U.S. dollar borrowings represent 69
percent (2000: 61 percent) of total financial obligations.
Short-term borrowings (excluding the short-term portion of debentures)
amounted to E3,528 million (2000: E3,579 million) with a weighted average
interest rate of 5.4 percent (2000: 6.6 percent) The Bayer Group's financial
obligations are primarily unsecured and of equal priority.
F-42
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)
Debentures include the following:
EFFECTIVE STATED
RATE RATE VOLUME DEC. 31, 2001 DEC. 31, 2000
--------- ------ ----------------- ------------- -------------
(E MILLION)
BAYER CAPITAL CORPORATION B.V.
2.820%.. 2.500% Bonds with Warrants Attached CHF 250.0 million 169 164
1987/2002
BAYER CORPORATION
6.735%.. 6.500% Notes 1995/2002 USD 400.0 million 454 430
7.323%.. 7.125% Notes 1995/2015 USD 200.0 million 227 215
6.784%.. 6.750% Notes 1996/2001 USD 250.0 million -- 269
2.166%.. 2.250% Bonds 1997/2002 CHF 200.0 million 135 131
3.500%.. 3.500% Revenue Bonds 1997/2009 USD 20.6 million 23 22
4.000%.. 4.000% Revenue Bonds 1997/2027 USD 25.0 million 28 27
6.761%.. 6.650% Notes 1998/2028 USD 350.0 million 397 376
6.391%.. 6.200% Bonds 1998/2028 USD 250.0 million 284 269
4.750%.. 4.750% Money Market Puttable Reset USD 500.0 million 568 269
Securities 2001/2011
BAYER LTD., JAPAN
3.869%.. 3.750% Bonds 2000/2005 CHF 400.0 million 270 239
OTHER DEBENTURES................................... 37 26
----- -----
2,592 2,168
===== =====
The other debentures totaling E37 million are due between 2002 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.
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 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, 2001, the effective U.S.
dollar interest rate was 2.17%. 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 30 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
F-43
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)
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. The
debt was swapped into yen at a floating interest rate.
In March 2001, Bayer Corporation issued USD 500 million of 4.75% Money
Market Puttable Reset Securities to qualified institutional buyers, due in 2011.
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, on each
anniversary date of the original marketing of the securities.
At December 31, 2001, the Group had approximately E6.2 billion (2000: E5.6
billion) in total lines of credit, of which E1.1 billion (2000: E1.5 billion)
was used and E5.1 billion (2000: E4.1 billion) were unused and available for
borrowing on an unsecured basis.
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 E1,174 million (2000: E285
million), including E293 million (2000: E86 million) in interest, are to be made
to the respective lessors in future years.
The liabilities associated with finance leases mature as follows:
Lease payments in 2001 in connection with operating leases amounted to E244
million (2000: E162 million; 1999:E 154 million).
The other financial obligations include E85 million (2000: E42 million) to
nonconsolidated subsidiaries.
[31] TRADE ACCOUNTS PAYABLE
Trade accounts are payable mainly to third parties; they are carried at the
higher of nominal and redemption value. As last year, the entire amount is due
within one year. Trade accounts payable as of December 31, 2001 include E1,991
million (2000: E2,013 million) maturing within one year and E2 million (2000: E3
million)
F-44
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)
maturing after one year. Of the total, E8 million (2000: E8 million) is payable
to subsidiaries, E7 million (2000: E16 million) to other affiliated companies
and E1,978 million (2000: E1,992 million) to other suppliers.
[32] MISCELLANEOUS LIABILITIES
Miscellaneous liabilities are carried at the higher of nominal and
redemption value. They are comprised as follows:
DEC. 31, 2001 DEC. 31, 2000
----------------- -----------------
MATURING MATURING
TOTAL IN 2002 TOTAL IN 2001
----- -------- ----- --------
(E MILLION)
Payroll liabilities.................................... 443 320 537 422
Tax liabilities........................................ 281 280 291 289
Liabilities for social expenses........................ 144 144 114 114
Accrued interest on liabilities........................ 125 125 73 46
Advance payments received.............................. 25 25 24 24
Liabilities from the acceptance of drafts.............. 17 17 14 14
License liabilities.................................... 56 56 32 32
Other miscellaneous liabilities........................ 881 865 1,385 1,333
----- ----- ----- -----
1,972 1,832 2,470 2,274
===== ===== ===== =====
Tax liabilities include not only Group companies' own tax liabilities, but
also taxes withheld for paying over to the authorities on behalf of third
parties.
Liabilities for social expenses include, in particular, social insurance
contributions that had not been paid over by the closing date.
The other miscellaneous liabilities comprise mainly guarantees, commissions
to customers, and expense reimbursements.
The total of miscellaneous liabilities includes E42 million (2000: E76
million) to non-consolidated subsidiaries and E3 million (2000: E12 million) to
other affiliated companies.
[33] FURTHER INFORMATION ON OTHER LIABILITIES
Other liabilities (financial obligations, trade accounts payable and
miscellaneous liabilities) include E1,779 million (2000: E1,636 million)
maturing in more than five years.
Of the total, E334 million (2000: E283 million) was secured, mainly by
mortgages of E256 million (2000: E256 million).
Included is E125 million (2000: E123 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, 2001 comprises
E111 million (2000: E113 million) in such grants and subsidies received from
governments; the amount reversed and recognized in income was E17 million (2000:
E13 million).
F-45
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)
[35] DISCONTINUING OPERATIONS
Assets and liabilities include the following amounts pertaining to the
discontinuing operations of Haarmann & Reimer, Erdolchemie, Fibers and DyStar:
Contingent liabilities as of December 31, 2001 -- almost all of which exist
toward third parties -- amount to E193 million. They result from:
DEC. 31, 2001 DEC. 31, 2000
------------- -------------
(E MILLION)
Issuance and endorsement of bills........................... 22 23
Guarantees.................................................. 53 44
Warranties.................................................. 118 148
--- ---
193 215
=== ===
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
contractual terms encountered 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 payments relating to
operating leases total E557 million (2000: E598 million). The respective payment
obligations mature as follows:
E MILLION
---------
2002........................................................ 188
2003........................................................ 91
2004........................................................ 69
2005........................................................ 56
2006........................................................ 86
2007 or later............................................... 67
---
557
===
F-46
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)
Financial commitments resulting from orders already placed under purchase
agreements related to planned or ongoing capital expenditure projects total E354
million (2000: E446 million). The respective payments are due almost entirely in
2002.
Under collective agreements on part-time work arrangements for certain
older employees, we have to accept applications for such arrangements from a
certain quota of the work force. Other financial obligations that may arise from
such work arrangements in the future cannot be quantified, since the quota has
already been exceeded.
In addition, the Group has entered into research agreements with a number
of third parties under which Bayer has agreed to fund various research projects
or has assumed other commitments based on the achievement of certain milestones
or other specific conditions. The total amount of such funding and other
commitments is E732 million (2000: E683 million). At December 31, 2001, the
remaining payments expected to be made to these parties, assuming the milestones
or other conditions are met, were as follows:
MATURING IN E MILLION
----------- ---------
2002........................................................ 218
2003........................................................ 215
2004........................................................ 88
2005........................................................ 81
2006........................................................ 84
2007 or later............................................... 46
---
732
===
[37] RELATED PARTIES
Transactions with related persons and companies, which are invariably
performed on an arm's length basis, are mainly trade transactions. The related
receivables and payables have been included in the respective notes to the
financial statements as required by European Union directives. The revenue and
expenses related to these transactions are immaterial to the consolidated
financial statements as a whole.
[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. In
compliance with IAS 39 (Financial Instruments: Recognition and Measurement),
asset instruments are categorized as "held for trading", "held to maturity", or
"available for sale" and, accordingly, recognized at fair value or amortized
cost. Changes in fair value are recognized in stockholders' equity. In the event
of impairment losses, the assets are written down and the write-downs are
recognized in income. Financial instruments constituting liabilities are carried
at the higher of nominal and redemption value.
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 securities included in
investments and of marketable securities are derived from their market prices
and reflected in the financial statements. 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 E83 million less than their carrying
value. The remaining
F-47
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)
receivables and liabilities and the liquid assets have such short terms that
there is no significant discrepancy between their fair values and carrying
amounts.
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.
In some cases forecasted transactions are also hedged to further reduce the
related anticipated currency risk. At December 31, 2001 the total notional
amount of the hedging instruments concerned -- mainly forward exchange contracts
for the sale of U.S. dollars or Japanese yen and all maturing before December
31, 2002 -- was E497 million, which is not included in the hedged amount of E2.5
billion. These hedging relationships amount to cash flow hedges as defined in
IAS 39. The contracts are concluded monthly so that they run for one year and
mature in the middle of each month. On these dates the results of the
transactions are recognized in income. In 2001, the differences resulting from
fair value measurement and initially recognized in equity amounted to E1.9
million.
On the asset side, 62 percent of currency risks relate to the U.S. dollar
and 10 percent to the Japanese yen. On the liabilities side, 60 percent of
foreign currency risks relate to the U.S. dollar, while only 4 percent relate to
euro risk positions of subsidiaries domiciled outside the euro zone. The
remaining exposure involves liabilities in British pounds (3 percent), Japanese
yen (5 percent) and a number of other currencies outside the dollar and euro
zones. The U.S. dollar accounts for 77 percent of the asset volume hedged
through derivative financial instruments, while the pound accounts for 8 percent
and the yen for 6 percent. Of the hedged liabilities, 59 percent are in U.S.
dollars, 7 percent in yen, 5 percent in British pounds and 29 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. When economically hedging
exchange rate risk on recorded foreign currency operating items, we
F-48
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)
do not aim for hedge accounting treatment. Changes in the fair values of the
respective hedging instruments are therefore recognized immediately in income.
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 foreign 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. "Regular way" purchases and sales of financial assets
are recorded at the settlement date in compliance with IAS 39. The main
objective in using derivative financial instruments is to reduce fluctuations in
cash flows and earnings associated with changes in interest and foreign exchange
rates.
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 volume of the contracted
purchases or sales of the respective derivatives.
F-49
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:
Gains and losses from changes in fair values are immediately recognized in
income, except where the strict conditions for the recognition of a hedge
accounting relationship are present. This is also the case with fair value
hedges, where the gain or loss on both the hedging contract and the hedged item
are recognized in income. However, gains or losses incurred through cash flow
hedge accounting are recognized initially in equity and subsequently in the
income for the year in which the term of the respective hedging contract is
completed.
CREDIT RISK
Credit risk exposure is E139 million (2000: E227 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 E2.7 billion (2000:
E3.3 billion) mature within one year, while instruments in the amount of E0.3
billion (2000: E0.2 billion) have longer remaining terms.
INTEREST RATE RISK
Short-term interest rate hedging contracts (including interest and
principal currency swaps) total E2.0 billion (2000: E0.3 billion). Those
maturing after more than one year total E2.5 billion (2000: E3.2 billion).
HEDGE ACCOUNTING
Most interest rate swaps and interest and principal currency swaps are
performed to allow the company to maintain a target range of floating rate debt.
All swap contracts amount to permissible hedge accounting relationships and
there is no ineffectiveness related to these hedges. Changes in the fair values
of derivatives that hedge interest rate risk are recorded as interest expense
for the respective periods, as are offsetting changes in the fair value of the
related hedged debt items. Fair value hedge accounting is not used in any other
circumstances. Some interest rate or interest and principal currency instruments
involve a swap from variable to fixed interest rates. Such contracts are
accounted for as cash flow hedges as defined in IAS 39. However, most of the
cash flow hedges are entered into to protect future operating revenues against
currency fluctuations, as explained earlier.
F-50
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)
[39] NET CASH PROVIDED BY OPERATING ACTIVITIES
The cash flow statement starts from the operating result. The gross cash
flow for 2001 of E2.9 billion (2000: E4.2 billion; 1999: E3.2 billion) is the
cash surplus from operating activities before any changes in working capital.
Breakdowns of the gross cash flow by segment and region are given in the table
on pages F-20 to F-22. The net cash flow of E3.9 billion (2000: E3.1 billion;
1999: E3.2 billion) takes into account changes in working capital.
[40] NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
Additions to property, plant and equipment and intangible assets in 2001
resulted in a cash outflow of E2.6 billion (2000: E2.6 billion; 1999: E2.6
billion). Cash outflows for acquisitions amounted to E0.5 billion (2000: E4.1
billion; 1999: E0.3 billion). Sales of property, plant and equipment led to a
cash inflow of E0.5 billion (2000: E0.3 billion; 1999: E0.1 billion), while that
from interest and dividend receipts and from marketable securities amounted to
E0.4 billion (2000: E0.3 billion; 1999: E0.4 billion).
[41] NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
The net cash outflow of E1.5 billion in 2001 mainly comprises the E1.0
billion dividend payment for 2000 (2000: E1.0 billion dividend payment for 1999;
1999: E0.8 billion dividend payment for 1998) and E0.5 billion (2000: E0.3
billion; 1999: E0.3 billion) in interest payments.
[42] DISCONTINUING OPERATIONS
Discontinuing operations affected the Group cash flow statements as
follows:
ERDOLCHEMIE FIBERS HR DYSTAR AGFA TOTAL
------------------ ------------------ ------------------ ----------- ----- ----
2001 2000 1999 2001 2000 1999 2001 2000 1999 2000 1999 1999 2001
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----- ----
(E MILLION)
Net cash provided by operating
activities............................. 13 38 39 28 114 35 118 84 42 66 35 167 159
Net cash provided by (used in) investing
activities............................. 474 (87) (62) (16) (30) (62) (163) (116) (308) (65) (16) 2,613 295
Net cash provided by (used in) financing
activities............................. 0 0 (1) (41) * * 77 (7) 227 18 (28) -- 36
--- --- --- --- --- --- ---- ---- ---- --- --- ----- ---
CHANGE IN CASH AND CASH EQUIVALENTS..... 487 (49) (24) (29) 84 (27) 32 (39) (39) 19 (9) 2,780 490
=== === === === === === ==== ==== ==== === === ===== ===
TOTAL
------------
2000 1999
---- -----
(E MILLION)
Net cash provided by operating
activities............................. 302 318
Net cash provided by (used in) investing
activities............................. (298) 2,165
Net cash provided by (used in) financing
activities............................. 11 198
---- -----
CHANGE IN CASH AND CASH EQUIVALENTS..... 15 2,681
==== =====
* less than E1 million
[43] CASH AND CASH EQUIVALENTS
Cash and cash equivalents as of December 31, 2001 amounted to E0.7 billion
(2000: E0.5 billion; 1999: E2.8 billion). The liquid assets of E0.8 billion
(2000: E0.7 billion; 1999: E3.1 billion) shown in the balance sheet also include
marketable securities and other instruments.
F-51
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)
[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 2001 2001 2000 1999
----- -------------- ----------- ----------- -----------
($ MILLION(1)) (E MILLION) (E MILLION) (E MILLION)
NET INCOME REPORTED UNDER IAS............... 859 965 1,816 2,002
Fair value of derivative financial
instruments............................... a (85) (95) 95 --
Available for sale securities............... b (27) (30) -- --
Business combinations....................... c (56) (63) (128) (54)
Pensions.................................... d (21) (24) (24) (24)
Other....................................... e (5) (5) 33 54
Deferred tax effect on U.S. GAAP
adjustments............................... 46 52 (9) (11)
----- ----- ----- -----
NET INCOME REPORTED UNDER U.S. GAAP......... 711 800 1,783 1,967
===== ===== ===== =====
BASIC AND DILUTED EARNINGS PER SHARE UNDER
U.S. GAAP................................. 0.97 1.10 2.44 2.69
===== ===== ===== =====
DECEMBER 31,
------------------------------------------
NOTES 2001 2001 2000
----- -------------- ----------- -----------
($ MILLION(1)) (E MILLION) (E MILLION)
STOCKHOLDERS' EQUITY REPORTED UNDER IAS.............. 15,062 16,922 16,140
Fair value of derivative financial instruments....... a -- -- 95
Available for sale securities........................ b -- -- 1,366
Business combinations................................ c 700 786 822
Pensions............................................. d 784 881 1,105
Other................................................ e 93 105 109
Deferred tax effect on U.S. GAAP adjustments......... (351) (394) (527)
------ ------ ------
STOCKHOLDERS' EQUITY REPORTED UNDER U.S. GAAP........ 16,288 18,300 19,110
====== ====== ======
DECEMBER 31,
------------------------------------------
2001 2001 2000
-------------- ----------- -----------
($ MILLION(1)) (E MILLION) (E MILLION)
COMPONENTS OF STOCKHOLDERS' EQUITY IN ACCORDANCE WITH U.S.
GAAP:
Capital stock of Bayer AG................................... 1,664 1,870 1,870
Capital reserves of Bayer AG................................ 2,619 2,942 2,942
Retained earnings........................................... 10,922 12,270 12,492
Accumulated other comprehensive income:
-- Unrealized market value adjustment on securities
available for sale (net of taxes of $37 million, E42
million, E14 million).................................... 499 561 1,352
-- Unrealized market value adjustment on cash flow hedges
(net of taxes of $1 million, E1 million, and E nil)...... 1 1 0
-- Additional minimum pension liability (net of taxes of
$152 million, E171 million, and E90 million)............. (217) (244) (124)
-- Translation differences.................................. 800 900 578
------ ------ ------
TOTAL....................................................... 16,288 18,300 19,110
====== ====== ======
F-52
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)
(1) The 2001 U.S. dollar figures have been translated at an exchange rate of
$1.1235 = 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. The Group uses
foreign currency forward contracts for hedging of anticipated transactions.
These forward contracts were recorded at the lower of cost or market value under
IAS and were marked to market through the income statement in accordance with
U.S. GAAP applicable at the time. The E95 million difference between IAS and
U.S. GAAP net income and equity for the year ended December 31, 2000 arose from
the recognition of a E95 million gain relating to the anticipated cash flow
forward contracts under U.S. GAAP.
During 2001, the fair value of the foreign currency forward contracts that
had been entered into during 2000 declined to E68 million. As the hedged
anticipated transactions were realized during 2001, this E68 million was
recorded as gain under IAS. Conversely, under U.S. GAAP, the E27 million decline
in value was recognized as an expense. Therefore, the reconciling item between
net income under IAS and U.S. GAAP for the year ended December 31, 2001 of E95
million results from the difference between the E68 million gain under IAS
compared to the E27 million expense under U.S. GAAP. Subsequent to the adoption
of IAS 39 and SFAS 133, the accounting for new foreign currency forward
contracts for hedging of anticipated transactions is consistent between IAS and
U.S. GAAP.
b. AVAILABLE FOR SALE SECURITIES
Under IAS, unrealized losses on available-for-sale financial assets are
recorded in income only when the decline in market value is considered
permanent. Under U.S. GAAP, unrealized losses are recorded in income when they
are judged to be other-than-temporary. All declines in market value are
considered to be other-than-temporary if they have exceeded 20% over a continual
period of 6 months and there is no indication of a significant increase in fair
value in the short-term. Principally, other declines in fair value that do not
meet these criteria may be considered other-than-temporary depending upon the
circumstances surrounding the underlying investment.
Prior to the adoption of IAS 39 in 2001, investments in debt and certain
equity securities were reflected in the balance sheet at nominal value less any
necessary write-downs under IAS. Under 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.
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 estimated useful lives between 20 and 40
years. In addition to the normally recurring amortization expense on these
amounts during 2001, the Group wrote-off E22 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.
F-53
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)
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". 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:
2001 2000 1999
------ ------ ------
(E MILLION)
PENSION BENEFITS:
Liability recognized for IAS................................ (3,057) (3,151) (3,191)
Asset limitation under IAS 19............................... 1,249 1,249 1,261
Additional minimum liability under SFAS No. 87.............. (415) (215) (218)
Difference in unrecognized transition obligation............ 47 71 95
------ ------ ------
LIABILITY RECOGNIZED FOR U.S. GAAP.......................... (2,176) (2,046) (2,053)
====== ====== ======
Net periodic benefit cost recognized for IAS................ 270 260 291
Amortization of transition obligation....................... 24 24 24
------ ------ ------
NET PERIODIC BENEFIT COST RECOGNIZED FOR U.S. GAAP.......... 294 284 315
====== ====== ======
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.
ADDITIONAL U.S. GAAP DISCLOSURES
DISCONTINUED OPERATIONS
Under IAS, the Group has classified DyStar, EC Erdolchemie, Haarmann &
Reimer and the Fibers business group 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 these operations will not be
completed within one year. The following U.S. GAAP income statement information
excludes DyStar as a discontinued operation.
2001 2001 2000 1999
----------- ----------- ----------- -----------
($ MILLION) (E MILLION) (E MILLION) (E MILLION)
INCOME FROM CONTINUING OPERATIONS................ 427 481 1,603 1,898
Discontinued Operations -- net of tax............ 284 319 180 69
----- ----- ----- -----
NET INCOME REPORTED UNDER U.S. GAAP.............. 711 800 1,783 1,967
===== ===== ===== =====
F-54
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)
EARNINGS PER SHARE 2001 2001 2000 1999
------------------ ----------- ----------- ----------- -----------
($ MILLION) (E MILLION) (E MILLION) (E MILLION)
Basic and diluted:
Income from continuing operations.............. 0.58 0.66 2.19 2.60
Income from discontinued operations............ 0.39 0.44 0.25 0.09
----- ----- ----- -----
BASIC AND DILUTED EARNINGS PER SHARE............. 0.97 1.10 2.44 2.69
===== ===== ===== =====
FINANCIAL ASSETS AND LIABILITIES
The components of marketable securities under U.S. GAAP at December 31,
2001 and 2000 are the following:
GROSS GROSS CARRYING VALUE
UNREALIZED UNREALIZED AND ESTIMATED
COST GAINS LOSSES FAIR VALUE
----- ---------- ---------- --------------
(E MILLION)
AS OF DECEMBER 31, 2001
Available for sale securities:
Equity securities............................. 944 625 (35) 1,534
Debt securities............................... 39 20 (7) 52
----- ----- ----- -----
TOTAL........................................... 983 645 (42) 1,586
===== ===== ===== =====
AS OF DECEMBER 31, 2000
Available for sale securities:
Equity securities............................. 426 1,370 (6) 1,790
Debt securities............................... 51 2 -- 53
----- ----- ----- -----
TOTAL........................................... 447 1,372 (6) 1,843
===== ===== ===== =====
Prior to the adoption of IAS 39, unrealized holding gains on available for
sale securities were not recorded under IAS, and gross unrealized holding losses
on available for sale securities were 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 in all periods presented.
Proceeds from sales of available for sale securities were E195 million,
E296 million, and E71 million in 2001, 2000 and 1999, respectively. Gross
realized gains were E25 million, E73 million, and E13 million on those sales in
2001, 2000 and 1999, respectively. Gross realized losses were E2 million in 1999
on those sales. There were no gross realized losses in 2001 or in 2000. The gain
or loss on these sales was determined using the weighted average cost method.
The maturities of debt securities at December 31, 2001 are as follows:
AVAILABLE FOR
SALE
-------------
(E MILLION)
Within one year............................................. 33
Over one year through five years............................ 19
---
TOTAL....................................................... 52
===
F-55
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)
DERIVATIVE FINANCIAL INSTRUMENTS
The estimated fair values of derivative financial instruments are provided
in Note 38 to the Consolidated Financial Statements of the Bayer Group. The use
of derivatives is confined to the hedging of the operating business and of the
related investments and financing transactions.
FAIR VALUE HEDGES
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
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 twelve-months ended December 1, 2001, and no amounts were
reclassified to earnings for forecasted transactions that did not occur.
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.
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 before 2001, as described above. Non-derivative financial assets
consist 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.
Information concerning the fair values of long and short-term financial
debt is provided in Note 38 to the Consolidated Financial Statements of the
Bayer Group.
F-56
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)
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:
2001 2000 1999
----------- ----------- -----------
(E MILLION) (E MILLION) (E MILLION)
Net income under U.S. GAAP.................................. 800 1,783 1,967
Other comprehensive income:
Unrealized market value adjustment on available-for-sale
securities
(net of taxes of E28 million, E3 and E7 million,
respectively).......................................... (816) 799 507
Unrealized market value adjustment on cash flow hedges
(net of taxes of E1 million, E nil, and E nil)......... 1 0 0
Reclassification adjustment:
Net realized gains on sales of securities (net of taxes
of E nil, E4 million and E5 million, respectively)... 25 (12) (7)
Additional minimum pension liability (net of taxes of E80
million, E1 and E19 million, respectively)............. (120) 2 27
Foreign currency translation adjustment................... 322 288 1,304
----- ----- -----
COMPREHENSIVE INCOME UNDER U.S. GAAP........................ 212 2,860 3,798
===== ===== =====
EMPLOYEE BENEFIT PLANS
Presented below are the disclosures required by SFAS No. 132 "Employers'
Disclosures about Pensions and Other Post-Retirement Benefits"), which provide a
roll forward of benefit obligations, plan assets and funded status of the plan:
OTHER POST-
EMPLOYMENT
PENSION BENEFITS BENEFITS
----------------- ---------------
2001 2000 2001 2000
------- ------- ------ ------
(E MILLION)
BENEFIT OBLIGATION
At beginning of year....................................... 10,684 10,161 949 864
Service cost............................................... 265 323 23 192
Interest cost.............................................. 669 642 58 52
Spin-offs of subsidiaries.................................. (184) (91) -- --
Acquisitions............................................... 2 -- 2 7
Plan amendments............................................ -- (94) --
Plan settlements........................................... (1) (12) -- --
Actuarial (gain) loss...................................... 305 51 84 (13)
Foreign currency translation............................... 66 128 25 50
Benefit payments........................................... (503) (518) (90) (203)
------ ------ ------ ------
BENEFIT OBLIGATION AT END OF YEAR.......................... 11,303 10,684 957 949
------ ------ ------ ------
F-57
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)
OTHER POST-
EMPLOYMENT
PENSION BENEFITS BENEFITS
----------------- ---------------
2001 2000 2001 2000
------- ------- ------ ------
(E MILLION)
PLAN ASSETS AT FAIR VALUE
At beginning of year....................................... 8,790 8,407 389 337
Actual return on plan assets............................... (563) 355 (43) 24
Spin-offs of subsidiaries.................................. (130) (72) -- --
Acquisitions............................................... 2 51 -- --
Foreign currency translation............................... 178 155 9 26
Employer contribution...................................... 313 368 72 205
Employee contributions..................................... 39 44 -- --
Benefit payments........................................... (503) (518) (90) (203)
------ ------ ------ ------
PLAN ASSETS AT FAIR VALUE AT END OF YEAR................... 8,126 8,790 337 389
------ ------ ------ ------
FUNDED STATUS.............................................. (3,177) (1,894) (620) (560)
Unrecognized transition obligation......................... 50 79 -- --
Unrecognized prior service cost............................ 16 3 (85) 5
Unrecognized actuarial (gains) losses...................... 1,350 (130) 70 (82)
ADDITIONAL MINIMUM LIABILITY............................... (415) (215) -- --
------ ------ ------ ------
PREPAID (ACCRUED) BENEFIT COST............................. (2,176) (2,157) (635) (637)
====== ====== ====== ======
Amounts recognized in the balance sheet
Prepaid benefit cost....................................... 1,792 1,604 -- --
Accrued benefit liability.................................. (3,968) (3,761) (635) (637)
------ ------ ------ ------
NET AMOUNT RECOGNIZED...................................... (2,176) (2,157) (635) (637)
====== ====== ====== ======
BENEFIT COST
Service cost............................................... 265 323 23 192
Flat-rate tax on employer contributions.................... 7 7 -- --
Interest cost.............................................. 669 642 58 52
Expected return on plan assets............................. (608) (592) (31) (30)
Employee contributions..................................... (39) (42) -- --
Amortisation of unrecognized prior service cost............ 10 1 -- --
Amortisation of transition obligation...................... (22) 20 -- --
Amortisation of actuarial (gains) losses................... 12 (9) 13 (1)
------ ------ ------ ------
NET PERIODIC BENEFIT COST.................................. 294 350 63 213
====== ====== ====== ======
OTHER POST-RETIREMENT BENEFIT PLANS WEIGHTED-AVERAGE ASSUMPTIONS AS OF DECEMBER 31, 2001 2000
----------------------------------------------------------------------------------- ----- -----
Discount rate.......................................................... 7.00% 7.00%
Rate of compensation increase.......................................... N/A N/A
Expected return on plan assets......................................... 8.50% 8.50%
F-58
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)
The assumed health care cost trend rate at December 31, 2001 was 8.0%
gradually declining to 5.0% by the year 2004. A one-percentage-point change in
the assumed health care cost trend rates compared to those used for 2001 would
have the following effects:
1% POINT INCREASE 1% POINT DECREASE
----------------- -----------------
(E MILLION)
Effects on total of service and interest cost components.... 13 (11)
Effect on post retirement benefit obligations............... 87 (75)
PRO FORMA NET INCOME
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. 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 APB No. 25.
Hence the additional pro forma disclosures required under SFAS No. 123 do not
apply.
PROPORTIONAL CONSOLIDATION
The Group accounts for its investment in 12 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, 2001 DEC. 31, 2000
------------------------- ------------- -------------
(IN MILLION E)
Current assets.............................................. 175 582
Noncurrent assets........................................... 236 791
Short-term liabilities...................................... 128 (511)
Long-term liabilities....................................... 38 (189)
STATEMENT OF INCOME INFORMATION DEC. 31, 2001 DEC. 31, 2000
------------------------------- ------------- -------------
(IN MILLION E)
Net sales................................................... 492 1,799
Operating result............................................ 63 132
Net income.................................................. 55 118
STATEMENT OF CASH FLOW INFORMATION DEC. 31, 2001 DEC. 31, 2000
---------------------------------- ------------- -------------
(IN MILLION E)
Net cash provided by operating activities................... 61 159
Net cash (used in) investing activities..................... (16) (142)
Net cash (used in) financing activities..................... (44) (29)
The reduction in joint venture amounts listed above relates to the
inclusion of DyStar by the equity method starting in 2001.
F-59
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)
SELF-INSURANCE
Various Group companies are self-insured to different degrees. The maximum
amount of any Group company's self-insurance is for general liability up to
approximately E10 million per occurrence, and product liability up to E14
million per occurrence. For claims against our US subsidiary, the product
liability self-insurance is limited to a maximum of E22 million per year. An
estimate of the cost of settling existing claims is included under accrued
liabilities.
LEGAL PROCEEDINGS
As discussed in Note 29, 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 section, 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
F-60
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)
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. 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 appealed this judgment to the Court of Appeals for the
Federal Circuit, which heard oral arguments 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 was held in April and May 2002. The Court has
not yet made a ruling. Carlsbad has 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.
F-61
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)
Antitrust actions. Bayer Corporation has been named as a defendant in 39
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 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 have
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. Nine cases are currently pending in a California state court. Bayer is
also involved in 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 a 30 mg dosage form. 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 (60 mg dosage
form) 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. We appealed these decisions to the
Court of Appeals for the Federal Circuit. The Federal Circuit vacated these
decisions of the District Court and remanded the cases to the District Court for
further proceedings.
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 stayed before
the U.S. federal District Court for the District of Puerto Rico.
F-62
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)
As defendants have prevailed in some of these lawsuits, it is possible that
they may also prevail in the trials and appeals that may take place in the
future. 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. Bayer Corporation has also satisfactorily settled
nearly 400 lawsuits by plaintiffs who opted out of the class action. Seven 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, about
1,700 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. The
federal cases are being transferred to the U.S. federal District Court for the
District of Minnesota 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 are defending them vigorously. Without
acknowledging any liability, we have settled a small number of these cases in
the past. We may, on a case-by-case basis, settle additional cases for
reasonable amounts when, in our judgment, settlement is economically feasible
given the risks and costs inherent in any litigation.
F-63
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)
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. More
than 540 class and individual lawsuits have been initiated in the United States
against Bayer Corporation. 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.
Medicaid Rebate Program allegations
Our U.S. subsidiary, Bayer Corporation, is currently under investigation by
the U.S. Attorney's Office for the District of Massachusetts. The investigation,
which is assisted by the Department of Health & Human Services, focuses
primarily on allegations that Bayer Corporation improperly underpaid rebates
under the Medicaid Rebate Program during a period from 1995 to 2000.
These investigations could lead the government to bring criminal or civil
actions, or both, against Bayer Corporation. If the government brought such
actions and obtained a conviction or verdict against Bayer Corporation, we would
likely be required to reimburse the government the amount of the alleged
underpayment. We would also become liable to pay civil and/or criminal fines or
penalties, which could be substantial. Although we believe this outcome to be
unlikely, in the worst case a conviction or adverse verdict could result in the
exclusion of Bayer Corporation from participation in federal health programs.
Bayer Corporation is providing information to the government and otherwise
cooperating with the investigation. Bayer Corporation believes that its
practices complied in all material respects with all applicable laws and is
therefore seeking to persuade the government to discontinue its investigation.
If the government does bring civil or criminal charges against Bayer
Corporation, Bayer Corporation intends to defend itself vigorously.
Average wholesale price manipulation proceedings
Seven pending lawsuits allege that a number of pharmaceutical companies,
including Bayer Corporation, manipulated the average wholesale price of their
products. The suits allege that this manipulation resulted in overcharges to
Medicare beneficiaries, Medicaid recipients, state governmental health programs,
and private health plans. These suits generally seek damages, treble damages,
disgorgement of profits, restitution and attorney's fees. We expect that six of
these actions will be consolidated before the U.S. federal court for the
District of Massachusetts. The remaining case, in which the State of Nevada is
plaintiff, has been removed to federal court in Nevada but may be subject to
remand to a state court. Bayer Corporation has not yet responded to the
complaints in these actions, but intends to defend itself vigorously.
EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS
U.S. GAAP
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
F-64
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)
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.
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.
In 2001, the Emerging Issues Task Force (EITF) reached consensus on EITF
00-14 "Accounting for Certain Sales Incentives" and EITF 00-25 "Vendor Income
Statement Characterization of Consideration Paid to a Reseller of the Vendor's
Products", which address the recognition, measurement and income statement
presentation classification of certain sales incentives, and the statement of
earnings of consideration from a vendor to an entity that purchases the vendor's
products for resale, respectively. We have not yet completed our analysis of the
impact of these statements on our financial information presented in accordance
with U.S. GAAP.
[45] SUBSEQUENT EVENTS (UNAUDITED)
In October 2001, we entered into an agreement to acquire Aventis
CropScience from Aventis and Schering for E7.25 billion. The European Commission
approved the transaction in April 2002, and the United States Federal Trade
Commission gave its preliminary approval of the transaction under the terms of a
consent order on May 30, 2002. Both approvals are subject to the condition that
we divest or out-license some of the combined enterprise's products. These
conditions require us, among other things, to: divest Aventis CropScience's
Fipronil business worldwide, with a right to obtain a co-exclusive license for
non-agricultural uses worldwide, except for Europe; divest five Aventis
fungicides in Europe and grant a world-wide, non-exclusive license for the
Aventis seed treatment products; divest the sugar beet herbicide Metamitron in
Europe; divest the broad-spectrum pyrethroid insecticides Cyfluthrin
(Baythroid(R)) and beta-cyfluthrin (Bulldock(R)); divest the sugar beet
herbicide (Goltix(R)); divest the insecticide Acetamiprid in Europe and North
America; divest the wheat herbicide Everest worldwide; and divest Aventis
CropScience's cotton defoliant business Folex in the U.S. The total sales value
of all divestments is about E650 to 700 million of which about 25 percent comes
from the former Bayer Crop protection business and 75 percent from the former
Aventis CropScience. The acquisition of Aventis CropScience
F-65
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)
was closed on June 3, 2002, and we do not expect to make additional major
acquisitions in our Crop Protection segment in the near term.
In April 2002, Bayer AG placed benchmark bonds in the European capital
market. The total volume of the issue was E5 billion, split into two tranches of
a five-year E3 billion bond and a ten-year E2 billion bond.
The tranches carry a 5.375% and a 6% coupon, respectively. The bond
proceeds served to finance part of the costs of Bayer's acquisition of Aventis
CropScience. The remaining price will be covered through the ongoing issuance of
commercial paper.
In May 2002, we decided to retain our Fiber business as part of polymers,
because presently the market is not prepared to pay an appropriate price for
this business. We will include the Fiber business in our continuing operations
for all periods beginning with the second quarter of 2002. Continuing the
business offers better prospects for success than a divestment. As a result of
the present review process of the fibers' activities, an impairment write-down
affecting the operating results of polymers substantially may arise.
On June 4, 2001 we sold the remaining 30 percent stake in Agfa for a gain
of approximately E200 million.
TOTAL REMUNERATION OF THE BOARD OF MANAGEMENT AND THE SUPERVISORY BOARD,
ADVANCES AND LOANS
The remuneration of the Board of Management for 2001 amounted to
E8,153,562. Emoluments to retired members of the Board of Management and their
surviving dependants amounted to E8,355,270.
Pension provisions for these individuals amounting to E69,341,493 are
reflected in the balance sheet of Bayer AG.
The remuneration of the Supervisory Board amounted to E1,293,750.
There were no loans to members of the Board of Management or the
Supervisory Board outstanding as of December 31, 2001, nor any repayments of
such loans during the year.
Leverkusen, February 26, 2002
Bayer Aktiengesellschaft
The Board of Management
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