Basis of Preparation
INTRODUCTION The financial information in this document is intended to illustrate the merged results and financial position of Astra AB and Zeneca Group PLC (collectively AstraZeneca PLC) for the years 1995, 1996, 1997 and 1998 prepared under UK GAAP and in accordance with merger accounting. BASIS OF PREPARATION Throughout the document information is presented under the headings of 'Combined Actual', 'Merck Adjustments', 'Pro Forma Adjustments' and 'Pro Forma Combined'. These headings have the following meaning:
Combined Actual - represents the merged historical results of Astra and Zeneca prepared in accordance with UK GAAP. The 'Combined Actual' amounts will form the comparative figures in AstraZeneca's 1999 consolidated statutory accounts. Merck Adjustments - illustrates the effect of the Astra Merck Restructuring on the consolidated profit and loss account as if the restructuring had occurred on 1 January 1998. The effect includes the impact of the restructuring of the operations formerly included within the Astra Merck joint venture as well as the UK GAAP accounting classification of the joint venture's operations (i.e. change from equity accounting to consolidation). Pro Forma Adjustments - includes adjustments arising directly as a result of the merger. Upon consummation of the merger, AstraZeneca was required to pay to Merck & Co., Inc. (i) $713 million in exchange for the release by Merck of certain claims under the license agreement between Astra and a Merck affiliate and (ii) a portion of the option exercise price for the First Option Assets amounting to $967 million. Merck has challenged the methodology used by Astra in calculating the first payment and has asserted that the amount of such payment should be approximately 10% greater. AstraZeneca disputes Merck's assertion and intends to defend its calculation of the amount. The first of these payments was expensed upon completion of the merger and is not included in the Pro Forma Combined Profit and Loss Account since it is a non-recurring exceptional charge. The second of the payments is the present value of a portion of the option exercise price representing compensation to Merck for contingent payments which it has agreed to forego in respect of Astra's products discovered or acquired after the merger. This payment has been capitalised as an intangible asset and amortised in the Pro Forma Combined Profit and Loss Account for 1998 over a period of 20 years. Both of the payments have been reflected as a reduction of cash and short-term investments on the Pro Forma Combined 31 December 1998 Balance Sheet. An adjustment has also been made in the Profit and Loss Account for 1998 to reflect the reduction in interest income resulting from the assumed reduced cash balances had these payments been made at the beginning of 1998. Pro Forma Combined - represents the summation of 'Combined Actual', 'Merck Adjustments' and 'Pro Forma Adjustments' as appropriate. Where presented, the 'Pro Forma Combined' information has been prepared for illustrative purposes only and is intended to give a reasonable comparative basis of the existing state of the merged organisations.
Further details in respect of adjustments to Astra's historical financial statements to conform with UK GAAP, the Astra Merck Restructuring agreement, the payments to
Merck arising upon consummation of the merger and additional information relating to Astra, Zeneca and the merger transaction are included in the Merger Document and Zeneca's Circular to Shareholders, both dated 21 January 1999, and in Zeneca's Registration Statement on Form F-4 filed with the US Securities and Exchange Commission. For 1998, the Profit and Loss Account, and component items of it, and the year end balance sheet have been reconciled from the Actual Combined basis to the Pro Forma Combined basis. Relevant Pharmaceutical sales information has been presented on both the Actual Combined and Pro Forma Combined bases for all periods. All other financial information for 1997 and earlier years has been presented on the Combined Actual basis. BUSINESS SEGMENTS Following the announcement of the sale of its Specialty Chemicals business, and the prospective closure of the Textile Colours Contract Manufacture arrangements with BASF in January 2000, segmental data from these businesses is presented under the discontinued/discontinuing heading. Marlow Foods which has previously been reported within the Specialties sector will in the future be reported in the Other Trading sector. Marlow Foods historical data has been reclassified accordingly. ACCOUNTING RESTATEMENT Following the merger of Astra and Zeneca a detailed comparison has been undertaken of the accounting conventions used by the two companies. As a result, there has been a reclassification of Agrochemicals rebates from cost of sales to sales. This is in line with industry practice. US GAAP Under US GAAP the merger will be accounted for according to purchase accounting conventions. This requires fair values to be applied to the Astra tangible and intangible assets and for the balance of the exchange of value to be accounted for as goodwill. The reconciliation of net assets and earnings figures from UK GAAP to US GAAP therefore shows a significantly enhanced balance sheet, but US GAAP profits significantly reduced by the amortisation of those higher asset values, particularly the amortisation of the intangible assets and goodwill. Under purchase accounting the results of the two companies will only be combined from the date of the merger (5th April 1999). The US GAAP adjustments in the ‘Combined Actual’ column therefore include the removal of the Astra net income incorporated in the UK GAAP figures, together with the US GAAP adjustments relevant to Zeneca on a stand alone basis. The ‘Pro Forma Combined’ column includes, for illustrative purposes only, the US GAAP adjustments which would have arisen had the merger taken place on 1st January 1998. The US GAAP figures given in this document are taken from the fair value estimates given in Zeneca’s January 1999 Form F-4 SEC filing. Following the completion of the merger, work is underway to complete the fair value assessment of the Astra assets, in process R&D, and the provisions appropriate to US GAAP acquisition accounting. The figures given herewith will be revised when this assessment is complete.
EXCHANGE RATES For the periods presented, Astra accounted for and reported its results in Swedish Kronor, whereas Zeneca accounted for and reported its results in sterling. Consistent with AstraZeneca's decision to publish its financial statements in US dollars, the financial information in this document has been translated from kronor and sterling into US dollars at the following applicable exchange rates: Average Rates (profit and loss account, cash flow)
1995 1996 1997 1998 1997 Q1 1997 Q2 1997 Q3 1997 Q4 1998 Q1 1998 Q2 1998 Q3 1998 Q4
SEK/USD
7.1100 6.7000 7.6225 7.9384 7.3500 7.6900 7.8200 7.6300 8.0067 7.7967 7.9967 7.9533
USD/GBP
1.5796 1.5525 1.6386 1.6603 1.6413 1.6226 1.6408 1.6495 1.6536 1.6592 1.6519 1.6763
End of Year Spot Rates (balance sheet)
1995 1996 1997 1998
SEK/USD
6.6500 6.8400 7.8500 8.0400
USD/GBP
1.5500 1.6900 1.6600 1.6600
The above exchange rates are different from the US dollar 'convenience rate' given in the 'Pro Forma Combined 1998 Results' press release of 17th February 1999. FINANCIAL STATEMENTS The unaudited financial information in this document does not constitute AstraZeneca PLC's (formerly Zeneca Group PLC) statutory accounts for such years. Statutory accounts of Zeneca Group PLC for 1995, 1996 and 1997 have been delivered to the registrar of companies, and those for 1998 will be delivered following the annual general meeting which took place on 21 May 1999. The auditors have reported on those accounts; their reports were unqualified and did not contain a statement under sections 237(2) or (3) of the Companies Act 1985.