Item 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Recent Developments

        The Company restated its previously issued financial statements for the three years ended December 31, 2001, including the corresponding 2001 and 2000 interim periods, and the quarterly periods ended March 31, 2002 and June 30, 2002. The restatement affected periods prior to 1999. The impact of the restatement on such prior periods was reflected as an adjustment to opening retained earnings as of January 1, 1999. The restatement was reported in Amendment No. 1 to the Company's Annual Report on Form 10-K/A for the year ended December 31, 2001, and Amendments No. 1 to the Company's Quarterly Reports on Form 10-Q/A for the quarterly periods ended March 31, 2002 and June 30, 2002.

        The Company experienced a substantial buildup of wholesaler inventories in its U.S. pharmaceuticals business over several years, primarily in 2000 and 2001. This buildup was primarily due to sales incentives offered by the Company to its wholesalers. These incentives were generally offered towards the end of a quarter in order to incentivize wholesalers to purchase products in an amount sufficient to meet the Company's quarterly sales projections established by the Company's senior management. In April 2002, the Company disclosed this substantial buildup, and developed and subsequently undertook a plan to work down in an orderly fashion these wholesaler inventory levels.

        In late October 2002, based on further review and consideration of the previously disclosed buildup of wholesaler inventories in the Company's U.S. pharmaceuticals business and the incentives offered to certain wholesalers, and on advice from the Company's independent auditors, PricewaterhouseCoopers LLP, the Company determined that it was required to restate its sales and earnings to correct errors in timing of revenue recognition for certain sales to certain U.S. pharmaceuticals wholesalers. Since that time, the Company undertook an analysis of its transactions and incentive practices with U.S. pharmaceuticals wholesalers. As a result of its analysis, the Company determined that certain of its sales to two of the largest wholesalers for the U.S. pharmaceuticals business should be accounted for under the consignment model rather than recognizing revenue for such transactions upon shipment, based in part on the relationship between the amount of incentives offered to these wholesalers and the amount of inventory held by these wholesalers. This determination involved evaluation of a variety of criteria and a number of complex accounting judgments.

        Following its determination to restate its sales and earnings for the matters described above, the Company also determined that it would correct certain of its historical accounting policies to conform the accounting to U.S. generally accepted accounting principles (GAAP) and certain known errors made in the application of GAAP that were previously not recorded because in each such case the Company believed the amount of any such error was not material to the Company's consolidated financial statements. In addition, as part of the restatement process, the Company investigated its accounting practices in certain areas that involve significant judgments and determined to restate additional items with respect to which the Company concluded errors were made in the application of GAAP, including certain revisions of inappropriate accounting.

        Senior management set aggressive targets for each of the Company's businesses. The errors and inappropriate accounting, which were corrected by the restatement, arose, at least in part, from a period of unrealistic expectations for, and consequent over-estimation of the anticipated performance of, certain of the Company's products and programs.

        In connection with their audits of the restatement of previously issued annual financial statements and the Company's consolidated financial statements for the year ended December 31, 2002, the Company's independent auditors, PricewaterhouseCoopers LLP, identified and communicated to the

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Company and the Audit Committee two "material weaknesses" (as defined under standards established by the American Institute of Certified Public Accountants) relating to the Company's accounting and public financial reporting of significant matters and to its initial recording and management review and oversight of certain accounting matters.

        In the last year, the Company searched for and hired a new chief financial officer from outside the Company, restaffed the controller position, created a position of chief compliance officer and changed leadership at the Pharmaceuticals group.

        In response to the wholesaler inventory buildup and the other matters identified as restatement adjustments, under the direction of the Audit Committee, in the last year, senior management has directed that the Company dedicate resources and take steps to strengthen control processes and procedures in order to identify and rectify past accounting errors and prevent a recurrence of the circumstances that resulted in the need to restate prior period financial statements. The Company also revised its budgeting process to emphasize a bottom-up approach in contrast to a top-down approach. The Company has implemented a review and certification process of its annual and quarterly reports under the Securities Exchange Act of 1934, as amended, as well as processes designed to enhance the monitoring of wholesaler inventories. In addition, the Company is in the process of expanding its business risks and disclosure group, which includes senior management, including the chief executive officer and the chief financial officer, and is taking a number of additional steps designed to create a more open environment for communications and flow of information throughout the Company. The Company continues to identify and implement actions to improve the effectiveness of its disclosure controls and procedures and internal controls, including plans to enhance its resources and training with respect to financial reporting and disclosure responsibilities, and to review such actions with its Audit Committee and independent auditors.

        The Company's accounting for certain of its sales to two of the largest wholesalers for the U.S. pharmaceuticals business under the consignment model is discussed below under —Net Sales.

        Throughout the following Management's Discussion and Analysis of Financial Condition and Results of Operations, all referenced amounts for prior periods and prior period comparisons reflect the balances and amounts on a restated basis.

Summary

        In 2002, the Company reported annual global sales of $18.1 billion. Sales increased 1% from the prior year level, reflecting volume increases of 4%, offset by net price declines of 3%, and no net impact from foreign exchange fluctuations. Earnings from continuing operations in 2002 were $2,034 million, or $1.05 per share on a basic and diluted basis, compared to $2,043 million, or $1.05 basic earnings per share and $1.04 diluted earnings per share, in 2001. Several items affected the comparability of the results between 2002 and 2001, as discussed below under —Earnings.

        In addition to these items, earnings in 2002 were adversely affected by generic competition in the U.S. on several key pharmaceutical products and an increase in interest expense due to the $5.0 billion of debt issued in the third quarter of 2001 to finance the DuPont and ImClone transactions. Partially offsetting this decline in 2002 was the favorable impact of DuPont operations.

        In 2002, the Company had two blockbuster products, each with sales of over $1.5 billion—PRAVACHOL and PLAVIX*. PRAVACHOL sales grew 8% to $2.3 billion, and PLAVIX* sales grew 61% to $1.9 billion. In addition to these two products, the Company had 42 product lines with more than $50 million in annual sales, including 27 products with more than $100 million in annual sales, of which four had annual sales in excess of $500 million.

        The Company's financial position remains strong. At December 31, 2002, the Company held almost $4.0 billion in cash, time deposits and marketable securities. Approximately $3.7 billion of such

21

cash, time deposits and marketable securities is held by the Company's foreign subsidiaries. Repatriation of this cash to the U.S. would require additional tax provisions, which are not reflected in the consolidated financial statements. For a further discussion of this matter, see Critical Accounting Policies—Income Taxes below. Cash provided from operating activities was $1.0 billion, and working capital was a healthy $1.8 billion. The Company paid dividends of approximately $2.2 billion, which provided a dividend yield of 4.8% in 2002.

        In 2002, consistent with the Company's mission to extend and enhance human life by developing the highest-quality products, the Company invested $2.2 billion in research and development, a 2% growth over 2001. Research and development dedicated to pharmaceutical products was $2.1 billion and increased to 14.4% of pharmaceutical sales compared to 14.2% in 2001. The compound annualized growth in pharmaceutical research and development spending was 12% over the past five years.

        Research and development highlights included:

•

U.S. Food and Drug Administration (FDA) regulatory approval for the new chemical entity (NCE) ABILIFY*, a new anti-psychotic medication indicated for the treatment of schizophrenia. In the U.S., the Company markets ABILIFY* jointly with Otsuka America Pharmaceutical.



•

Eight FDA regulatory approvals for the following life cycle management (LCM) indications: VIDEX EC once daily tablet, SUSTIVA once daily tablet, PLAVIX* acute coronary syndrome, AVAPRO*/APROVEL* diabetic nephropathy, GLUCOVANCE* in combination with thiazolidinediones, PRAVACHOL pediatrics, ZERIT XR and Prolonged Release Capsule, and TEQUIN for the uncomplicated skin and skin structure indication.



•

Seven regulatory filings were achieved in 2002, including U.S. and European submissions for the NCE atazanavir and six LCM supplemental filings (SERZONE pediatrics, TAXOL® first-line metastatic breast cancer, PRAVACHOL pediatrics, MONOPRIL pediatrics, PLATINOL hepatocellular carcinoma and GLUCOPHAGE* XR 750 mg Reduced Mass Tablet).

        Patent expirations in the U.S. on several key products, including GLUCOPHAGE* IR, TAXOL® and BUSPAR, had a significant impact on the Company's financial performance during 2002. U.S. patents that are expected to expire in the next three years include the patent for CEFZIL (December 2005) and one of several patents relating to PLAVIX* (July 2003). In addition, a use patent for PARAPLATIN will expire in April 2004. Hatch-Waxman data protection will expire for GLUCOPHAGE* XR in October 2003, and for GLUCOVANCE* in July 2003. All of these expiry dates could be extended by six-months under the pediatric extension upon the completion and acceptance of pediatric studies by the FDA in advance of the expiration. The Company received the six-month pediatric extension for the composition of matter patent for MONOPRIL, which is now expected to expire in June 2003, and the composition of matter patent for SERZONE, which is now expected to expire in September 2003, and a patent covering the formulation of VIDEX EC, which is now expected to expire in May 2004. Except with respect to PLAVIX*, as discussed in Item 3, Legal Proceedings, in Part I of this Form 10-K and Note 22, Litigation Matters, to the consolidated financial statements, the Company believes that no single patent or license is of material importance in relation to the business as a whole.

Net Sales

        Sales in 2002 were $18.1 billion, an increase of 1% from the prior year, compared to sales increases of 3% and 6% in 2001 and 2000, respectively. Sales in 2002 and 2001 include approximately $1,540 million and $331 million, respectively, of sales related to products acquired as part of the DuPont acquisition, which was completed on October 1, 2001. Domestic sales decreased 3% to $11,361 million in 2002, compared to an increase of 2% to $11,744 million in 2001, while international sales increased 8% to $6,758 million in 2002 (foreign exchange had no significant impact), compared to

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an increase of 3% to $6,243 million in 2001 (foreign exchange unfavorably impacted sales by 6%). In general, the Company's business is not seasonal. For information on U.S. pharmaceuticals prescriber demand, reference is made to the table on page 31, which sets forth a comparison of changes in net sales to the estimated total (both retail and mail order customers) prescription growth for certain of the Company's primary care pharmaceutical products.

        The composition of the net increase in sales is as follows:

        A significant portion of the Company's U.S. pharmaceuticals sales is made to wholesalers. The Company experienced a substantial buildup of wholesaler inventories in its U.S. pharmaceuticals business over several years, primarily in 2000 and 2001. This buildup was primarily due to sales incentives offered by the Company to its wholesalers, including discounts, buy-ins in anticipation of price increases, and extended payment terms to certain U.S. pharmaceuticals wholesalers. These incentives were generally offered towards the end of a quarter in order to incentivize wholesalers to purchase products in an amount sufficient to meet the Company's quarterly sales projections established by the Company's senior management. The timing of the Company's recognition of revenue from its sales to wholesalers differs by wholesaler and by period.

        Historically, the Company recognized revenue for sales upon shipment of product to its customers. Under GAAP, revenue is recognized when substantially all the risks and rewards of ownership have transferred. In the case of sales made to wholesalers (1) as a result of incentives, (2) in excess of the wholesaler's ordinary course of business inventory level, (3) at a time when there was an understanding, agreement, course of dealing or consistent business practice that the Company would extend incentives based on levels of excess inventory in connection with future purchases and (4) at a time when such incentives would cover substantially all, and vary directly with, the wholesaler's cost of carrying inventory in excess of the wholesaler's ordinary course of business inventory level, substantially all the risks and rewards of ownership do not transfer upon shipment and, accordingly, such sales should be accounted for using the consignment model. The determination of when, if at all, sales to a wholesaler meet the foregoing criteria involves evaluation of a variety of factors and a number of complex judgments.

        Under the consignment model, the Company does not recognize revenue upon shipment of product. Rather, upon shipment of product the Company invoices the wholesaler, records deferred revenue at gross invoice sales price and classifies the inventory held by the wholesalers as consignment inventory at the Company's cost of such inventory. The Company recognizes revenue (net of discounts, rebates, estimated sales allowances and accruals for returns) when the consignment inventory is no longer subject to incentive arrangements but not later than when such inventory is sold through to the wholesalers' customers, on a first-in first-out (FIFO) basis. For additional discussion of the Company's revenue recognition policy, see Note 1, Accounting Policies, to the consolidated financial statements.

        The Company restated its previously issued financial statements for the period 1999 through the second quarter of 2002 to correct the timing of revenue recognition for certain previously recognized U.S. pharmaceuticals sales to Cardinal Health, Inc. (Cardinal) and McKesson Corporation (McKesson), two of the largest wholesalers for the Company's U.S. pharmaceuticals business, that, based on the application of the criteria described above, were recorded in error at the time of shipment and should have been accounted for using the consignment model. The Company determined that shipments of

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product to Cardinal and shipments of product to McKesson met the consignment model criteria set forth above as of July 1, 1999 and July 1, 2000, respectively, and, in each case, continuing through the end of 2002 and for some period thereafter. Accordingly, the consignment model was required to be applied to such shipments. Prior to those respective periods, the Company recognized revenue with respect to sales to Cardinal and McKesson upon shipment of product. Although the Company generally views approximately one month of supply as a desirable level of wholesaler inventory on a going-forward basis and as a level of wholesaler inventory representative of an industry average, in applying the consignment model to sales to Cardinal and McKesson, the Company defined inventory in excess of the wholesaler's ordinary course of business inventory level as inventory above two weeks and three weeks of supply, respectively, based on the levels of inventory that Cardinal and McKesson required to be used as the basis for negotiation of incentives granted.

        As a result of this restatement adjustment, net sales were reduced by $1,015 million, $475 million and $409 million in 2001, 2000 and 1999, respectively, and increased by $508 million in the six months ended June 30, 2002. The corresponding effect on earnings from continuing operations before minority interest and income taxes was a reduction of $789 million, $399 million and $322 million in 2001, 2000 and 1999, respectively, and an increase of $412 million in the six months ended June 30, 2002.

        Separately from the above discussion, in March 2001, the Company entered into a distribution agreement with McKesson for provision of warehousing and order fulfillment services for the Company's Oncology Therapeutics Network (OTN), a specialty distributor of anti-cancer medicines and related products. Prior to the restatement, the Company recorded in error sales of the Company's products under this agreement upon shipment of product to McKesson. The Company restated its previously issued financial statements to account for these sales under the consignment model. The resulting effect on net sales and earnings from continuing operations before minority interest and income taxes was a reduction of $81 million and $77 million, respectively, in 2001, and an increase of $25 million and $24 million, respectively, in the six months ended June 30, 2002.

        At December 31, 2002, 2001 and 2000, the Company's aggregate cost of the pharmaceutical products held by Cardinal and McKesson that were accounted for using the consignment model (and, accordingly, were reflected as consignment inventory on the Company's consolidated balance sheet) was approximately $58 million, $208 million and $99 million, respectively, of which approximately $1 million and $4 million at December 31, 2002 and 2001, respectively, related to OTN. The deferred revenue, recorded at gross invoice sales price, related to the inventory of pharmaceutical products accounted for using the consignment model was approximately $470 million, $2,026 million and $908 million at December 31, 2002, 2001 and 2000, respectively, of which approximately $39 million and $81 million at December 31, 2002 and 2001, respectively, related to OTN. As a result of the restatement for the application of the consignment model, approximately $1,980 million of sales (calculated net of customary 2% early pay cash discounts) had been reversed from the period 1999 through 2001, of which approximately $1,395 million was recognized in 2002 as inventory held by Cardinal and McKesson was worked down and approximately $422 million is projected to be recognized in 2003, a significant portion of which is expected to be recognized in the first quarter of 2003. The corresponding effect on earnings from continuing operations before minority interest and income taxes was an increase of $1,093 million in 2002. The corresponding projected effect on earnings from continuing operations before minority interest and income taxes for 2003 is an increase of approximately $290 million, a significant portion of which is expected to be recognized in the first quarter of 2003. Sales to Cardinal and McKesson represented approximately 56%, 52%, and 41% of U.S. pharmaceuticals net sales in 2002, 2001, and 2000, respectively.

        The Company has determined that, although sales incentives were offered to other wholesalers and there was a buildup of inventories at such wholesalers, the consignment model criteria discussed above were not met. Accordingly, the Company recognized revenue when the products were shipped to these wholesalers. The Company estimates that the inventory of pharmaceutical products held by these other

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U.S. pharmaceuticals wholesalers in excess of approximately one month of supply in the case of the Company's exclusive products, approximately one and a half months of supply in the case of PLAVIX* and AVAPRO*, which are marketed under the Company's alliance with Sanofi-Synthelabo, and approximately two months of supply in the case of the Company's non-exclusive products, was in the range of approximately $550 million to $750 million at December 31, 2001.

        The Company's estimates of inventories held by wholesalers are based on the projected prescription demand-based sales for its products, as well as the Company's analysis of third-party information, including information obtained from certain wholesalers with respect to their inventory levels and sell-through to customers and third-party market research data, and the Company's internal information. The Company's estimates are subject to inherent limitations of estimates that rely on third-party data, as certain third-party information was itself in the form of estimates, and reflect other limitations.

        In April 2002, the Company disclosed the substantial buildup of wholesaler inventories in its U.S. pharmaceuticals business, and developed and subsequently undertook a plan to work down in an orderly fashion these wholesaler inventory levels. To facilitate an orderly workdown, the Company's plan included continuing to offer sales incentives, at reduced levels, to certain wholesalers. With respect to McKesson and Cardinal, the Company entered into agreements for an orderly workdown that provide for these wholesalers to make specified levels of purchases and for the Company to offer specified levels of incentives through the workdown period.

        The Company expects that the orderly workdown of inventories of its pharmaceutical products held by all U.S. pharmaceuticals wholesalers will be substantially completed at or before the end of 2003. The Company also expects that the consignment model criteria will no longer be met with respect to the Company's U.S. pharmaceuticals sales to Cardinal and McKesson (other than the abovementioned sales related to OTN) at or before the end of 2003. At December 31, 2002, the Company's aggregate cost of pharmaceutical products held by Cardinal and McKesson that were accounted for using the consignment model (and, accordingly, were reflected as consignment inventory on the Company's consolidated balance sheet) was approximately $58 million. At December 31, 2002, the deferred revenue, recorded at gross invoice sales price, related to such inventory was approximately $470 million, including approximately $39 million related to OTN. The Company estimates, based on the data noted above, that the inventory of pharmaceutical products held by the other U.S. pharmaceuticals wholesalers in excess of or below approximately one month of supply in the case of the Company's exclusive products, approximately one and a half months of supply in the case of PLAVIX* and AVAPRO*, which are marketed under the Company's alliance with Sanofi-Synthelabo, and approximately two months of supply in the case of the Company's non-exclusive products was in the range of approximately $100 million below this level of supply to $100 million in excess of this level of supply at December 31, 2002. This estimate is subject to the inherent limitations noted above. The Company expects to account for certain pharmaceutical sales relating to OTN using the consignment model until the abovementioned agreement with McKesson expires in 2006.

        The Company's financial results and prior period and quarterly comparisons are affected by the buildup and orderly workdown of wholesaler inventories, as well as the application of the consignment model to certain sales to certain wholesalers. In addition, with respect to sales not accounted for using the consignment model, the Company's financial results and prior period and quarterly comparisons are affected by fluctuations in the buying patterns of wholesalers, including the effect of incentives offered, and the corresponding changes in inventory levels maintained by these wholesalers. These wholesaler buying patterns and wholesaler inventory levels may not reflect underlying prescriber demand. For information on U.S. pharmaceuticals prescriber demand, reference is made to the table on page 31, which sets forth a comparison of changes in net sales to the estimated total (both retail and mail order customers) prescription growth for certain of the Company's primary care pharmaceutical products. The Company expects that when the consignment model is no longer being applied with respect to sales to

25

Cardinal or McKesson, the buying patterns and fluctuations in inventory levels of these wholesalers will have an effect on the Company's financial results and prior period and quarterly comparisons.

Earnings

        In 2002, earnings from continuing operations before minority interest and income taxes increased 19% to $2,647 million from $2,218 million in 2001. Earnings from continuing operations in 2002 of $2,034 million were consistent with the $2,043 million earned in 2001. Basic earnings per share from continuing operations were flat with the prior year at $1.05, and diluted earnings per share from continuing operations increased 1% to $1.05 from $1.04 in the prior year. In 2001, earnings from continuing operations before minority interest and income taxes decreased 58% to $2,218 million from $5,247 million in 2000. Earnings from continuing operations decreased 47% in 2001 to $2,043 million from $3,830 million in 2000. Basic earnings per share from continuing operations decreased 46% to $1.05 in 2001 from $1.95 in 2000, and diluted earnings per share from continuing operations decreased 46% to $1.04 in 2001 from $1.92 in 2000. Net earnings margins for continuing operations decreased to 11.2% in 2002 from 11.4% in 2001 and 21.8% in 2000.

        During the years ended December 31, 2002, 2001 and 2000, the Company recorded several items that affected the comparability of results of the periods presented herein, which are set forth in the following table. For a discussion of these items, see Note 2, Alliances and Investments, Note 3, Restructuring and Other Items, Note 4, Acquisitions and Divestitures, and Note 5, Discontinued Operations, to the consolidated financial statements.

(1)

$15 million of restructuring reversal and $58 million and $40 million of restructuring expense are included in cost of products sold in 2002, 2001 and 2000, respectively. $69 million of accelerated depreciation on research facilities is included in research and development in 2002. $74 million of deductions and customer chargebacks related to abandoned product lines are included as a reduction of net sales in 2001.

        In 2001, the Company also incurred $61 million of costs related to the DuPont acquisition, of which $30 million is included in cost of products sold.

        Gross margin percentages were 64.7%, 69.7% and 73.0% in 2002, 2001 and 2000, respectively. Gross margins were adversely impacted by generic competition and a change in product mix.

        The effective income tax rate on earnings from continuing operations before minority interest and income taxes was 16.4% in 2002 compared with 3.3% in 2001 and 25.2% in 2000. The 2002 effective income tax rate includes an income tax benefit of $235 million due to the settlement of certain prior year tax matters and the determination by the Company as to the expected settlement of ongoing tax litigation, partially offset by $192 million of valuation allowances, comprised of $112 million related to

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certain state net deferred tax assets, $45 million related to certain state tax net operating loss carryforwards and $35 million related to foreign tax credit carryforwards, each of which the Company currently does not believe are more likely than not to be realized in the future. The low effective income tax rate in 2001 results primarily from lower pre-tax income in the U.S., caused by the write-off of acquired in-process research and development, as well as proportionately greater income earned in low-tax jurisdictions.

Expenses

        Total costs and expenses, as a percentage of sales, were 85.4% in 2002 compared with 87.7% in 2001 and 70.1% in 2000.

        Cost of products sold, as a percentage of sales, increased over the last three years to 35.3% in 2002 compared with 30.3% in 2001 and 27.0% in 2000, principally due to increased sales of lower-margin products from OTN and from a decline in higher-margin GLUCOPHAGE* IR, TAXOL® and BUSPAR sales as a result of the introduction of generic products in the U.S. Cost of products sold includes a $15 million reversal of prior period reserves for inventory write-offs related to actions that have been cancelled in 2002 and $58 million and $40 million of other restructuring expense in 2001 and 2000, respectively.

        Advertising and promotion expenses decreased slightly to $1,295 million in 2002 from $1,299 million in 2001, primarily as a result of reduced spending on the metformin franchise and VANIQA*, partially offset by ABILIFY* product launch expenses and increased support of PLAVIX* and AVAPRO* in the U.S. In 2001, advertising and promotion expenses decreased 15% from 2000 to $1,299 million as a result of lower spending on TAXOL® and BUSPAR. As a percentage of sales, 2002 advertising and promotion expenses decreased to 7.1% from 7.2% in 2001 and 8.7% in 2000.

        Marketing, selling and administrative expenses, as a percentage of sales, increased to 21.7% in 2002 from 21.6% in 2001. The slight increase in 2002 was mainly due to higher sales force expenses as a result of the addition of the Medical Imaging business, which was acquired in October 2001 as part of the DuPont acquisition. In 2001, marketing, selling and administrative expenses, as a percentage of sales, decreased to 21.6% from 22.0% in 2000, primarily as a result of cost-efficiencies and a reduction in sales force expenses.

        The Company's investment in research and development totaled $2,218 million in 2002, an increase of 2% over 2001, and as a percentage of sales, increased to 12.2% in 2002, compared with 12.1% in 2001 and 10.7% in 2000. Research and development included $69 million of accelerated depreciation on research facilities in 2002. In 2002, research and development spending dedicated to pharmaceutical products increased to 14.4% of pharmaceutical sales compared with 14.2% and 12.4% in 2001 and 2000, respectively. The lower growth in research and development spending in 2002 is consistent with the new priorities the Company announced to ensure that the Company can fully realize the value of its research and development pipeline. The new priorities include rebalancing drug discovery and development to increase support for the Company's full late-stage development pipeline. They also include devoting greater resources to ensuring successful near-term product launches and increasing the Company's efforts on in-licensing opportunities. Consistent with these priorities, the Company expects a mid-to-high teens increase on a percentage basis to spending in advertising and promotion.

        In 2002, the charges related to acquired in-process research and development were $169 million and primarily related to milestone payments to ImClone for ERBITUX*. Of the $200 million milestone payable to ImClone, $160 million (or 80.1%) was expensed to acquired in-process research and development in the first quarter of 2002. The remaining $40 million was recorded as an additional equity investment to eliminate the income statement effect of the portion of the milestone payment for which the Company has an economic claim through its 19.9% ownership interest in ImClone. The

27

acquired in-process research and development charge in 2001 was $2,772 million, including $2,009 million related to the DuPont acquisition and $735 million attributable to the ImClone equity investment. In addition, acquired in-process research and development for 2002, 2001 and 2000 include charges of $9 million, $28 million and $38 million, respectively, for licensing payments related to products not yet approved for marketing.

        Restructuring programs were implemented in 2002 to downsize, realign and streamline operations in order to increase productivity, reduce operating expenses and rationalize the Company's manufacturing network and research facilities. The programs include costs for the termination of approximately 1,040 employees including research, manufacturing and administrative personnel. In addition, the Company eliminated non-strategic research efforts and consolidated research facilities in the U.S. Actions under the restructuring program are expected to be substantially complete by late 2003. As a result of these actions, the Company expects the annual benefit to earnings from continuing operations before minority interest and income taxes to be approximately $150 million in future years.

        Restructuring programs were implemented in 2001 to downsize, realign and streamline operations in order to increase productivity, reduce operating expenses and rationalize the Company's manufacturing network and research facilities. The programs include costs for the termination of approximately 3,400 employees including sales force, manufacturing, administrative and research personnel. In addition, a contract sales force has been terminated. The Company also exited a nutritional business in Eastern Europe, a pharmaceutical production facility in the U.S. and a research facility in France. Actions under the restructuring program are expected to be substantially complete in early 2003. As a result of these actions, the Company expects the annual benefit to earnings from continuing operations before minority interest and income taxes to be approximately $400 million in future years, of which a portion was realized in 2002.

        Restructuring programs were implemented in 2000 to downsize, realign and streamline operations in order to increase productivity, reduce operating expenses and rationalize the Company's manufacturing network and research facilities. Under the program, approximately 5,200 employees were to be terminated, including sales force, manufacturing and administrative personnel. In addition, the Company also exited a production facility in the U.S., certain international operations of ConvaTec and a research facility in Japan. As a result of these actions, the Company expects the annual benefit to earnings from continuing operations before minority interest and income taxes of approximately $275 million in future years, a majority of which has been realized. These actions are substantially complete.

        For additional information on restructuring, see Note 3, Restructuring and Other Items, to the consolidated financial statements.

Pharmaceuticals

        In 2002, worldwide pharmaceuticals sales decreased 2% to $14,705 million, reflecting a 4% price decline, 2% volume increase, and no foreign exchange impact. Domestic sales declined 7% to

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$9,174 million, primarily due to generic competition in the U.S. on GLUCOPHAGE* IR, TAXOL® and BUSPAR, partially offset by increased sales of PLAVIX* and the addition of products acquired from the DuPont acquisition, which was completed on October 1, 2001. In addition, the decrease in domestic pharmaceutical sales was impacted by the buildup in the prior period of inventory levels at those U.S. wholesalers not accounted for under the consignment model and the subsequent workdown in 2002. International sales increased 9% to $5,531 million (foreign exchange had no significant impact) primarily due to increased sales of PRAVACHOL and PLAVIX* in Europe, TAXOL® in Japan and the addition of products acquired from the DuPont acquisition. Approximately $1,395 million of sales (calculated net of customary 2% early pay cash discounts) recognized in the year ended December 31, 2002 had been reversed from prior years.

        In 2001, worldwide pharmaceuticals sales increased 3% to $14,941 million, reflecting a 3% price increase, 2% volume increase partially offset by a 2% decrease in foreign exchange. Domestic sales in 2001 increased 2% to $9,853 million primarily due to strong growth of PLAVIX*, PRAVACHOL, TEQUIN and GLUCOPHAGE* IR, partially offset by decreased sales in TAXOL® and BUSPAR due to generic competition. In addition, the 2001 domestic sales increase reflects the favorable impact of the previously disclosed buildup of inventory levels at those U.S. wholesalers not accounted for under the consignment model. International sales in 2001 increased 4% to $5,088 million, including a 6% decrease from foreign exchange, as a result of increased sales of PRAVACHOL in Europe, PLAVIX* internationally and TAXOL® in Japan, partially offset by decreased sales of CAPOTEN.

        Key pharmaceutical products and their sales include the following:

•

Sales of PRAVACHOL, a cholesterol-lowering agent and the Company's largest-selling product, increased 8% to $2,266 million in 2002. Domestic sales increased 1% to $1,311 million in 2002, while international sales increased 18% (foreign exchange had a 4% favorable impact) to $955 million. In October 2002, the FDA approved a new indication for use in treating pediatric patients with heterozygous familial hypercholesterolemia. Additionally, a six-month exclusivity extension was granted through April 2006. PRAVACHOL sales increased 19% to $2,101 million in 2001.



•

Sales from OTN, a specialty distributor of anticancer medicines and related products, increased 33% to $1,900 million in 2002 and 33% to $1,433 million in 2001.



•

Sales of PLAVIX*, a platelet aggregation inhibitor, increased 61% to $1,890 million in 2002, driven in part by the positive results of the CURE (Clopidogrel in Unstable angina to prevent Recurrent ischemic Events) study. In addition, the American College of Cardiology and the American Heart Association issued updated guidelines adding PLAVIX* to standard therapy, including aspirin, to treat people with acute coronary syndrome. Sales of AVAPRO*, an angiotensin II receptor blocker for the treatment of hypertension, increased 20% to $586 million in 2002. Sales of AVAPRO* and PLAVIX* increased 35% and 32% to $487 million and $1,171 million, respectively, in 2001. AVAPRO* and PLAVIX* are cardiovascular products that were launched from the alliance between Bristol-Myers Squibb and Sanofi-Synthelabo.



•

GLUCOPHAGE* franchise sales decreased 67% to $778 million in 2002, compared to a 34% increase to $2,337 million in 2001. GLUCOPHAGE* IR, the leading branded oral medication for treatment of non-insulin- dependent (type 2) diabetes, saw 2002 sales decrease 88% to $220 million. The decline in GLUCOPHAGE* IR was due to the introduction of generic metformin in the U.S. in early 2002. GLUCOPHAGE* IR sales increased 7% to $1,838 million in 2001. GLUCOVANCE*, an oral combination drug, and GLUCOPHAGE* XR Extended Release tablets had sales in 2002 of $246 million and $297 million, respectively, compared with sales in 2001 of $269 million and $230 million, respectively. In 2002, the FDA approved METAGLIP*, a combination of glipizide and metformin HCI tablets, as initial drug therapy for people with type 2 diabetes. Sales of METAGLIP* were $15 million in 2002.

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•

Sales of TAXOL® decreased 23% to $857 million in 2002. International sales increased 11% (foreign exchange had a 1% favorable impact), to $719 million, led by strong sales in Japan and France. Domestic sales decreased 70% to $138 million due to generic competition. TAXOL® sales decreased 29% to $1,112 million in 2001.



•

Sales of PARAPLATIN, which is used in combination therapy for the treatment of ovarian cancer, increased 23% to $727 million in 2002. PARAPLATIN sales decreased 9% to $592 million in 2001.



•

Sales of ZERIT, an anti-retroviral drug used in the treatment of HIV, decreased 14% to $443 million in 2002, primarily as a result of decreased demand due to adverse side effects. ZERIT sales decreased 11% to $515 million in 2001.



•

MONOPRIL, a second-generation angiotensin converting enzyme (ACE) inhibitor, had increased sales of 3% reaching $426 million in 2002. MONOPRIL sales increased 2% to $413 million in 2001.



•

Sales of SUSTIVA and COUMADIN, products acquired from DuPont in October 2001, were $455 million and $300 million, respectively, in 2002. Total U.S. prescriptions for COUMADIN decreased 16% in 2002.



•

Sales of VIDEX/VIDEX EC, an anti-retroviral agent, increased 9% to $262 million in 2002. VIDEX/VIDEX EC sales increased 16% to $240 million in 2001.



•

Sales of SERZONE, a treatment for depression, decreased 34% to $221 million in 2002, primarily as a result of a labeling change indicating a serious side effect of the product. SERZONE sales increased 5% to $334 million in 2001.

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        The following table sets forth a comparison of reported net sales changes and the estimated total (both retail and mail order customers) prescription growth for certain of the Company's U.S. primary care pharmaceutical products. The estimated prescription growth amounts are based on third-party data. A significant portion of the Company's domestic pharmaceutical sales is made to wholesalers. Where changes in reported net sales differs from prescription growth, this change in net sales may not reflect underlying prescriber demand.

        Earnings before minority interest and income taxes in 2002 and 2001 were $2,413 million and $1,158 million, respectively. The increase in 2002 is mainly due to lowered earnings in 2001 as a result of the write-off of $2,772 million of acquired in-process research and development. Earnings in 2002 were unfavorably affected by higher sales of lower margin products, including products from the OTN business, and the full year impact of generic competition on GLUCOPHAGE* IR, TAXOL® and BUSPAR in the U.S. Earnings before minority interest and income taxes of $1,158 million in 2001 decreased from $4,371 million in 2000, primarily due to the acquired in-process research and development expenses in 2001, together with the impact of generic competition on TAXOL® and BUSPAR in the U.S.

Nutritionals

        In 2002, Nutritionals sales were comparable to the prior year level at $1.8 billion, reflecting a 3% increase due to price, offset by a 2% decrease due to volume and a 1% decrease due to foreign exchange. Worldwide infant formula sales decreased 4% to $1,176 million, primarily in the specialty infant formula business. Worldwide sales of ENFAMIL, the Company's largest-selling infant formula, of $750 million in 2002 were consistent with $753 million in 2001. Mead Johnson continues to be the leader in the U.S. infant formula markets. Worldwide children's nutritionals sales increased 24%, including a 2% decrease from foreign exchange, to $383 million in 2002 from $308 million in 2001, as a result of a 53% increase in sales of ENFAGROW, primarily across the Pacific region, to $121 million in 2002. Sales of ENFAGROW increased 34% to $79 million in 2001. In 2001, Nutritionals sales were flat with prior year at $1.8 billion, reflecting a 3% increase due to price, offset by a 1% decrease due to volume and a 2% decrease due to foreign exchange. Worldwide infant formula sales increased 3%, including a 1% decrease from foreign exchange, to $1,226 million in 2001, primarily due to a 5% increase in sales of ENFAMIL. Worldwide adult nutritional sales decreased 15% to $143 million from $169 million in 2000 as a result of the divestiture of the VIACTIV* business.

        Earnings before minority interest and income taxes in the Nutritionals segment decreased to $444 million in 2002 from $482 million in 2001 as a result of increased promotional spending and sales force expense related to the ENFAMIL product line. In 2001, earnings before minority interest and income taxes in the Nutritionals segment increased to $482 million from $348 million in 2000 primarily due to copromotion income for CEFZIL from the Pharmaceuticals segment and lower advertising and promotion spending on VIACTIV*.

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Other Healthcare

        The Other Healthcare segment includes ConvaTec, the Medical Imaging business and Consumer Medicines in the U.S. and Japan.

        Sales in the Other Healthcare segment increased 30% to $1,586 million in 2002, including $465 million of sales from Medical Imaging, which was purchased in October 2001 as part of the DuPont acquisition. The Other Healthcare sales increase was a result of a 28% increase due to volume and a 2% increase from changes in selling prices. Foreign exchange did not have a net impact on the sales change. In 2001, sales in this segment increased 6% to $1,219 million from $1,152 million in 2000. In 2001, the Other Healthcare sales increase was a result of a 9% increase due to volume, 1% increase from changes in selling prices and 4% decrease due to foreign exchange. Other Healthcare sales by business were as follows:

        In 2002, the increase in ConvaTec sales was due to a 3% increase in sales of ostomy products to $459 million and strong growth of wound care products, which increased 11% to $276 million. Foreign exchange contributed 1% to the sales increase in 2002. In 2001, the increase in ConvaTec sales was due to a 4% increase in sales of ostomy products to $444 million and strong growth of wound care products, which increased 9% to $248 million. Foreign exchange in 2001 had a 4% negative effect on sales.

        The steady decline in sales of Consumer Medicines, from $467 million in 2000 to $377 million in 2002, is primarily a result of lower demand for analgesics and KERI products in the U.S.

        Earnings before minority interest and income taxes in the Other Healthcare segment increased to $394 million in 2002 from $287 million in 2001, primarily due to the strong growth in the ConvaTec business and the addition of the Medical Imaging business in October 2001. Earnings before minority interest and income taxes in this segment increased to $287 million in 2001 from $252 million in 2000, primarily due to the addition of the Medical Imaging business.

Geographic Areas

        The Company's products are available in virtually every country in the world. The largest markets are in the U.S., France, Japan, Germany, Spain, Canada and Italy.

        Sales in the U.S. decreased 3% in 2002, primarily due to generic competition in the U.S. on GLUCOPHAGE* IR, TAXOL® and BUSPAR and, to a lesser extent, the buildup in the prior period of inventory levels at those U.S. wholesalers not accounted for under the consignment model and the subsequent workdown in 2002. This decrease was partially offset by an increase in PLAVIX* sales and the addition of the products acquired from DuPont. DuPont pharmaceuticals U.S. sales in 2002 were $603 million. In 2001, sales in the U.S. increased 2%, primarily due to the growth of PLAVIX*, PRAVACHOL and GLUCOPHAGE* IR, offset by declines in TAXOL® and BUSPAR. DuPont pharmaceuticals U.S. sales in 2001 were $106 million. The Company's acquisition of DuPont was completed on October 1, 2001. For information on U.S. pharmaceuticals prescriber demand, reference is made to the table on page 31, which sets forth a comparison of changes in net sales to the estimated

32

total (both retail and mail order customers) prescription growth for certain of the Company's primary care pharmaceutical products.

        Sales in Europe, Mid-East and Africa increased 12% in 2002, including a 4% increase from foreign exchange, as a result of the strong growth of PRAVACHOL in France and the United Kingdom, PLAVIX* in Spain, and the addition of the DuPont products throughout the region. DuPont sales in the region were $309 million in 2002. In 2001, sales in Europe, Mid-East and Africa increased 6%, including a 4% decrease from foreign exchange, primarily due to the growth of PRAVACHOL in France and Italy.

        Sales in Other Western Hemisphere countries decreased 6%, including an 8% decrease from foreign exchange in 2002. The unfavorable impact of foreign exchange was primarily in Brazil and Argentina. The underlying sales growth was primarily due to increased sales of PLAVIX* in Canada and increased sales of nutritional products in Mexico. In 2001, sales in the Other Western Hemisphere countries decreased 2%, including a 5% decrease from foreign exchange. The unfavorable impact of foreign exchange was mainly in Brazil. The underlying sales growth in 2001 was primarily driven by increased sales of nutritional products in Mexico.

        Sales in the Pacific region increased 12%, including a 2% decrease from foreign exchange in 2002. Products with strong growth included TAXOL® and PARAPLATIN in Japan and nutritional products in China and Indonesia. In 2001, Pacific region sales decreased 1%, including a 12% decrease from foreign exchange. The underlying sales growth in 2001 was driven primarily by the strong growth of TAXOL® in Japan and nutritional products in the Philippines, Thailand and China.

Financial Position

        Cash and cash equivalents, time deposits and marketable securities totaled approximately $4.0 billion at December 31, 2002, compared with $5.7 billion at December 31, 2001. Approximately $3.7 billion of such cash, cash equivalents, time deposits and marketable securities was held by the Company's foreign subsidiaries. Repatriation of this cash to the U.S. would require additional tax provisions, which are not reflected in the consolidated financial statements. For a further discussion of this matter, see Critical Accounting Policies-Income Taxes below. Working capital decreased to $1.8 billion at December 31, 2002, from $2.1 billion at December 31, 2001, primarily as a result of a decrease in cash and cash equivalents, and an increase in commercial paper outstanding, partially offset by lower deferred revenue on consigned inventory. Cash and cash equivalents, time deposits, marketable securities and the conversion of other working-capital items are expected to fund near-term operations.

        Cash and cash equivalents, time deposits and marketable securities at December 31, 2002, were denominated primarily in U.S. dollar instruments with near-term maturities. The average interest yield on cash and cash equivalents was 1.5% and 2.0% at December 31, 2002 and 2001, respectively, while interest yields on time deposits and marketable securities averaged 1.3% and 1.7%, respectively.

        Short-term borrowings and long-term debt at December 31, 2002, are denominated primarily in U.S. dollars but also include Japanese yen long-term debt of $102 million. A majority of the Company's debt is fixed rate. The Company has entered into fixed to floating interest rate swaps for $3.0 billion of its long-term debt. Interest expense in 2002, 2001 and 2000 was $410 million, $182 million and $108 million, respectively. The average interest rate on short-term borrowings was 9.58% and 7.41% and on current installments of long-term debt was 2.77% and 4.03%, in each case at December 31, 2002 and 2001, respectively. In 2002, the Company's long-term credit ratings, from both Moody's and Standard and Poor's credit rating agencies, were reduced from Aaa/AAA to Aa2 and AA, respectively. In December 2002, Moody's placed the Company's long-term and short-term debt ratings under review for possible downgrade. Since then, the Company has held discussions with Moody's and has provided additional information requested to facilitate their review. In March 2003, Moody's confirmed the

33

Prime-1 short-term ratings for the Company. The Company's long-term ratings remain under review for a possible downgrade.

        Net cash provided by operating activities was approximately $1.0 billion in 2002, $5.4 billion in 2001 and $4.7 billion in 2000. The decrease in 2002 is attributable to lower net earnings and income tax cash outflows of $2.1 billion, which is primarily related to taxes on the gain arising from the sale of the Clairol business. Cash flow from operations also included pension contributions of $547 million, $300 million and $267 million in 2002, 2001 and 2000, respectively.

        Cash provided from operations was primarily used over the past three years to pay dividends of $6.2 billion and repurchase 73 million shares at a cost of $4.1 billion. The Company has also invested $2.6 billion over the past three years in capital expansion to improve plant efficiency and maintain superior research facilities.

        During 2002, the Company purchased 5 million shares of common stock at a cost of $164 million, bringing the total shares acquired since the share repurchase program's inception to 372 million shares. The Company repurchased 27 million and 41 million shares of common stock at a cost of $1,589 million and $2,338 million in 2001 and 2000, respectively. The share repurchase program authorizes the Company to purchase common stock from time to time in the open market or through private transactions as market conditions permit. This program is intended to reduce the increase in shares outstanding from option exercises and to obtain shares for general corporate purposes.

        Employment levels of 44,000 at December 2002 decreased from prior-year levels of 46,000 as a result of workforce reductions associated with restructuring activities and overall attrition.

        Dividends declared per common share in 2002, 2001 and 2000 were $1.12, $1.11 and $1.01, respectively. In December 2002, the Company declared a quarterly dividend of $.280 per common share and an indicated dividend for the full year 2003 of $1.12 per share.

(1)

2003 payments are included in short-term borrowings on the Company's consolidated balance sheet.

(2)

Excludes $40 million which has no expiry date.

        For a discussion of contractual obligations, reference is made to Note 15, Short-Term Borrowings and Long-Term Debt, Note 17, Financial Instruments, and Note 19, Leases, to the consolidated financial statements.

        On March 5, 2002, the Company and ImClone revised their agreement, reducing the total payment to $900 million from $1 billion. Pursuant to this agreement, the Company paid ImClone $200 million in 2001, $140 million in 2002, and $60 million in 2003 and will pay an aggregate of $500 million upon

34

achievement of two milestones. For a discussion of the Company's agreement with ImClone, see Note 2, Alliances and Investments, to the consolidated financial statements.

Recently Issued Accounting Standards

        In January 2003, the Financial Accounting Standards Board (FASB) issued Interpretation No. 46, Consolidation of Variable Interest Entities (FIN 46). FIN 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity's activities or entitled to receive a majority of the entity's residual returns or both. FIN 46 also requires disclosures about variable interest entities that a company is not required to consolidate but in which it has a significant variable interest. The consolidation requirements of FIN 46 apply immediately to variable interest entities created after January 31, 2003 and to existing entities in the first fiscal year or interim period beginning after June 15, 2003. Certain of the disclosure requirements apply to all financial statements issued after January 31, 2003, regardless of when the variable interest entity was established. The Company is in the process of assessing what impact this pronouncement will have on its consolidated financial statements. Based on its preliminary analysis of the impact of FIN 46, the Company believes that it is reasonably possible that ImClone could meet the criteria to be considered a variable interest entity in relation to the Company. Accordingly, the Company included the required transitional disclosures of FIN 46 in Note 2, Alliances and Investments, to the consolidated financial statements.

        In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure . SFAS No. 148 amends SFAS No. 123, Accounting for Stock-Based Compensation , to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The provisions of SFAS No. 148 are effective for financial statements for the year ended December 31, 2002. SFAS No. 148 did not have a material impact on the Company's consolidated financial statements as the adoption of this standard did not require the Company to change, and the Company does not plan to change, to the fair value based method of accounting for stock-based compensation.

        In November 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (FIN 45). FIN 45 requires a guarantor to recognize a liability at the inception of the guarantee for the fair value of the obligation undertaken in issuing the guarantee and include more detailed disclosure with respect to guarantees. The types of contracts the Company enters into that meet the scope of this interpretation are financial and performance standby letters of credit on behalf of wholly-owned subsidiaries. FIN 45 is effective for guarantees issued or modified after December 31, 2002. The initial adoption of this accounting pronouncement did not have a material effect on the Company's consolidated financial statements.

        In June 2002, the FASB issued SFAS No. 146, Accounting for Exit or Disposal Activities, effective for exit or disposal activities that are initiated after December 31, 2002. SFAS No. 146 addresses issues regarding the recognition, measurement, and reporting of costs that are associated with exit and/or disposal activities, including restructuring activities that are currently accounted for pursuant to the guidance that the Emerging Issues Task Force (EITF) has set forth in EITF Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring) , and the SEC has set forth in the Staff Accounting Bulletin No. 100, Restructuring and Impairment Charges . The initial adoption of this accounting standard did not have a material effect on the Company's consolidated financial statements.

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        In April 2002, the FASB issued SFAS No. 145, which superseded SFAS No. 4 and the requirement to aggregate all gains and losses from extinguishment of debt and to classify, if material, as an extraordinary item, net of related income tax effect. As a result, the criteria in Accounting Principles Board Opinion No. 30 will be used to classify those gains and losses. SFAS No. 145 also amends SFAS No. 13 to require that certain lease modifications that have economic effects similar to sale-leaseback transactions be accounted for in the same manner as sale-leaseback transactions. The initial adoption of this standard did not materially affect the Company's consolidated financial statements.

        In 2002, the Company adopted SFAS No. 142, Goodwill and Other Intangible Assets , and SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets . See Note 1, Accounting Policies, to the accompanying consolidated financial statements for more information.

        In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations . Under SFAS No. 143, the fair value of a liability for an asset retirement obligation must 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. The provisions of SFAS No. 143 are effective for financial statements for fiscal years beginning after June 15, 2002. The initial adoption of this standard is not expected to have a material impact on the Company's consolidated financial statements.

Retirement Benefits

Plan Description

        The Company and certain of its subsidiaries have defined benefit pension plans and defined contribution plans for regular full-time employees. The principal defined benefit pension plan is the Bristol-Myers Squibb Retirement Income Plan and the principal defined contribution plan is the Bristol-Myers Squibb Savings and Investment Program.

        Approximately 85% of total Company defined benefit pension plan assets and liabilities are held in U.S. plans. The assets for the U.S. plans are held in a single trust with a common asset allocation. Unless specified otherwise, the references in this section are to total Company plans (U.S. plans together with international plans).

        Benefits under the Company's defined benefit pension plans are based primarily on years of credited service and on participants' compensation. Assets under the Company's defined benefit plans consist primarily of equity and fixed-income securities. At December 31, 2002, the fair market value of plan assets for the Company's defined benefit plans decreased to $3,267 million from $3,508 million at December 31, 2001. For the U.S. plans, assets were allocated 67% to equity securities (compared to 70% at the end of 2001), 26% to fixed income securities (compared to 23% at the end of 2001) and 7% to real estate and other investments (no change from the end of 2001). Bristol-Myers Squibb common stock represented less than 1% of assets for the U.S. plans at the end of 2002 and 2001.

        The Company provides comprehensive medical and group life benefits for substantially all U.S. retirees who elect to participate in the Company's comprehensive medical and group life plans. The asset allocation for these postretirement plans is identical to the asset allocation described above for the U.S. defined benefit pension plans.

Accrual Accounting and Significant Assumptions

        Consistent with the GAAP requirements set forth in SFAS No. 87, Employers' Accounting for Pensions , the Company accounts for pension benefits using the accrual method, recognizing pension expense before the payment of benefits to retirees. The accrual method of accounting for pension benefits necessarily requires actuarial assumptions concerning future events that will determine the amount and timing of the benefit payments.

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        The Company's key assumptions used in calculating its cost of pension benefits are the discount rate, the rate of compensation increase and the expected long-term rate of return on plan assets. The Company, in consultation with its actuaries, evaluates the key actuarial assumptions and other assumptions used in calculating its cost of pension benefits, such as retirement, turnover and mortality rates, based on expectations or actual experience, as appropriate, and determines such assumptions on December 31 of each year to calculate liability information as of that date and pension expense for the following year. Depending on the assumptions used, the pension expense could vary within a range of outcomes and have a material effect on reported earnings. In addition, the assumptions can materially affect accumulated benefit obligations and future cash funding. Actual results in any given year may differ from those estimated because of economic and other factors.

        The assumed discount rate used by the Company for determining future pension obligations under the U.S. plans is based on indices of AA and AAA-rated corporate bonds. The indices of high quality corporate bonds selected reflect the weighted-average remaining period of benefit payments. The assumed rate of compensation increase used by the Company for determining future pension obligations reflects an estimate of the change in actual future compensation levels due to general price levels, productivity, seniority and other factors.

        In 2002, net pension expense for the Company's defined benefit pension plans included in earnings before minority interest and income taxes was $45 million, compared to $77 million in 2001 (which included $25 million for a U.S. curtailment/settlement loss).

        The U.S. plans pension expense for 2002 was determined using a 7.25% assumed discount rate and a 4.25% assumed rate of compensation increase. The accumulated benefit obligation at December 31, 2002 for the U.S. plans was determined using a 6.75% assumed discount rate. If the assumed discount rate used in determining the U.S. plans pension expense for 2002 had been reduced by 0.5%, such expense would have increased by approximately $14 million. If the assumed rate of compensation increase used in determining the U.S. plans pension expense for 2002 had been reduced by 0.25%, such expense would have decreased by approximately $5 million. If the assumed discount rate used in determining the accumulated benefit obligation at December 31, 2001 had been reduced by 0.5%, the accumulated benefit obligation would have increased by $217 million.

        In determining the expected long-term rate of return on plan assets, the Company evaluates allocation of assets and the expected returns on various asset classes. The Company evaluates any short-term market volatility in the context of the long-term nature of pension commitments. The U.S. plans' pension expense for 2002 was determined using a 10% expected long-term rate of return on plan assets. If the expected long-term rate of return on plan assets used in determining the U.S. plans pension expense for 2002 had been reduced by 1%, such expense would have increased by $35 million.

        Actual rates of return earned on U.S. plan assets for each of the last ten years were as follows:

        As discussed below, accounting principles provide that differences between expected and actual returns are recognized over the average future service of employees.

        At December 31, 2001, the Company lowered its assumed discount rate from 7.75% to 7.25%, to reflect a decline in yields on high quality corporate bonds, and its assumed rate of compensation increase from 4.75% to 4.25%, to reflect expectations of lower inflation in the future and consistent

37

with the reduction in the assumed discount rate. The reduction in the assumed discount rate increased the present value of future benefit obligations and, accordingly, had the effect of increasing U.S. plans pension expense for 2002. In contrast, a reduction in the assumed rate of compensation increase decreased the present value of benefit obligations and, accordingly, had the effect of decreasing U.S. plans pension expense for 2002.

        At December 31, 2002, the Company further lowered its assumed discount rate for U.S. plans from 7.25% to 6.75% and its assumed rate of compensation increase for U.S. plans from 4.25% to 4%. In the aggregate, these revisions had the effect of increasing the present value of future benefit obligations and, accordingly, will have the effect of increasing pension expense for 2003. In addition, the Company revised, based on a change in its expectations of future terminations and retirements, its retirement and turnover assumptions. This revision had the effect of decreasing the present value of future benefit obligations and, accordingly, will have the effect of decreasing pension expense for 2003.

        Over the course of the last several years, global equity markets have experienced negative returns. The negative equity market returns of 2001 and 2000 have been compounded by a further market decline in 2002 (S&P 500 declined by 22.1%). The Company evaluates market conditions in determining its expected long-term rate of return on plan assets. The Company reduced the expected rate of return on U.S. plans assets at December 31, 2002 from 10% to 9%. This reduction is expected to result in higher pension expense for 2003 of approximately $34 million.

        The Company expects that the net pension expense for its defined benefit pension plans included in earnings before minority interest and income taxes will be approximately $120 million higher in 2003 than in 2002, reflecting, among other things, the decreases in the assumed discount rate and expected long-term rate of return outlined above and a decrease in the value of the assets in the Company's defined benefit pension plans.

        The Company used the same assumed discount rates and expected long-term rates of return on plan assets in calculating its cost of postretirement benefits as it did in calculating its cost of pension benefits.

Delayed Recognition of Actuarial Gains and Losses

        At December 31, 2002 and 2001, unrecognized net actuarial losses for the Company's defined benefit plans were $1,635 million and $645 million, respectively, based on the fair market value of plan assets. These unrecognized net actuarial losses reflect a decline in the fair market value of plan assets and a reduction of the weighted-average discount rate in 2002 and 2001.

        SFAS No. 87 provides for delayed recognition of actuarial gains and losses, including amounts arising from changes in the estimated plan benefit obligations due to changes in the assumed discount rate, differences between the actual and expected returns on plan assets, and other assumption changes. SFAS No. 87 requires that unrecognized net actuarial gain or loss, determined based on the market-related value of plan assets (which differs from fair market value and is a calculated value that recognizes changes in fair value in a systematic and rational manner over not more than five years), be amortized in pension income or expense for the year to the extent that such unrecognized net actuarial loss or gain exceeds 10% of the greater of the projected benefit obligation or the market-related value of plan assets at the beginning of the year. These net gains and losses are recognized as pension income or expense prospectively over a period that approximates the average remaining service period of active employees expected to receive benefits under the plans (approximately 10 years) to the extent that they are not offset by losses and gains in subsequent years.

        At December 31, 2001, the unrecognized net actuarial loss, determined based on the market-related value of plan assets, was $180 million. This amount did not exceed 10% of the greater of the

38

projected benefit obligation or the market-related value of plan assets at the beginning of the year and, accordingly, was not required to be amortized as pension expense for 2002. At December 31, 2002, the unrecognized net actuarial loss, determined based on the market-related value of plan assets, was $971 million. This amount exceeded 10% of the greater of the projected benefit obligation or the market related value of plan assets by $565 million. Unless offset by future unrecognized gains from higher discount rates or higher than expected returns on plan assets, amortization of this $565 million unrecognized loss is expected to increase pension expense for each of the following ten years by approximately $57 million per year, which amount is reflected in the expected increase in pension expense for 2003 of approximately $120 million compared to 2002.

        In the event the fair market value of pension plan assets of a particular plan is less than the accumulated benefit obligation for such plan at year-end, GAAP may require an additional minimum liability and, in such circumstances, a reduction in stockholders' equity or an establishment of an intangible asset. At December 31, 2002, fair market value of the Company's defined benefit pension plan assets was $3,267 million, and the related accumulated benefit obligation was $3,500 million. At December 31, 2001, the fair market value of the Company's defined benefit pension plans assets was $3,508 million and the related accumulated benefit obligation was $3,300 million. The Company recognized an additional minimum liability of $138 million at December 31, 2002, which was offset by the creation of a $10 million intangible asset and $128 million charge in other comprehensive income included in stockholders' equity. The Company also recognized an additional minimum liability of approximately $37 million and $17 million at December 31, 2001 and 2000, respectively.

Plan Funding

        The Company's funding policy for defined benefit plans is to contribute amounts to provide for current service and to fund past service liability. The Company contributed to the defined benefit plans $547 million, $300 million and $267 million in 2002, 2001 and 2000, respectively. The recent decline in the global equity markets has resulted in a decrease in the value of the assets in the Company's pension plans. This decline is expected to adversely affect the Company's related accounting results in future periods through higher pension expense and increased cash funding requirements.

        The Company's contribution to the defined contribution plans is based on employee contributions and the level of Company match. The Company contributed to the principal defined contribution plan $50 million, $54 million and $53 million in 2002, 2001 and 2000, respectively.

Critical Accounting Policies

        The Company prepares its financial statements in accordance with GAAP. The preparation of financial statements in conformity with GAAP requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities, including disclosure of contingent assets and contingent liabilities, at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. The Company's critical accounting policies are those that are both most important to the Company's financial condition and results of operations and require the most difficult, subjective or complex judgments on the part of management in their application, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Because of the uncertainty of factors surrounding the estimates or judgments used in the preparation of the consolidated financial statements, actual results may vary from these estimates.

        The Company believes that the following represent its critical accounting policies. For a summary of all of the Company's significant accounting policies, including the critical accounting policies discussed below, see Note 1, Accounting Policies, to the consolidated financial statements. Management

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and the Company's independent accountants have discussed the Company's critical accounting policies with the Audit Committee of the board of directors.

Revenue Recognition

        The Company's accounting policy for revenue recognition has a substantial impact on its reported results and relies on certain estimates that require the most difficult, subjective and complex judgments on the part of management. The Company recognizes revenue for sales upon shipment of product to its customers, except in the case of certain transactions with its U.S. pharmaceuticals wholesalers which are accounted for using the consignment model. Under GAAP, revenue is recognized when substantially all the risks and rewards of ownership have transferred. In the case of sales made to wholesalers (1) as a result of incentives, (2) in excess of the wholesaler's ordinary course of business inventory level, (3) at a time when there was an understanding, agreement, course of dealing or consistent business practice that the Company would extend incentives based on levels of excess inventory in connection with future purchases and (4) at a time when such incentives would cover substantially all, and vary directly with, the wholesaler's cost of carrying inventory in excess of the wholesaler's ordinary course of business inventory level, substantially all the risks and rewards of ownership do not transfer upon shipment and, accordingly, such sales should be accounted for using the consignment model. The determination of when, if at all, sales to a wholesaler meet the foregoing criteria involves evaluation of a variety of factors and a number of complex judgments. Under the consignment model, the Company does not recognize revenue upon shipment of product. Rather, upon shipment of product the Company invoices the wholesaler, records deferred revenue at gross invoice sales price and classifies the inventory held by the wholesalers as consignment inventory at the Company's cost of such inventory. The Company recognizes revenue (net of discounts, rebates, sales allowances and accruals for returns, all of which involve significant estimates and judgments) when the consignment inventory is no longer subject to incentive arrangements but not later than when such inventory is sold through to the wholesalers' customers, on a first-in first-out (FIFO) basis.

        The Company's estimates of inventory at the wholesalers and deferred revenue on consigned inventory are based on the projected prescription demand-based sales for its products, as well as the Company's analysis of third-party information, including information obtained from certain wholesalers with respect to their inventory levels and sell-through to customers and third-party market research data, and the Company's internal information. The Company's estimates are subject to inherent limitations of estimates that rely on third-party data, as certain third-party information was itself in the form of estimates, and reflect other limitations.

Acquired In-Process Research and Development

        The fair value of in-process research and development acquired in a business combination (acquired IPR&D) is determined by independent appraisal and based on the present value of each research project's projected cash flows, utilizing an income approach consistent with the AICPA Practice Aid, Assets Acquired in Business Combinations to be Used in Research and Development Activities: A Focus in Software, Electronic Devices and Pharmaceutical Industries . Future cash flows are predominately based on the net income forecast of each project consistent with historical pricing, margins and expense levels of similar products. Revenues are estimated based on relevant market size and growth factors, expected industry trends, individual project life cycles and the life of each research project's underlying patent. In determining the fair value of each research project, expected revenues are first adjusted for technical risk of completion. The resulting cash flows are then discounted at a rate approximating the Company's weighted average cost of capital.

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Impairment of Long-Lived Assets

        In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets , the Company periodically evaluates whether current facts or circumstances indicate that the carrying value of its depreciable long-lived assets to be held and used may not be recoverable. If such circumstances are determined to exist, an estimate of undiscounted future cash flows produced by the long-lived asset, or the appropriate grouping of assets, is compared to the carrying value to determine whether an impairment exists. If an asset is determined to be impaired, the loss is measured based on quoted market prices in active markets, if available. If quoted market prices are not available, the estimate of fair value is based on various valuation techniques, including a discounted value of estimated future cash flows. The Company reports an asset to be disposed of at the lower of its carrying value or its estimated net realizable value.

        Goodwill is evaluated at least annually for impairment in accordance with SFAS No. 142, Goodwill and Other Intangible Assets . SFAS No. 142 requires that goodwill be tested for impairment using a two-step process. The first step is to identify a potential impairment, and the second step measures the amount of the impairment loss, if any. Goodwill is deemed to be impaired if the carrying amount of a reporting unit's goodwill exceeds its estimated fair value. SFAS No. 142 requires that indefinite-lived intangible assets be tested for impairment using a one-step process, which consists of a comparison of the fair value to the carrying value of the intangible asset. Intangible assets are deemed to be impaired if the net book value exceeds the estimated fair value.

        The estimates of future cash flows, based on reasonable and supportable assumptions and projections, require management's judgment. Any changes in key assumptions about the Company's businesses and their prospects, or changes in market conditions, could result in an impairment charge.

Equity Investments

        The Company reviews its equity investments for impairment based on its determination of whether the decline in market value of the investment below the Company's carrying value is other than temporary. In making this determination, the Company considers Accounting Principles Board Opinion No. 18, The Equity Method of Accounting for Investments in Common Stock , which sets forth factors to be evaluated in determining whether a loss in value should be recognized, including the Company's ability to hold its investment, the market price and market price fluctuations of the investment's publicly traded shares and inability of the investee to sustain an earnings capacity which would justify the carrying amount of the investment. The Company's investment in ImClone is subject to this accounting. See Note 2, Alliances and Investments, to the consolidated financial statements for a discussion of the Company's investment in ImClone.

Retirement Benefits

        The Company's pension plans and postretirement benefit plans are accounted for using actuarial valuations required by SFAS No. 87, Employers' Accounting for Pensions , and SFAS No. 106 , Employers' Accounting for Postretirement Benefits Other Than Pensions . The Company considers accounting for retirement plans critical because management is required to make significant subjective judgments about a number of actuarial assumptions, including discount rates, salary growth, long-term return on plan assets, retirement, turnover, health care cost trend rates and mortality rates. Depending on the assumptions and estimates used, the pension and postretirement benefit expense could vary within a range of outcomes and have a material effect on reported earnings. In addition, the assumptions can materially affect accumulated benefit obligations and future cash funding. For a detailed discussion of the Company's retirement benefits, see —Retirement Benefits above, and Note 20, Retirement Plans,

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and Note 21, Postretirement Benefit Plans Other Than Pensions, to the consolidated financial statements.

Restructuring

        To downsize and streamline operations and rationalize manufacturing facilities, the Company has periodically recorded restructuring charges. As a result, the Company has made estimates and judgments regarding its future plans, including future termination benefits and other exit costs to be incurred when the restructuring actions take place. Actual results could vary from these estimates resulting in an adjustment to earnings.

Contingencies

        In the normal course of business, the Company is subject to contingencies, such as legal proceedings and claims arising out of its business, that cover a wide range of matters, including product liability, environmental liability and tax matters. In accordance with SFAS No. 5, Accounting for Contingencies , the Company records accruals for such contingencies when it is probable that a liability will be incurred and the amount of loss can be reasonably estimated. For a discussion of contingencies, reference is made to Note 8, Income Taxes, and Note 22, Litigation Matters, to the consolidated financial statements.

Income Taxes

        As of December 31, 2002, taxes were not provided on approximately $9.0 billion of undistributed earnings of foreign subsidiaries, as the Company has invested or expects to invest the undistributed earnings indefinitely. If in the future these earnings are repatriated to the United States, or if the Company determines such earnings will be remitted in the foreseeable future, additional tax provisions would be required. Due to complexities in the tax laws and the assumptions that would have to be made, it is not practicable to estimate the amounts of income taxes that would have to be provided.

        The Company evaluates the need for a deferred tax asset valuation allowance by assessing whether it is more likely than not that it will realize its deferred tax assets in the future. The assessment of whether or not a valuation allowance is required often requires significant judgement including the forecast of future taxable income and the evaluation of tax planning initiatives. Adjustments to the deferred tax valuation allowance are made to earnings in the period when such assessment is made.

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        In addition, the Company has operations in tax jurisdictions located in most areas of the world and is subject to audit in these jurisdictions. Tax audits by their nature are often complex and can require several years to resolve. Accruals for tax contingencies require management to make estimates and judgments with respect to the ultimate outcome of a tax audit. Actual results could vary from these estimates.

Outlook for 2003

        The Company currently expects 2003 sales growth to more closely reflect underlying prescription trends. Sales growth is expected to benefit from the absence of significant inventory workdown at wholesalers not on the consignment model.

        Expected 2003 sales growth drivers are several key products, including, PLAVIX*, AVAPRO*, PRAVACHOL, PARAPLATIN, ABILIFY* and the expected introduction of atazanavir, subject to FDA approval, as well as growth in the OTN business. The Company also expects significant sales growth for SUSTIVA and CARDIOLITE, products obtained through the October 2001 acquisition of DuPont Pharmaceuticals. Partially offsetting the growth drivers are the expected loss of exclusivity in 2003 for several products, including MONOPRIL, SERZONE and GLUCOPHAGE* XR in the U.S. and TAXOL® in Europe.

        Gross margins for 2003 are expected to be consistent with gross margins for 2002, as the adverse impact of generic competition and changes in product mix are expected to be offset by the growth of new products and continued growth of current key products.

        The Company plans to increase product advertising and promotion in 2003 by approximately the mid-to high teens on a percentage basis focusing on support for ABILIFY*, AVAPRO*, PLAVIX* and PRAVACHOL. Research and development expenses are expected to be comparable to 2002, with continued rebalancing of drug discovery and development to provide additional support for late-stage development pipeline. Selling, general and administrative expenses are expected to increase in the single digits on a percentage basis. Underlying drivers of operating expense growth in 2003 include expected higher pension cost, which is estimated to negatively impact earnings before minority interest and income taxes by approximately $120 million, and, to a lesser extent, the expected increase in sales force expense due to full-year ABILIFY* sales force support and fewer open sales force positions compared to 2002. Minority interest expense is expected to increase, due to higher sales of products in the worldwide alliance with Sanofi.

        The Company projects fully diluted earnings per share in 2003 will be $1.60 to $1.65, excluding the impact from any in-process research and development that may arise from any external development agreements and other non-comparable items.

        The Company expects the consignment model will no longer be applied to sales to any U.S. pharmaceuticals wholesalers at or before the end of 2003, except as to sales under the distribution agreement related to OTN. Thereafter, the Company expects buying patterns and fluctuations in inventory levels of wholesalers will have an effect on the Company's financial results and the comparability to prior periods.

        Actual results may differ materially from the estimates and expectations described above. Some of the factors that could affect these estimates and expectations are described below under —Cautionary Factors That May Affect Future Results.

Cautionary Factors That May Affect Future Results

        This annual report on Form 10-K (including documents incorporated by reference) and other written and oral statements the Company makes from time to time contain certain "forward-looking" statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the

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Securities Exchange Act of 1934. You can identify these forward-looking statements by the fact they use words such as "should", "expect", "anticipate", "estimate", "may", "will", "project", "guidance", "intend", "plan", "believe" and other words and terms of similar meaning and expression in connection with any discussion of future operating or financial performance. One can also identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. Such forward-looking statements are based on current expectations and involve inherent risks and uncertainties, including factors that could delay, divert or change any of them, and could cause actual outcomes to differ materially from current expectations. These statements are likely to relate to, among other things, the Company's goals, plans and projections regarding the Company's financial position, results of operations, market position, product development, product approvals, sales efforts, expenses, performance or results of current and anticipated products and the outcome of contingencies such as legal proceedings, and financial results which are based on current expectations that involve inherent risks and uncertainties, including factors that could delay, divert or change any of them in the next several years.

        Although it is not possible to predict or identify all factors, they may include the following:

•

New government laws and regulations, such as (i) health care reform initiatives in the United States at the state and federal level and in other countries; (ii) changes in the FDA and foreign regulatory approval processes that may cause delays in approving, or preventing the approval of, new products; (iii) tax changes such as the phasing out of tax benefits heretofore available in the United States and certain foreign countries; and (iv) new laws, regulations and judicial decisions affecting pricing or marketing.



•

Competitive factors, such as (i) new products developed by competitors that have lower prices or superior performance features or that are otherwise competitive with the Company's current products; (ii) generic competition as its products mature and patents expire on products; (iii) technological advances and patents attained by competitors; (iv) problems with licensors, suppliers and distributors; and (v) business combinations among the Company's competitors or major customers.



•

Difficulties and delays inherent in product development, manufacturing and sale, such as (i) products that may appear promising in development may fail to reach market for numerous reasons, including efficacy or safety concerns, the inability to obtain necessary regulatory approvals and the difficulty or excessive cost to manufacture; (ii) seizure or recall of products; (iii) the failure to obtain, the imposition of limitations on the use of, or loss of patent and other intellectual property rights; (iv) failure to comply with Current Good Manufacturing Practices and other application regulations and quality assurance guidelines that could lead to temporary manufacturing shutdowns, product shortages and delays in product manufacturing; and (v) other manufacturing or distribution problems.



•

Legal difficulties, any of which can preclude or delay commercialization of products or adversely affect profitability, including (i) intellectual property disputes; (ii) adverse decisions in litigation, including product liability and commercial cases; (iii) the inability to obtain adequate insurance with respect to this type of liability; (iv) recalls of pharmaceutical products or forced closings of manufacturing plants; (v) government investigations; (vi) claims asserting violations of securities, antitrust and other laws; (vii) environmental matters; and (viii) tax liabilities.



•

Increasing pricing pressures worldwide, including rules and practices of managed care groups and institutional and governmental purchasers, judicial decisions and governmental laws and regulations related to Medicare, Medicaid and healthcare reform, pharmaceutical reimbursement and pricing in general.

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•

Fluctuations in buying patterns of major distributors, retail chains and other trade buyers which may result from seasonality, pricing, wholesaler buying decisions or other factors (including the effect of incentives offered), the Company's wholesaler inventory management policies (including the workdown of wholesaler inventory levels) or other factors.



•

Greater than expected costs and other difficulties including unanticipated effects and difficulties of acquisitions, dispositions and other events, including obtaining regulatory approvals occurring in connection with evolving business strategies; legal defense costs, insurance expense, settlement costs and the risk of an adverse decision related to litigation.



•

Changes to advertising and promotional spending and other categories of spending that may affect sales.



•

Changes in the Company's structure resulting from acquisitions, divestitures, mergers, restructurings or other strategic initiatives.



•

Economic factors over which the Company has no control such as changes of business and economic conditions including, but not limited to, changes in interest rates and fluctuation of foreign currency exchange rates.



•

Changes in business, political and economic conditions due to the recent terrorist attacks in the U.S., the threat of future terrorist activity in the U.S. and other parts of the world and related U.S. military action overseas.



•

Changes in accounting standards promulgated by the Financial Accounting Standards Board, the Securities and Exchange Commission or the American Institute of Certified Public Accountants, which may require adjustments to financial statements.

        Although the Company believes it has been prudent in its plans and assumptions, no assurance can be given that any goal or plan set forth in forward-looking statements can be achieved and readers are cautioned not to place undue reliance on such statements, which speak only as of the date made. The Company undertakes no obligation to release publicly any revisions to forward-looking statements as a result of new information, future events or otherwise.