-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JxY/BMvkhpr6AeOdUXmWBli2kKGm5jOMMjoe1UzFcFyEbR29cn+Iha+3ph79p/XL M65XerT0SGDKr4O07E94Cw== 0000310158-99-000019.txt : 19991115 0000310158-99-000019.hdr.sgml : 19991115 ACCESSION NUMBER: 0000310158-99-000019 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991112 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SCHERING PLOUGH CORP CENTRAL INDEX KEY: 0000310158 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 221918501 STATE OF INCORPORATION: NJ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-06571 FILM NUMBER: 99747131 BUSINESS ADDRESS: STREET 1: ONE GIRALDA FARMS CITY: MADISON STATE: NJ ZIP: 07940-1000 BUSINESS PHONE: 9738227000 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1999 Commission file number 1-6571 SCHERING-PLOUGH CORPORATION Incorporated in New Jersey 22-1918501 One Giralda Farms (I.R.S. Employer Identification No.) Madison, N.J. 07940-1000 (973) 822-7000 (telephone number) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. YES X NO Common Shares Outstanding as of September 30, 1999: 1,469,074,987 PART I. - FINANCIAL INFORMATION Item 1. Financial Statements SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED INCOME (UNAUDITED) (Amounts in millions, except per share figures)
Three Months Nine Months Ended Ended September 30 September 30 1999 1998 1999 1998 Net Sales . . . . . . . . . . . $2,236 $1,986 $6,873 $6,018 Costs and expenses: Cost of sales. . . . . . . . . 438 394 1,342 1,197 Selling, general and administrative. . . . . . 814 762 2,571 2,302 Research and development . . . 305 257 864 742 Other, net . . . . . . . . . . (7) 1 (29) 6 1,550 1,414 4,748 4,247 Income before income taxes. . . 686 572 2,125 1,771 Income taxes. . . . . . . . . . 168 140 521 434 Net Income. . . . . . . . . . . $ 518 $ 432 $1,604 $1,337 Basic earnings per common share $ .35 $ .29 $ 1.09 $ .91 Diluted earnings per common share $ .35 $ .29 $ 1.08 $ .90 Dividends per common share. . . $ .125 $ .11 $ .36 $ .315 See notes to consolidated financial statements.
SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED) (Amounts in millions, except per share figures)
September 30, December 31, 1999 1998 Assets Cash and cash equivalents . . . . . . . . $ 1,665 $ 1,259 Accounts receivable, net. . . . . . . . . 1,068 704 Inventories . . . . . . . . . . . . . . . 965 841 Prepaid expenses, deferred income taxes and other current assets . . . . . 1,092 1,154 Total current assets. . . . . . . . . 4,790 3,958 Property, plant and equipment . . . . . . 4,277 4,068 Less accumulated depreciation . . . . . . 1,451 1,393 Property, net . . . . . . . . . . . . 2,826 2,675 Intangible assets, net. . . . . . . . . . 570 565 Other assets. . . . . . . . . . . . . . . 874 642 $ 9,060 $ 7,840 Liabilities and Shareholders' Equity Accounts payable. . . . . . . . . . . . . $ 954 $ 1,003 Short-term borrowings and current portion of long-term debt. . . . . . . . 695 558 Other accrued liabilities . . . . . . . . 1,661 1,471 Total current liabilities . . . . . . 3,310 3,032 Long-term liabilities . . . . . . . . . . 1,010 806 Shareholders' Equity: Preferred shares - $1 par value; Issued: none . . . . . . . . . . . . . . - - Common shares - $.50 par value; Issued: 1999 and 1998 - 2,030. . . . . . 1,015 1,015 Paid-in capital . . . . . . . . . . . . . 540 365 Retained earnings . . . . . . . . . . . . 7,875 6,802 Accumulated other comprehensive income. . (262) (238) Total . . . . . . . . . . . . . . . . 9,168 7,944 Less treasury shares, at cost - 1999 - 561 shares; 1998 - 558 shares .. . . 4,428 3,942 Total shareholders' equity. . . . . . 4,740 4,002 $ 9,060 $ 7,840 See notes to consolidated financial statements.
SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30 (UNAUDITED) (Amounts in millions)
1999 1998 Operating Activities: Net Income. . . . . . . . . . . . . . . . $ 1,604 $ 1,337 Depreciation and amortization . . . . . . 193 172 Accounts receivable . . . . . . . . . . . (393) (61) Inventories . . . . . . . . . . . . . . . (146) (73) Prepaid expenses and other assets . . . . (122) (205) Accounts payable and other liabilities . 188 358 Net cash provided by operating activities . . . . . . . . . . . . . . . 1,324 1,528 Investing Activities: Capital expenditures . . . . . . . . . . (338) (227) Reduction of investments. . . . . . . . . 204 - Purchases of investments. . . . . . . . . (288) (103) Other, net. . . . . . . . . . . . . . . . 2 (3) Net cash used for investing activities. . (420) (333) Financing Activities: Dividends paid to common shareholders . . (532) (465) Common shares repurchased . . . . . . . . (475) (109) Short-term borrowings, net. . . . . . . . 152 (433) Other, net, primarily equity proceeds . . 359 37 Net cash used for financing activities . . . . . . . . . . . . . . . (496) (970) Effect of exchange rates on cash and cash equivalents. . . . . . . . . . . . . (2) (2) Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . 406 223 Cash and cash equivalents, beginning of period . . . . . . . . . . . . . . . . 1,259 714 Cash and cash equivalents, end of period . $ 1,665 $ 937 See notes to consolidated financial statements.
SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Amounts in millions, except per share figures) Basis of Presentation The unaudited financial statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission for reporting on Form 10-Q. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. These statements should be read in conjunction with the accounting policies and notes to consolidated financial statements included in the Company's 1998 Annual Report on Form 10-K. In the opinion of management, the financial statements reflect all adjustments necessary for a fair statement of the operations for the interim periods presented. Earnings Per Common Share The shares used for basic earnings per common share and diluted earnings per common share are reconciled as follows: Three Months Nine Months Ended Ended September 30, September 30, 1999 1998 1999 1998 Average shares outstanding for basic earnings per share . . 1,469 1,469 1,470 1,467 Dilutive effect of options and deferred stock units . . . . 15 21 17 20 Average shares outstanding for diluted earnings per share . 1,484 1,490 1,487 1,487 As of September 30, 1999, there were 9 million options outstanding with exercise prices higher than the average price of the Company's common stock during the third quarter of 1999. Accordingly, these options are not included in the dilutive effects indicated above. Inventories Inventories consisted of: September 30, December 31, 1999 1998 Finished products . . . . . . . $398 $483 Goods in process. . . . . . . . 328 174 Raw materials and supplies. . . 239 184 Total inventories . . . . . . $965 $841 Segment Reporting Schering-Plough is a worldwide research-based pharmaceutical company engaged in the discovery, development, manufacturing and marketing of pharmaceutical products. Discovery and development efforts target the field of human health. However, application in the field of animal health can result from these efforts. The Company views animal health applications as a means to maximize the return on investments in discovery and development. The Company operates primarily in the prescription pharmaceutical marketplace. However, the Company has sought regulatory approval to switch prescription products to over-the-counter (OTC) status as a means of extending a product's life cycle. In this way the OTC marketplace is yet another means of maximizing the return on investments in discovery and development. Effective January 1, 1999, the Company changed the structure of its internal organization to reflect this focus on pharmaceutical research and development. As a result, the Company will report as one segment. Previously, the Company was organized into two business units: pharmaceuticals and healthcare. New Accounting Pronouncement In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133, as amended by SFAS No. 137, requires adoption no later than January 1, 2001; the Company plans to adopt the new standard at that time. This statement is not expected to materially impact the Company's financial statements because management has not engaged in a formula-based program using derivative instruments to hedge market risks. Comprehensive Income Comprehensive income for the three months ended September 30, 1999 and 1998 was $532 and $436, respectively. Comprehensive income for the nine months ended September 30, 1999 and 1998 was $1,580 and $1,312, respectively. Legal and Environmental Matters The Company has responsibilities for environmental clean-up under various state, local and federal laws, including the Comprehensive Environmental Response, Compensation and Liability Act, commonly known as Superfund. At several Superfund sites (or equivalent sites under state law), the Company is alleged to be a potentially responsible party (PRP). The Company estimates its obligations for clean-up costs for Superfund sites based on information obtained from the federal Environmental Protection Agency, an equivalent state agency, and/or studies prepared by independent engineers, and on the probable costs to be paid by other PRPs. The Company records a liability for environmental assessments and/or clean-up when it is probable a loss has been incurred and the amount can reasonably be estimated. The Company is also involved in various other claims and legal proceedings of a nature considered normal to its business, including product liability cases. The estimated costs the Company expects to pay in these cases are accrued when the liability is considered probable and the amount can be reasonably estimated. Consistent with trends in the pharmaceutical industry, the Company is self-insured for certain events. The recorded liabilities for the above matters at September 30, 1999 were not material. Expected insurance recoveries have not been considered in determining the costs for environmental- related liabilities. Management believes that, except for the matters discussed in the following paragraphs, it is remote that any material liability in excess of the amounts accrued will be incurred. The Company is a defendant in more than 160 antitrust actions commenced (starting in 1993) in state and federal courts by independent retail pharmacies, chain retail pharmacies and consumers. The plaintiffs allege price discrimination and/or conspiracy between the Company and other defendants to restrain trade by jointly refusing to sell prescription drugs at discounted prices to the plaintiffs. One of the federal cases is a class action on behalf of approximately two-thirds of all retail pharmacies in the United States and alleges a price-fixing conspiracy. The Company agreed to settle the federal class action for a total of $22, which has been paid in full. The settlement provides, among other things, that the Company shall not refuse to grant discounts on brand- name prescription drugs to a retailer based solely on its status as a retailer and that, to the extent a retailer can demonstrate its ability to affect market share of a Company brand-name prescription drug in the same manner as a managed care organization with which the retailer competes, it will be entitled to negotiate similar incentives subject to the rights, obligations, exemptions and defenses of the Robinson-Patman Act and other laws and regulations. The United States District Court in Illinois approved the settlement of the federal class action on June 21, 1996. In June 1997, the Seventh Circuit Court of Appeals dismissed all appeals from that settlement, and it is not subject to further review. The defendants that did not settle the class action proceeded to trial in September 1998. The trial ended in November 1998 with a directed verdict in the defendants' favor. Three of the state antitrust cases have been certified as class actions. Two are class actions on behalf of certain retail pharmacies in California and Wisconsin, and the other is a class action in the District of Columbia, on behalf of consumers of prescription medicine. The Company has settled the retailer class action in Wisconsin and an alleged class action in Minnesota. The settlements of the state antitrust cases in Wisconsin and Minnesota have been approved by the respective courts. The settlement amounts were not significant. In addition, an action has been brought in Alabama purportedly on behalf of consumers in Alabama and several other states. Plaintiffs are seeking to maintain the action as a class action. Also, in August 1998, a class action was brought in Tennessee purportedly on behalf of consumers in Tennessee and several other states. The court has conditionally certified a class of consumers, but has stayed the case pending the resolution of an earlier-filed Tennessee case, which the Company has settled in principle. In April - June 1999, state consumer cases were filed in state courts in North Dakota, West Virginia and New Mexico. The Company has also recently settled the state consumer cases in all of the states except Alabama, Tennessee, North Dakota, West Virginia and New Mexico. Court approval of those settlements has been obtained. The settlement amounts were not material to the Company. In June 1999, the Alabama Supreme Court reversed the denial of a motion for judgment on the pleadings in one of the Alabama retailer cases. The court held that the Alabama antitrust law did not apply to conspiracies alleged to be in interstate commerce. The Company believes that this ruling should result in the dismissal of all of the Alabama state court cases. Plaintiffs in these antitrust actions generally seek treble damages in an unspecified amount and an injunction against the allegedly unlawful conduct. In May 1998, the Company settled six of the federal antitrust cases brought by 26 food and drug chain retailers and several independent retail stores. Plaintiffs in these cases comprise collectively approximately one-fifth of the prescription drug retail market. In April 1999, the Company settled federal antitrust cases brought by independent pharmacists and small pharmacy chains comprising about 2% of the prescription drug retail market. The settlement amounts were not material to the Company. In April 1997, certain of the plaintiffs in the federal class action commenced another purported class action in United States District Court in Illinois against the Company and the other defendants who settled the previous federal class action. The complaint alleges that the defendants conspired not to implement the settlement commitments following the settlement discussed above. The District Court has denied the plaintiffs' motion for a preliminary injunction hearing. The Company believes all the antitrust actions are without merit and is defending itself vigorously. On March 13, 1996, the Company was notified that the United States Federal Trade Commission (FTC) is investigating whether the Company, along with other pharmaceutical companies, conspired to fix prescription drug prices. The investigation is ongoing. The Company vigorously denies that it has engaged in any price- fixing conspiracy. The Company is a defendant in a state court action in Texas brought by Foxmeyer Health Corporation, the parent of a pharmaceutical wholesaler that filed for bankruptcy in August 1996. The case is against another pharmaceutical wholesaler and 11 pharmaceutical companies and alleges that the defendants conspired to drive the plaintiff's wholesaler subsidiary out of business. The complaint also alleged that the defendants defamed the wholesaler and interfered with its business. There are related actions pending in the Delaware bankruptcy proceedings of the wholesaler and certain of the plaintiff's claims against the Company have been dismissed. The Company believes that this action is without merit and is defending itself vigorously against all claims. In February 1998, Geneva Pharmaceuticals, Inc. (Geneva) submitted an Abbreviated New Drug Application (ANDA) to the U.S. Food and Drug Administration (FDA) seeking to market a generic form of CLARITIN in the United States several years before the expiration of the Company's patents. Geneva has alleged that certain of the Company's U.S. CLARITIN patents are invalid and unenforceable. The CLARITIN patents are material to the Company's business. In March 1998, the Company filed suit in federal court seeking a ruling that Geneva's ANDA submission constitutes willful infringement of the Company's patents and that its challenge to the Company's patents is without merit. The Company believes that it should prevail in the suit. However, as with any litigation, there can be no assurance that the Company will prevail. Copley Pharmaceutical, Inc. (Copley), Teva Pharmaceuticals, Inc. (Teva) and Novex Pharma (Novex) notified the Company in February, April and June 1999, respectively, that each had submitted an ANDA to the FDA seeking to market a generic form of CLARITIN Syrup in the United States before the expiration of certain of the Company's patents. Each has alleged that one of those patents is invalid and unenforceable. In March 1999, the Company filed suit in federal court seeking a ruling that Copley's ANDA submission and proposed marketing of a generic syrup constitute willful infringement of the Company's patent and that its challenge to the patent is without merit. The Company also sued Teva in June 1999 asking for the same relief. The Company has filed a similar suit in federal court concerning the Novex ANDA submission. In May 1999, the Company received notice from Zenith Goldline Pharmaceuticals (Zenith) that it had submitted an ANDA to the FDA for generic CLARITIN tablets. In June 1999, the Company filed suit in federal court in New Jersey seeking a ruling that Zenith's ANDA submission and proposed marketing of a generic tablet constitute willful infringement of the Company's patent and that Zenith's challenge to the patent is without merit. The Company believes that it should prevail in these suits. However, as with any litigation, there can be no assurance that the Company will prevail. The Company is a party to an arbitration filed by Biogen, Inc. (Biogen) in a dispute over the method used by Biogen to determine the amount of royalties payable to Biogen on sales of REBETRON Combination Therapy containing REBETOL Capsules and INTRON A Injection. The Company believes that it will prevail in this arbitration. However, there can be no assurance that the Company will prevail. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations - three and nine months ended September 30, 1999 compared with the corresponding periods in 1998. Net Sales Consolidated net sales for the third quarter advanced $250 million or 13 percent compared with the same period in 1998. For the nine months, net sales rose $855 million or 14 percent over 1998. Exchange rate fluctuations had no impact on the net sales for the three or nine-month periods. Net sales by major therapeutic category for the third quarter and nine months were as follows ($ in millions): Third Quarter Nine Months 1999 1998 % 1999 1998 % Allergy & Respiratory $ 980 $ 864 13 $2,970 $2,579 15 Anti-infectives & Anticancer 413 319 29 1,243 902 38 Dermatologicals 186 134 38 497 463 7 Cardiovasculars 161 175 (8) 493 556 (11) Other Pharmaceuticals 171 171 3 576 461 26 Animal Health 161 161 0 486 475 2 Foot Care 93 93 (1) 276 264 5 OTC 60 57 5 165 161 2 Sun Care 11 12 (2) 167 157 6 Consolidated Net Sales $2,236 $1,986 13 $6,873 $6,018 14 Worldwide net sales of allergy and respiratory products advanced 13 percent in the quarter and 15 percent for the nine-month period due to continued strong market growth of the CLARITIN line of nonsedating antihistamines. Worldwide net sales of the CLARITIN brand totaled $716 million and $2,100 million for the quarter and nine months, respectively, compared with $635 million and $1,758 million for the corresponding periods in 1998. Franchise sales of nasal inhaled steroid products, which include VANCENASE allergy products and NASONEX, a once-daily corticosteroid for allergies, increased in the quarter and year- to-date due to market expansion in the U.S. and international markets. Net sales of anti-infective and anticancer products worldwide increased 29 percent in the quarter and 38 percent for the nine months, primarily due to the 1998 U.S. introduction of REBETRON Combination Therapy containing REBETOL Capsules and INTRON A Injection for the treatment of chronic hepatitis C in both relapsed and previously untreated (naive) patients. International sales of INTRON A (including combination therapy with REBETOL) also contributed to the sales increase in the third quarter and nine months due to the 1998 launch of INTRON A solution in a multidose pen in several European markets and the 1999 launch of REBETOL in certain markets. Dermatological products' worldwide net sales rose 38 percent in the quarter due to timing of trade buying and 7 percent for the first nine months due to market share growth. Worldwide sales of cardiovascular products decreased 8 percent for the quarter and 11 percent for the nine months primarily in the U.S. due to generic competition for IMDUR, an oral nitrate for angina and NORMODYNE, an alpha-beta blocker for hypertension. Partially offsetting these declines in both periods were higher U.S. sales of INTEGRILIN injection, a platelet receptor glycoprotein inhibitor, following its launch in the second quarter of 1998 and K-DUR, a sustained-release potassium supplement, due to stronger script demand. Other pharmaceuticals consist of products that do not fit into the Company's major therapeutic categories and include contract manufacturing and alliance revenues. Costs and Expenses Cost of sales as a percentage of sales decreased slightly to 19.6 percent in the quarter and 19.5 percent for the first nine months from 19.9 percent in both periods of 1998. The slight decrease in the overall rate is primarily due to better product mix. Selling, general and administrative expenses represented 36.4 percent of sales in the third quarter of 1999, a decrease when compared with 38.4 percent last year. For the nine-month period, the ratio decreased to 37.4 percent versus 38.3 percent in 1998. The decrease was primarily driven by the timing of promotional spending. Research and development spending rose 19 percent in the third quarter representing 13.6 percent of sales compared with 12.9 percent in 1998. For the first nine months of 1999 spending increased 16 percent and represented 12.6 percent of sales, compared to 12.3 percent in 1998. The higher spending in 1999 reflects the Company's funding of both internal research efforts and research collaborations with various partners to develop a steady flow of innovative products. The Company expects research and development spending for 1999 to increase more than 15 percent over prior year spending. The effective tax rate was 24.5 percent in the three and nine month periods of both 1999 and 1998. Diluted earnings per common share grew 21 percent in the third quarter to $.35 from $.29 in 1998. For the nine-month period, diluted earnings per common share increased 20 percent from $.90 last year to $1.08. Basic earnings per common share advanced 21 percent in the quarter and 20 percent in the nine-month period. Foreign currency exchange rate changes had no impact on basic or diluted earnings per common share for the third quarter of 1999. Excluding exchange, diluted earnings per share for the first nine months of 1999 would have increased 19 percent when compared to the same period in 1998. Additional Factors Influencing Operations In the United States, many of the Company's pharmaceutical products are subject to increasingly competitive pricing as managed care groups, institutions, government agencies and other buying groups seek price discounts. In most international markets, the Company operates in an environment of government- mandated cost containment programs. Several governments have placed restrictions on physician prescription levels and patient reimbursements, emphasized greater use of generic drugs and enacted across-the-board price cuts as methods of cost control. Since the Company is unable to predict the final form and timing of any future domestic and international governmental or other health care initiatives, their effect on operations and cash flows cannot be reasonably estimated. The market for pharmaceutical products is competitive. The Company's operations may be affected by technological advances of competitors, patents granted to competitors, new products of competitors and generic competition as the Company's products mature. In addition, patent positions can be highly uncertain and an adverse result in a patent dispute can preclude commercialization of products or negatively affect sales of existing products. The effect on operations of competitive factors and patent disputes cannot be predicted. Uncertainties inherent in government regulatory approval processes, including among other things delays in approval of new products, may also affect the Company's operations. The effect on operations of regulatory approval processes cannot be predicted. Liquidity and financial resources - nine months ended September 30, 1999 Cash generated from operations continues to be the Company's major source of funds to finance working capital, additions to property, shareholder dividends and common share repurchases. Cash provided by operating activities was $1,324 million for the first nine months of 1999, a decrease of $204 million from 1998. The decrease in 1999 is primarily due to increases in accounts receivable because of timing of collections and an increase in inventories because of specific actions to stockpile certain products. Cash flow related to financing activities included equity proceeds as well as proceeds from short-term borrowings. In October 1997, the Board of Directors authorized the repurchase of $1 billion of the Company's common shares. As of September 30, 1999 this program was approximately 62 percent complete. In April 1999, the Board of Directors increased the quarterly dividend by 14 percent to $.125 from $.11 per common share. In September 1998, the Board of Directors authorized a 2-for-1 stock split of the Company's common shares. The distribution of the split shares was made on December 2, 1998, to the shareholders of record at the close of business on November 6, 1998. Certain 1998 amounts have been restated to reflect this stock split. The Company's liquidity and financial resources continue to be sufficient to meet its operating needs. Year 2000 Historically, many computer systems ("IT systems") and equipment and instruments with embedded microprocessors ("non-IT systems") were designed to recognize only the last two digits of a calendar year. Without remediation, these systems and microprocessors could, in the near future, encounter operating problems due to their inability to distinguish years after 1999 from years preceding 1999. As a result, the Company undertook an extensive project to remediate or replace its date-sensitive IT systems and non-IT systems. The project involves four phases: (1) compiling an inventory of IT and non-IT systems; (2) distinguishing "critical" systems from "non-critical" systems; (3) remediating or replacing IT and non- IT systems; and (4) testing the remediated or replaced IT and non-IT systems. "Critical" systems for this purpose include systems that may affect health and safety, product manufacturing, product distribution, customer service and certain research systems. The following chart indicates the estimated state of completion of each phase of this project as of September 30, 1999: IT Systems Non-IT Systems Inventory systems 100% 100% Identify critical and non-critical systems 100% 100% Remediate or replace systems 100% 99% Testing systems 100% 99% The last two lines of the preceding table exclude non-critical, non-IT equipment used in our research operations because the Company has concluded that any failure of such equipment will not adversely affect the Company's operations. Repairs or replacements of this non-critical, non-IT equipment will continue into the year 2000. The Company expects to complete all phases of this project for all critical, non-IT systems by December 31, 1999. The estimated maximum cost of the Year 2000 project is approximately $95 million. Approximately 55 percent of the $95 million will be of an expense nature and 45 percent will be for capitalizable replacements. As of September 30, 1999, $62 million of the $95 million has been incurred; $18 million has been capitalized and $44 million has been expensed. This $95 million cost estimate includes the estimated cost to repair or replace non-critical, non-IT equipment some of which will be spent in the year 2000. No other significant information systems projects have been deferred as a result of the Company's Year 2000 project. The book value of computers, software and equipment that will need to be written-off as a result of not being Year 2000 compliant is immaterial. The Company's internal auditors have regularly reviewed progress on the Year 2000 project and provided evaluations of the Company's readiness to senior management. Management believes that the Year 2000 issue will not have a material adverse effect on the Company's internal operating systems. However, the Company's operations may be impacted in the event that computer disruption is encountered by third parties with whom the Company conducts significant business. These third parties include wholesalers, distributors, managed care organizations, hospitals, suppliers, clinical researchers, research partners and government agencies. The Company has been communicating with these third parties concerning their state of readiness. However, the Company can provide no assurance that these third parties will not experience business disruption. The Company currently believes that the most reasonably likely worst case scenario concerning the Year 2000 involves potential business disruption among the third parties with whom it conducts significant business. If a number of these third parties (including, in particular, wholesalers, managed care organizations and clinical researchers) experience business disruption due to a Year 2000 computer problem, the Company's results of operations and cash flows could be materially adversely affected. The Company has developed contingency plans to address potential business disruptions at these third parties. Contingency planning includes increased inventory levels, establishing secondary sources of supply and manufacturing and maintaining backup lines of communications with our customers. However, it is unlikely that any contingency plan can fully mitigate the impact of significant business disruptions among these third parties. Certain third parties, such as retail pharmacies and wholesalers, may order extra inventory as part of their contingency planning. The impact to the Company of such contingency planning by third parties cannot be predicted. The estimates and conclusions in this description of the Year 2000 issue contain forward looking statements and are based on management's estimates of future events. Risks to completing the Year 2000 project include the continued availability of resources and qualified information systems personnel. Cautionary Statements for Forward Looking Information Management's discussion and analysis set forth above contains certain forward looking statements, including statements regarding the Company's financial position and results of operations. These forward looking statements are based on current expectations. Certain factors have been identified by the Company in Exhibit 99 of the Company's December 31, 1998, Form 10-K filed with the Securities and Exchange Commission, which could cause the Company's actual results to differ materially from expected and historical results. Exhibit 99 from the Form 10-K is incorporated by reference herein. Item 3. Market Risk Disclosures As discussed in the 1998 Annual Report to Shareholders, the Company's exposure to market risk from changes in foreign currency exchange rates and interest rates, in general, is not material. PART II OTHER INFORMATION Item 1. Legal Proceedings The Company is a party to an arbitration filed by Biogen, Inc. (Biogen) in a dispute over the method used by Biogen to determine the amount of royalties payable to Biogen on sales of REBETRON Combination Therapy containing REBETOL Capsules and INTRON A Injection. The Company believes that it will prevail in this arbitration. However, there can be no assurance that the Company will prevail. Item 6. Exhibits and Reports on Form 8-K a) Exhibits - The following Exhibits are filed with this document: Exhibit Number Description 10(a) - Form of amendment to form of employment agreement between the Company and its executive officers effective upon a change of control 10(b) - Amended and Restated Directors' Deferred Compensation Plan 10(c) - Amended and Restated Directors' Stock Award Plan 10(d) - Amended and Restated Directors' Deferred Stock Equivalency Program 27 - Financial Data Schedule 99 - Company Statement Relating to Forward Looking Information b) Reports on Form 8-K: No report was filed during the three months ended September 30, 1999. SIGNATURE(S) Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Schering-Plough Corporation (Registrant) Date November 11, 1999 /s/Thomas H. Kelly Thomas H. Kelly Vice President and Controller S:\2188\3rd qtr 99 10 Q.doc 11/11/99 10:38 AM S:\2188\3rd qtr 99 10 Q.doc 11/11/99 10:38 AM - 3 - S:\2188\3rd qtr 99 10 Q.doc 11/11/99 10:38 AM - 14 - EX-27 2
5 This schedule contains financial data extracted from Schering-Plough Corporation and Subsidiaries consolidated financial statements for the nine months ended September 30, 1999, and is qualified in its entirety by reference to such financial statements. 1,000,000 9-MOS DEC-31-1999 SEP-30-1999 1665 0 1068 0 965 4790 4277 1451 9060 3310 0 0 0 1015 3725 9060 6873 6873 1342 1342 864 0 0 2125 521 1604 0 0 0 1604 1.09 1.08
EX-99 3 Exhibit 99 Company Statement Relating to Forward Looking Information From press release by the Company dated October 20, 1999 (Filed Pursuant to Rule 175) Mr. Richard J. Kogan, Chairman and Chief Executive Officer, commenting on the Company's business results, stated "For the full year, we expect that the increase in Schering-Plough's 1999 earnings per share will approach 20 percent." A:\3rd qtr 1999 10Q Exhibit 99.doc EX-10 4 Exhibit 10 (a) FIRST AMENDMENT TO EMPLOYMENT AGREEMENT THIS FIRST AMENDMENT (this "Amendment") to the Employment Agreement by and between SCHERING-PLOUGH CORPORATION, a New Jersey corporation (the "Company"), and [name] (the "Executive") dated as of [date] (the "Employment Agreement"), is made and entered into as of this 28th day of September, 1999. WHEREAS, the Company and the Executive wish to amend the Employment Agreement as set forth below; NOW, THEREFORE, IN CONSIDERATION of the mutual promises, covenants and agreements set forth below, it is hereby agreed as follows: 1. There is added to, and made a part of, the Employment Agreement a new subparagraph (a)(iv) of Section 6 reading in its entirety as follows: (iv) Notwithstanding anything to the contrary in any employee pension benefit plan or any supplemental or excess employee pension benefit plan of the Company (including without limitation the Retirement Plan, the SERP, the Company's Retirement Benefits Equalization Plan (the "BEP") or any successor or replacement plan thereto), all benefits payable to the Executive under any supplemental or excess employee pension benefit plan of the Company (including without limitation the SERP, the BEP or any successor or replacement plan thereto) following a Change of Control (as defined therein) if, on the Date of Termination, the Executive is then age 50 or over shall not be reduced by any "reduction factors" or similar formulae or otherwise because such benefits are payable prior to a specified age or because the Executive has not yet reached a specified age (including, without limitation, the Executive's earliest or normal retirement age under the terms of the relevant plan). 2. There is added to, and made a part of, the Employment Agreement a new subparagraph (a)(v) of Section 6 reading in its entirety as follows: (v) In addition to the benefits provided in subparagraph (a)(ii) of this Section 6, if the Executive is age 45 or over on the Date of Termination, the Executive shall, upon attainment of age 55 and upon termination of the three year period after the Executive's Date of Termination, become eligible for all benefits under medical plans, practices, policies and programs made available immediately prior to the Date of Termination (or, if greater, immediately prior to the Effective Date) to retired peer executives of the Company (including without limitation any supplemental coverage under the Executive Medical Benefits Plan) as if the Executive had at the Date of Termination satisfied the age and service conditions for coverage under the applicable provisions of such plans, practices, policies and programs. If the Company is unable to provide the Executive with coverage under such plans, practices, policies and programs, the Company shall provide the Executive with separate comparable coverage but in no event less favorable, in the aggregate, than the most favorable of such plans, practices, policies and programs in effect for retirees immediately prior to the Effective Date. 3. Except as provided above, the Employment Agreement shall continue in effect without alteration as in effect on the date hereof. The Employment Agreement, as amended by this Amendment, constitutes the entire agreement of the parties and supersedes all prior agreements and understandings with respect to the subject matter hereof and thereof. IN WITNESS WHEREOF, the Executive and, pursuant to due authorization from its Board of Directors, the Company have caused this Amendment to be executed as of the day and year first above written. _______________________ [Executive] SCHERING-PLOUGH CORPORATION _______________________ Richard Jay Kogan Chairman of the Board and Chief Executive Officer 1 - -2- A:\emplmt agmt revision 11 10 99.doc EX-10 5 SCHERING-PLOUGH CORPORATION DIRECTORS DEFERRED COMPENSATION PLAN As amended to October 26, 1999 I. Purpose To provide a plan of deferred compensation for members of the Board of Directors ("Directors") of Schering-Plough Corporation (the "Corporation") in which Board of Directors and Board of Directors Committee annual retainers and/or meeting fees may be deferred. II. Effective Date The effective date of the Plan is July 1, 1986 (the "Effective Date"). III. Election of Deferral A. Prior to the Effective Date in the case of the first calendar year, and on or before the thirty-first day of December preceding any subsequent calendar year, an incumbent director may, and prior to election, a nominee for director may, instruct the Corporation, by delivery of written notice, to irrevocably defer payment of all or any part of any meeting fees or annual retainers otherwise payable to the Director (the "Deferred Amounts") for services rendered during the forthcoming partial or whole calendar year, as the case may be, to one or both funds of an account (the "Deferred Account") established on the books of the Corporation. B. At least one year prior to the date on which a Director will terminate service as a Director, he or she may elect to receive payment in cash of his or her Deferred Account upon termination of service, either in (i) a lump sum upon termination of service or any anniversary thereof up to the twentieth anniversary or (ii) in approximately equal annual installments of up to twenty (20) years. If a Director elects a lump sum payment immediately upon termination of service or installment payments, such payment or payments shall be made or commence, as the case may be, within thirty (30) days following the termination of service. If no such election is timely made, then payment of his or her Deferred Account shall be made in a lump sum within 30 days following the termination of service. Any such election shall be delivered in writing to the Secretary of the Corporation and the latest such election which is made at least one year prior to the date of termination of service shall be deemed final and irrevocable. C. For purposes of this Section, meeting fees shall be deemed payable on the date of the respective meetings, and the annual retainer shall be deemed to be payable in four equal installments on the first day of each quarter. IV. Deferred Accounts A. The Deferred Account shall consist of the following two funds: 1. The Simple Interest Fund. A fund on which Deferred Amounts shall earn simple interest equal to the interest rate offered by Chase Manhattan Bank, New York, New York, to its respective preferred risk commercial borrowers, as published by said bank from time to time. 2. The Schering-Plough Stock Equivalency Fund. A fund established to record the hypothetical number of shares of Schering-Plough Corporation Common Stock which would have accrued had the Deferred Amounts and any hypothetical dividends on such shares been invested in said stock as of the close of the business day when said Deferred Amounts and/or dividends are payable. For purposes of determining any amount payable hereunder, the Deferred Account shall be valued as of the date immediately preceding any date of payment. With respect to the Schering-Plough Stock Equivalency Fund, said value shall be the closing price on the New York Stock Exchange of Schering- Plough Common Stock on such valuation date, or if no trading occurs on such date, on the next preceding date on which trading occurs. B. A Director may elect once during each calendar year to reallocate all or a portion of his deferred amounts to the Schering-Plough Stock Equivalency Fund by delivering such election in writing to the Secretary of the Corporation. Such reallocation shall be effective upon receipt of such election by the Secretary, or upon such later date as may be designated in such election by the Director. A Director may also elect by prior written notice to the Secretary of the Corporation to reallocate, as of the date of his termination of service as Director, all or a portion of the funds in the Deferred Accounts which are to be paid in annual installments or in a deferred lump sum payment pursuant to Section III-B. V. Special Provisions A. At the request of a former Director who has elected to receive a deferred lump sum payment or installment payments pursuant to Section III-B, the Executive Compensation and Organization Committee of the Board of Directors, or any successor committee thereto, may, in its discretion, accelerate payment of any such installment or lump sum upon a finding of severe financial hardship resulting from the illness of or an unexpected accident or casualty to the former Director or a member of his or her family or to his or her property, or due to other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the former Director. A severe financial hardship shall not exist to the extent the loss or expense is covered by insurance or can be met by the sale of other liquid assets of the former Director. Unforeseeable hardship shall not include the college expenses of a child or the costs of purchasing a residence. B. In the event of the death of a Director, the Corporation shall pay in a lump sum on the 60th day thereafter the balance of his Deferred Account to such beneficiary or beneficiaries as the Director may have designated in writing or, in the event a beneficiary has not been so designated, to the Director's estate. VI. Miscellaneous A. The amounts credited to the Deferred Account shall constitute an unsecured claim against the general funds of the Corporation. B. No right or interest of the Director, his beneficiary, or estate, established herein, shall be assignable or transferable in whole or in part, either directly or by operation of law or otherwise, including, but not by way of limitation, execution, levy, garnishment, attachment, pledge, bankruptcy, or in any other manner, and no right or interest established herein shall be liable for, or subject to, any obligation or liability of the Director. C. Except as herein provided, this Plan shall be binding upon the parties hereto, their heirs, executors, administrators, successors (including but not limited to successors resulting from any corporate merger) or assigns. D. This Plan may be amended or terminated at any time by the Corporation, but no such termination or amendment shall adversely affect a Director's rights and benefits under this Plan, except with his consent. E. This Plan shall be construed in accordance with the laws of the State of New Jersey. Exhibit 10(b) -8- EX-10 6 DIRECTORS' STOCK AWARD PLAN (Amended by Board of Directors to October 26, 1999) 1. The purposes of the Directors Stock Award Plan are (a) to attract and retain highly qualified individuals to serve as Directors of Schering-Plough Corporation (the "Corporation"), (b) to relate non-employee Directors' compensation more closely to the Corporation's performance and its shareholders' interests, and (c) to increase non- employee Directors' stock ownership in the Corporation. 2. The Plan shall become effective on June 28, 1988 (the "Effective Date"). 3. Upon the Effective Date, all incumbent non-employee Directors will receive 100 shares of Common Stock of the Corporation for each year or partial year remaining in his or her current term of directorship. 4. From and after October 26, 1999, each non-employee Director shall receive 2500 shares of Common Stock of the Corporation on the day following each Annual Meeting of Shareholders of the Corporation. Newly eligible non- employee Directors shall receive a pro rata portion of such award for the applicable term pending the next succeeding Annual Meeting of Shareholders. 5. If the outstanding Common Stock of the Corporation shall at any time be changed or exchanged by declaration of a stock dividend, stock split, combination of shares, recapitalization, merger, consolidation or other corporate reorganization in which the Corporation is the surviving corporation, the number of shares distributable pursuant to Section 4 shall be appropriately and equitably adjusted. 6. All shares of Common Stock of the Corporation to be used for purposes of this Plan shall be treasury shares. 7. Upon receiving a distribution of shares pursuant to this Plan, the Director may be required to represent in writing that he or she is acquiring such shares for his or her account for investment and not with a view to, or for sale in connection with, the distribution of any part thereof. The certificate for such shares may include any legend which the Corporation deems appropriate to reflect any restrictions on transactions. 8. This Plan shall be construed in accordance with the laws of the State of New Jersey and may be amended or terminated at any time by action of the Board of Directors of the Corporation; provided, however, that this Plan shall not be amended more than once every six months, other than to comport with changes in the Internal Revenue Code, the Employee Retirement Income Security Act, or the rules thereunder. -2- Exhibit 10(c) EX-10 7 SCHERING-PLOUGH CORPORATION DIRECTORS DEFERRED STOCK EQUIVALENCY PROGRAM (Approved and adopted by the Board of Directors on September 24, 1996, effective January 1, 1997, as amended to October 26, 1999) I. Purpose The purposes of the Schering-Plough Corporation Directors Deferred Stock Equivalency Program ("Program") are (a) to attract and retain highly qualified individuals to serve as Directors of Schering-Plough Corporation ("Corporation") and (b) to relate non-employee Directors' interests more closely to the Corporation's performance and its shareholders' interests. II. Effective Date The effective date of the Schering-Plough Corporation Directors Deferred Stock Equivalency Program is January 1, 1997 ("Effective Date"). III. Participation From and after the Effective Date, each Director shall be a participant in the Program throughout his or her term of service as a Director; except that any Director who has attained age 72 prior to the Effective Date or is entitled to receive employee pension benefits from the Corporation or any of its subsidiaries shall not be a participant in the Program. Directors who are participants in the Program shall be entitled, effective as of the Effective Date, to transfer to their account in the Program ("Deferred Account") by an election made prior to the Effective Date the lump-sum present value of their earned benefits under the Corporation's Pension Plan for Directors based on service through December 31, 1996. For purposes of calculating the lump-sum present value of earned pension benefits, a discount rate of seven percent per annum shall be used. IV. Amount of Deferral The Company shall credit an amount equal to $25,000 to each participant's Deferred Account annually as of January 1; except that in the case of any Director who is or will be a participant in the Program for a portion of a calendar year, a pro rata portion of $25,000 shall be credited to the Deferred Account of such Director. Such pro rata amount, if applicable, shall be credited as of the date on which the Director becomes a participant in the Program or, in the case of a Director expected to retire in a given calendar year, as of January 1 of such calendar year. In addition, amounts transferred by a Director from the Pension Plan for Directors to this Program pursuant to Article III hereof shall be credited to the Director's Deferred Account as of the Effective Date. For purposes hereof, "Deferred Amounts" shall mean all amounts credited to a Director's Deferred Account. V. Deferred Account (a) The Corporation shall establish a separate Deferred Account for each participant. Deferred Amounts shall be expressed and credited to each participant's Deferred Account in terms of units ("Units"). As of each date on which Deferred Amounts are credited to a participant's Deferred Account, the Corporation shall credit to such Deferred Account a number of Units and fractional Units determined by dividing the Deferred Amounts credited by the Unit Value (as defined below) of one share of the Corporation's Common Shares. The "Unit Value" of one share of the Corporation's Common Shares shall be the closing price of one share of the Corporation's Common Shares on the New York Stock Exchange on the day on which Deferred Amounts are credited or a payment is to be valued under Article VI (b) below, as the case may be; or if there were no sales on that day, then the closing price on the New York Stock Exchange on the nearest preceding day on which there were sales. Deferred Amounts transferred from the Pension Plan for Directors shall be credited as of the Effective Date. (b) When dividends are paid with respect to the Corporation's Common Shares, the Corporation shall calculate the amount which would have been payable in cash or property on the Units in each participant's Deferred Account on each dividend payment date as if each Unit represented one issued and outstanding share of the Corporation's Common Shares. The applicable number of Units and fractional Units equal to the amount of such dividends (based on the Unit Value of one share of the Corporation's Common Shares on the dividend payment date) shall be credited to each participant's Deferred Account. In the event of any capital stock adjustment to the Corporation's Common Shares or other appropriate event or circumstance, the number of Units or fractional Units credited to Deferred Accounts shall be correspondingly adjusted as of the date of such capital stock adjustment or other event or circumstance. VI. Payment of Benefits (a) Except as provided in Article VII below, the value of a participant's Deferred Account shall be payable solely in cash, either in (i) a lump sum upon termination of service or any anniversary thereof up to the twentieth anniversary, or (ii) in approximately equal annual installments of up to 20 years in accordance with an election made by the participant by written notice to the Corporation given at least one year prior to the date on which a Director will terminate service as a Director. If the participant elects a lump sum payment immediately upon termination of service or installment payments, such payment or payments shall be made or commence, as the case may be, within 30 days following the termination of service as Director. (b) Any lump sum payment shall be valued as of the end of the most recent calendar month prior to the payment date. The amount of each installment payment shall be determined by dividing the aggregate Unit Value of the Units credited to the participant's Deferred Account valued as of the end of the most recent calendar month prior to the payment date by the remaining number of unpaid installments; provided, however, that the Corporation's Executive Compensation and Organization Committee may, in its absolute discretion, approve any other method of determining the amount of each installment payment in order to achieve approximately equal installment payments over the installment period. VII. Death of Participant In the event of the death of a Director, the Corporation shall pay in a lump sum on the 60th day thereafter the balance of his or her Deferred Account to such beneficiary or beneficiaries as the Director may have designated in writing or, in the event a beneficiary has not been so designated, to the Director's estate. VIII. Miscellaneous A. The amounts credited to the Deferred Account shall constitute an unsecured claim against the general funds of the Corporation. B. The Program is unfunded, and the Corporation will make Plan benefit payments solely on a current disbursement basis; provided, however, the Corporation shall provide alternative sources of benefit payments under this Program through one or more grantor trusts. The existence of any such trust or trusts shall not relieve the Corporation of any liability to make benefit payments under this Program, but to the extent any benefit payments are made from any such trust, such payment shall be in satisfaction of and shall reduce the Corporation's liabilities under this Program. C. No right or interest of the Director, his beneficiary, or estate, established herein, shall be assignable or transferable in whole or in part, either directly or by operation of law or otherwise, including, but not by way of limitation, execution, levy, garnishment, attachment, pledge, bankruptcy, or in any other manner, and no right or interest established herein shall be liable for, or subject to, any obligation or liability of the Director. D. Except as herein provided, this Program shall be binding upon the parties hereto, their heirs, executors, administrators, successors (including but not limited to successors resulting from any corporate merger) or assigns. E. This Program may be amended or terminated at any time by the Board of Directors of the Corporation, but no such termination or amendment shall adversely affect a Director's rights and benefits under this Plan, except with his consent. F. This Program shall be construed in accordance with the laws of the State of New Jersey. -9- Exhibit 10(d) -----END PRIVACY-ENHANCED MESSAGE-----