-----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, WBv8VQD1LpuG/uMg3MyjHDyNJHCU2RltWPG433tVOwB+YcD1Me1B1kN1Ss+evTEy LpydQlm2yJu4ZwW4CglpSA== 0000005187-99-000005.txt : 19990330 0000005187-99-000005.hdr.sgml : 19990330 ACCESSION NUMBER: 0000005187-99-000005 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 16 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990329 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN HOME PRODUCTS CORP CENTRAL INDEX KEY: 0000005187 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 132526821 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-01225 FILM NUMBER: 99576215 BUSINESS ADDRESS: STREET 1: 5 GIRALDA FARMS CITY: MADISON STATE: NJ ZIP: 07940 BUSINESS PHONE: 9736605835 MAIL ADDRESS: STREET 1: 5 GIRALDA FARMS CITY: MADISON STATE: NJ ZIP: 07940 10-K405 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended Commission file number December 31, 1998 1-1225 AMERICAN HOME PRODUCTS CORPORATION (Exact name of registrant as specified in its charter) Delaware 13-2526821 (State or other jurisdiction of (I.R.S. Employer Identification incorporation or organization) Number) Five Giralda Farms, Madison, NJ 07940-0874 (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code (973) 660-5000 Securities registered pursuant to Section 12(b) of the Act: Name of Each Exchange On Title of Each Class Which Registered $2 Convertible Preferred Stock, $2.50 par value New York Stock Exchange Common Stock, $.33 - 1/3 par value New York Stock Exchange Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] State the aggregate market value of the voting stock held by nonaffiliates of the registrant. (The aggregate market value shall be computed by reference to the price at which the stock was sold, or the average bid and asked prices of such stock, as of a specified date within 60 days prior to the date of filing). Aggregate market value at March 15, 1999 $87,622,827,443 Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date (applicable only to corporate registrants). Outstanding at March 15, 1999 Common Stock, $0.33 - 1/3 par value 1,311,379,350 Documents incorporated by reference: list hereunder the following documents if incorporated by reference and the part of the Form 10-K into which the document is incorporated: (1) any annual report to security holders; (2) any proxy or information statements; and (3) any prospectus filed pursuant to Rule 424(b) or (c) under the Securities Act of 1933 (the listed documents should be clearly described for identification purposes). (1) 1998 Annual Report to Shareholders - In Parts I, II and IV (2) Proxy Statement filed March 18, 1999 - In Part III PART I ITEM 1. BUSINESS General American Home Products Corporation (the "Company" or "AHPC"), a Delaware corporation organized in 1926, is currently engaged in the discovery, development, manufacture, distribution and sale of a diversified line of products in three primary businesses: Pharmaceuticals, Consumer Health Care and Agricultural Products. Pharmaceuticals include branded and generic ethical pharmaceuticals, biologicals, nutritionals, and animal biologicals and pharmaceuticals. Principal products include women's health care products, cardiovascular products, neuroscience therapies, anti-inflammatory and gastroenterology drugs, anti-infectives, vaccines, biopharmaceuticals, oncology therapies and infant nutritionals. Principal animal health products include vaccines, pharmaceuticals, endectocides and growth implants. Consumer Health Care products include analgesics, cough/cold/allergy remedies, nutritional supplements including vitamins, minerals and herbal products, and hemorrhoidal, antacid and asthma relief items sold over-the-counter. Agricultural Products include crop protection and pest control products such as herbicides, insecticides, fungicides and plant growth regulators. In July 1998, the Company purchased the vitamin and nutritional supplement products business of Solgar Vitamin and Herb Company Inc. and its related affiliates ("Solgar") for approximately $425 million in cash. In February 1998, the Company sold the Sherwood-Davis & Geck medical devices business for approximately $1.770 billion. This transaction completed the Company's exit from the medical devices business. In December 1997, the Company sold the stock of Storz Instrument Company and affiliated companies, a global manufacturer and marketer of ophthalmic products, and certain related assets for approximately $380 million. In February 1997, the Company purchased the worldwide animal health business of Solvay S.A. for approximately $460 million. In December 1996, the Company purchased the remaining equity interest in the biopharmaceutical company, Genetics Institute, Inc. ("G.I."), that it did not already own for approximately $1.279 billion. In November 1996, the Company sold a majority interest in the American Home Foods business for approximately $1.209 billion. The Company initially retained a 20% equity interest in International Home Foods, the successor to American Home Foods. During 1998 and 1997, the Company sold its remaining equity interest in International Home Foods. I-1 In late 1994, the Company purchased the outstanding common stock of American Cyanamid Company ("Cyanamid"). The aggregate purchase price to acquire all of Cyanamid including acquisition-related fees and expenses was approximately $9.6 billion. Additional information relating to the Solgar, Solvay S.A., and G.I. acquisitions, the Sherwood-Davis & Geck, Storz and American Home Foods dispositions, and certain other acquisitions and divestitures is set forth in Notes 2 and 3 of the Notes to Consolidated Financial Statements in the Company's 1998 Annual Report to Shareholders and is incorporated herein by reference. Unless stated to the contrary, or unless the context otherwise requires, references to the Company in this report include American Home Products Corporation and its majority-owned subsidiaries. Operating Segments Financial information, by operating segment, for the three years ended December 31, 1998 is set forth in Note 11 of the Notes to Consolidated Financial Statements in the Company's 1998 Annual Report to Shareholders and is incorporated herein by reference. The Company is not dependent on any single or major group of customers for its sales. The Company has four reportable segments as outlined below. The product designations appearing in differentiated type herein are trademarks. PHARMACEUTICALS SEGMENT - The Pharmaceuticals segment manufactures, distributes, and sells branded and generic ethical pharmaceuticals, biologicals, nutritionals, and animal biologicals and pharmaceuticals. These products are promoted and sold worldwide primarily to wholesalers, pharmacies, hospitals, physicians, retailers, veterinarians and other human and animal health care institutions. Some of these sales are made to large buying groups representing certain of these customers. Principal product categories for human use and their respective products are: women's health care products including PREMARIN, PREMPRO, PREMPHASE, LO/OVRAL (marketed as MIN-OVRAL internationally), NORDETTE and TRIPHASIL (marketed as TRINORDIOL internationally); infant nutritionals including S26 and 2ND AGE PROMIL (international markets only); cardiovascular products including CORDARONE and ZIAC; neuroscience therapies including ATIVAN, EFFEXOR and EFFEXOR XR; anti-inflammatory and gastroenterology drugs including LODINE and ZOTON (international markets only); anti-infectives including MINOCIN and ZOSYN (marketed as TAZOCIN internationally); vaccines; biopharmaceuticals including BENEFIX Coagulation Factor IX (Recombinant) and recombinant Factor VIII; and oncology therapies. Principal animal health product categories include vaccines, pharmaceuticals (including anthelmintics), endectocides including CYDECTIN, and growth implants. The Company manufactures these products in the United States and Puerto Rico and in 21 foreign countries. I-2 Sales of women's health care products in the aggregate, and the PREMARIN family of products individually, accounted for more than 10% of consolidated net sales in 1998. Sales of women's health care products in the aggregate accounted for more than 10% of consolidated net sales in 1997 and 1996. Operating income before taxes from women's health care products in the aggregate, and the PREMARIN family of products individually, accounted for more than 10% of consolidated operating income before taxes in 1998, 1997 and 1996. Except for the products noted above, no other single pharmaceutical product or category of products accounted for more than 10% of consolidated net sales or operating income before taxes in 1998, 1997 or 1996. CONSUMER HEALTH CARE SEGMENT - The Consumer Health Care segment manufactures, distributes and sells over-the-counter products. Principle over-the-counter health care product categories and their respective products are: analgesics including ADVIL; cough/cold/allergy remedies including ROBITUSSIN and DIMETAPP; nutritional supplements including CENTRUM and CENTRUM SILVER vitamins, CENTRUM herbals and SOLGAR vitamins and herbal products; and hemorrhoidal, antacid and asthma relief items. These products are generally sold to wholesalers and retailers, and are primarily promoted to consumers worldwide through advertising. These products are manufactured in the United States and Puerto Rico and in 16 foreign countries. No single consumer health care product or category of products accounted for more than 10% of consolidated net sales or operating income before taxes in 1998, 1997 or 1996. AGRICULTURAL PRODUCTS SEGMENT - The Agricultural Products segment manufactures, distributes and sells crop protection and pest control products. Principal agricultural product categories and their respective products are: herbicides including PURSUIT (marketed as PIVOT internationally), PROWL (marketed as STOMP internationally) and RAPTOR; insecticides including COUNTER; fungicides and plant growth regulators which are promoted to consumers worldwide and generally sold directly to wholesalers and retailers. In addition to the United States and Puerto Rico, these products are manufactured in eight foreign countries. No single agricultural product or category of products accounted for more than 10% of consolidated net sales or operating income before taxes in 1998, 1997 or 1996. CORPORATE AND ALL OTHER SEGMENT - Corporate is responsible for the treasury, tax, legal and compliance operations of the Company's businesses and incurs and maintains certain assets, liabilities, expenses, gains and losses related to the overall management of the Company which are not allocated to the other reportable segments. These items include interest expense, net, gains on the sales of businesses, investments and other Corporate I-3 assets, certain litigation provisions and other miscellaneous items. All Other consists of certain divested businesses. Prior to December 31, 1998, the Company operated in the medical devices and food products businesses. The medical devices business, which the Company exited completely in February 1998, manufactured, distributed and sold medical devices products, which included needles and syringes, tubes, catheters, wound closure products, ophthalmic surgical equipment, enteral feeding systems, microsurgical equipment and other hospital products. The food products business, which was sold in November 1996, manufactured, distributed and sold food products, which included prepared pastas and other entrees, regional specialty foods, condiments, snack products, spreadable fruit products and other food products. No single medical device or food product or category of products accounted for more than 10% of consolidated net sales or operating income before taxes in 1998, 1997 or 1996. Sources and Availability of Raw Materials Generally, raw materials and packaging supplies are purchased in the open market from various outside vendors. The loss of any one source of supply would not have a material adverse effect on the Company's future results of operations. However, finished dosage forms of ENBREL are produced by one third-party manufacturer. Patents and Trademarks The Company owns, has applications pending for, and is licensed under many patents relating to a wide variety of products. The Company believes that its patents and licenses are important to its business, but no one patent or license (or group of related patents or licenses) currently is of material importance in relation to its business as a whole. In the pharmaceuticals business, many of the Company's major products are not protected by patents. LODINE XL, a product extension of LODINE, will have patent protection until at least 2007. ZIAC, a combination beta blocker and diuretic, will have patent protection until at least 2000. SYNVISC, a visco supplementation for treatment of osteoarthritis of the knee, will have patent protection until at least 2010. The anti-infective ZOSYN will have patent protection until at least 2007. The anti-depressant EFFEXOR will have patent protection until at least 2007. SUPRAX, a third-generation cephalosporin antibiotic, remains under patent protection until at least 2002. PREMPRO, a combination estrogen and progestin product, will have patent protection until at least 2015. Concentrated recombinant human antihemophilic factor (Factor VIII), a product that helps regulate activation of the body's coagulation pathway, will have patent protection until 2014. CYDECTIN, a moxidectin product to control parasites in animals, will have patent protection until at least 2011. Sales in the consumer health care business are largely supported by the Company's trademarks and brand names. These trademarks and brand names are a significant part of the Company's business and have a perpetual life as long as they remain in use. See "Competition" below for a discussion of generic and store brands competition. I-4 In the agricultural products business, the imidazolinone herbicide products SCEPTER and PURSUIT will have patent protection until at least 2006 and RAPTOR will have patent protection until at least 2011. ACROBAT, a fungicide, will have patent protection until at least 2016. Seasonality Sales and results of operations of the U.S. agricultural products business are seasonal and tend to be heavily concentrated in the first six months of each year. Sales of consumer health care products are affected by seasonal demand for cough/cold products and, as a result, second quarter results for consumer health care products tend to be lower than results in other quarters. Competition PHARMACEUTICALS - The Company operates in the highly competitive pharmaceutical industry which includes the ethical pharmaceutical and animal health businesses. Within these businesses, the Company has many major multinational competitors and numerous smaller domestic and foreign competitors. Based on net sales, the Company believes it ranks within the top 10 major competitors within the ethical pharmaceutical industry and ranks within the top five major competitors within the animal health industry. The Company's competitive position is affected by several factors including resources available to develop, enhance and promote products, customer acceptance, product quality, patent protection, development of alternative therapies by competitors, scientific and technological advances and governmental actions affecting pricing and generic substitutes. The growth of managed care organizations, such as health maintenance organizations and pharmaceutical benefit management companies, has resulted in increased competitive pressures. The continued growth of generic substitutes is further promoted by legislation, regulation and various incentives enacted and promulgated in both the public and private sectors. PREMARIN, one of the Company's conjugated estrogens products manufactured from pregnant mare's urine, which has not had patent protection for many years, is the leader in its category and contributes significantly to sales and results of operations. PREMARIN's principal uses are to manage the symptoms of menopause and osteoporosis, a condition involving a loss of bone mass in postmenopausal women. Estrogen-containing products manufactured by other companies have been marketed for many years for the treatment of menopausal symptoms, and some of these products also have obtained marketing approval for the treatment of osteoporosis. During the past several years, other manufacturers have introduced products for the treatment and/or prevention of osteoporosis. Some companies have attempted to obtain approval for generic versions of PREMARIN. These products, if approved, could be routinely substitutable for PREMARIN under many state laws and third-party insurance payer plans. In May 1997, the U.S. Food and Drug I-5 Administration ("FDA") announced that it would not approve certain synthetic estrogen products as generic equivalents of PREMARIN given known compositional differences between the active ingredient of these products and PREMARIN. Although the FDA has not approved any generic equivalent to PREMARIN to date, PREMARIN will continue to be subject to competition from existing and new competing estrogen and other products for its approved indications and may be subject to some form of generic competition from either natural or synthetic generic conjugated estrogens products in the future. Health care costs will continue to be the subject of attention in both the public and private sectors in the United States. Similarly, in international markets, health care spending is subject to increasing governmental review, much of which is focused on pharmaceutical prices. While the Company cannot predict the impact that any future health care initiatives may have on the Company's worldwide results of operations, the Company believes that the pharmaceutical industry will continue to play a very positive role in helping to contain global health care costs through the development of innovative products. CONSUMER HEALTH CARE - The consumer health care business has many competitors. Based on net sales, the Company believes it ranks within the top five major competitors within the consumer health care industry. The Company's competitive position is affected by several factors including resources available to develop, enhance and promote products, customer acceptance, product quality, development of alternative therapies by competitors, and scientific and technological advances. The growth of generic and store brands continued to impact some of the Company's consumer health care branded product line categories in 1998 and is expected to continue during 1999. AGRICULTURAL PRODUCTS - The Company operates in the highly competitive agrochemical industry. The agricultural products business has over 40 competitors worldwide and ranks in the top 10 based on net sales. Among these companies, the top 10 competitors are multinational, representing over 85% of the sales in the agrochemical market. Competitive factors include product efficacy, distribution channels and resource availability for development of new products and improvement of existing ones. There can also be generic competition when products are no longer patent protected. Additionally, the rapid acceptance of genetically modified seed, particularly for soybeans, has generated competition from agricultural products not traditionally used on crops grown from conventional seed. It is anticipated that approximately 50% of the soybean crop in the United States and approximately 20% of the soybean crop outside the United States will be genetically modified in 1999 compared to 38% and 6% in 1998, respectively, which could have an adverse effect on the results of operations of the agricultural products business in 1999 and thereafter. I-6 GENERAL - In all business segments, advertising and promotional expenditures are significant costs to the Company and are necessary to effectively communicate information concerning the Company's products to health professionals, to the trade and to consumers. Research and Development Worldwide research and development activities are focused on developing and bringing to market new products to treat and/or prevent some of the most serious health care and agricultural problems. Research and development expenditures totaled $1,654,745,000 in 1998, $1,558,035,000 in 1997 and $1,429,056,000 in 1996 with approximately 84% of these expenditures in the ethical pharmaceutical area in 1998. The Company currently has five New Drug Applications and 20 Supplemental Drug Applications filed with the FDA for review, and 125 active Investigational New Drug Applications and one Biologics License Application pending. During 1998, several major collaborative research and development arrangements were commenced or continued with other pharmaceutical and biotechnology companies. Additionally, the animal health business has 58 Veterinary Biologics License Applications awaiting approval by the United States Department of Agriculture ("USDA") and the agricultural products business has 28 applications and the animal health business has one application for new products and/or expanded use of existing products awaiting approval by the United States Environmental Protection Agency ("EPA"). In 1998, FDA approval was granted for ENBREL, a first-in-class, breakthrough product for the treatment of rheumatoid arthritis jointly marketed in the United States by the Company and Immunex Corporation, a majority-owned company. During 1998, the Company also received FDA approval for the non-steroidal anti-inflammatory product LODINE XL 500 mg. tablets, the combination estrogen and progestin hormone replacement product PREMPRO 0.625 mg./5 mg. tablet, the vaccine ROTASHIELD, for use in the prevention of rotavirus gastroenteritis, the anti-infectives product ZOSYN GALAXY SYSTEM, the animal health care endectocide product CYDECTIN Pour-On (moxidectin), to treat beef cattle affected by parasites, ETOGESIC (etodolac), a non-steroidal anti-inflammatory to treat osteoarthritis in dogs, and the over-the-counter product ADVIL Pediatric Drops and Chewable Tablets. In 1998, the Company also received EPA approval for ACROBAT MZ, a fungicide product. Regulation The Company's various health care and agricultural products are subject to regulation by government agencies throughout the world. The primary emphasis of these requirements is to assure the safety and effectiveness of the Company's products. In the United States, the FDA, under the Federal Food, Drug and Cosmetic Act and the Public Health Service Act, regulates many of the Company's health care products, including human and animal pharmaceuticals, vaccines, consumer health care products and dietary supplements. The Federal Trade Commission ("FTC") has the authority to regulate the promotion and advertising of I-7 the consumer health care products including over-the-counter drugs and dietary supplements. The USDA regulates the Company's domestic animal vaccine products. The FDA's enforcement powers include the imposition of criminal and civil sanctions against companies, including seizures of regulated products and criminal sanctions against individuals. The FDA's enforcement powers also include its inspection of the numerous facilities operated by the Company. To facilitate compliance, the Company from time to time may institute voluntary compliance actions such as product recalls when it believes it is appropriate to do so. In addition, many states have similar regulatory requirements. Most of the Company's pharmaceutical products, and an increasing number of its consumer health care products, are regulated under the FDA's new drug approval processes, which mandate pre-market approval of all new drugs. Such processes require extensive time, testing and documentation for approval, resulting in significant costs for new product introductions. The Company's U.S. pharmaceutical business is also affected by the Controlled Substances Act, administered by the Drug Enforcement Administration, which regulates strictly all narcotic and habit-forming drug substances. In addition, in the foreign countries where the Company does business, it is subject to regulatory and legislative climates that, in many instances, are similar to or more restrictive than that described above. The Company devotes significant resources to dealing with the extensive federal, state and local regulatory requirements applicable to its products in the United States and internationally. Federal law also requires drug manufacturers to pay rebates to state Medicaid programs in order for their products to be eligible for federal matching funds under the Social Security Act. Additionally, a number of states are, or may be, pursuing similar initiatives for rebates and other strategies to contain the cost of pharmaceutical products. The federal Vaccines for Children entitlement program enables states to purchase vaccines at federal vaccine prices and limits federal vaccine price increases in certain respects. Federal and state rebate programs are expected to continue. The manufacture and sale of pesticides are regulated by the EPA. No new pesticide and no existing pesticide for a new use may be manufactured, processed or used in the United States without prior notice to or approval of the EPA. Outside the United States, agricultural chemicals are regulated by various agencies, often by standards which differ from those in the United States. Environmental Certain of the Company's operations are affected by a variety of federal, state and local environmental protection laws and regulations and the Company has, in a number of instances, been notified of its potential responsibility relating to the generation, storage, treatment and disposal of hazardous waste. In addition, the Company has been advised that it may be a responsible party in several sites on the National Priority List created by the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), commonly known as Superfund. (See Item 3. Legal Proceedings.) In connection with the spin-off in 1993 by Cyanamid of Cytec Industries Inc. ("Cytec"), Cyanamid's former chemicals business, Cytec assumed the environmental I-8 liabilities relating to the chemicals businesses, except for the former chemical business site at Bound Brook, New Jersey, and certain sites for which there is shared responsibility between Cyanamid and Cytec. This assumption is not binding on third parties, and if Cytec were unable to satisfy these liabilities, they would, in the absence of other circumstances, be enforceable against Cyanamid. The Company has no reason to believe that it has any practical exposure to any of the liabilities against which Cytec has agreed to assume and indemnify Cyanamid. Additional information on environmental matters is set forth in Notes 5 and 10 of the Notes to Consolidated Financial Statements in the Company's 1998 Annual Report to Shareholders and is incorporated herein by reference. Employees At the end of 1998, the Company had 52,984 employees worldwide, with 27,447 employed in the United States including Puerto Rico. Approximately 27% of worldwide employees are represented by various collective bargaining groups. Relations with most organized labor groups remain relatively stable. Financial Information about the Company's Foreign and Domestic Operations Financial information about international and United States operations for the three years ended December 31, 1998 is set forth in Note 11 of the Notes to Consolidated Financial Statements in the Company's 1998 Annual Report to Shareholders and is incorporated herein by reference. The Company's operations outside the United States are conducted primarily through subsidiaries. International sales in 1998 amounted to 43% of the Company's total worldwide sales. The Company's international businesses are subject to risks of currency fluctuations, governmental actions and other governmental proceedings which are inherent in conducting business outside of the United States. The Company does not regard these factors as deterrents to maintaining or expanding its non-U.S. operations. Additional information about international operations, specifically the Asian-Pacific region, is set forth in Liquidity, Financial Condition and Capital Resources in Management's Discussion and Analysis of Financial Condition and Results of Operations in the Company's 1998 Annual Report to Shareholders and is incorporated herein by reference. ITEM 2. PROPERTIES The Company's corporate headquarters and the headquarters of its domestic consumer health care business are located in Madison, New Jersey. The Company's domestic and international ethical pharmaceutical operations and its international consumer health care business are headquartered in three executive/administrative buildings in Radnor and St. Davids, Pennsylvania. The Company's animal health business is headquartered in Overland Park, Kansas. The agricultural products business maintains its headquarters in Parsippany, New Jersey. The Company's foreign subsidiaries and affiliates, which generally own their I-9 properties, have manufacturing facilities in 23 countries outside the United States. The following are the principal manufacturing plants (M) and research laboratories (R) of the Company as of December 31, 1998: Pharmaceuticals and Consumer Health Care: United States: Charles City, Iowa (M) Fort Dodge, Iowa (M, R) Andover, Massachusetts (M, R) Cambridge, Massachusetts (R) Cherry Hill, New Jersey (M, R) Princeton, New Jersey (R) Chazy, New York (R) Pearl River, New York (M, R) Rouses Point, New York (M, R) Sanford, North Carolina (M) Marietta, Pennsylvania (M, R) Radnor, Pennsylvania (R) West Chester, Pennsylvania (M) Carolina, Puerto Rico (M) Guayama, Puerto Rico (M) Georgia, Vermont (M) Richmond, Virginia (M, R) International: St. Laurent, Canada (M, R) Suzhou, China (M) Munster, Germany (M) Havant, Great Britain (M, R) Askeaton, Ireland (M, R) Newbridge, Ireland (M) Catania, Italy (M, R) Cabuyao, Philippines (M) Hsin-Chu Hsien, Taiwan (M) All of the above facilities are exclusively pharmaceuticals facilities except for Pearl River, New York, Rouses Point, New York, Guayama, Puerto Rico, Richmond, Virginia, St. Laurent, Canada, Suzhou, China, Munster, Germany, Havant, Great Britain, Newbridge, Ireland and Hsin-Chu Hsien, Taiwan which are both pharmaceutical and consumer health care facilities. I-10 Agricultural Products: United States: Hannibal, Missouri (M) Princeton, New Jersey (R) International: Paulinia, Brazil (M) Resende, Brazil (M) Genay, France (M) Schwabenheim, Germany (R) All of the above properties are owned except certain facilities in Cambridge, Massachusetts, Cherry Hill, New Jersey, Guayama, Puerto Rico and Suzhou, China which are under lease. The Company also owns or leases a number of other smaller properties worldwide which are used for manufacturing, research, warehousing and office space. ITEM 3. LEGAL PROCEEDINGS The Company and its subsidiaries are parties to numerous lawsuits and claims arising out of the conduct of its business, including product liability and other tort claims. On September 15, 1997, the Company's Wyeth-Ayerst Laboratories division, the manufacturer of PONDIMIN (fenfluramine hydrochloride) tablets C-IV and the distributor of REDUX (dexfenfluramine hydrochloride capsules) C-IV, announced a voluntary and immediate withdrawal of these antiobesity medications. The Company took this action on the basis of new, preliminary information provided to the Company on September 12, 1997 by the FDA regarding heart valve abnormalities in patients using these medications. The Company estimates that approximately six million people used these medications in the United States. As of March 22, 1999, the Company has been served or is aware that it has been named as a defendant in 2,615 lawsuits as the manufacturer of PONDIMIN and/or the distributor of REDUX. These lawsuits have been filed on behalf of individuals who claim to have been injured as a result of their use of PONDIMIN and/or REDUX, either individually or in combination with the prescription drug phentermine (which the Company does not manufacture, distribute or market). The lawsuits also often name as defendants other distributors and/or retailers of PONDIMIN and/or REDUX, the manufacturers, distributors and/or retailers of phentermine and physicians or other health care providers. The Company anticipates that it will be named as a defendant in an unknown number of additional PONDIMIN and/or REDUX lawsuits in the future. Of the 2,615 lawsuits naming the Company as a defendant, 70 are actions that seek certification of a class, some on a national and others on a statewide basis. Of these 70 lawsuits, 29 are pending in various federal district courts and 41 are pending in various state courts. A number of the actions brought in state courts have been I-11 removed to federal courts. Individual plaintiffs have filed the remaining lawsuits: 833 individual lawsuits are pending in various federal district courts and 1,712 individual lawsuits are pending in various state courts. On December 10, 1997, the federal Judicial Panel on Multi-District Litigation ("MDL") transferred all pending federal lawsuits alleging injuries from the use of REDUX and/or PONDIMIN to the U.S. District Court for the Eastern District of Pennsylvania, where they are being coordinated for all pretrial purposes before U.S. District Judge Louis C. Bechtle. The state cases are pending in 45 different states or jurisdictions, with the bulk of the cases in Alabama, California, Florida, Kentucky, New Jersey, New York, Oklahoma, Pennsylvania, Texas and Utah. Plaintiffs' allegations of liability are based on various theories of recovery, including, but not limited to, product liability, strict liability, negligence, various breaches of warranty, conspiracy, fraud, misrepresentation and deceit. These lawsuits typically allege that the short or long-term use of PONDIMIN and/or REDUX, independently or in combination (including the combination of PONDIMIN and phentermine popularly known as "fen/phen"), causes, among other things, primary pulmonary hypertension, valvular heart disease and/or neurological dysfunctions. In addition, some lawsuits allege severe emotional distress caused by the knowledge that ingestion of these drugs, independently or in combination, could cause such injuries. Plaintiffs typically seek relief in the form of monetary damages (including general damages, medical care and monitoring expenses, loss of earnings and earnings capacity, compensatory damages and punitive damages), generally in unspecified amounts, on behalf of the individual or the class. In addition, some actions seeking class certification ask for certain types of purportedly equitable relief, including, but not limited to, declaratory judgments and the establishment of a research or medical surveillance program. Motions to certify a class of state residents who used REDUX or PONDIMIN and who are seeking medical monitoring or surveillance for possible injuries have been granted in Illinois (Rhyne, et al. v. AHPC, et al., Circuit Court, Chancery Division, Cook Cty., No. 98-CH-04099); New Jersey (Vadino, et al. v. AHPC, et al., Superior Court, Middlesex Cty., No. MID-L-425-98); Pennsylvania (In re Pennsylvania Diet Drugs Litigation, Court of Common Pleas, Philadelphia Cty., No. 9709-3162); Texas (Earthman, et al. v. AHPC, District Court, Montgomery Cty., No. 97-10-03790-CV); Washington (St. John, et al. v. AHPC, et al., Superior Court, Spokane Cty., No. 97-2-06368-4); and West Virginia (Burch, et al. v. AHPC, et al., Circuit Court, Brooke Cty., No. 97-C-204 (1-11)). All of these decisions have been or will be appealed. In Arkansas (Baker, et al. v. Wyeth-Ayerst Laboratories, et al., Circuit Court, Washington Cty., No. CIV 97-1192), the court found that certification was precluded by the myriad individual medical and legal issues presented by the plaintiffs' claims. Class certification will be briefed and argued in 1999 in Iowa, Kentucky, Montana and New York. In Florida (Petito, et al. v. A.H. Robins Company, Inc., et al., Circuit Court, Dade Cty., No. 97-26031 CA 21), the court has dismissed plaintiffs' claims for medical monitoring on the grounds that no such cause of action exists under Florida law. In the federal MDL proceedings, plaintiffs in 28 separate actions have filed a total of 17 motions seeking class certification for a variety of classes. The court heard argument on the motions on March 17, 1999. Several individual state cases are also expected to go to trial during 1999. I-12 The Company is also named as a defendant in two shareholder lawsuits arising out of the REDUX and PONDIMIN withdrawal. Oran, et al. v. Stafford, et al. (No. 97-CV-4513 (NHP), U.S.D.C., D.N.J.), which was commenced on September 18, 1997, is a securities fraud putative class action in which plaintiffs allege, on behalf of a class of individuals who purchased shares of AHPC Common Stock on the open market during the period from March 1, 1997 through September 16, 1997, that the Company (and nine officers and directors named as controlling persons under section 20(a) of the Securities Exchange Act of 1934 (the "Exchange Act")) engaged in a plan to defraud the market and purchasers of AHPC Common Stock in violation of section 10(b) of the Exchange Act and SEC Rule 10b-5 by failing to disclose material facts or making material misstatements of fact regarding alleged adverse events associated with REDUX and PONDIMIN, in particular the alleged association between those two products and valvular heart disease. Plaintiffs' amended complaint also includes claims for negligent misrepresentation and common law fraud and deceit. Plaintiffs seek compensatory damages for themselves and for the class. On February 5, 1999, the Oran case was dismissed with prejudice by the U.S. District Court for the District of New Jersey. Plaintiffs have filed a Notice of Appeal to the U.S. Court of Appeals for the Third Circuit. Grill v. Stafford, et al., (No. MRS-L-164-98, N.J. Sup. Ct., Morris Cty.), which was commenced on January 14, 1998, is a shareholder derivative action filed against the Company, the directors (other than Mr. Essner), a former director and officer of the Company, and certain officers which seeks to recover any losses or damages sustained by the Company, as well as profits from the sale of stock by present and former officers and directors, as a result of alleged intentional, reckless or negligent breaches of fiduciary duty by the defendants. The complaint contains allegations of material misstatements and omissions regarding alleged adverse events associated with REDUX and PONDIMIN similar to those described above and alleges that the defendants' actions have exposed the Company to liability for personal injury lawsuits and securities claims. The Company believes that it has meritorious defenses to these actions and that it has acted properly at all times in dealing with REDUX and PONDIMIN matters. The Company intends to defend all of the REDUX and PONDIMIN litigation vigorously. As of March 22, 1999, there were pending against the Company approximately 3,730 lawsuits in federal or state courts on behalf of approximately 41,082 plaintiffs alleging injuries as a result of use of the NORPLANT SYSTEM, the Company's implantable contraceptive containing levonorgestrel. Although approximately 60 of the cases have been filed as class actions, class certification has been denied in the federal actions. It has also been denied in each of the four states that have decided motions for class certification. In West Virginia, where the court had indicated during 1998 that it would certify a statewide class of NORPLANT users, plaintiffs have moved the court for the entry of a class certification order and a hearing on that motion is scheduled for March 31, 1999 (Ramey, et al. v. Harts Health Clinic, Inc., Circuit Court, Lincoln Cty., West Virginia, No. 97-C-132). A motion to certify a class of Louisiana NORPLANT users is also expected to be heard during 1999. On December 6, 1994, the MDL ordered that all NORPLANT SYSTEM lawsuits filed in federal courts be consolidated for pretrial proceedings in the U.S. District Court (E.D. Tex.) in Beaumont. The MDL proceedings now account for approximately 30,000 of the NORPLANT SYSTEM plaintiffs. Following the denial of class certification at the federal level, the MDL court scheduled three "bellwether" trials, each involving the claims of five Texas plaintiffs. Rather than proceeding with the first of these trials, the court entered summary judgment in favor of the Company on all of plaintiffs' claims and that decision was affirmed by the U.S. Court of Appeals for the Fifth Circuit during 1998. All but three of the state NORPLANT SYSTEM cases involving the Company that have approached trial have either been dismissed by the courts or withdrawn by the plaintiffs. The first NORPLANT SYSTEM lawsuit to go to trial (Morales, et al. v. Wyeth-Ayerst Laboratories, et al., District Court, Hidalgo Cty., Texas, No. C-1679-95-F) ended with a mistrial being declared on January 23, 1998, due to conflicts among plaintiffs' attorneys. The first NORPLANT I-13 SYSTEM case to reach a jury verdict (Gaytan, et al. v. Wyeth-Ayerst Laboratories, et al., District Court, Cameron Cty., Texas, No. C-95-08-3985-A) resulted in a judgment in favor of the Company on September 3, 1998. That judgment has not been appealed. The third case to go to trial, and the second to reach a verdict (Davis, et al. v. AHPC, et al., District Court, Jefferson Cty., Texas, No. B-150,760) concluded with a verdict rendered on March 4, 1999. On March 24, 1999, the court entered judgment in favor of the Company on the claims of three of the four plaintiffs in the Davis case. Judgment on the claims of the fourth plaintiff has not yet been entered. The Company will continue to contest the NORPLANT SYSTEM litigation vigorously. Two putative personal injury class actions have been filed in connection with the Company's voluntary withdrawal from the market of DURACT, its non-narcotic analgesic pain reliever. McGloin v. Wyeth-Ayerst Laboratories, filed on June 30, 1998 in the U.S. District Court for the Northern District of California (No. C-98-2596-CW), seeks the certification of a nationwide class of persons who used DURACT and who have suffered or may suffer liver damage or related conditions as a result of using the product. Chimento, et al. v. Wyeth-Ayerst Laboratories, et al., filed on July 21, 1998 in the 34th Judicial District Court of Louisiana for the Parish of St. Bernard (No. 982488), seeks the certification of a class of Louisiana residents who were exposed to and who suffered injury from DURACT. Plaintiffs in both cases seek compensatory and punitive damages, the refund of all purchase costs, and the creation of a court-supervised medical monitoring program for the diagnosis and treatment of liver damage and related conditions allegedly caused by DURACT. The Company intends to defend the DURACT litigation vigorously. On July 7, 1997, the plaintiffs were awarded $44 million in compensatory damages and $1 million in punitive damages in an action which was commenced in U.S. District Court in August 1993 (University of Colorado et al. v. American Cyanamid Company, Docket No. 93-K-1657, D.Col.). The plaintiffs had accused Cyanamid of misappropriating the invention of, and patenting as its own, the formula for the current MATERNA Multi-Vitamins. The complaint also contained allegations of conversion, fraud, misappropriation, wrongful naming of inventor and copyright and patent infringement. The patent whose ownership and inventorship is in dispute was granted to Cyanamid in 1984. The Court had previously granted Cyanamid's summary judgment motions dismissing all counts for relief except for unjust enrichment and fraud, which were the issues tried before the court in a three-week bench trial in May 1996. Although the plaintiffs had earlier been granted summary judgment of their copyright infringement claim, the court had declined to award plaintiffs damages on that claim. Plaintiffs' post-trial motions seeking to increase the damages to approximately $111 million allegedly representing Cyanamid's gross profit for 1982-1985 from the sale of the reformulated MATERNA product and to recover approximately $800,000 of attorneys fees has been denied. The Company has appealed the district court decision to the U.S. Court of Appeals for the Federal Circuit. Plaintiffs have cross-appealed the District Court's decision denying damages on the copyright claim, denying plaintiffs post-trial motions I-14 regarding the calculation of damages and all other orders entered against the plaintiffs by the District Court. The Court of Appeals decision is pending. On October 14, 1993, Rite Aid Corporation, Revco D.S. Inc., and other retail drug chains and retail pharmacies filed an action in U.S. District Court (M.D. Pa.) against the Company, other pharmaceutical manufacturers and a pharmacy benefit management company alleging that the Company and other defendants provided discriminatory price and promotional allowances to managed care organizations and others in violation of the Robinson-Patman Act. The complaint further alleged collusive conduct among the defendants related to the alleged discriminatory pricing in violation of the Sherman Antitrust Act as well as certain other violations of common law principles of unfair competition. Subsequently, numerous other cases, many of which were purported class actions brought on behalf of retail pharmacies and retail drug and grocery chains, were filed in various federal courts against the Company as well as other pharmaceutical manufacturers and wholesalers. These cases made one or more similar allegations of violations of federal or state antitrust or unfair competition laws. In addition, a mail order pharmacy plaintiff alleged that it was forced out of business and certain plaintiffs also alleged that the defendants' patents covering brand name prescription drugs give the defendants power to enter into exclusionary arrangements with certain managed care customers and seek compulsory patent licenses. The various class actions were consolidated as a single class action (the "Consolidated Class Action") which alleged violations of Section 1 of the Sherman Act. All of the federal actions have been coordinated and consolidated for pretrial purposes under the caption In re Brand Name Prescription Drugs Antitrust Litigation (MDL 997 N.D. Ill.). These federal actions seek treble damages in unspecified amounts and injunctive and other relief. In June 1996, the court in the federal actions approved an amended settlement among certain defendants, including the Company, and the Consolidated Class Action plaintiffs. The settlement provides, among other things, for certain payments to be made by the settling defendants, over a period of three years, to the Consolidated Class Action plaintiffs. The Company's settlement payments (including payments to be made on behalf of Cyanamid) total $42.5 million. Certain provisions of the amended settlement, which became effective on January 28, 1998 and will be in effect for three years, prohibit the settling manufacturers from refusing to grant discounts to retailers solely because of their status as retailers and require that retailers be given the opportunity to demonstrate their ability to move market share and to negotiate and earn discounts similar to any discounts offered to managed care organizations. The terms of the settlement also provide that it shall not be deemed or construed to be an admission or evidence of any violation of any statute or law or of any liability or wrongdoing by the Company or of the truth of any of the claims or allegations alleged in the Consolidated Class Action. In January 1999, after a trial on the merits involving manufacturers and wholesalers that had not previously settled the Consolidated Class Action case, the district court granted a directed verdict to the defendants in that case. Plaintiffs have appealed. I-15 The Company has also settled the following cases brought by retailers that opted out of the Consolidated Class Action: Albertson's, Inc., et al. v. Abbott Labs., et al. (Docket No. 94-C-3669, S.D. Ohio); American Drug Stores, Inc. v. Abbott Labs., et al. (Docket No. 97-C-8076, N.D. Ill.); Eckerd Corp. v. Abbott Labs., et al. (Docket No. 97-C-8075, N.D. Ill.); and two groups of cases brought by retail pharmacies, one involving five complaints with multiple plaintiffs and the other involving 113 complaints with multiple plaintiffs. The terms of the settlements, which are not material to the Company, provide that they shall not be deemed to be an admission of or evidence of any violation of any statute or law or of any liability or wrongdoing by the Company. The remaining individual actions in MDL 997, including those brought by Rite Aid Corporation, Revco D.S. Inc., and other retailers, continue to be pending against the Company. In 1997, the class action plaintiffs also filed a complaint against the defendants that settled the Consolidated Class Action, including the Company. The class action plaintiffs allege that the settling defendants conspired to not implement the affirmative obligations in the settlement agreements which were before the Seventh Circuit Court of Appeals and not yet final at that time. The complaint seeks class action status and requests preliminary and permanent injunctions. It does not request money damages. The request for a preliminary injunction was denied. In addition to the federal actions, similar litigation on behalf of consumers or retail pharmacies has been brought in various state courts, including purported class actions in Alabama, Arizona, California, Colorado, District of Columbia, Florida, Kansas, Maine, Michigan, Minnesota, Mississippi, New York, North Carolina, North Dakota, Tennessee, Washington and Wisconsin. The Company and certain other defendants have entered into an agreement to settle the California litigation. Under this agreement, which has not received final approval by the court, the Company would pay approximately $3.1 million in cash and approximately $16 million in product valued at the wholesale acquisition cost. Additionally, the Company and other defendants have entered into settlements to resolve the consumer actions in Arizona, the District of Columbia, Florida, Kansas, Maine, Michigan, Minnesota, New York, North Carolina, Tennessee and Wisconsin. The aggregate payments by the Company under these settlements amounted to approximately $5.4 million. The Company and other defendants have also settled a purported class action with similar allegations under state antitrust, unfair competition and unitary pricing laws in Wisconsin state court on behalf of retail pharmacies located in that state. The Company's share of that settlement was approximately $440,000. Final approval was received for a settlement of a similar state law case by retailers in Minnesota. The Company's share of the Minnesota settlement with retailers was approximately $99,000. The actions in Colorado and Washington were dismissed on pre-trial motions. The FTC has been investigating allegations of concerted action in the pricing of pharmaceutical products and the Company has provided information in response to a subpoena. In an action commenced in state court in Texas in January 1997 by Avatex Corporation (formerly FoxMeyer Health Corporation) against McKesson Corp., the Company's Wyeth-Ayerst Laboratories Division and eleven other manufacturers, which was removed to U.S. District Court for I-16 the Northern District of Texas (Civil Action No. 3:99-CV-0010-L) and referred to U.S. Bankruptcy Court in Dallas, Texas (Adv. No. 397-3052, U.S.B.C., N.D. Tex.), Avatex is seeking in excess of $400 million in compensatory damages alleged to have risen from an alleged conspiracy to drive Avatex's subsidiary into bankruptcy, ostensibly so that McKesson could then purchase the drug distribution operations of the subsidiary at a discounted price. Some of the plaintiff's counts were dismissed but Avatex has appealed the dismissal. The Company has agreed to pay $5.2 million to settle a purported class action commenced in 1997 in state court in Tennessee, Fox v. American Cyanamid Company (No. 19,996, Ch. Ct. Tenn.) that alleges violations of state antitrust and consumer protection laws by Cyanamid concerning pricing practices relating to marketing programs for crop protection products. The complaint purports to be on behalf of indirect purchasers of Cyanamid's crop protection products in the states of Tennessee, Alabama, California, Florida, Kansas, Maine, Michigan, Minnesota, Mississippi, New Mexico, North Carolina, North Dakota, South Dakota, West Virginia, Wisconsin and the District of Columbia. The settlement is subject to court approval. The terms of the settlement provide that it is not an admission or evidence of wrongdoing by the Company or of the truth of any of the claims alleged. A purported class action in federal court in Alabama, Lowell v. American Cyanamid Company (No. 97-581-BH-M, U.S.D.C., S.D. Ala.) alleges violations of federal antitrust laws involving pricing practices relating to marketing programs for crop protection products. This action was dismissed but the plaintiffs have appealed the dismissal to the U.S. Court of Appeals for the 11th Circuit. On November 24, 1998, two applicators of herbicides filed a complaint (WoodTech Services, Inc. v. American Cyanamid Co., CV98-C-2935-W USDC West. Dist. Ala.) alleging that Cyanamid discriminated in price in connection with the sale of herbicides to the plaintiffs and to applicators who are affiliated with distributors for Cyanamid. The complaint seeks injunctive and other relief. The Company has been named as a defendant in seven lawsuits in which plaintiffs purport to represent a statewide class of health care workers who have been injured by needle and syringe devices manufactured by the Company's former Sherwood-Davis & Geck subsidiary. The complaints have been filed in Alabama, Florida, New Jersey, Ohio, Oklahoma, Pennsylvania, Texas and South Carolina and contain virtually identical allegations. (Daniels v. AHPC, et al., No. 2757-G, Circ. Ct., Montgomery Cty., Alabama; Swartley v. AHPC et al., No. L-9448-98, Sup. Ct., Camden Cty., New Jersey; Grant v. AHPC, et al., No. C2-98-344, U.S.D.C., S. D. Ohio; Palmer v. AHPC, et al., No. CJ-98-685, Dist. Ct., Sequoyah Cty., Oklahoma; Snodgrass v. AHPC et al., No. 1998-03474, Ct. of Common Pleas, Philadelphia, Pennsylvania; Calvin v. AHPC, et al., No. 342-173329-98, Dist. Ct., Tarrant Cty., Texas; Bates v. AHPC et al., No. 98-CP-40-4343, Circ. Ct., Richland Cty., South Carolina). Each names AHPC, Becton Dickinson and Company, Sherwood's largest competitor, and Tyco International (U.S.) Inc., Sherwood's current corporate parent, as well as several distributors of medical devices. The complaints allege that the needle and syringe devices designed and manufactured by Sherwood are defective in that they expose healthcare workers to the risk of accidental needlesticks and the resultant possibility of acquiring blood-borne diseases. Each named plaintiff seeks to represent a I-17 statewide class of healthcare workers who have sustained a "contaminated" needlestick; reported the incident to their employer and have tested negative for a blood-borne disease. The complaints seek recovery for the costs of treating the needlesticks and for the emotional distress allegedly arising out of the fear of contracting a disease from the incidents. The Company is being defended and indemnified in each of these cases by Tyco with respect to injuries alleged to have occurred after February 27, 1998 and the Company remains responsible for injuries occurring prior to that date and is defending and indemnifying Tyco for those injuries. A class has not been certified in any of the cases. A class certification hearing is set for June 1, 1999 in the Calvin case in Texas. Discovery in the other six cases has not yet commenced. The Company will defend the needlestick litigation vigorously. As discussed in Item I, the Company is a party to, or otherwise involved in, legal proceedings under CERCLA and similar state laws directed at the cleanup of various sites including 61 Superfund sites, including the Cyanamid-owned Bound Brook, N.J. site. The Company's potential liability varies greatly from site to site. For some sites, the potential liability is de minimis and, for others, the final costs of cleanup have not yet been determined. As assessments and cleanups proceed, these liabilities are reviewed periodically and are adjusted as additional information becomes available. Environmental liabilities are inherently unpredictable. The liabilities can change substantially due to such factors as additional information on the nature or extent of contamination, methods of remediation required and other actions by governmental agencies or private parties. The 61 Superfund sites exclude sites for which Cytec assumed full liability and agreed to indemnify Cyanamid but include certain sites for which there is shared responsibility between Cyanamid and Cytec. The Company has no reason to believe that it has any practical exposure to any of the liabilities against which Cytec has agreed to assume and indemnify Cyanamid. In the opinion of the Company, although the outcome of any litigation cannot be predicted with certainty, the ultimate liability of the Company in connection with pending litigation and other matters described above will not have a material adverse effect on the Company's financial position but could be material to the results of operations in any one accounting period. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. I-18 EXECUTIVE OFFICERS OF THE REGISTRANT AS OF MARCH 29,1999 Each officer is elected to hold office until a successor is chosen or until earlier removal or resignation. None of the executive officers is related to another: Elected to Name Age Offices and Positions Office John R. Stafford 61 Chairman of the Board December 1986 President and Chief Executive Officer Chairman of Executive, Finance, Operations and Nominating Committees Business Experience: 1991 to date, Chairman of the Board, President and Chief Executive Officer (President to May 1990 and from February 1994) Robert G. Blount 60 Senior Executive Vice October 1995 President Director, Member of Executive, Finance and Operations Committees Business Experience: To October 1995, Executive Vice President October 1995 to date, Senior Executive Vice President Robert Essner 51 Executive Vice President September 1997 Director, Member of Finance and Operations Committees Business Experience: To March 1997, President, Wyeth-Ayerst Laboratories, U.S. Pharmaceutical Business March 1997 to September 1997, President, Wyeth-Ayerst Global Pharmaceuticals September 1997 to date, Executive Vice President Joseph J. Carr 56 Senior Vice President May 1993 Member of Finance and Operations Committees Business Experience: To May 1993, Group Vice President May 1993 to date, Senior Vice President I-19 Elected to Name Age Offices and Positions Office Louis L. Hoynes,Jr. 63 Senior Vice President and November 1990 General Counsel Member of Finance and Operations Committees Business Experience: 1991 to date, Senior Vice President and General Counsel Robert I. Levy, M.D. 61 Senior Vice President - March 1998 Science and Technology Member of Finance and Operations Committees Business Experience: To March 1998, President, Wyeth-Ayerst Research March 1998 to date, Senior Vice President - Science and Technology William J. Murray 53 Senior Vice President October 1995 Member of Finance and Operations Committees Business Experience: To January 1995, Group Vice President, American Cyanamid Company January 1995 to October 1995, Vice President October 1995 to date, Senior Vice President David M. Olivier 55 Senior Vice President January 1996 Member of Finance and Operations Committees Business Experience: To January 1996, President, Wyeth-Ayerst International, Inc. January 1996 to date, Senior Vice President I-20 Elected to Name Age Offices and Positions Office John R. Considine 48 Vice President - Finance February 1992 Member of Finance and Operations Committees Business Experience: 1992 to date, Vice President - Finance Paul J. Jones 53 Vice President and May 1995 Comptroller Member of Finance Committee Business Experience: To April 1995, Senior Vice President - Finance and Administration, Wyeth-Ayerst Laboratories Division May 1995 to date, Vice President and Comptroller Rene R. Lewin 52 Vice President - Human May 1994 Resources Member of Finance Committee Business Experience: To May 1994, Executive Director Human Resources - Worldwide Pharmaceutical Division, Eli Lilly and Company May 1994 to date, Vice President - Human Resources Thomas M. Nee 59 Vice President - Taxes May 1986 Member of Finance Committee Business Experience: 1991 to date, Vice President - Taxes I-21 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The New York Stock Exchange is the principal market on which the Company's Common Stock is traded. Tables showing the high and low sales price for the Common Stock, as reported in the consolidated transaction reporting system, and the dividends paid per common share for each quarterly period during the past two years, as presented in Market Prices of Common Stock and Dividends on page 45 of the Company's 1998 Annual Report to Shareholders, are incorporated herein by reference. There were 64,873 holders of record of the Company's Common Stock as of March 15, 1999. ITEM 6. SELECTED FINANCIAL DATA The data with respect to the last five fiscal years, appearing in the Ten-Year Selected Financial Data presented on pages 26 and 27 of the Company's 1998 Annual Report to Shareholders, are incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's Discussion and Analysis of Financial Condition and Results of Operations, appearing on pages 46 through 52 of the Company's 1998 Annual Report to Shareholders, is incorporated herein by reference. ITEM 7(A). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Market Risk Disclosures as set forth in Management's Discussion and Analysis of Financial Condition and Results of Operations, appearing on page 51 of the Company's 1998 Annual Report to Shareholders, are incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Consolidated Financial Statements and Notes to Consolidated Financial Statements on pages 28 through 43 of the Company's 1998 Annual Report to Shareholders, the Report of Independent Public Accountants on page 44, and Quarterly Financial Data on page 45, are incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. II-1 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (a) Information relating to the Company's directors is incorporated herein by reference to pages 2 and 3 of a definitive proxy statement filed with the Securities and Exchange Commission on March 18, 1999 ("the 1999 Proxy Statement"). (b) Information relating to the Company's executive officers as of March 29, 1999 is furnished in Part I hereof under a separate unnumbered caption ("Executive Officers of the Registrant as of March 29, 1999"). (c) Information relating to certain filing obligations of directors and executive officers of the Company under the federal securities laws set forth on page 5 of the 1999 Proxy Statement under the caption "Section 16(a) Beneficial Ownership Reporting Compliance" is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION Information relating to executive compensation is incorporated herein by reference to pages 8 through 15 (excluding the performance graph on page 13) of the 1999 Proxy Statement. Information with respect to compensation of directors is incorporated herein by reference to pages 4 and 5 of the 1999 Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information relating to security ownership is incorporated herein by reference to pages 6 and 7 of the 1999 Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None. III-1 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)1. Financial Statements The following Consolidated Financial Statements, Notes to Consolidated Financial Statements and Report of Independent Public Accountants, included on pages 28 through 44 of the Company's 1998 Annual Report to Shareholders, are incorporated herein by reference. Pages Consolidated Balance Sheets as of December 31, 1998 and 1997 28 Consolidated Statements of Income for the years ended December 31, 1998, 1997 and 1996 29 Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 1998, 1997 and 1996 30 Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996 31 Notes to Consolidated Financial Statements 32-43 Report of Independent Public Accountants 44 (a)2. Financial Statement Schedules The following consolidated financial information is included in Part IV of this report: Pages Report of Independent Public Accountants on Supplemental Schedule IV-8 Schedule II - Valuation and Qualifying Accounts for the years ended December 31, 1998, 1997 and 1996 IV-9 Schedules other than those listed above are omitted because they are not applicable. IV-1 ITEM 14. (Continued) (a)3. Exhibits Exhibit No. Description (3.1) The Company's Restated Certificate of Incorporation is incorporated herein by reference to Exhibit 3.1 of the Company's Form 10/A dated May 4, 1998. (3.2) The Company's By-Laws are incorporated herein by reference to Exhibit 3.2 of the Company's Form 10/A dated May 4, 1998. (4.1) Indenture, dated as of April 10, 1992, between the Company and The Chase Manhattan Bank (successor to Chemical Bank), as Trustee, is incorporated by reference to Company's Exhibit 2 of the Company's Form 8-A dated August 25, 1992 (File 1-1225). (4.2) Supplemental Indenture, dated October 13, 1992, between the Company and The Chase Manhattan Bank (successor to Chemical Bank), as Trustee, is incorporated by reference to the Company's Form 10-Q for the quarter ended September 30, 1992 (File 1-1225). (10.1) B Credit Agreement, dated as of September 9, 1994, among the Company, American Home Food Products, Inc., Sherwood Medical Company, A.H. Robins Company, Incorporated, the several banks and other financial institutions from time to time parties thereto and The Chase Manhattan Bank (successor to Chemical Bank), as agent for the lenders thereunder, filed as Exhibit 11(b)(3) to Amendment No. 7 to the Schedule 14D-1 is incorporated herein by reference. (10.2) First Amendment to B Credit Agreement, dated as of August 4, 1995, among the Company, American Home Food Products, Inc., Sherwood Medical Company, A.H. Robins Company, Incorporated, the several banks and other financial institutions from time to time parties thereto and The Chase Manhattan Bank (successor to Chemical Bank), as agent for the lenders thereunder, is incorporated by reference to Exhibit 10.4 of the Company's Form 10-K for the year ended December 31, 1995. (10.3) Second Amendment to B Credit Agreement, dated as of August 2, 1996, among the Company, American Home Food Products, Inc., Sherwood Medical Company, A.H. Robins Company, Incorporated, the several banks and other financial institutions from time to time parties thereto and The Chase Manhattan Bank, as agent for the lenders thereunder, is incorporated by reference to Exhibit 10.6 of the Company's Form 10-K for the year ended December 31, 1996. IV-2 ITEM 14. (Continued) (a)3. Exhibits Exhibit No. Description (10.4) Third Amendment to B Credit Agreement, dated as of July 31, 1997, among the Company, Sherwood Medical Company, A.H. Robins Company, Incorporated, AC Acquisition Holding Company, the several banks and other financial institutions from time to time parties thereto and The Chase Manhattan Bank, as agent for the lenders thereunder, is incorporated by reference to Exhibit 10.8 of the Company's Form 10-K for the year ended December 31, 1997. (10.5) Letter, dated March 26, 1998, amending the B Credit Agreement, among the Company, AC Acquisition Holding Company, A. H. Robins Company, Incorporated, the lender parties thereto and The Chase Manhattan Bank, as Agent, dated as of September 9, 1994 and as amended is incorporated herein by reference to Exhibit 10.1 of the Company's Form 10-Q for the quarter ended March 31, 1998. (10.6)* 1980 Stock Option Plan, as amended, is incorporated by reference to Exhibit 10.3 of the Company's Form 10-K for the year ended December 31, 1991 (File 1-1225). (10.7)* Amendment to the 1980 Stock Option Plan is incorporated by reference to Exhibit 10.7 of the Company's Form 10-K for the year ended December 31, 1995. (10.8)* 1985 Stock Option Plan, as amended is, incorporated by reference to Exhibit 10.4 of the Company's Form 10-K for the year ended December 31, 1991 (File 1-1225). (10.9)* Amendment to the 1985 Stock Option Plan is incorporated by reference to Exhibit 10.9 of the Company's Form 10-K for the year ended December 31, 1995. (10.10)* Amendment to the 1985 Stock Option Plan is incorporated by reference to Exhibit 10.12 of the Company's Form 10-K for the year ended December 31, 1996. (10.11)* 1990 Stock Incentive Plan is incorporated by reference to Exhibit 28 of the Company's Form S-8 Registration Statement File No. 33-41434 under the Securities and Exchange Act of 1933, filed June 28, 1991 (File 1-1225). (10.12)* Amendment to the 1990 Stock Incentive Plan is incorporated by reference to Exhibit 10.13 of the Company's Form 10-K for the year ended December 31, 1995. * Denotes management contract or compensatory plan or arrangement required to be filed as an exhibit hereto. IV-3 ITEM 14. (Continued) (a)3. Exhibits Exhibit No. Description (10.13)* Amendment to the 1990 Stock Incentive Plan is incorporated by reference to Exhibit 10.21 of the Company's Form 10-K for the year ended December 31, 1996. (10.14)* 1993 Stock Incentive Plan, as amended to date, is incorporated by reference to Appendix III of the Company's definitive Proxy Statement filed March 18, 1999. (10.15)* 1996 Stock Incentive Plan, as amended to date, is incorporated by reference to Appendix II of the Company's definitive Proxy Statement filed March 18, 1999. (10.16)* 1999 Stock Incentive Plan, is incorporated by reference to Appendix I of the Company's definitive Proxy Statement filed March 18, 1999. (10.17)* Form of Stock Option Agreement (phased vesting). (10.18)* Form of Special Stock Option Agreement (phased vesting) is incorporated by reference to Exhibit 10.27 of the Company's Form 10-K for the year ended December 31, 1995. (10.19)* Form of Special Stock Option Agreement (three-year vesting) is incorporated by reference to Exhibit 10.28 of the Company's Form 10-K for the year ended December 31, 1995. (10.20)* Amendment to Special Stock Option Agreement is incorporated by reference to Exhibit 10.30 of the Company's Form 10-K for the year ended December 31, 1996. (10.21)* Form of Stock Option Agreement (transferable options). (10.22)* Form of Restricted Stock Performance Award Agreement under the 1990 Stock Incentive Plan, 1993 Stock Incentive Plan and 1996 Stock Incentive Plan for a three year period. (10.23)* Form of Restricted Stock Performance Award Agreement under the 1990 Stock Incentive Plan, 1993 Stock Incentive Plan and 1996 Stock Incentive Plan for a two year period. (10.24)* Special Restricted Stock Performance Award Agreement under the 1996 Stock Incentive Plan for William J. Murray. * Denotes management contract or compensatory plan or arrangement required to be filed as an exhibit hereto. IV-4 ITEM 14. (Continued) (a)3. Exhibits Exhibit No. Description (10.25)* Restricted Stock Trust Agreement under the 1993 Stock Incentive Plan is incorporated by reference to Exhibit 10.23 of the Company's Form 10-K for the year ended December 31, 1995. (10.26)* Management Incentive Plan, as amended to date. (10.27)* 1994 Restricted Stock Plan for Non-Employee Directors, as amended to date. (10.28)* Stock Option Plan for Non-Employee Directors. (10.29)* Savings Plan, as amended, is incorporated by reference to Exhibit 99 of the Company's Form S-8 Registration Statement File No. 33-50149 under the Securities and Exchange Act of 1933, filed September 1, 1993 (File 1-1225). (10.30)* Retirement Plan for Outside Directors, as amended on January 27, 1994, is incorporated by reference to Exhibit 10.12 of the Company's Form 10-K for the year ended December 31, 1993. (10.31)* Directors' Deferral Plan is incorporated by reference to Exhibit 10.37 of the Company's Form 10-K for the year ended December 31, 1996. (10.32)* Deferred Compensation Plan,as amended to date. (10.33)* Executive Retirement Plan is incorporated by reference to Exhibit 10.2 of the Company's Form 10-Q for the quarter ended September 30, 1997. (10.34)* Supplemental Employee Savings Plan is incorporated by reference to Exhibit 10.42 of the Company's Form 10-K for the year ended December 31, 1997. (10.35)* Supplemental Executive Retirement Plan is incorporated by reference to Exhibit 10.6 of the Company's Form 10-K for the year ended December 31, 1990 (File 1-1225). (10.36)* American Cyanamid Company's Supplemental Executive Retirement Plan is incorporated by reference to Exhibit 10K of American Cyanamid Company's Form 10-K for the year ended December 31, 1988 (File 1-3426). * Denotes management contract or compensatory plan or arrangement required to be filed as an exhibit hereto. IV-5 ITEM 14. (Continued) (a)3. Exhibits Exhibit No. Description (10.37)* American Cyanamid Company's Supplemental Employees Retirement Plan Trust Agreement, dated September 19, 1989, between American Cyanamid Company and Morgan Guaranty Trust Company of New York is incorporated by reference to Exhibit 10K of American Cyanamid Company's Form 10-K for the year ended December 31, 1989 (File 1-3426). (10.38)* American Cyanamid Company's ERISA Excess Retirement Plan is incorporated by reference to Exhibit 10N of American Cyanamid Company's Form 10-K for the year ended December 31, 1988 (File 1-3426). (10.39)* American Cyanamid Company's Excess Retirement Plan Trust Agreement, dated September 19, 1989, between American Cyanamid Company and Morgan Guaranty Trust Company of New York is incorporated by reference to Exhibit 10M of American Cyanamid Company's Form 10-K for the year ended December 31, 1989 (File 1-3426). (10.40)* Form of Severance Agreement entered into between the Company and the executive officers specified therein is incorporated by reference to Exhibit 10.43 of the Company's Form 10-K for the year ended December 31, 1997. (10.41)* Form of Severance Agreement entered into between the Company and the executive officers specified therein is incorporated by reference to Exhibit 10.1 of the Company's Form 10-Q for the quarter ended June 30, 1998. (12) Computation of Ratio of Earnings to Fixed Charges. (13) 1998 Annual Report to Shareholders. Such report, except for those portions thereof which are expressly incorporated by reference herein, is furnished solely for the information of the Commission and is not to be deemed "filed" as part of this filing. (21) Subsidiaries of the Company. (23) Consent of Independent Public Accountants relating to their report dated January 26, 1999, consenting to the incorporation thereof in Registration Statements on Form S-3 (File Nos. 33-45324 and 33-57339) and on Form S-8 (File Nos. 2-96127, 33-24068, 33-41434, 33-53733, 33-55449, 33-45970, 33-14458, 33-50149, 33-55456 and 333-15509) by reference to the Form 10-K of the Company filed for the year ended December 31, 1998. * Denotes management contract or compensatory plan or arrangement required to be filed as an exhibit hereto. IV-6 ITEM 14. (Continued) (a)3. Exhibits Exhibit No. Description (27) Financial Data Schedule. (99) Cautionary Statements regarding "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995. (b) Reports on Form 8-K A Current Report on Form 8-K regarding the Company's termination of the merger agreement with Monsanto Company was filed on October 13, 1998. IV-7 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To American Home Products Corporation: We have audited in accordance with generally accepted auditing standards, the consolidated financial statements included in American Home Products Corporation's Annual Report to Shareholders incorporated by reference in this Form 10-K, and have issued our report thereon dated January 26, 1999. Our audit was made for the purpose of forming an opinion on those statements taken as a whole. The schedule listed in the accompanying index is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. The schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP New York, N.Y. January 26, 1999 IV-8 American Home Products Corporation and Subsidiaries Schedule II - Valuation and Qualifying Accounts For the Years Ended December 31, 1998, 1997 and 1996 (Dollars in thousands)
Column A Column B Column C Column D Column E Balance Balance at at Beginning Deductions End of Period Additions (A) of Period Description Year ended 12/31/98: Allowance for doubtful accounts $168,425 $ 58,685 $ 44,041 $183,069 Allowance for cash discounts 28,730 236,273 225,532 39,471 Allowance for deferred tax assets 299,424 10,245 60,618 249,051 $496,579 $305,203 $330,191 $471,591 Year ended 12/31/97: Allowance for doubtful accounts $179,980 $ 9,974 $ 21,529 $168,425 Allowance for cash discounts 24,141 226,284 221,695 28,730 Allowance for deferred tax assets 294,840 19,486 14,902 299,424 $498,961 $255,744 $258,126 $496,579 Year ended 12/31/96: Allowance for doubtful accounts $108,164 $ 88,273 $ 16,457 $179,980 Allowance for cash discounts 27,445 235,802 239,106 24,141 Allowance for deferred tax assets 206,644 117,569 29,373 294,840 $342,253 $441,644 $284,936 $498,961
(A) Represents amounts used for the purposes for which the accounts were created and reversal of amounts no longer required. IV-9 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized. AMERICAN HOME PRODUCTS CORPORATION (Registrant) March 29, 1999 By /S/ Robert G. Blount Robert G. Blount Senior Executive Vice President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signatures Title Date Principal Executive Officer: /S/ John R. Stafford Chairman, President March 29, 1999 John R. Stafford and Chief Executive Officer Principal Financial Officer: /S/ Robert G. Blount Senior Executive Vice March 29, 1999 Robert G. Blount President and Director Principal Accounting Officer: /S/ Paul J. Jones Vice President and March 29, 1999 Paul J. Jones Comptroller Directors: /S/ Clifford L. Alexander, Jr. Director March 29, 1999 Clifford L. Alexander, Jr. /S/ Frank A. Bennack, Jr. Director March 29, 1999 Frank A. Bennack, Jr. /S/ Robert Essner Director March 29, 1999 Robert Essner IV-10 Signatures Title Date /S/ John D. Feerick Director March 29, 1999 John D. Feerick /S/ John P. Mascotte Director March 29, 1999 John P. Mascotte /S/ Mary Lake Polan, M.D., Ph.D. Director March 29, 1999 Mary Lake Polan, M.D., Ph.D. /S/ Ivan G. Seidenberg Director March 29, 1999 Ivan G. Seidenberg /S/ John R. Torell III Director March 29, 1999 John R. Torell III IV-11 INDEX TO EXHIBITS Exhibit No. Description (10.17)* Form of Stock Option Agreement (phased vesting). (10.21)* Form of Stock Option Agreement (transferable options). (10.22)* Form of Restricted Stock Performance Award Agreement under the 1990 Stock Incentive Plan, 1993 Stock Incentive Plan and 1996 Stock Incentive Plan for a three year period. (10.23)* Form of Restricted Stock Performance Award Agreement under the 1990 Stock Incentive Plan, 1993 Stock Incentive Plan and 1996 Stock Incentive Plan for a two year period. (10.24)* Special Restricted Stock Performance Award Agreement under the 1996 Stock Incentive Plan for William J. Murray. (10.26)* Management Incentive Plan, as amended to date. (10.27)* 1994 Restricted Stock Plan for Non-Employee Directors, as amended to date. (10.28)* Stock Option Plan for Non-Employee Directors. (10.32)* Deferred Compensation Plan, as amended to date. (12) Computation of Ratio of Earnings to Fixed Charges. (13) 1998 Annual Report to Shareholders. Such report, except for those portions thereof which are expressly incorporated by reference herein, is furnished solely for the information of the Commission and is not to be deemed "filed" as part of this filing. (21) Subsidiaries of the Company. (23) Consent of Independent Public Accountants relating to their report dated January 26, 1999, consenting to the incorporation thereof in Registration Statements on Form S-3 (File Nos. 33-45324 and 33-57339) and on Form S-8 (File Nos. 2-96127, 33-24068, 33-41434, 33-53733, 33-55449, 33-45970, 33-14458, 33-50149, 33-55456 and 333-15509) by reference to the Form 10-K of the Company filed for the year ended December 31, 1998. (27) Financial Data Schedule. (99) Cautionary Statements regarding "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995. * Denotes management contract or compensatory plan or arrangement required to be filed as an exhibit hereto. EX-10.17 2 Exhibit 10.17 AMERICAN HOME PRODUCTS CORPORATION STOCK OPTION AGREEMENT (Phased Vesting) UNDER: [Name and address] DATED: OPTION PRICE: INCENTIVE STOCK OPTION SHARES: NON-QUALIFIED STOCK OPTION SHARES: 1. Under the terms and conditions of this Agreement and of the American Home Products Corporation (the "Company") 1996 Stock Incentive Plan (the "Plan"), a copy of which is attached hereto and incorporated herein by reference, the Company hereby grants to the Optionee an option or options (together, the "Option") to purchase the number of shares of the Company's common stock as specified above ("Option Shares") at the option price also above specified. Capitalized terms not otherwise defined herein have the meanings assigned to them in the Plan. 2. This Option may be exercised, in whole or in part from time to time in any whole number of Option Shares, upon and after the earlier of (i) in the case of the Incentive Stock Option, if any, and Non-Qualified Stock Option, respectively, with respect to one-third of the Option Shares (rounded down), the date that is one year from the date of grant of this Option, with respect to an additional one-third of the Option Shares (rounded down), the date that is two years from the date of grant of this Option and, with respect to the remaining one-third of the Option Shares, the date that is three years from the date of grant of this Option, or (ii) the date of the death, Disability or Retirement (each as defined in the Plan) of Optionee, subject to the provisions of Section 5 of the Plan which generally requires that at the time of exercise or the date of termination of Optionee's employment with the Company and its subsidiaries, the Optionee is or was employed by the Company or one or more of its subsidiaries and has been continuously employed by the Company or one or more of its subsidiaries for at least two years and since the date of grant. Once this Option becomes exercisable, it shall remain exercisable until its expiration as described in paragraph 3 below. To the extent Option Shares have been purchased pursuant to the exercise of this Option, such shares shall no longer be available for purchase hereunder. The date after which this Option may be exercised will be accelerated upon a Change in Control of the Company (as defined in the Plan) and upon such occurrence may be cashed out at the discretion of the Compensation and Benefits Committee on the terms described in Section 9 of the Plan. 3. This Option shall expire upon the date that is ten years from the date of grant or earlier as provided in Section 5 of the Plan which provides, among other things, that Options shall expire upon the first to occur of the following: (i) the date that is three years from the date of Optionee's death, Disability or Retirement, (ii) the date that is three months from the date of the termination of Optionee's employment with the Company and its subsidiaries by the Company or any of its subsidiaries for any reason other than death, Disability, Retirement or deliberate gross misconduct (as determined by the Compensation and Benefits Committee), or (iii) immediately upon the date of (A) the termination of Optionee's employment with the Company and its subsidiaries by the Company or any of its subsidiaries because of Optionee's deliberate gross misconduct (as determined by the Compensation and Benefits Committee), (B) Optionee's voluntary termination of employment with the Company and its subsidiaries, or (C) Optionee's violation of (x) the noncompetition, or cooperation provisions of Section 5(g) of the Plan or (y) the undertaking not to deliberately cause substantial harm to the Company as set forth in Section 5(g) of the Plan. 4. To the extent any Incentive Stock Option granted hereby becomes exercisable for the first time in the aggregate amount of more than $100,000 (fair market value at time of grant) during any calendar year (including for this purpose any other Incentive Stock Options previously granted to the Optionee by the Company), such excess will be treated as a non-qualified stock option under U.S. federal tax provisions, if applicable. In addition, any such incentive stock option exercised by Optionee after three months after separation from service to the Company (or after one year after total and permanent disability) will be treated as a non-qualified stock option under applicable U.S. federal tax provisions. 5. This Option may be exercised by sending the Treasurer of the Company an option exercise notice indicating the number of Option Shares for which the Option is to be exercised at that time and the form in which the certificates are to be registered for Option Shares purchased (in the name of the Optionee or in Optionee's name and that of another person(s) as joint tenants with the right of survivorship). This notice shall be accompanied by payment of the Option Price for the Option Shares being purchased in the form of (i) a personal or bank check in U.S. Dollars payable to American Home Products Corporation and drawn on or payable at a United States bank and/or (ii) shares of the Company's common stock issued in the Optionee's name and duly assigned to the Company or (iii) by any other form of consideration which has been approved by the Compensation and Benefits Committee, as and to the extent provided and permitted by Section 5(d) of the Plan. Notwithstanding anything to the contrary herein, the Company or its subsidiaries, as appropriate, shall have the right to deduct from the number of Option Shares to be delivered upon exercise such number of Option Shares as may be necessary to satisfy all federal, state or local taxes or other deductions legally required to be withheld or in the alternative may require the Optionee to deliver to the Company or a subsidiary an amount of cash or number of shares of common stock of the Company to satisfy such withholding. 6. This Agreement and this Option as well as the Company's obligation to sell and deliver Option Shares covered by this Option is subject to all federal, state and other laws, rules and regulations of the United States and/or of the country wherein the Optionee resides or is employed. Compliance with any recording, protocolization or registration requirements and payment of any fees or taxes applicable to this Agreement or the transactions it contemplates are the exclusive responsibility of the Optionee. 7. This Option is not transferable or assignable other than by will or by the laws of descent and distribution and may be exercised during the Optionee's lifetime only by him or her. After the Optionee's death the Option may be exercised only by the Optionee's legal representative or legatee or such other person designated by an appropriate court as the person entitled to make such exercise. The Option may be exercised after the Optionee's death only to the extent that Optionee was entitled to exercise it at the time of Optionee's death. 8. In the event that this Agreement also contains a grant of a Stock Appreciation Right (an "SAR") in connection with the Option, the terms of the SAR shall be governed by the provisions of Section 6 of the Plan. 9. Subject to the express provisions of the Plan, this Agreement and the Plan are to be interpreted and administered by the Compensation and Benefits Committee, whose determination will be final. 10. This Agreement shall be governed by the laws of the State of Delaware and in accordance with such federal law as may be applicable. AMERICAN HOME PRODUCTS CORPORATION /s/ John R. Stafford Chairman of the Board Accepted and agreed to: Optionee's Signature Optionee's Social Security Number - ------------------------ -------------------------------- EX-10.21 3 Exhibit 10.21 AMERICAN HOME PRODUCTS CORPORATION STOCK OPTION AGREEMENT (Transferable Option) UNDER: [Name and address] DATED: OPTION PRICE: INCENTIVE STOCK OPTION SHARES: NON-QUALIFIED STOCK OPTION SHARES: 1. Under the terms and conditions of this Agreement and of the American Home Products Corporation (the "Company") 1996 Stock Incentive Plan (the "Plan"), a copy of which is attached hereto and incorporated herein by reference, the Company hereby grants to the Optionee an option or options (together, the "Option") to purchase the number of shares of the Company's common stock as specified above ("Option Shares") at the option price also above specified. Capitalized terms not otherwise defined herein have the meanings assigned to them in the Plan. 2. This Option may be exercised, in whole or in part from time to time in any whole number of Option Shares, upon and after the earlier of (i) in the case of the Incentive Stock Option, if any, and Non-Qualified Stock Option, respectively, with respect to one-third of the Option Shares (rounded down), the date that is one year from the date of grant of this Option, with respect to an additional one-third of the Option Shares (rounded down), the date that is two years from the date of grant of this Option and, with respect to the remaining one-third of the Option Shares, the date that is three years from the date of grant of this Option, or (ii) the date of the death, Disability or Retirement (each as defined in the Plan) of Optionee, subject to the provisions of Section 5 of the Plan which generally requires that at the time of exercise or the date of termination of Optionee's employment with the Company and its subsidiaries, the Optionee is or was employed by the Company or one or more of its subsidiaries and has been continuously employed by the Company or one or more of its subsidiaries for at least two years and since the date of grant. Once this Option becomes exercisable, it shall remain exercisable until its expiration as described in paragraph 3 below. To the extent Option Shares have been purchased pursuant to the exercise of this Option, such shares shall no longer be available for purchase hereunder. The date after which this Option may be exercised will be accelerated upon a Change in Control of the Company (as defined in the Plan) and upon such occurrence may be cashed out at the discretion of the Compensation and Benefits Committee on the terms described in Section 9 of the Plan. 3. This Option shall expire upon the date that is ten years from the date of grant or earlier as provided in Section 5 of the Plan which provides, among other things, that Options shall expire upon the first to occur of the following: (i) the date that is three years from the date of Optionee's death, Disability or Retirement, (ii) the date that is three months from the date of the termination of Optionee's employment with the Company and its subsidiaries by the Company or any of its subsidiaries for any reason other than death, Disability, Retirement or deliberate gross misconduct (as determined by the Compensation and Benefits Committee), or (iii) immediately upon the date of (A) the termination of Optionee's employment with the Company and its subsidiaries by the Company or any of its subsidiaries because of Optionee's deliberate gross misconduct (as determined by the Compensation and Benefits Committee), (B) Optionee's voluntary termination of employment with the Company and its subsidiaries, or (C) Optionee's violation of (x) the noncompetition, or cooperation provisions of Section 5(g) of the Plan or (y) the undertaking not to deliberately cause substantial harm to the Company as set forth in Section 5(g) of the Plan. 4. To the extent any Incentive Stock Option granted hereby becomes exercisable for the first time in the aggregate amount of more than $100,000 (fair market value at time of grant) during any calendar year (including for this purpose any other Incentive Stock Options previously granted to the Optionee by the Company), such excess will be treated as a non-qualified stock option under U.S. federal tax provisions, if applicable. In addition, any such incentive stock option exercised by Optionee after three months after separation from service to the Company (or after one year after total and permanent disability) will be treated as a non-qualified stock option under applicable U.S. federal tax provisions. 5. This Option may be exercised by sending the Treasurer of the Company an option exercise notice indicating the number of Option Shares for which the Option is to be exercised at that time and the form in which the certificates are to be registered for Option Shares purchased in the name of the Optionee (or a Transferee (as defined in paragraph 7, below), or in Optionee's name and that of another person(s) as joint tenants with the right of survivorship). This notice shall be accompanied by payment of the Option Price for the Option Shares being purchased in the form of (i) personal or bank check in U.S. Dollars payable to American Home Products Corporation and drawn on or payable at a United States bank and/or (ii) shares of the Company's common stock issued in the Optionee's (or permitted Transferee's) name and duly assigned to the Company or (iii) by any other form of consideration which has been approved by the Compensation and Benefits Committee, as and to the extent provided and permitted by Section 5(d) of the Plan. Notwithstanding anything to the contrary herein, the Company or its subsidiaries, as appropriate, shall have the right to deduct from the number of Option Shares to be delivered upon exercise such number of Option Shares as may be necessary to satisfy all federal, state or local taxes or other deductions legally required to be withheld or in the alternative may require the Optionee to deliver to the Company or a subsidiary an amount of cash or number of shares of common stock of the Company to satisfy such withholding. 6. This Agreement and this Option as well as the Company's obligation to sell and deliver Option Shares covered by this Option is subject to all federal, state and other laws, rules and regulations of the United States and/or of the country wherein the Optionee resides or is employed. Compliance with any recording, protocolization or registration requirements and payment of any fees or taxes applicable to this Agreement or the transactions it contemplates are the exclusive responsibility of the Optionee. 7. This Option is not transferable or assignable other than by will or by the laws of descent and distribution and may be exercised during the Optionee's lifetime only by Optionee except that the Optionee may irrevocably transfer all or a portion of the non-qualified stock options represented hereby to (i) the spouse (current or former), children, stepchildren, grandchildren or step-grandchildren of the Optionee ("Immediate Family Members"), (ii) a trust or trusts for the exclusive benefit of such Immediate Family Members, or (iii) a general or limited partnership or other entity in which such Immediate Family Members are the only partners or beneficial owners, provided that (x) there may be no consideration for any such transfer, (y) the Optionee submits to the Company an Option Transfer Form duly completed and executed by the Optionee and Transferee in the form attached as Exhibit A hereto, and (z) subsequent transfers shall be prohibited except by will or the laws of descent and distribution. Following transfer, any such Option shall continue to be subject to the same terms and conditions as were applicable immediately prior to transfer, provided that for purposes of the Plan the term "Optionee" shall be deemed to include a permitted transferee hereunder (the "Transferee"), provided, however, that (i) the events of death, Disability, Retirement or other termination of employment (and any other provision regarding employment) described in paragraphs 2 and 3 of this Agreement and Sections 5(f) and 5(g) of the Plan shall continue to be applied with respect to the Optionee, and following any such events, the transferred Option shall be exercisable by the Transferee only to the extent, and for the periods specified in the Plan, (ii) the cashless exercise program referred to in Section 5(d) of the Plan shall not apply to Transferee unless specifically permitted by the Committee, and (iii) Section 6A of the Plan shall not apply to Transferee. If such Option is transferred to a Transferee, upon exercise of such Option, if any taxes are withheld from the proceeds remitted (in cash or stock) to Transferee or if the Transferee separately satisfies any withholding tax obligation, the amount of the withholding tax shall be deemed to be a loan from Transferee to Optionee. 8. After the Optionee's death the Option may be exercised only by the Optionee's legal representative or legatee or such other person designated by an appropriate court as the person entitled to make such exercise or, subject to paragraph 7 above, by other Transferees. The Option may be exercised after the Optionee's death by any permitted distributee or Transferee only to the extent that he or she was entitled to exercise it at the time of Optionee's death. 9. In the event that this Agreement also contains a grant of a Stock Appreciation Right (an "SAR") in connection with the Option, the terms of the SAR shall be governed by the provisions of Section 6 of the Plan, provided, however, that any permitted transfer of an Option, in accordance with paragraph 7 hereof, shall result in the automatic termination of any SARs in tandem with such Option. 10. Subject to the express provisions of the Plan, this Agreement and the Plan are to be interpreted and administered by the Compensation and Benefits Committee, whose determination will be final. 11. This Agreement shall be governed by the laws of the State of Delaware and in accordance with such federal law as may be applicable. AMERICAN HOME PRODUCTS CORPORATION /s/ John R. Stafford Chairman of the Board Accepted and agreed to: Optionee's Signature Optionee's Social Security Number - ------------------------ -------------------------------- EXHIBIT A OPTION TRANSFER FORM Reference is made to the Stock Option Agreement dated _____________________ (the "Agreement") under which American Home Products Corporation (the "Company") granted to the undersigned transferor ("Optionee") non-qualified stock options covering _________________ shares of the Company's Common Stock under the 1996 Stock Incentive Plan (the "Plan"). Capitalized terms used herein without definition are used as defined in the Agreement and the Plan. The Optionee hereby transfers non-qualified stock options covering __________________ shares of the Company's Common Stock (the "Options") granted under the Plan pursuant to the Agreement to the following transferee (the "Transferee"): - --------------------------- --------------------------- Name of person or entity Social security or tax ID number - --------------------------- Type of entity (if applicable) - --------------------------- Relationship to Optionee - ----------------------------------------------------------------- Address The Optionee and, by its execution of this form, the Transferee, hereby represent and warrant to the Company that the Transferee is a permitted transferee in accordance with paragraph 7 of the Agreement and under Section 5(h) of the Plan. It is understood and agreed by Optionee and Transferee that (i) the Committee shall be entitled, in its sole discretion, to determine whether such transfer is in accordance with such requirements, and (ii) the Company and the Committee shall be under no obligation to notify the Transferee of the termination date of any Option transferred hereunder. The Transferee hereby agrees, subject to paragraph 7 of the Agreement, to be bound by all of the terms, conditions and limitations set forth in the Agreement and the Plan binding upon the Optionee under the Agreement, and specifically understands that (i) the events of death, Disability, Retirement or other termination of employment (and any other provisions regarding employment) described in paragraphs 2 and 3 of the Agreement and Sections 5(f) and 5(g) of the Plan shall continue to be applied with respect to the Optionee, and following any such events, the transferred Options shall be exercisable by the Transferee only to the extent, and for the periods specified in the Plan, and (ii) the Options may not, without the consent of the Committee, be transferred by the Transferee except by will or pursuant to the laws of descent and distribution. The Transferee understands and acknowledges that any shares of Common Stock purchased by the Transferee pursuant to the Options may not be registered under the Securities Act of 1933, as amended, and that such shares may contain a restrictive legend in substantially the form as set forth below (in addition to any legend required under applicable state securities laws): THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO THE SECURITIES UNDER SUCH ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED OR UNLESS SOLD PURSUANT TO RULE 144 OF SUCH ACT. In order to enforce the foregoing, the Company may impose stop-transfer instructions with respect to such securities until such time as the Company is reasonably satisfied that such restrictions are no longer applicable to the sale of such securities. The Optionee further represents and warrants to the Company and the Transferee that (i) Optionee has delivered to the Transferee a copy of the Agreement, (ii) Optionee has consulted with qualified income and estate tax advisors in determining to transfer the Options to the Transferee or waives any such requirement to do so and (iii) Optionee has considered and understands each of the following: 1. The transfer to the Transferee is irrevocable. 2. Optionee will not control the exercise of the Options once they have been transferred. 3. Optionee is assuming all of the risks and possible consequences associated with the transfer of the Options, and acknowledges that the Company and its representatives are not responsible or liable for any tax, penalty, judgment or outcome resulting from the transfer of the Options. OPTIONEE: TRANSFEREE: - ---------------------------------- ---------------------------------- EX-10.22 4 Exhibit 10.22 AMERICAN HOME PRODUCTS CORPORATION RESTRICTED STOCK PERFORMANCE AWARD AGREEMENT UNDER THE 1996 STOCK INCENTIVE PLAN DATE: NUMBER OF SHARES SUBJECT TO TARGET AWARD: [Name] [Address] Under the terms and conditions of this Agreement and of the Company's 1996 Stock Incentive Plan (the "Plan"), a copy of which has been delivered to you and is made a part hereof, the Company hereby awards to you units (the "Units") representing shares of the Company's Common Stock (the "Common Stock") subject to the restrictions set forth in this Agreement in the amount set forth above (the "Target Award"). Upon the satisfaction by the Company of certain performance criteria as described in Paragraph 3 of this Agreement, the Units will be converted into shares of the Company's Common Stock entitling the holder to all of the rights of a stockholder as described herein but subject to the restrictions set forth in this Agreement (the "Restricted Stock"). Except as provided herein, the terms used in this Agreement shall have the same meanings as in the Plan. 1. Rights as Stockholders. During the period from the date of this Agreement through the Conversion Date (as defined herein), no shares of the Company's Common Stock represented by the Units will be earmarked for you or your account nor shall you have any of the rights of a stockholder with respect to such shares. Upon issuance of the Restricted Stock as of the Conversion Date you will be the owner of record of the shares of Common Stock represented by the Restricted Stock and shall receive either (through book-entry form) a credit to an account maintained on your behalf or a stock certificate representing such shares of Common Stock and you shall be entitled to all of the rights of a stockholder of the Company, including the right to vote and the right to receive dividends, subject to the restrictions stated in this Agreement and referred to in the legend described in Paragraph 7 below and subject to the additional provisions of Paragraph 4. If you receive any additional shares by reason of being the holder of Restricted Stock under this Agreement, all the additional shares shall be subject to the provisions of this Agreement and all certificates evidencing ownership of the additional shares shall bear the legend. 2. Restricted Period. During the period from the date of this Agreement through the date which is three years after such date (the "Restricted Period"), you may not sell, transfer, assign, pledge, or otherwise encumber or dispose of any Units or Restricted Stock granted hereunder. 3. Conversion to Restricted Stock. (a) At meetings of the Committee to be held within 60 days after the end of each of the current year and the two immediately succeeding years or at such other time or times as the Committee in its discretion deems appropriate, the Committee shall compare the EPS (as defined below) for such year with the EPS Target (as defined below) for such year (the date on which each such determination is made being referred to herein as a "Conversion Date"). If, on the date of such meeting, the Committee determines that, with respect to the preceding year: (i) EPS is less than 90% of the EPS Target, then all rights with respect to one-third of the Target Award (the "Annual Target Amount") shall thereupon be forfeited; (ii) EPS is greater than or equal to 90% of the EPS Target and less than or equal to 95% of the EPS Target, then Units representing 75% of the Annual Target Amount shall be converted into Restricted Stock and all rights with respect to the remaining portion of such Annual Target Amount shall thereupon be forfeited; (iii) EPS is greater than 95% of the EPS Target and less than or equal to 105% of the EPS Target, then Units representing the entire Annual Target Amount shall be converted into Restricted Stock; and (iv) EPS is greater than 105% of the EPS Target, then Units representing the entire Annual Target Amount shall be converted into Restricted Stock and you shall be entitled to receive an additional grant of Restricted Stock representing 25% of the Annual Target Amount (a "Bonus Award"); such additional grant to be made by the Committee at such meeting. (b) Notwithstanding anything to the contrary contained in this Agreement, Units shall be converted into Restricted Stock in whole numbers of shares only and, if necessary, (i) the Annual Target Amount shall be rounded up or down (A) to the nearest whole number for the first two years and (B) for the third year to equal, together with the Annual Target Amounts for the first two years, the Target Award; and (ii) the calculations based upon such amounts in subparagraphs 3(a)(ii) and 3(a)(iv) above shall be rounded up or down to the nearest whole number. (c) As used in this Agreement, the term: (i) "EPS" for any year means the earnings or net income per share of common stock of the Company for such year, adjusted to exclude the effect of extraordinary or unusual items of income or expense, all as determined in good faith by the Committee acting in its sole discretion. (ii) "EPS Target" shall be $1.88 for 1998 and, for 1999 and 2000, shall be the amount established by the Committee at a meeting to be held no later than March 1 of each such year; provided, however, that if for any reason the Committee shall determine that the EPS Target is no longer a practicable or appropriate measure of financial performance, the Committee may take action to substitute another financial measure as it deems appropriate under the circumstances. 4. Restricted Stock Trust. (a) Subject to Paragraph 4(b) below, you are eligible to make a one-time irrevocable election to cause the Company to contribute as of the Conversion Date the shares of Restricted Stock, issuable hereunder, to the Restricted Stock Trust (as defined below) by completing the form set forth on Schedule A attached hereto wherein such shares of stock shall be held, subject to claims of the Company's creditors, until delivery to you under the terms of Paragraph 5 herein. Subject to Paragraph 4(b), below, if you do not make such election, such shares shall be delivered to you as provided in Paragraph 5(a)(i) of this Agreement. (b) Notwithstanding anything to the contrary contained in this Agreement, if you are or, in the judgment of the Committee, are expected to be a Named Executive Officer with respect to any year in which a Conversion Date occurs, then you will be deemed to have made the election under Paragraph 4(a) above to have the Restricted Stock into which Units shall be converted on such date and thereafter contributed to the Restricted Stock Trust. (c) For purposes of this Agreement: (i) "Named Executive Officer" shall mean the Chief Executive Officer of the Company or any of the four highest compensated officers (other than the Chief Executive Officer of the Company) whose total compensation payable is required to be reported to shareholders under the Securities Exchange Act of 1934, as amended (the "1934 Act"); and (ii) "Restricted Stock Trust" means the trust fund established under the Restricted Stock Trust Agreement dated as of April 20, 1994 (the "Trust Agreement") to accommodate the deferral of delivery of shares of Common Stock represented by Units and/or Restricted Stock (and dividends paid thereon) as provided in Paragraph 5(a)(ii) of this agreement, which trust fund is subject to the claims of the Company's general creditors under federal and state law in the event of insolvency of the Company as described in the Trust Agreement. 5. Delivery of Shares of Common Stock. (a) Subject to Paragraphs 4 and 9 of this Agreement, as soon as practicable after the Restricted Period (or six months after the Conversion Date with respect to a Bonus Award) all shares of Restricted Stock granted hereunder shall be cancelled and in replacement thereof you shall receive either (through book-entry form) a credit to an account maintained on your behalf or a certificate representing the Common Stock free of any restrictive legend other than as may be required by applicable state or federal securities law, such Common Stock to be either (i) so delivered to you promptly or (ii) if you have made or are deemed to have made the election under Paragraph 4 above, contributed to the Restricted Stock Trust, in which case such shares shall be maintained in the Restricted Stock Trust and delivery shall be deferred until after your Retirement in accordance with the election set forth on Schedule A attached hereto, or if either (1) no such election is made or (2) your employment with the Company is terminated prior to Retirement for any reason (including death), delivery shall be made on the first business day of the calendar year following your termination of employment or as otherwise provided in the Trust Agreement. (b) Notwithstanding any other provisions hereof, the number of shares of Common Stock which shall be delivered to you pursuant to Paragraph 5(a) either directly or from the Restricted Stock Trust shall be (i) the number of such shares which would have been delivered in the absence of this Paragraph 5(b) minus (ii) the number of whole shares of Common Stock necessary to satisfy the minimum federal, state and/or local income tax withholding obligations which are imposed on the Company by applicable law in respect of the delivery of such award as well as other withholding obligations (e.g. Social Security and Medicare) which may be due and payable under applicable law as of the lapse of the Restricted Period as defined in Paragraph 2, whether or not delivery of such shares is deferred under Paragraph 4 (and which may be satisfied by the reduction effected hereby in the number of deliverable shares), it being understood that the value of the shares referred to in clause (ii) above shall be determined, for the purposes of satisfying such withholding obligations, on the basis of the average of the high and low per share prices for the Common Stock as reported on the Consolidated Transaction Reporting System on the designated date of delivery, or on such other reasonable basis for determining fair market value as the Committee may from time to time adopt. 6. Termination of Employment. (a) Subject to Section 7(f) of the Plan, in the event of your termination of employment during the Restricted Period for any reason other than death, Disability or Retirement, you shall forfeit all rights to all Units and Restricted Stock granted hereunder and you agree (i) to assign, transfer, and deliver the Restricted Stock to the Company and (ii) that you shall cease to be a shareholder of the Company with respect to such shares, provided, the Committee may provide for a partial or complete exception to this requirement as it deems equitable in its sole discretion. (b) In the event that your employment is terminated due to Disability or Retirement, or in the event of your death, vesting of all shares of Restricted Stock covered by the Target Award and any related Bonus Award and delivery of the shares of Common Stock of the Company represented thereby will be made to you or your designated beneficiary or your legal representative, legatee or such other person designated by an appropriate court as entitled to receive the same, as the case may be, on the terms and, subject to the conditions of this Agreement, including Paragraph 3 above. 7. Legend. Each book-entry or certificate evidencing ownership of Restricted Stock issued during the Restricted Period shall bear the following legend: "These shares have been issued or transferred subject to a Restricted Stock Performance Award and are subject to substantial restrictions, including a prohibition against transfer and a provision requiring transfer of these shares to the Company without payment in the event of termination of the employment of the registered owner under certain circumstances all as more particularly set forth in a Restricted Stock Performance Award Agreement dated May 21, 1998, a copy of which is on file with the Company." 8. Miscellaneous. This Agreement may not be amended except in writing and neither the existence of the Plan and this Agreement nor the Target Award granted hereby shall create any right to continue to be employed by the Corporation or its subsidiaries and your employment will continue to be at will and terminable at will by the Corporation. In the event of a conflict between this Agreement and the Plan, the Plan shall govern. 9. Compliance With Laws. (a) This Agreement shall be governed by the laws of the state of Delaware and any applicable laws of the United States. Notwithstanding anything herein to the contrary, the Corporation shall not be obligated to cause to be delivered any Restricted Stock or shares of Common Stock of the Company represented thereby pursuant to this Agreement unless and until the Company is advised by its counsel that the issuance of such shares either (through book-entry form) by a credit to an account maintained on your behalf or by delivery of certificates representing such shares is in compliance with all applicable laws and regulations of governmental authority. The Corporation shall in no event be obliged to register any securities pursuant to the Securities Act of 1933 (as now in effect or as hereafter amended) or to take any other action in order to cause the issuance of such shares either (through book-entry form) by a credit to an account maintained on your behalf or by delivery of certificates representing such shares to comply with any such law or regulation. (b) If you are subject to Section 16 of the 1934 Act, transactions under the Plan and this Agreement are intended to comply with all applicable conditions of Rule 16b-3 or its successors under the 1934 Act. To the extent any provision of the Plan, this Agreement or action by the Committee involving you is deemed not to comply with an applicable condition of Rule 16b-3, such provision or action shall be deemed null and void as to you, to the extent permitted by law and deemed advisable by the Committee. Moreover, in the event the Plan and/or this Agreement does not include a provision required by Rule 16b-3 to be stated therein, such provision (other than one relating to eligibility requirements or the price and amount of awards as applicable) shall be deemed automatically to be incorporated by reference into the Plan and/or this Agreement insofar as you are concerned, with such incorporation to be deemed effective as of the effective date of such Rule 16b-3 provision. In addition, the Committee in its discretion may cause the Company to retain custody of the certificates representing the Common Stock to be delivered under Paragraph 5 above so long as necessary or appropriate to ensure that any minimum holding period under Rule 16b-3 is satisfied. 10. No Change of Control. Notwithstanding Section 9 of the Plan, upon a Change in Control (as defined in the Plan), (A) the date upon and after which the Units will be converted to shares of Restricted Stock (or Common Stock free from restriction) will not be accelerated and (B) the Units (or shares of Restricted Stock) will not be cashed out, in each case unless and until the Compensation and Benefits Committee provides otherwise. Furthermore, you hereby waive all rights under the Severance Agreement entered into by and between you and the Company and approved by the Board on January 29, 1998 (the "Severance Agreement") to receive an amount in respect of the Units (or shares of Restricted Stock) in the event that this Agreement is terminated or such Units (or shares of Restricted Stock) are forfeited upon termination of your employment following a Change in Control (as defined in the Severance Agreement) to which you would otherwise be entitled thereunder. AMERICAN HOME PRODUCTS CORPORATION By: Corporate Treasurer Accepted and agreed to: - ------------------------- ---------------------------- Name (Please Print) Social Security Number - ------------------------- ---------------------------- Signature Date of Birth SCHEDULE A ELECTION FORM (To Be Completed in Conjunction with Your Restricted Stock Performance Award Agreement) I, , hereby make an election to defer distribution of all shares of Common Stock less those shares necessary to satisfy any applicable withholding obligation under Paragraph 5(b) of the Restricted Stock Performance Award Agreement (the "Agreement) and to cause the Company to contribute such shares to the Restricted Stock Trust (with any dividends thereon to be reinvested under the AHPC Master Investment Plan). See Note Below I, _______________________, hereby make an election to receive, after Retirement, a distribution of such number of shares in the Restricted Stock Trust to which I am entitled in substantially equal annual installments over a period not to exceed ten years as follows, subject to the provisions of the Agreement, including Paragraph 5, thereof (provided, however, that in the event of my death all remaining installments shall be accelerated and promptly distributed): Circle the number of annual installments: 2 3 4 5 6 7 8 9 10 These elections shall be irrevocable upon execution of the Agreement. - -------------------------- Signature of Executive - -------------------------- Dated: - -------------------------- Witnessed: NOTE: 1. If you are or are expected to be a Named Executive Officer with respect to any year in which a Conversion Date occurs, you will be deemed to have elected deferred distribution hereunder. Beneficiary Designation In the event of my death, I designate the following beneficiary (ies) to receive any shares of the Company's Common Stock to be distributed to me or which have been deferred on my behalf to the Restricted Stock Trust under this Agreement together with any dividends thereon. - -------------------------- Beneficiary (ies) - -------------------------- Contingent Beneficiary (ies) - -------------------------- Signature of Executive - -------------------------- Dated: - -------------------------- Witnessed: EX-10.23 5 Exhibit 10.23 AMERICAN HOME PRODUCTS CORPORATION RESTRICTED STOCK PERFORMANCE AWARD AGREEMENT UNDER THE 1996 STOCK INCENTIVE PLAN DATE: NUMBER OF SHARES SUBJECT TO TARGET AWARD: [Name] [Address] Under the terms and conditions of this Agreement and of the Company's 1996 Stock Incentive Plan (the "Plan"), a copy of which has been delivered to you and is made a part hereof, the Company hereby awards to you units (the "Units") representing shares of the Company's Common Stock (the "Common Stock") subject to the restrictions set forth in this Agreement in the amount set forth above (the "Target Award"). Upon the satisfaction by the Company of certain performance criteria as described in Paragraph 3 of this Agreement, the Units will be converted into shares of the Company's Common Stock entitling the holder to all of the rights of a stockholder as described herein but subject to the restrictions set forth in this Agreement (the "Restricted Stock"). Except as provided herein, the terms used in this Agreement shall have the same meanings as in the Plan. 1. Rights as Stockholders. During the period from the date of this Agreement through the Conversion Date (as defined herein), no shares of the Company's Common Stock represented by the Units will be earmarked for you or your account nor shall you have any of the rights of a stockholder with respect to such shares. Upon issuance of the Restricted Stock as of the Conversion Date you will be the owner of record of the shares of Common Stock represented by the Restricted Stock and shall receive either (through book-entry form) a credit to an account maintained on your behalf or a stock certificate representing such shares of Common Stock and you shall be entitled to all of the rights of a stockholder of the Company, including the right to vote and the right to receive dividends, subject to the restrictions stated in this Agreement and referred to in the legend described in Paragraph 7 below and subject to the additional provisions of Paragraph 4. If you receive any additional shares by reason of being the holder of Restricted Stock under this Agreement, all the additional shares shall be subject to the provisions of this Agreement and all certificates evidencing ownership of the additional shares shall bear the legend. 2. Restricted Period. During the period from the date of this Agreement through the date which is three years after such date (the "Restricted Period"), you may not sell, transfer, assign, pledge, or otherwise encumber or dispose of any Units or Restricted Stock granted hereunder. 3. Conversion to Restricted Stock. (a) At a meeting of the Committee to be held within 60 days after the end of 2000 or at such other time or times as the Committee in its discretion deems appropriate, the Committee shall compare the EPS (as defined below) with the EPS Target (as defined below). If, on the date of such meeting (the "Conversion Date"), the Committee determines that: (i) EPS is less than 90% of the EPS Target, then all rights with respect to the Target Award shall thereupon be forfeited; (ii) EPS is greater than or equal to 90% of the EPS Target and less than or equal to 95% of the EPS Target, then Units representing 75% of the Target Award shall be converted into Restricted Stock and all rights with respect to the remaining portion of such Target Award shall thereupon be forfeited; (iii) EPS is greater than 95% of the EPS Target and less than or equal to 105% of the EPS Target, then Units representing the entire Target Award shall be converted into Restricted Stock; and (iv) EPS is greater than 105% of the EPS Target, then Units representing the entire Target Award shall be converted into Restricted Stock and you shall be entitled to receive an additional grant of Restricted Stock representing 25% of the Target Award (a "Bonus Award"); such additional grant to be made by the Committee at such meeting. (b) Notwithstanding anything to the contrary contained in this Agreement, Units shall be converted into Restricted Stock in whole numbers of shares only and, if necessary, the calculations based upon such amounts in subparagraphs 3(a)(ii) and 3(a)(iv) above shall be rounded up or down to the nearest whole number. (c) As used in this Agreement, the term: (i) "EPS" means the earnings or net income per share of common stock of the Company for 2000, adjusted to exclude the effect of extraordinary or unusual items of income or expense, all as determined in good faith by the Committee acting in its sole discretion. (ii) "EPS Target" shall be the amount established by the Committee at a meeting to be held no later than March 1, 2000; provided, however, that if for any reason the Committee shall determine that the EPS Target is no longer a practicable or appropriate measure of financial performance, the Committee may take action to substitute another financial measure as it deems appropriate under the circumstances. 4. Restricted Stock Trust. (a) Subject to Paragraph 4(b) below, you are eligible to make a one-time irrevocable election to cause the Company to contribute as of the Conversion Date the shares of Restricted Stock, issuable hereunder, to the Restricted Stock Trust (as defined below) by completing the form set forth on Schedule A attached hereto wherein such shares of stock shall be held, subject to claims of the Company's creditors, until delivery to you under the terms of Paragraph 5 herein. Subject to Paragraph 4(b), below, if you do not make such election, such shares shall be delivered to you as provided in Paragraph 5(a)(i) of this Agreement. (b) Notwithstanding anything to the contrary contained in this Agreement, if you are or, in the judgment of the Committee, are expected to be a Named Executive Officer with respect to the year in which the Conversion Date occurs, then you will be deemed to have made the election under Paragraph 4(a) above to have the Restricted Stock issuable hereunder contributed to the Restricted Stock Trust. (c) For purposes of this Agreement: (i) "Named Executive Officer" shall mean the Chief Executive Officer of the Company or any of the four highest compensated officers (other than the Chief Executive Officer of the Company) whose total compensation payable is required to be reported to shareholders under the Securities Exchange Act of 1934, as amended (the "1934 Act"); and (ii) "Restricted Stock Trust" means the trust fund established under the Restricted Stock Trust Agreement dated as of April 20, 1994 (the "Trust Agreement") to accommodate the deferral of delivery of shares of Common Stock represented by Units and/or Restricted Stock (and dividends paid thereon) as provided in Paragraph 5(a)(ii) of this agreement, which trust fund is subject to the claims of the Company's general creditors under federal and state law in the event of insolvency of the Company as described in the Trust Agreement. 5. Delivery of Shares of Common Stock. (a) Subject to Paragraphs 4 and 9 of this Agreement, as soon as practicable after the Restricted Period (or six months after the Conversion Date with respect to a Bonus Award) all shares of Restricted Stock granted hereunder shall be cancelled and in replacement thereof you shall receive either (through book-entry form) a credit to an account maintained on your behalf or a certificate representing the Common Stock free of any restrictive legend other than as may be required by applicable state or federal securities law, such Common Stock to be either (i) so delivered to you promptly or (ii) if you have made or are deemed to have made the election under Paragraph 4 above, contributed to the Restricted Stock Trust, in which case such shares shall be maintained in the Restricted Stock Trust and delivery shall be deferred until after your Retirement in accordance with the election set forth on Schedule A attached hereto, or if either (1) no such election is made or (2) your employment with the Company is terminated prior to Retirement for any reason (including death), delivery shall be made on the first business day of the calendar year following your termination of employment or as otherwise provided in the Trust Agreement. (b) Notwithstanding any other provisions hereof, the number of shares of Common Stock which shall be delivered to you pursuant to Paragraph 5(a) either directly or from the Restricted Stock Trust shall be (i) the number of such shares which would have been delivered in the absence of this Paragraph 5(b) minus (ii) the number of whole shares of Common Stock necessary to satisfy the minimum federal, state and/or local income tax withholding obligations which are imposed on the Company by applicable law in respect of the delivery of such award as well as other withholding obligations (e.g. Social Security and Medicare) which may be due and payable under applicable law as of the lapse of the Restricted Period as defined in Paragraph 2, whether or not delivery of such shares is deferred under Paragraph 4 (and which may be satisfied by the reduction effected hereby in the number of deliverable shares), it being understood that the value of the shares referred to in clause (ii) above shall be determined, for the purposes of satisfying such withholding obligations, on the basis of the average of the high and low per share prices for the Common Stock as reported on the Consolidated Transaction Reporting System on the designated date of delivery, or on such other reasonable basis for determining fair market value as the Committee may from time to time adopt. 6. Termination of Employment. (a) Subject to Section 7(f) of the Plan, in the event of your termination of employment during the Restricted Period for any reason other than death, Disability or Retirement, you shall forfeit all rights to all Units and Restricted Stock granted hereunder and you agree (i) to assign, transfer, and deliver the Restricted Stock to the Company and (ii) that you shall cease to be a shareholder of the Company with respect to such shares, provided, the Committee may provide for a partial or complete exception to this requirement as it deems equitable in its sole discretion. (b) In the event that your employment is terminated due to Disability or Retirement, or in the event of your death, vesting of all shares of Restricted Stock covered by the Target Award and any related Bonus Award and delivery of the shares of Common Stock of the Company represented thereby will be made to you or your designated beneficiary or your legal representative, legatee or such other person designated by an appropriate court as entitled to receive the same, as the case may be, on the terms and, subject to the conditions of this Agreement, including Paragraph 3 above. 7. Legend. Each book-entry or certificate evidencing ownership of Restricted Stock issued during the Restricted Period shall bear the following legend: "These shares have been issued or transferred subject to a Restricted Stock Performance Award and are subject to substantial restrictions, including a prohibition against transfer and a provision requiring transfer of these shares to the Company without payment in the event of termination of the employment of the registered owner under certain circumstances all as more particularly set forth in a Restricted Stock Performance Award Agreement dated May 21, 1998, a copy of which is on file with the Company." 8. Miscellaneous. This Agreement may not be amended except in writing and neither the existence of the Plan and this Agreement nor the Target Award granted hereby shall create any right to continue to be employed by the Corporation or its subsidiaries and your employment will continue to be at will and terminable at will by the Corporation. In the event of a conflict between this Agreement and the Plan, the Plan shall govern. 9. Compliance With Laws. (a) This Agreement shall be governed by the laws of the state of Delaware and any applicable laws of the United States. Notwithstanding anything herein to the contrary, the Corporation shall not be obligated to cause to be delivered any Restricted Stock or shares of Common Stock of the Company represented thereby pursuant to this Agreement unless and until the Company is advised by its counsel that the issuance of such shares either (through book-entry form) by a credit to an account maintained on your behalf or by delivery of certificates representing such shares is in compliance with all applicable laws and regulations of governmental authority. The Corporation shall in no event be obliged to register any securities pursuant to the Securities Act of 1933 (as now in effect or as hereafter amended) or to take any other action in order to cause the issuance of such shares either (through book-entry form) by a credit to an account maintained on your behalf or by delivery of certificates representing such shares to comply with any such law or regulation. (b) If you are subject to Section 16 of the 1934 Act, transactions under the Plan and this Agreement are intended to comply with all applicable conditions of Rule 16b-3 or its successors under the 1934 Act. To the extent any provision of the Plan, this Agreement or action by the Committee involving you is deemed not to comply with an applicable condition of Rule 16b-3, such provision or action shall be deemed null and void as to you, to the extent permitted by law and deemed advisable by the Committee. Moreover, in the event the Plan and/or this Agreement does not include a provision required by Rule 16b-3 to be stated therein, such provision (other than one relating to eligibility requirements or the price and amount of awards as applicable) shall be deemed automatically to be incorporated by reference into the Plan and/or this Agreement insofar as you are concerned, with such incorporation to be deemed effective as of the effective date of such Rule 16b-3 provision. In addition, the Committee in its discretion may cause the Company to retain custody of the certificates representing the Common Stock to be delivered under Paragraph 5 above so long as necessary or appropriate to ensure that any minimum holding period under Rule 16b-3 is satisfied. 10. No Change of Control. Notwithstanding Section 9 of the Plan, upon a Change in Control (as defined in the Plan), (A) the date upon and after which the Units will be converted to shares of Restricted Stock (or Common Stock free from restriction) will not be accelerated and (B) the Units (or shares of Restricted Stock) will not be cashed out, in each case unless and until the Compensation and Benefits Committee provides otherwise. Furthermore, you hereby waive all rights under the Severance Agreement entered into by and between you and the Company and approved by the Board on January 29, 1998 (the "Severance Agreement") to receive an amount in respect of the Units (or shares of Restricted Stock) in the event that this Agreement is terminated or such Units (or shares of Restricted Stock) are forfeited upon termination of your employment following a Change in Control (as defined in the Severance Agreement) to which you would otherwise be entitled thereunder. AMERICAN HOME PRODUCTS CORPORATION By: Corporate Treasurer Accepted and agreed to: - --------------------------- --------------------------- Name (Please Print) Social Security Number - --------------------------- --------------------------- Signature Date of Birth SCHEDULE A ELECTION FORM (To Be Completed in Conjunction with Your Restricted Stock Performance Award Agreement) I, ___________________, hereby make an election to defer distribution of all shares of Common Stock less those shares necessary to satisfy any applicable withholding obligation under Paragraph 5(b) of the Restricted Stock Performance Award Agreement (the "Agreement") and to cause the Company to contribute such shares to the Restricted Stock Trust (with any dividends thereon to be reinvested under the AHPC Master Investment Plan). See Note Below I, ______________________, hereby make an election to receive, after Retirement, a distribution of such number of shares in the Restricted Stock Trust to which I am entitled in substantially equal annual installments over a period not to exceed ten years as follows, subject to the provisions of the Agreement, including Paragraph 5, thereof (provided, however, that in the event of my death all remaining installments shall be accelerated and distributed promptly): Circle the number of annual installments: 2 3 4 5 6 7 8 9 10 These elections shall be irrevocable upon execution of the Agreement. --------------------------------- Signature of Executive Dated: ______________________________________________________ Witnessed: __________________________________________________ NOTE: 1. If you are or are expected to be a Named Executive Officer with respect to any year in which an Anniversary Date occurs, you will be deemed to have elected deferred distribution hereunder. Beneficiary Designation In the event of my death, I designate the following beneficiary (ies) to receive any shares of the Company's Common Stock to be distributed to me or which have been deferred on my behalf to the Restricted Stock Trust under this Agreement together with any dividends thereon. -------------------------------------------------- Beneficiary (ies) -------------------------------------------------- Contingent Beneficiary (ies) ---------------------------------- Signature of Executive Dated: ______________________________________________________ Witnessed: ___________________________________________________ EX-10.24 6 Exhibit 10.24 AMERICAN HOME PRODUCTS CORPORATION SPECIAL RESTRICTED STOCK PERFORMANCE AWARD AGREEMENT UNDER THE 1996 STOCK INCENTIVE PLAN AS OF: JANUARY 28, 1999 NUMBER OF SHARES SUBJECT TO TARGET AWARD FOR 1999: 8,500 FOR 2000: 8,500 William J. Murray Five Giralda Farms Madison, New Jersey 07940 Under the terms and conditions of this Agreement and of the Company's 1996 Stock Incentive Plan (the "Plan"), a copy of which has been delivered to you and is made a part hereof, the Company hereby awards to you units (the "Units") representing shares of the Company's Common Stock (the "Common Stock") for 1999 and 2000, respectively, subject to the restrictions set forth in this Agreement, in the amounts set forth above (each a "Target Award"). Upon the satisfaction by the Company of the performance criteria as described in Paragraph 3 of this Agreement, the Units will be converted into shares of the Company's Common Stock entitling you to all of the rights of a stockholder as described herein but subject to the restrictions set forth in this Agreement (the "Restricted Stock"). Except as provided herein, the terms used in this Agreement shall have the same meanings as in the Plan. 1. Rights as Stockholders. During the period from the date of this Agreement through any Conversion Date (as defined herein), no shares of the Company's Common Stock represented by the Units will be earmarked for you or your account nor shall you have any of the rights of a stockholder with respect to such shares. Upon issuance of shares of Restricted Stock as of a Conversion Date, you will be the owner of record of the shares of Common Stock represented by such Restricted Stock and shall receive either (through book-entry form) a credit to an account maintained on your behalf or a stock certificate representing such shares of Common Stock and you shall be entitled to all of the rights of a stockholder of the Company, including the right to vote and the right to receive dividends, subject to the restrictions stated in this Agreement and referred to in the legend described in Paragraph 7 below and subject to the additional provisions of Paragraph 4. If you receive any additional shares by reason of being the holder of Restricted Stock under this Agreement, all the additional shares shall be subject to the provisions of this Agreement and all certificates evidencing ownership of the additional shares shall bear the legend. 2. Restricted Period. Except as set forth in Section 5 or 6(b), during the period from the date of this Agreement through the date on which the Committee determines whether performance targets have been met for 2000 (the "Restricted Period"), you may not sell, transfer, assign, pledge, or otherwise encumber or dispose of any Units or Restricted Stock granted hereunder. 3. Conversion to Restricted Stock. (a) Except if this Agreement is earlier terminated in accordance with its terms, at meetings of the Committee to be held within 60 days after the end of each of 1999 and 2000, respectively, or at such other time or times as the Committee in its discretion deems appropriate, the Committee shall compare the IBT (as defined below) for the preceding year with the Target IBT (as defined below) for such year (the date on which each such determination is made being referred to herein as a "Conversion Date") and, if the Committee determines for such year that: (i) IBT is less than 90% of the Target IBT, then all rights with respect to the Target Award for such year (the "Annual Target Amount") shall thereupon be forfeited; (ii) IBT is greater than or equal to 90% of the Target IBT and less than 95% of the Target IBT, then Units representing 75% of the Annual Target Amount shall be converted into Restricted Stock and all rights with respect to the remaining portion of such Annual Target Amount shall thereupon be forfeited; (iii) IBT is greater than or equal to 95% of the Target IBT and less than 105% of the Target IBT, then Units representing the entire Annual Target Amount shall be converted into Restricted Stock; and (iv) IBT is greater than or equal to 105% of the Target IBT, then Units representing the entire Annual Target Amount shall be converted into Restricted Stock and you shall be entitled to receive an additional grant of Restricted Stock representing 25% of the Annual Target Amount (a "Bonus Award"), such additional grant to be made by the Committee at such meeting. (b) Notwithstanding anything to the contrary contained in this Agreement, Units shall be converted into Restricted Stock in whole numbers of shares only and, if necessary, shall be rounded up or down for each such year. (c) As used in this Agreement, the term: (i) "IBT" for any year means the net income before income taxes of the Company's Agricultural Products Division as determined in accordance with the Company's Master Accounting Manual on a basis that is consistent with past practice, such determination to be made in good faith by the Committee acting in its sole discretion. (ii) "Target IBT" means, for each of 1999 and 2000, the amounts set forth on Exhibit I hereto. 4. Restricted Stock Trust. (a) Subject to Paragraph 4(b) below, you are eligible to make a one-time irrevocable election to cause the Company to contribute as of the Conversion Date the shares of Restricted Stock, issuable hereunder, to the Restricted Stock Trust (as defined below) by completing the form set forth on Schedule A attached hereto wherein such shares of stock shall be held, subject to claims of the Company's creditors, until delivery to you under the terms of Paragraph 5 herein. Subject to Paragraph 4(b), below, if you do not make such election, such shares shall be delivered to you as provided in Paragraph 5(a)(i) of this Agreement. (b) Notwithstanding anything to the contrary contained in this Agreement, if you are or, in the judgment of the Committee, are expected to be a Named Executive Officer with respect to any year in which a Conversion Date occurs, then you will be deemed to have made the election under Paragraph 4(a) above to have the Restricted Stock into which Units shall be converted on such date and thereafter contributed to the Restricted Stock Trust. (c) For purposes of this Agreement: (i) "Named Executive Officer" shall mean the Chief Executive Officer of the Company or any of the four highest compensated officers (other than the Chief Executive Officer of the Company) whose total compensation payable is required to be reported to stockholders under the Securities Exchange Act of 1934, as amended (the "1934 Act"); and (ii) "Restricted Stock Trust" means the trust fund established under the Restricted Stock Trust Agreement dated as of April 20, 1994 (the "Trust Agreement") to accommodate the deferral of delivery of shares of Common Stock represented by Units and/or Restricted Stock (and dividends paid thereon) as provided in Paragraph 5(a)(ii) of this agreement, which trust fund is subject to the claims of the Company's general creditors under federal and state law in the event of insolvency of the Company as described in the Trust Agreement. 5. Delivery of Shares of Common Stock. (a) Subject to Paragraphs 4 and 9 of this Agreement, as soon as practicable after the Restricted Period, all shares of Restricted Stock (and any Bonus Award) granted hereunder shall be canceled and in replacement thereof you shall receive either (through book-entry form) a credit to an account maintained on your behalf or a stock certificate representing the Common Stock free of any restrictive legend other than as may be required by applicable state or federal securities law, such Common Stock to be either (i) so delivered to you promptly or (ii) if you have made or are deemed to have made the election under Paragraph 4 above, contributed to the Restricted Stock Trust, in which case such shares shall be maintained in the Restricted Stock Trust and delivery shall be deferred until after your Retirement in accordance with the election set forth on Schedule A attached hereto, or if either (1) no such election is made or (2) your employment with the Company is terminated prior to Retirement for any reason (including death), delivery shall be made on the first business day of the calendar year following your termination of employment or as otherwise provided in the Trust Agreement. (b) Notwithstanding any other provisions hereof, the number of shares of Common Stock which shall be delivered to you pursuant to Paragraph 5(a) either directly or from the Restricted Stock Trust shall be (i) the number of such shares which would have been delivered in the absence of this Paragraph 5(b) minus (ii) the number of whole shares of Common Stock necessary to satisfy the minimum federal, state and/or local income tax withholding obligations which are imposed on the Company by applicable law in respect of the delivery of such award as well as other withholding obligations (e.g., Social Security and Medicare) which may be due and payable under applicable law as of the lapse of the Restricted Period as defined in Paragraph 2, whether or not delivery of such shares is deferred under Paragraph 4 (and which may be satisfied by the reduction effected hereby in the number of deliverable shares), it being understood that the value of the shares referred to in clause (ii) above shall be determined, for the purposes of satisfying such withholding obligations, on the basis of the average of the high and low per share prices for the Common Stock as reported on the Consolidated Transaction Reporting System on the designated date of delivery, or on such other reasonable basis for determining fair market value as the Committee may from time to time adopt. 6. Termination of Employment. (a) Subject to Section 7(f) of the Plan, in the event of your termination of employment during the Restricted Period for any reason other than death, Disability or Retirement, you shall forfeit all rights to all Units and Restricted Stock granted hereunder and you agree (i) to assign, transfer, and deliver the Restricted Stock to the Company and (ii) that you shall cease to be a stockholder of the Company with respect to such shares, provided, the Committee may provide for a partial or complete exception to this requirement as it deems equitable in its sole discretion. (b) In the event that your employment is terminated due to Disability or Retirement, or in the event of your death, vesting of all shares of Restricted Stock covered by the Target Award and any related Bonus Award and delivery of the shares of Common Stock of the Company represented thereby will be made to you or your designated beneficiary or your legal representative, legatee or such other person designated by an appropriate court as entitled to receive the same, as the case may be, on the terms and, subject to the conditions of this Agreement, including Paragraph 3 above and Paragraphs 10 and 11 below. 7. Legend. Each book-entry or certificate evidencing ownership of Restricted Stock issued during the Restricted Period shall bear the following legend: "These shares have been issued or transferred subject to a Special Restricted Stock Performance Award and are subject to substantial restrictions, including a prohibition against transfer and a provision requiring transfer of these shares to the Company without payment in the event of termination of the employment of the registered owner under certain circumstances all as more particularly set forth in a Special Restricted Stock Performance Award Agreement dated as of January 28, 1999, a copy of which is on file with the Company." 8. Miscellaneous. This Agreement may not be amended except in writing and neither the existence of the Plan and this Agreement nor the Target Award granted hereby shall create any right to continue to be employed by the Corporation or its subsidiaries and your employment will continue to be at will and terminable at will by the Corporation. In the event of a conflict between this Agreement and the Plan, the Plan shall govern. 9. Compliance With Laws. (a) This Agreement shall be governed by the laws of the State of Delaware and any applicable laws of the United States. Notwithstanding anything herein to the contrary, the Corporation shall not be obligated to cause to be delivered any Restricted Stock or shares of Common Stock of the Company represented thereby pursuant to this Agreement unless and until the Company is advised by its counsel that the issuance of such shares either (through book-entry form) by a credit to an account maintained on your behalf or by delivery of certificates representing such shares is in compliance with all applicable laws and regulations of governmental authority. The Corporation shall in no event be obligated to register any securities pursuant to the Securities Act of 1933 (as now in effect or as hereafter amended) or to take any other action in order to cause the issuance of such shares either (through book-entry form) by a credit to an account maintained on your behalf or by delivery of certificates representing such shares to comply with any such law or regulation. (b) If you are subject to Section 16 of the 1934 Act, transactions under the Plan and this Agreement are intended to comply with all applicable conditions of Rule 16b-3 or its successors under the 1934 Act. To the extent any provision of the Plan, this Agreement or action by the Committee involving you is deemed not to comply with an applicable condition of Rule 16b-3, such provision or action shall be deemed null and void as to you, to the extent permitted by law and deemed advisable by the Committee. Moreover, in the event the Plan and/or this Agreement does not include a provision required by Rule 16b-3 to be stated therein, such provision (other than one relating to eligibility requirements or the price and amount of awards as applicable) shall be deemed automatically to be incorporated by reference into the Plan and/or this Agreement insofar as you are concerned, with such incorporation to be deemed effective as of the effective date of such Rule 16b-3 provision. In addition, the Committee in its discretion may cause the Company to retain custody of the certificates representing the Common Stock to be delivered under Paragraph 5 above so long as necessary or appropriate to ensure that any minimum holding period under Rule 16b-3 is satisfied. 10. Sale of the Agricultural Products Division. Notwithstanding anything to the contrary herein, in the event of a sale or other divestiture by the Company of the Agricultural Products Division prior to December 31, 1999, the Target Award for 2000 will be canceled and the Target Award for 1999 will be subject to conversion to Restricted Stock in the sole discretion of the Committee based upon the determination by the Committee as to whether and to what extent the performance criteria would have (assuming that the divestiture transaction had not occurred) been satisfied. In the event of any such transaction occurring during 2000, no change shall be made with respect to the Award for 1999 and the Target Award for 2000 will be subject to conversion to Restricted Stock in the sole discretion of the Committee based upon the determination by the Committee as to whether and to what extent the performance criteria would have (assuming that the divestiture transaction had not occurred) been satisfied. 11. Change of Control. Notwithstanding Section 9 of the Plan, upon a Change in Control (as defined in the Plan), (A) the date upon and after which the Units will be converted to shares of Restricted Stock (or Common Stock free from restriction) will not be accelerated and (B) the Units (or shares of Restricted Stock) will not be cashed out, in each case unless and until the Committee provides otherwise. Furthermore, you hereby waive all rights under the Severance Agreement entered into by and between you and the Company and approved by the Board on January 29, 1998 (the "Severance Agreement") to receive an amount in respect of the Units (or shares of Restricted Stock) in the event that this Agreement is terminated or such Units (or shares of Restricted Stock) are forfeited upon termination of your employment following a Change in Control (as defined in the Severance Agreement) to which you would otherwise be entitled thereunder. AMERICAN HOME PRODUCTS CORPORATION By: Corporate Treasurer Accepted and agreed to: - -------------------------- ------------------------- Name (Please Print) Social Security Number - -------------------------- ------------------------- Signature Date of Birth SCHEDULE A ELECTION FORM (To Be Completed in Conjunction with Your Special Restricted Stock Performance Award Agreement) I, , hereby make an election to defer distribution of all shares of Common Stock less those shares necessary to satisfy any applicable withholding obligation under Paragraph 5(b) of the Special Restricted Stock Performance Award Agreement (the "Agreement) and to cause the Company to contribute such shares to the Restricted Stock Trust (with any dividends thereon to be reinvested under the AHPC Master Investment Plan). See Note Below I, _______________________, hereby make an election to receive, after Retirement, a distribution of such number of shares in the Restricted Stock Trust to which I am entitled in substantially equal annual installments over a period not to exceed ten years as follows, subject to the provisions of the Agreement, including Paragraph 5, thereof (provided, however, that in the event of my death all remaining installments shall be accelerated and promptly distributed): Circle the number of annual installments: 2 3 4 5 6 7 8 9 10 These elections shall be irrevocable upon execution of the Agreement. - -------------------------- Signature of Executive - -------------------------- Dated: - -------------------------- Witnessed: NOTE: 1. If you are or are expected to be a Named Executive Officer with respect to any year in which a Conversion Date occurs, you will be deemed to have elected deferred distribution hereunder. Beneficiary Designation In the event of my death, I designate the following beneficiary (ies) to receive any shares of the Company's Common Stock to be distributed to me or which have been deferred on my behalf to the Restricted Stock Trust under this Agreement together with any dividends thereon. - -------------------------- Beneficiary (ies) - -------------------------- Contingent Beneficiary (ies) -------------------------- Signature of Executive - -------------------------- Dated: - -------------------------- Witnessed: EX-10.26 7 Exhibit 10.26 American Home Products Corporation MANAGEMENT INCENTIVE PLAN (Approved by stockholders on April 28, 1997, as amended pursuant to Board of Directors authorization on March 5, 1998 and adoption by the Compensation and Benefits Committee on April 23, 1998) I. Purpose The Management Incentive Plan (the "Plan") is maintained by the Corporation primarily for the purpose of providing immediate and deferred incentive compensation for a select group of management and highly compensated employees and is designed to provide for awards to selected key salaried employees in executive, administrative, technical, professional or other important capacities, who individually, or as members of a group, contribute in a substantial degree to the success of the Company, thus affording to them a means of participating in that success and an incentive to contribute further to that success. II. Definitions The following words and phrases as used herein shall have the meanings set forth below: (1) "Company" shall mean American Home Products Corporation (the Corporation), and any corporation, domestic or foreign, 50% or more of whose share voting power is held, directly or indirectly, by the Company. (2) "Employee" shall mean any key salaried employee of the Company whether or not an Officer or Director, including individuals whose employment has terminated during the applicable year by reason of death or retirement. (3) "Committee" shall mean the Compensation and Benefits Committee consisting of three or more Corporation Directors who are not Employees. (4) "Average Net Capital" shall mean the average of the beginning and ending balances, shown in the Corporation's Consolidated Balance Sheet, of the Stockholders' Equity and funded debt. (5) "Net Income" shall mean the "net income for year," after taxes, shown in the Corporation's Consolidated Statement of Income, adjusted, however, by adding any amount by which such net income after taxes has been reduced by provision for awards under the Plan. (6) "Incentive Earnings" shall mean the excess of Net Income for any year over the greater of (a) an amount equal to 12% of Average Net Capital or b) an amount equal to $.1875 multiplied by the average number of shares of the Corporation's Common Stock outstanding at the close of business on each day of the year assuming full conversion of the Corporation's Preferred Stock. The amount of Incentive Earnings shall be reported to the Committee by the Corporation's Treasurer as promptly after the close of the year as is practical; provided, however, that such Incentive Earning's and awards based thereon shall be adjusted downward, if necessary, to reflect the net income for the year certified by the Corporation's independent public accountants as adjusted as provided in II (5) above. In the event of stock split, stock dividend or other relevant change in the Corporation's capitalization, the Committee shall, subject to the approval of the Board of Directors, appropriately adjust such $.1875 per share of the Corporation's Common Stock. (7) "Award Fund" shall mean the amount, not in excess of 12% of Incentive Earnings, which is recommended by the Committee and approved by the Board of Directors as the maximum amount to be used for awards under the Plan for the applicable year. Any unawarded portion of the Award Fund shall not be available for awards for subsequent years. III. Administration The Plan shall be administered by the Committee which may make such determinations, make such awards and take such other action in connection with the Plan as it deems necessary, taking into consideration the recommendations of management. Such determinations, awards and action shall be binding and conclusive for all purposes and upon all persons unless and except to the extent that the Board of Directors of the Company shall have previously directed that all or specified types of action by the Committee shall be subject to approval by the Board of Directors. IV. Eligibility The individuals eligible to receive awards under the Plan shall be such Employees as the Committee shall determine each year. V. Awards The Committee shall determine the awards to be made for any year subject to the following: (1) the award amounts payable with respect to any year to an Employee who for such year is the Chief Executive Officer of the Corporation or one of the Corporation's four other highest compensated officers (as determined in accordance with Section 162(m) of the Internal Revenue Code of 1986, as amended) shall not exceed 3% of the Award Fund, and, (2) the portion of the Award Fund remaining after the awards to the Employees in (1) above shall be available for awards to other Employees in such amounts as the Committee determines. In no event, however, shall the amount of an award payable to any Employee exceed the Employee's total compensation for the year, excluding only any award under the Plan. Awards may be in whole or in part (a) current and payable in cash ("Cash Award"), or (b) deferred and conditional and payable (i) in cash ("Contingent Cash Award") or (ii) in shares of the Corporation's Common Stock ("Contingent Stock Award"). The aggregate number of shares of the Corporation's Common Stock which may be issued under the Plan shall be 48,000,000 (plus the number of shares credited in respect of dividends as hereinafter provided) and all such shares shall be from Treasury Stock or from authorized and unissued shares as the Board of Directors shall from time to time determine. In the event of stock split, stock dividend or other relevant change in the Corporation's capitalization, the Committee shall, subject to the approval of the Board of Directors, appropriately adjust such maximum number of shares. Insofar as the Committee has not predetermined the manner of payment of awards, whether in terms of individuals or classifications on the basis of age, salary, amount of award or other criteria, the Committee may permit eligible Employees to indicate a preference, which shall not be binding on the Committee, within limits established by the Committee, that all or any portion of an award be a Cash Award, a Contingent Cash Award or a Contingent Stock Award. VI. Payment of Awards (1) Cash Awards The amount of each Cash Award shall be paid in cash as soon as practicable after the close of the calendar year for which the award is made. (2) Contingent Cash Awards The Company shall credit the amount of each Contingent Cash Award to the Employee's Contingent Award Account and shall, subject to the conditions of paragraph VI(4), pay the same out in equal installments on the five succeeding anniversaries of the date of the award. (3) Contingent Stock Awards (a) The amount of each Contingent Stock Award shall be used to determine the largest full number of shares of the Corporation's Common Stock which such amount would purchase at the average closing market price of such Common Stock on the Consolidated Transaction Reporting System for the last five business days, on which at least one sale of such Common Stock took place on such System, of the calendar year for which the award is made. The Company shall credit the Employee's Contingent Award Account as of the date of the award with the number of shares so determined. At no time after such credit and prior to the delivery of the shares so credited shall any of such shares be earmarked for his or her account, nor shall he or she have any of the rights of a stockholder with respect to such shares. Any excess of the Contingent Stock Award remaining after such computation of shares of stock shall be carried forward and treated as an addition to any future award to the Employee; provided, however, that any such excess remaining after termination of the Employee's employment shall be paid to him or her in cash at the time of the first delivery from his or her Contingent Award Account. As of December 31 of each year, the Corporation shall determine the amount of the dividends which would have been paid during such calendar year with respect to the number of shares credited in each Contingent Award Account at the record date for each such dividend payment had the shares so credited then been issued and outstanding. The Employee's Contingent Award Account shall be credited with the largest full number of shares of the Corporation's Common Stock purchasable with the above determined amount at the average closing market price of such Common Stock on the Consolidated Transaction Reporting System, for the last five business days, on which at least one sale of such Common Stock took place on such System, of the calendar year (such share credits in respect of dividends shall not be deemed awards under the Plan). The cash equivalent of any excess thereafter remaining shall be carried forward and treated as an addition to the next succeeding year's dividends on the shares credited to the Employee's Contingent Award Account; provided, however, that the cash equivalent of any such excess remaining after final delivery from the Employee's Contingent Award Account shall be paid to him or her in cash. In the event of stock split, stock dividend or other relevant change in the Corporation's capitalization, the Committee shall, subject to the approval of the Board of Directors, appropriately adjust the shares of stock theretofore credited to the Contingent Award Accounts. (b) The Company shall, subject to the conditions of paragraph VI(4), deliver to the Employee the shares of stock credited to his or her Contingent Award Account in approximately equal installments as soon as practicable after the first day of January of each of the five years following any termination of his or her employment, unless the Committee shall otherwise determine. (c) Notwithstanding any other provisions hereof, the Committee may in its absolute discretion provide, with respect to any Contingent Stock Award made to any participant or participants under the Plan, that in the event of any delivery of shares of Common Stock by the Company pursuant to such Contingent Stock Award, the number of such shares which the recipient thereof shall be entitled to receive and which shall be delivered by the Company shall be (i) the number of such shares which would have been delivered in the absence of this paragraph VI(3)(c), minus (ii) the number of whole shares of Common Stock necessary to satisfy the minimum federal, state and/or local income tax withholding obligations which are imposed on the Company by applicable law in respect of the delivery of such award (and which may be satisfied by the reduction effected hereby in the number of deliverable shares), it being understood that the value of the shares referred to in clause (ii) above shall be determined, for the purposes of satisfying such withholding obligations, on the basis of the average of the high and low per share prices for the Common Stock as reported on the Consolidated Transaction Reporting System on the date of authorization of delivery by the Committee, or on such other reasonable basis for determining fair market value as the Committee may from time to time adopt. Notwithstanding any term or provision of this paragraph VI(3)(c), in determining the total number of shares authorized for issuance under the Plan pursuant to paragraph V hereof and in calculating the limit set forth in paragraph V hereof on the number of shares which may be awarded to any individual Employee under the Plan, the reduction in the number of shares effected by this paragraph VI(3)(c) shall not be taken into account. (4) Conditions of Payment of Contingent Awards (a) In the event that the Employee is discharged for, or after any other termination of employment is found while employed by the Company to have engaged in, deliberate gross misconduct, as determined by the Company, no further payment or delivery shall thereafter be made in respect of his or her Contingent Cash or Stock Awards and all his or her rights with respect to his or her Contingent Cash or Stock Awards and all his or her rights with respect to his or her Contingent Award Account shall thereupon be forfeited. (b) In the event of termination of the Employee's employment prior to his or her retirement for reasons other than death or discharge for deliberate gross misconduct, as determined by the Company, any unpaid installments of his or her Contingent Cash Awards and any undelivered shares of stock from his or her Contingent Award Account shall, subject to the conditions set forth in paragraph (d) below, be paid or delivered to him or her at the dates and in the installments originally determined. (c) In the event of the Employee's death, any unpaid installments of his or her Contingent Cash Awards shall be paid and any undelivered shares of stock from his or her Contingent Award Account shall be paid or delivered at the dates and in the installments originally determined, unless the Committee shall otherwise determine, to or as directed by his or her legal representative, or legatee or such other person designated by an appropriate court as the person entitled to receive the same, provided that the Employee was employed by the Company at the time of his or her death or up to the date of his or her death had complied with the conditions set forth in paragraph (d) below. (d) No payment of a Contingent Cash Award or delivery from a Contingent Award Account shall be made to any Employee after termination of employment unless he or she shall have to the date fixed for such payment or delivery (i) refrained from becoming or serving as an officer, director or employee of any individual, partnership or corporation, or the owner of a business, or a member of a partnership which conducts a business in competition with the Company or renders a service (including, without limitations, advertising agencies and business consultants) to competitors with any portion of the business of the Company, (ii) made himself or herself available, if so requested by the Company, at reasonable times and upon a reasonable basis to consult with, supply information to, and otherwise cooperate with, the Company and (iii) refrained from engaging in deliberate action which, as determined by the Committee, causes substantial harm to the interests of the Company. If these conditions are not fulfilled, no further payment or delivery shall thereafter be made with respect to the Employee's Contingent Cash or Stock Awards and all his or her rights with respect to his or her Contingent Award Account shall thereupon be forfeited. VII. Limitations No Employee, whether or not deemed eligible or offered an opportunity to indicate a preference under the Plan, or other person shall have any claim or right (legal, equitable or other) to be granted an award under the Plan, and no Director, Officer, Employee of the Company or any other person shall have the authority to enter into any agreement with any person for the making or payment of an award or to make any representation or warranty with respect thereto. No Employee to whom a Contingent Award has been made shall have any rights to his or her Contingent Award Account other than to receive the Contingent Award at the time and in the form determined by the Committee, subject to the fulfillment of the conditions prescribed herein, which right may not be assigned, transferred or pledged during his or her lifetime. Neither the action of the Corporation in establishing the Plan nor any action taken by it or by the Committee under the provisions hereof, nor any provision of the Plan, shall be construed as giving to any Employee the right to be retained in the employ of the Company. VIII. Amendment, Suspension or Termination of the Plan in Whole or in Part The Board of Directors may discontinue the Plan at any time and may from time to time amend the terms of the Plan; provided, however, that no such discontinuance or amendment shall adversely affect any right or obligation with respect to any award theretofore made, and no such amendment shall, without the approval of stockholders, operate so as to increase the annual amount of the Award Fund or increase the aggregate number of shares of the Corporation's Common Stock that may be issued under the Plan. IX. Construction The Plan shall be governed by and construed in accordance with the laws of the State of New York. EX-10.27 8 Exhibit 10.27 AMERICAN HOME PRODUCTS CORPORATION 1994 RESTRICTED STOCK PLAN FOR NON-EMPLOYEE DIRECTORS (Initially approved by stockholders on April 20, 1994 and as amended by the Board of Directors on January 28, 1999) Section 1. Purpose. The purpose of the Restricted Stock Plan for Non-Employee Directors of American Home Products Corporation is to attract and retain qualified persons who are not employees or former employees of the Corporation or any of its subsidiaries or affiliates for service as members of the Board of Directors by granting such directors shares of the Company's Common Stock, which are restricted in accordance with the terms and conditions set forth below, and thereby encouraging ownership in the Company by non-employee directors. Section 2. Definitions. Whenever used herein, unless the context otherwise indicates, the following terms shall have the respective meaning set forth below: Act: The Securities Exchange Act of 1934, as amended. Board Membership: The period of time during which a person serves on the Board of Directors, regardless of whether occurring before or after the Effective Date. Board of Directors (or Board): The Board of Directors of the Company. Committee: The Compensation and Benefits Committee of the Board of Directors appointed to administer the Plan in accordance with Section 7 hereof. Common Stock: Common Stock, par value $.33 1/3 per share, of American Home Products Corporation. Company: American Home Products Corporation or any successor to it in ownership of substantially all of its assets, whether by merger, consolidation or otherwise. Director: Any member of the Board of Directors. Disability: A medically determinable physical or mental impairment which renders a participant substantially unable to function as a Director. Effective Date: The date specified in Section 10 hereof. Eligible Director (or Non-Employee Director): Any Director who is not an employee or former employee of the Company or any of its subsidiaries or affiliates. Participant: Each Director to whom Restricted Stock is granted under the Plan. Plan: The 1994 Restricted Stock Plan for Non-Employee Directors of American Home Products Corporation. Restricted Period: The period of time from the date of grant of the Restricted Stock until the earliest to occur of the events described in Section 4(b) hereof. Retirement Benefit: A normal benefit payable under the Retirement Plan. Retirement Plan: The American Home Products Corporation Retirement Plan for Outside Directors, as amended. Restricted Stock: Common Stock granted under the Plan which is subject to restrictions in accordance with Section 4 hereof. Year of Board Membership: 365 consecutive days of Board Membership. Section 3. Eligibility and Grants. (a) Grants. To be eligible to participate in the Plan, a Director must not be an employee or former employee of the Company or any of its subsidiaries or affiliates. Each Eligible Director on the Effective Date of the Plan shall receive a grant of eight hundred (800) shares of Restricted Stock. In addition, each person who becomes an Eligible Director for the first time after the Effective Date of the Plan shall also receive a grant of eight hundred (800) shares of Restricted Stock, effective as of the date of such person's election as an Eligible Director. Thereafter, each Eligible Director shall be granted eight hundred (800) shares of Restricted Stock for each subsequent Year of Board Membership, up to a maximum of four thousand (4,000) shares of Restricted Stock per Eligible Director. Notwithstanding anything to the contrary contained in this Plan, if a Participant shall terminate service as a Director due to death or Disability prior to having been granted the maximum number of shares of Restricted Stock hereunder and provided the Participant is not then eligible for a Retirement Benefit under the Retirement Plan, then such Participant, or such Participant's beneficiary or estate, as the case may be, shall be granted additional shares of Restricted Stock which together with the shares previously granted under the Plan will equal such maximum number of shares and all restrictions applicable to such shares shall lapse on the later of the date of such termination of service or six months after the date of grant. If required by the Committee, each grant of Restricted Stock shall be evidenced by a written agreement duly executed by or on behalf of the Company and the Participant. (b) Number of Shares. The total number of shares of Restricted Stock which may be granted under the Plan shall not exceed 100,000. The shares may be authorized and unissued or issued and reacquired shares, as the Board of Directors from time to time may determine. Shares of Restricted Stock that are forfeited before the restrictions lapse shall be available for subsequent grants of Restricted Stock under the Plan. (c) Non-Consecutive Terms. An Eligible Director who is elected to non-consecutive terms of Board Membership shall receive additional grants of shares of Restricted Stock at the time of such re-election to the Board and thereafter as provided in Section 3, provided that the amounts so granted, when aggregated with the number of shares of Restricted Stock previously granted to such Director with respect to which the restrictions thereon shall have lapsed, does not exceed four thousand (4,000) shares. Section 4. Terms and Conditions of Restricted Stock. The restrictions set forth in this section shall apply to each grant of Restricted Stock for the duration of the Restricted Period. (a) Restrictions. A stock certificate representing the number of shares of Restricted Stock granted shall be registered in the Participant's name but shall be held in custody by the Company for the Participant's account. The Participant shall have all rights and privileges of a stockholder as to such Restricted Stock, including the rights to vote and to receive dividends, except that, subject to the provisions of Sections 3(a) and 4(b), the following restrictions shall apply: (i) the Participant shall not be entitled to delivery of the certificate until the expiration of the Restricted Period; (ii) none of the shares of Restricted Stock may be sold, transferred, assigned, pledged or otherwise encumbered or disposed of during the Restricted Period; (iii) the Participant shall, if requested by the Company, execute and deliver to the Company, a stock power endorsed in blank. The Participant shall forfeit all shares of Restricted Stock with respect to which such restrictions do not lapse at the end of the Restricted Period. Upon the forfeiture (in whole or in part) of shares of Restricted Stock, such forfeited shares shall become treasury shares of the Company without further action by the Participant. The Participant shall have the same rights and privileges, and be subject to the same restrictions, with respect to any shares received pursuant to Section 6. (b) Events. The Restricted Period shall end upon the first to occur of the following events: (i) Five Years of Service. The Participant completes at least five (5) years of service from the date of the initial grant of Restricted Stock to the Participant under the Plan. (ii) Disability. The Participant ceases to be a Director by reason of Disability; provided, however, that if the Participant is at such time entitled to a Retirement Benefit, then the Restricted Period shall be deemed not to have lapsed. In such case, all shares of Restricted Stock will be forfeited. (iii) Death. The Participant ceases to be a Director by reason of death; provided, however, that if the Participant is at such time entitled to a Retirement Benefit, then the Restricted Period shall be deemed not to have lapsed. In such case, all shares of Restricted Stock will be forfeited. (c) Delivery of Restricted Shares. At the end of the Restricted Period as herein provided, subject to Section 3(a), a stock certificate for the number of shares of Restricted Stock with respect to which the restrictions have lapsed shall be delivered, free of all such restrictions, to the Participant or the Participant's beneficiary or estate, as the case may be, subject to the withholding requirements of Section 9 hereof. The Company shall not be required to deliver any fractional share of Common Stock but will pay, in lieu thereof, the fair market value (measured as of the date the restrictions lapse) of such fractional share to the Participant or the Participant's beneficiary or estate, as the case may be. Notwithstanding the foregoing, a Participant may make an irrevocable election to cause the Company to contribute such Restricted Shares to the Restricted Stock Trust which he or she otherwise would have received from the Plan by completing a deferral election form provided by the Company, wherein such shares shall be held, subject to the claims of the Company's creditors, until delivered to the Participant in accordance with such election. Section 5. Regulatory Compliance and Listing. The issuance or delivery of any shares of Restricted Stock may be postponed by the Company for such period as may be required to comply with any applicable requirements under the federal securities laws, any applicable listing requirements of any national securities exchange or any requirements under any other law or regulation applicable to the issuance or delivery of such shares and the Company shall not be obligated to issue or deliver any such shares if the issuance or delivery thereof shall constitute a violation of any provision of any law or any regulation of any governmental authority or any national securities exchange. Section 6. Adjustments. In the event of a recapitalization, stock split, stock dividend, combination or exchange of shares, merger, consolidation, rights offering, separation, reorganization or liquidation, or any other change in the corporate structure or shares of the Company, the Committee may make such equitable adjustments, to prevent dilution or enlargement of rights, as it may deem appropriate in the number and class of shares authorized to be granted hereunder. Section 7. Administration. The Plan shall be administered by the Compensation and Benefits Committee, consisting of three or more Directors each of whom shall be a "disinterested Director" within the meaning of Rule 16b-3 under the Act. All determinations of the Committee shall be conclusive. The Committee may obtain such advice or assistance as it deems appropriate from persons not serving on the Committee. Section 8. Termination or Amendment. The Board may at any time terminate the Plan and may from time to time alter or amend the Plan or any part thereof (including any amendment deemed necessary to ensure that the Company may comply with any regulatory requirement referred to in Section 5), provided, however, that, unless otherwise required by law, the rights of a Participant with respect to shares of Restricted Stock granted prior to such termination, alteration or amendment may not be impaired without the consent of such Participant and, provided further, without the approval of the Company's stockholders, no alteration or amendment may be made which would (i) increase the aggregate number of shares of Restricted Stock that may be granted under the Plan (except by operation of Section 6), or (ii) change the category of Directors eligible to receive shares of Restricted Stock under the Plan. Notwithstanding the foregoing, the 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. The Company intends that the Plan and the grants of Restricted Stock hereunder shall comply with the conditions of Rule 16b-3 of the Act and qualify for the exemption from Section 16(b) of the Act as a "formula plan". Should any provisions hereof not be necessary in order to comply with the requirements of such Rule or should any additional provisions be necessary in order to so comply, the Board of Directors may amend the Plan accordingly, without the necessity of obtaining the approval of the Company's stockholders. Section 9. Miscellaneous. (a) Right to Re-election. Nothing in the Plan shall be deemed to create any obligation on the part of the Board to nominate any Director for re-election by the Company's stockholders, nor confer upon any Director the right to remain a member of the Board of Directors. (b) Withholding and Responsibility For Taxes. The Company shall satisfy any tax withholding obligation required by law by reducing the number of shares of Common Stock otherwise deliverable to the Participant or the Restricted Stock Trust, as the case may be. To the extent no taxes are required to be withheld on the delivery of the shares of Common Stock to the Participant or the Restricted Stock Trust, the Participant shall be responsible for the payment of all applicable taxes. (c) Governing Law. This Plan shall be governed by the law of the State of Delaware and in accordance with such federal laws as may be applicable. (d) Construction. Wherever any words are used herein in the masculine gender they shall be construed as though they were also used in the feminine gender in all cases where they would so apply, and wherever any words are used herein in the singular form they shall be construed as though they were also used in the plural form in all cases where they would so apply. Section 10. Effective Date. The Plan shall be submitted to the stockholders of the Company for their approval at the Annual Meeting of Stockholders to be held on April 20, 1994. The Plan shall become effective upon the affirmative vote of the holders of a majority of the shares of Common Stock present, or represented, and entitled to vote at the meeting. EX-10.28 9 Exhibit 10.28 AMERICAN HOME PRODUCTS CORPORATION STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS (Effective as of March 2, 1999) 1. Purpose. The purpose of the American Home Products Corporation Stock Option Plan for Non-Employee Directors (the "Plan") is to attract and retain qualified persons who are not employees or former employees of American Home Products Corporation (the "Company") or any of its subsidiaries or affiliates for service as members of the Board of Directors of the Company by providing such members with an interest in the Company's success and progress by granting them non-qualified options ("Options") to purchase shares of the Company's common stock, par value $.33 1/3 per share (the "Common Stock"). 2. Administration. The Plan shall be administered by the Compensation and Benefits Committee or any successor thereto (the "Committee") of the Board of Directors (the "Board") of the Company. Questions involving eligibility for grants of Options, entitlement to Options or the operation of the Plan shall be referred to the Committee. All determinations of the Committee shall be conclusive. The Committee may obtain such advice or assistance as it deems appropriate from persons not serving on the Committee. 3. Eligibility and Grants. To be eligible to participate in the Plan, a director must not be an employee or former employee of the Company or any of its subsidiaries or affiliates. On the date in each calendar year of the Annual Meeting of Stockholders of the Company, each eligible director elected at such Annual Meeting shall automatically be granted an Option to purchase 3,000 shares of Common Stock; provided, however, that such amount may be increased or decreased by the Committee in the first calendar quarter of each year to reflect the competitive environment with respect to director compensation. Each eligible director to whom Options are granted is hereinafter referred to as a "Participant." Each grant of Options shall be evidenced by a written agreement duly executed and delivered by or on behalf of the Company and the Participant. 4. Shares Available. Subject to adjustment as provided in Section 10, the maximum aggregate number of shares of Common Stock which shall be available under the Plan for the issuance upon the exercise of Options is 250,000 shares. 5. Term of Options. Each Option granted under the Plan shall have a term of ten years from the date of grant, subject to earlier termination as provided in Section 8. 6. Option Price. Options are priced at 100% of the fair market value of the Common Stock on the date of grant. Such price shall be subject to adjustment as provided in Section 10. The fair market value of a share of Common Stock shall be the mean between the highest and lowest sales prices of the Common Stock as reported on the Consolidated Transaction Reporting System ("Fair Market Value"). 7. Exercise of Options. (a) Subject to Section 8, each Option shall become 100% exercisable on the later of (i) the date upon which the Participant has served one term-year as a member of the Board since the date the Option was granted (which for these purposes shall mean the period from one Annual Meeting to the subsequent Annual Meeting), and (ii) the date on which the Participant completes two years of continuous service as a director. (b) An Option may be exercised at any time or from time to time, as to any or all full shares of Common Stock as to which the Option is then exercisable; provided, however, that any such exercise shall be for at least 100 shares of Common Stock or, if less, the total number of shares of Common Stock as to which the Option is then exercisable. (c) The purchase price of the Common Stock as to which an Option is exercised shall be paid in full at the time of exercise; payment may be made in cash or in shares of Common Stock valued at the number of shares to be purchased multiplied by the option price per share or in any other form of consideration which has been approved by the Committee under the most recent stock option or incentive plan applicable to the executive officers of the Company (the "Stock Incentive Plan"). 8. Completion of Directorship. (a) In the event of the death of a Participant or the termination of a Participant's service as a director upon retirement after having attained age 65 with at least 10 years of service or on account of disability, any outstanding Options held by a Participant who has completed at least two years of continuous service as a director which are not yet exercisable shall become exercisable on the day following the date of (i) death; (ii) retirement; or (iii) termination of the Participant's service as a director by reason of disability, as the case may be, and all outstanding Options held by such Participant shall remain exercisable until the tenth anniversary of the date of grant. (b) In the event of a resignation or a termination of the service of a Participant from the Board (i) for any reason prior to the completion of two years of continuous service as a director; or (ii) thereafter, for any reason other than death, disability or retirement as contemplated under subsection (a) above, any outstanding Options held by such Participant shall expire at the close of business on the effective date of such resignation or termination; provided, however, that the Board may, in its discretion, cause the Options of such Participant to become exercisable, and/or to remain exercisable, for a period of time subsequent to such resignation or termination, but in no event may the Options remain exercisable after the tenth anniversary of the date of grant. 9. Regulatory Compliance and Listing. The issuance or delivery of any shares of Common Stock upon the exercise of Options may be postponed by the Company for such period as may be required to comply with any applicable requirements under the federal securities laws, any applicable listing requirements of any national securities exchange and requirements under any other law or regulation applicable to the issuance or delivery of such shares, and the Company shall not be obligated to issue or deliver any shares of Common Stock if the issuance or delivery of such shares shall constitute a violation of any provision of any law or of any rule or regulation of any governmental authority or any national securities exchange. 10. Adjustment in Event of Changes in Capitalization. In the event of a recapitalization, stock split, stock dividend, combination or exchange of shares, merger, consolidation, rights offering, separation, reorganization or liquidation, or any other change in the corporate structure or shares of the Company, the number of shares of Common Stock that may be awarded as Options or that are subject to outstanding Option grants, and the option price per share under outstanding Options, shall be adjusted automatically to prevent dilution or enlargement of rights. 11. Termination or Amendment of the Plan. The Board may at any time terminate the Plan and may from time to time alter or amend the Plan or any part thereof (including any amendment deemed necessary to ensure that the Company may comply with any regulatory requirement referred to in Section 9), provided that, unless otherwise required by law, the rights of a Participant with respect to Options granted prior to such termination, alteration or amendment may not be impaired without the consent of such Participant. 12. Miscellaneous. (a) Nothing in the Plan shall be deemed to create any obligation on the part of the Board to nominate any director for reelection by the Company's shareholders. (b) The Company shall have the right to require, prior to the issuance or delivery of any Common Stock upon the exercise of Options, payment by the Participant of any taxes required by law with respect to the issuance or delivery of such shares. Such amount may be paid in cash, in shares of Common Stock previously owned by the Participant (based on the Fair Market Value), or a combination of cash and shares of Common Stock. (c) The shares of Common Stock to be issued upon the exercise of Options under the Plan shall, unless otherwise determined by the Committee, be shares which have been or may be reacquired by the Company. (d) The Options granted hereunder shall not be transferable by the Participants hereunder otherwise than by will or the laws of descent and distribution except to the extent permitted under the Stock Incentive Plan with respect to executive officers of the Company. (e) This Plan and Options granted hereunder shall be governed by and construed in accordance with the laws of Delaware and in accordance with such federal laws as may be applicable. EX-10.32 10 Exhibit 10.32 AMERICAN HOME PRODUCTS CORPORATION DEFERRED COMPENSATION PLAN Effective as of July 31, 1997 As Amended Effective November 19, 1998 PURPOSE The purpose of the Deferred Compensation Plan (the "Plan") is to encourage the retention of a key group of management employees by allowing them to defer various types of compensation. SECTION ONE - DEFINITIONS Whenever used in the Plan, the following terms shall have the following meanings: (a) "Administrator" - means the Committee or such entity or person to whom the Committee may delegate responsibility for administration of the Plan. (b) "Beneficiary" - means one or more persons or entities (including a trust or estate) designated by an Employee, at any time or from time to time, to receive any payment under the Plan at or after such Employee's death. Such designation shall be made on a form provided or approved by the Administrator. If at any time a deferred amount shall become payable at or after the death of an Employee, and there shall not be in existence any person or entity so designated, then "Beneficiary" means the estate of such Employee. (c) "Board of Directors" - means the Board of Directors of the Company. (d) A "Change of Control" - shall be deemed to have occurred if (i) any "person" (as that term is used in Sections 13 and 14(d)(2) of the Exchange Act) other than a Permitted Holder (as defined below) is or becomes the beneficial owner (as that term is used in Section 13(d) of the Exchange Act), directly or indirectly, of fifty percent (50%) or more of either the outstanding shares of Common Stock or the combined voting power of the Company's then outstanding voting securities entitled to vote generally, (ii) during any period of two (2) consecutive years, individuals who constitute the Board of Directors of the Company at the beginning of such period cease for any reason to constitute at least a majority thereof, unless the election or the nomination for election by the Company's stockholders of each new director was approved by a vote of at least three-quarters (3/4) of the directors then still in office who were directors at the beginning of the period or (iii) the Company undergoes a liquidation or dissolution or a sale of all or substantially all of the assets of the Company. No merger, consolidation, or corporate reorganization in which the owners of the combined voting power of the Company's then outstanding voting securities entitled to vote generally prior to such combination, own fifty percent (50%) or more of the resulting entity's outstanding voting securities shall, by itself, be considered a Change of Control. As used herein, "Permitted Holder" means: (i) the Company, (ii) any corporation, partnership, trust, or other entity controlled by the Company and (iii) any employee benefit plan (or related trust) sponsored or maintained by the Company or any such controlled entity. (e) "Code" - means the Internal Revenue Code of 1986, as amended from time to time. (f) "Committee" - means the Compensation and Benefits Committee of the Board of Directors. (g) "Company" - means American Home Products Corporation, a Delaware Corporation. (h) "Deemed Rate of Interest" - means a rate of interest deemed payable on amounts deferred under the Plan equal to the average of the quarter end yields for a ten-year period ending September 30 of the prior year, of ten-year U.S. Treasury notes plus two percent (2%). The Deemed Rate of Interest shall be calculated, accrued, credited, and compounded quarterly by the Treasurer of the Company. The Deemed Rate of Interest may be increased or decreased from time to time by the Board as it may deem appropriate, provided that no such decrease shall be effective for deemed interest accruing prior to the latest of (i) the date of Board action implementing such decrease and (ii) the date such decrease is communicated to Participants. (i) "Eligible Employee" - means an employee of the Company employed in the United States who either: (i) is a principal officer of the Company as that term is defined at Paragraph 30 of the By-Laws of the Company, or (ii) earns an annual base salary of not less than one hundred seventy-five thousand dollars ($175,000) or such greater amount as may be determined from time to time by the Committee. Whether or not a person is an Eligible Employee will be determined on a Plan Year by Plan Year basis, such that a person who qualifies as an Eligible Employee in a particular Plan Year shall not qualify as an Eligible Employee in a subsequent Plan Year in which he/she meets neither of criteria (i) or (ii) above. (j) "Exchange Act" - means the Securities Exchange Act of 1934, as amended. (k) "Effective Date" - means July 31, 1997. (l) "Normal Retirement Date" - shall have the same meaning as set forth in the American Home Products Corporation Retirement Plan - United States. (m) "Participant" - means an Eligible Employee who elects to defer compensation under the terms of the Plan. (n) "Plan" - means the American Home Products Corporation Deferred Compensation Plan as set forth herein and as it may be amended and/or restated from time to time. (o) "Plan Year" - means the calendar year, except that the first Plan Year which shall be the period beginning on the Effective Date and ending on December 31, 1997. (p) "Retirement Date" - means the date an Employee elects to retire under the provisions of the American Home Products Corporation Retirement Plan - United States. (q) "SESP" - means the American Home Products Corporation Supplemental Employee Savings Plan, as amended from time to time. (r) "Stock Plans" - means the 1996 Stock Incentive Plan of the Company and all similar prior and subsequent plans of the Company providing for the granting of stock options to officers and other key employees of the Company. SECTION TWO - DEFERRALS UNDER PRIOR PLANS An Eligible Employee who, prior to the Effective Date, elected to defer part or all of (i) the cash portion of his/her Management Incentive Plan ("MIP") compensation, (ii) his/her base salary under the Deferred Compensation Program ("Program") of the Company, (iii) the income on the proceeds (net of after-tax withholding and prescribed fees) of the cashless exercise of his/her stock options under the Stock Plans, i.e., proceeds from the sale of the stock resulting from such exercise, or (iv) the proceeds (net after-tax withholding) of the exercise of stock appreciation rights, may elect to have such deferrals or proceeds considered to be credited under the Plan as of the Effective Date in accordance with such terms and conditions as may be established by the Committee. Thereafter, such deferrals shall continue in accordance with the deferral and distribution provisions of the Plan; provided that amounts attributable to such deferrals shall remain subject to the same elections and restrictions as previously had been in effect with respect thereto, unless thereafter changed by the Eligible Employee in accordance with the terms of the Plan. SECTION THREE - PARTICIPATION (a) Participation on the Effective Date. An employee of the Company shall become a Participant as of the Effective Date if he/she is an Eligible Employee on the Effective Date and elects to include previously deferred amounts under the Plan as described in Section Two above or elects to defer on and after the Effective Date by filing a deferral election form with the Administrator in accordance with Section 5. (b) Participation after the Effective Date. Any Eligible Employee who has not become a Participant on the Effective Date in accordance with Section 3(a) above shall become a Participant as of the Effective Date of his/her first deferral under the Plan in accordance with Section 5 following the Effective Date. SECTION FOUR - DEFERRALS UNDER THE PLAN (a) Deferral of Cash Awards under the MIP. (1) A Participant may designate a percentage of the cash portion of his/her MIP compensation from the Company which is payable in a Plan Year (the "Deferred MIP Compensation") to be deferred and distributed in accordance with a written election made by the Participant in accordance with Section 5. (2) A Participant's Deferred MIP Compensation shall accrue deemed interest, compounded quarterly, at the Deemed Rate of Interest from the date such Deferred MIP Compensation otherwise would have been paid to the date of distribution. (3) The Company shall distribute to a Participant his/her total Deferred MIP Compensation (together with deemed interest accrued thereon) in accordance with the deferral period and distribution form designated by the Participant in accordance with Section 5. (b) Deferral of Base Salary. (1) A Participant may designate a percentage of his/her total annual base salary for a Plan Year (the "Deferred Salary Compensation") to be deferred and distributed in accordance with a written election made by the Participant in accordance with Section 5. However, no such deferral shall be effective unless the Participant elects with respect to the same Plan Year to have no less than six percent (6%) of his/her total base salary deferred in accordance with the SESP, and such SESP deferral shall be subject to the terms of the SESP and not to this Plan. (2) A Participant's Deferred Salary Compensation shall accrue deemed interest, compounded quarterly, at the Deemed Rate of Interest from the date such Deferred Salary Compensation otherwise would have been paid to the date of distribution. (3) The Company shall distribute to the Participant his/her total Deferred Salary Compensation (together with deemed interest accrued thereon) in accordance with the deferral period and distribution form designated by the Participant in accordance with Section 5. (4) A Participant may, upon no less than thirty (30) days' advance written notice to the Vice President Finance of the Company or any successor thereto as designated by the Committee, prospectively terminate his/her deferral of base salary, effective as of the date stated in such written notice. Such termination shall not affect the treatment hereunder of amounts deferred prior to the effective date of such written notice. (c) Deferral of Proceeds from a Cashless Exercise/Sale Transaction. (1) A Participant may designate an amount of the proceeds (net of withheld taxes and prescribed fees) of a cashless exercise/sale transaction of stock options granted under the Stock Plans to be held by the Company pursuant to the Plan (the "Deferred Stock Option Proceeds") so that deemed interest accrued thereon in accordance with clause (2) immediately below would be deferred and distributed in accordance with a written election made by the Participant in accordance with Section 5. (2) A Participant's Deferred Stock Option Proceeds shall accrue deemed interest, compounded quarterly, at the Deemed Rate of Interest from the date the amount of such Deferred Stock Option Proceeds otherwise would have been paid. (3) The Company shall distribute to a Participant his/her total Deferred Stock Option Proceeds (together with deemed interest accrued thereon) in accordance with the deferral period and distribution form designated by the Participant in accordance with Section 5. (4) For purposes of clarity, it shall be understood that the intent of this Section 4(c) is to provide for a deferral of the Participant's taxation only with respect to the deemed interest credited in accordance with clause (2) above and not on the Deferred Stock Option Proceeds. As a result, it is intended that the cashless exercise/sale transaction shall be taxable to the Participant as if no election had been made hereunder and, upon distribution from the Plan, only the deemed interest accrued on the Deferred Stock Option Proceeds, and not the Deferred Stock Option Proceeds themselves, shall be taxable to the Participant. (d) Deferral of Proceeds from Exercise of Stock Appreciation Rights ("SARs"). (1) A Participant may designate an amount of the proceeds of the exercise of SARs ("Deferred SAR Proceeds"), as specified on the deferral election form, to be deferred and distributed in accordance with a written election made by the Participant in accordance with Section 5. (2) A Participant's Deferred SAR Proceeds shall accrue deemed interest, compounded quarterly, at the Deemed Rate of Interest from the date such Deferred SAR Proceeds otherwise would have been paid to the Participant. (3) The Company shall distribute to the Participant his/her total Deferred SAR Proceeds (together with deemed interest accrued thereon) in accordance with the deferral period and distribution form designated by the Participant in accordance with Section 5. SECTION FIVE - FORM OF DEFERRAL ELECTIONS (a) All deferrals made under Section 4 shall be evidenced by the Participant's properly executing a deferred compensation agreement form supplied by the Administrator in accordance with the rules set forth in this Section 5. (b) An election to consider amounts previously deferred to be credited under this Plan in accordance with Section 2 must be received by the Committee or its designee prior to the Effective Date. (c) An election to defer MIP compensation in accordance with Section 4(a) or base salary in accordance with Section 4(b) with respect to a particular Plan Year must be received by the Committee or its designee no later than the last day of the preceding Plan Year. Such election must designate the timing and form of distribution of such Deferred MIP Compensation and/or base salary and earnings thereon in accordance with the options described in Section 6(a) and (b), respectively. (d) An election to have the proceeds from a cashless exercise/sale transaction held by the Company in accordance with Section 4(c) must be received by the Committee within the time frame established by the Committee from time to time. Such election must designate the timing and form of distribution of such proceeds and earnings thereon in accordance with the options described in Section 6(c). (e) An election to defer proceeds from the exercise of SARs in accordance with Section 4(d) must be received by the Committee no later than six months prior to the exercise date of the SAR. Such election must designate the timing and form of distribution of such deferred SAR proceeds and earnings thereon in accordance with the options described in Section 6(d). (f) Notwithstanding the above, an employee who becomes an Eligible Employee for the first time during a Plan Year shall be permitted, within the thirty (30) day period that begins on the day he/she becomes an Eligible Employee, to make an election to defer base salary accrued after the effective date of such election for the remainder of the Plan Year and MIP Compensation payable with respect to the Plan Year, provided, in the case of MIP Compensation, that the amount of such compensation, if any, is not known prior to the effective date of such election. SECTION SIX - DISTRIBUTIONS (a) Deferred MIP Compensation. (1) Commencement of Payment of Deferral of Deferred MIP Compensation. Deferred MIP Compensation (together with deemed interest accrued thereon) shall commence to be paid at the election of the Participant either: (i) ten (10) years following the date the Deferred MIP Compensation otherwise would have been paid, or (ii) at the Participant's Retirement Date. (2) Form of Distribution of Deferred MIP Compensation. Deferred MIP Compensation (together with deemed interest accrued thereon) shall be distributed at the election of a Participant either: (i) in a lump sum payment payable within ninety (90) days following the time designated pursuant to Section 6(a)(1) above, or (ii) in installment payments of up to ten (10) substantially equal annual installments, with the first installment payable within ninety (90) days following the time designated pursuant to Section 6(a)(1) above, with the remaining installments payable within ninety (90) days following the anniversaries of such time. The amount of each installment shall be determined by dividing the amount credited to the Participant's account at the time the installment is to be made (including deemed interest) by the number of remaining installments (including the installment then due). (b) Deferred Salary Compensation. (1) Commencement of Payment of Deferred Salary Compensation. Deferred Salary Compensation (together with deemed interest accrued thereon) shall commence to be paid at the election of the Participant either: (i) ten (10) years following the date the Deferred Salary Compensation otherwise would have been paid, or (ii) at the Participant's Retirement Date. (2) Form of Distribution of Deferred Salary Compensation. Deferred Salary Compensation (together with interest accrued thereon) shall be distributed at the election of the Participant either: (i) in a lump sum payable within ninety (90) days following the time designated pursuant to Section 6(b)(1) above, or (ii) in installment payments of up to ten (10) substantially equal annual installments, with the first installment payable within ninety (90) days following the time designated pursuant to Section 6(b)(1) above, with the remaining installments payable within ninety (90) days following the anniversaries of such time. The amount of each installment shall be determined by dividing the amount credited to the Participant's account at the time the installment is to be made (including deemed interest) by the number of remaining installments (including the installment then due). (c) Deferred Stock Option Proceeds. (1) Commencement of Payment of Deferred Stock Option Proceeds. Deferred Stock Option Proceeds (together with deemed interest accrued thereon) shall commence to be paid at the election of a Participant either (i) not less than three (3) years nor more than ten (10) years following the exercise of the stock options subject to such election, or (ii) at the attainment of the Retirement Date of the Participant. (2) Form of Distribution of Deferred Stock Option Proceeds. Deferred Stock Option Proceeds (together with deemed interest accrued thereon) shall be distributed at the election of a Participant either: (i) in a lump sum payable within ninety (90) days following the time designated in Section 6(c)(1) above, or (ii) in installment payments of up to ten (10) substantially equal annual installments, with the first installment payable within ninety (90) days following the time designated in Section 6(c)(1) above, with the remaining installments payable within ninety (90) days following the anniversaries of such time. The amount of each installment shall be determined by dividing the amount of deferrals in the Participant's account at the time the installment is to be made (including deemed interest thereon) by the number of installments. (3) Early Payment of Deferred Stock Option Proceeds. A Participant may, upon written request to the Committee, receive payment of a portion or all of his/her Deferred Stock Option Proceeds (as elected by the Participant) prior to the date selected pursuant to Section 6(c)(1) above. In that event of such early payment, the deemed interest credited to the Participant for that Plan Year shall be one percent (1%) less than the rate otherwise applicable for the Plan Year, and shall be credited on Deferred Stock Option Proceeds distributable under this Section 6(c)(3) only through the date of distribution. A Participant shall not be allowed to elect to receive early payment under this Section 6(c)(3) of any deemed interest credited to his/her Deferred Stock Option Proceeds, but only of the Deferred Stock Option Proceeds themselves. (d) Deferred SAR Proceeds. (1) Commencement of Payment of Deferred SAR Proceeds. Deferred SAR Proceeds (together with deemed interest accrued thereon) shall commence to be paid at the election of a Participant either (i) ten (10) years following the exercise of the SAR subject to such election, or (ii) at the Participant's Retirement Date. (2) Form of Distribution of SAR Proceeds. Deferred SAR Proceeds (together with deemed interest accrued thereon) shall be distributed at the election of a Participant either: (i) in a lump sum payment payable within ninety (90) days following the time designated pursuant to Section 6(d)(1) above, or (ii) in installment payments of up to ten (10) substantially equal annual installments, with the first installment payable within ninety (90) days following the time period designated pursuant to Section 6(d)(1) above, with the remaining installments payable within ninety (90) days following the anniversaries of such time. The amount of each installment shall be determined by dividing the amount of deferrals in the Participant's account at the time the installment is to be made (including deemed interest thereon) by the number of installments. (e) Payment Upon Separation From Service. Notwithstanding the above, in the event a Participant shall separate from service with the Company (for reasons other than death) prior to the commencement of payment of his/her Deferred MIP Compensation, Deferred Salary Compensation, Deferred Stock Option Proceeds and/or Deferred SAR Proceeds, the Participant's account shall be distributed to the Participant in a single lump sum, together with deemed interest accrued thereon through the date of distribution, within ninety (90) days following such separation, provided that the foregoing shall not apply in the case of a Participant who (i) separates from service on a Retirement Date and (ii) had elected to receive payment of any amounts deferred under the Plan in the form of installment payments, commencing at his/her Retirement Date (but only with respect to amounts for which such election had been made). (f) Payment Upon Death. Notwithstanding anything in the Plan to the contrary, in the event a Participant dies prior to the receipt of any or all of his/her Deferred MIP Compensation, Deferred Salary Compensation, Deferred Option Proceeds, and/or Deferred SAR Proceeds, such amount shall be distributed in a single lump sum to the Participant's Beneficiary(ies), together with deemed interest accrued thereon through the date of such distribution, within ninety (90) days following his/her death. (g) Notwithstanding anything in the Plan to the contrary, including Sections 6(a)(1)(ii), 6(b)(1)(ii), 6(c)(1)(ii), and 6(d)(1)(ii), (i) a Participant who prior to November 19, 1998 has elected to commence payment at his or her Retirement Date may elect to defer such commencement of payments beyond his or her Retirement Date but in no event beyond his or her Normal Retirement Date; and (ii) on or after November 19, 1998 a Participant may elect to commence payment on or after his or her Retirement Date but in no event beyond his or her Normal Retirement Date; provided in each case that such deferral election or amended deferral election, as the case may be, is filed with the Committee or its delegate at least six months prior to his or her Retirement Date. SECTION SEVEN - MISCELLANEOUS (a) Funding of the Plan. The Plan is unfunded and the Company has no obligation to set aside, earmark, or place in trust any funds with which to pay its obligations under this Plan. The Company's obligation shall not be secured in any way and a Participant's rights shall in no way be preferred over the general creditors of the Company. (b) Change of Control. In the event of a Change of Control, all Deferred MIP Compensation, Deferred Salary Compensation, Deferred Stock Option Proceeds and/or Deferred SAR Proceeds shall be paid to the Participant in a lump sum, together with deemed interest accrued thereon, within ten (10) days following the Change of Control. (c) Employment. This Plan does not constitute an employment contract between the Company and a Participant. Nothing in this Plan shall be construed to give a Participant the right to be retained in the service of the Company, nor interfere with the right of the Company to terminate or discipline a Participant at any time. (d) Construction. This Plan shall be construed and interpreted under the laws of the State of New Jersey. (e) Taxes. The Company may withhold from distributions made from the Plan any taxes required to be withheld under federal, state, or local law. (f) Non-Assignable. Benefits payable under this Plan may not be anticipated, assigned (either at law or equity), alienated, pledged, encumbered, or subjected to attachment, garnishment, levy, execution, or other legal process, and any attempt to effect such distribution shall be void. (g) Minors and Incompetents. If the Administrator determines that any person to whom a payment is due hereunder is a minor or incompetent by reason of physical or mental disability, the Administrator shall have the power to cause the payments then due to such person to be made to another for the benefit of the minor or incompetent, without responsibility of the Company or the Administrator to see to the application of such payment, unless claim prior to such payment is made therefor by a duly appointed legal representative. Payments made pursuant to such power shall operate as a complete discharge of the Company and the Administrator. SECTION EIGHT - EMERGENCY BENEFIT In the event that the Committee determines that the Employee has suffered an unforeseeable financial emergency, the Administrator shall pay to the Employee as soon as possible following such determination, an amount not in excess of the amount needed to satisfy the emergency. Such payment shall be distributed first out of the Employee's Deferred Stock Option Proceeds and deemed interest accrued thereon, second, out of Deferred MIP Compensation and deemed interest accrued thereon, third, out of Deferred Salary Compensation and deemed interest accrued thereon, and fourth, out of Deferred SAR Proceeds and deemed interest accrued thereon. Deemed interest shall not be accrued for any Employee on an amount paid to the Employee after the date of such payment. For this purpose, an "unforeseeable financial emergency " means an unanticipated emergency that is caused by an event beyond the control of the Employee that would result in severe financial hardship if the emergency distribution were not permitted. In determining whether a Participant has suffered an unforeseeable financial emergency, the Administrator shall apply principals similar to those contained in Treasury Regulation Section 1.457-2(h)(4). SECTION NINE - ADMINISTRATION OF THE PLAN The Plan shall be administered by the Administrator which shall have full discretionary authority to interpret the Plan; to make all determinations as may be necessary or advisable; and to adopt, amend or rescind any rules, regulations, and procedures as it deems necessary or appropriate for the administration of the Plan. The determinations, actions, and decisions of the Administrator shall be binding and conclusive for all purposes and upon all persons. The Administrator may delegate part or all of its responsibilities under the Plan to such party or parties as it may deem necessary or appropriate. SECTION TEN - AMENDMENT AND TERMINATION The Board of Directors may from time to time amend or revise the terms of the Plan, or may discontinue the Plan at any time. However, such amendment, revision or discontinuance of the Plan may not adversely affect an Employee's benefit(s) accrued under the Plan prior to the date of such action. SECTION ELEVEN - CLAIMS PROCEDURE If a Participant does not receive the timely payment of the benefits which he/she believes are due under the Plan, the Participant may make a claim for benefits in the manner hereinafter provided. All claims for benefits under the Plan shall be made in writing and shall be signed by the Participant. Claims shall be submitted to the Administrator. If the Participant does not furnish sufficient information with the claim for the Administrator to determine the validity of the claim, the Administrator shall indicate to the Participant any additional information which is necessary for the Administrator to determine the validity of the claim. Each claim hereunder shall be acted on and approved or disapproved by the Administrator within 90 days following the receipt by the Administrator of the information necessary to process the claim. In the event the Administrator denies a claim for benefits in whole or in part, the Administrator shall notify the Participant in writing of the denial of the claim and notify the Participant of his right to a review of the Administrator's decision by the Administrator. Such notice by the Administrator shall also set forth, in a manner calculated to be understood by the Participant, the specific reason for such denial, the specific provisions of the Plan on which the denial is based, a description of any additional material or information necessary to perfect the claim with an explanation of the Plan's appeals procedure as set forth in this Section Eleven. If no action is taken by the Administrator on a Participant's claim within 90 days after receipt by the Administrator, such claim shall be deemed to be denied for purposes of the following appeals procedure. Any applicant whose claim for benefits is denied in whole or in part may appeal for a review of the decision by the Administrator. Such appeal must be made within three months after the applicant has received actual or constructive notice of the denial as provided above. An appeal must be submitted in writing within such period and must: (a) request a review by the Administrator of the claim for benefits under the Plan; (b) set forth all of the grounds upon which the Participant's request for review is based or any facts in support thereof; and (c) set forth any issues or comments which the Participant deems pertinent to the appeal. The Administrator shall act upon each appeal within 60 days after receipt thereof unless special circumstances require an extension of the time for processing, in which case a decision shall be rendered by the Administrator as soon as possible but not later than 120 days after the appeal is received by it. The Administrator may require the Participant to submit such additional facts, documents or other evidence as the Administrator in its discretion deems necessary or advisable in making its review. The Participant shall be given the opportunity to review pertinent documents or materials upon submission of a written request to the Administrator, provided the Administrator finds the requested documents or materials are pertinent to the appeal. On the basis of its review, the Administrator shall make an independent determination of the Participant's eligibility for benefits under the Plan. The decision of the Administrator on any appeal of a claim for benefits shall be final and conclusive upon all parties thereto. In the event the Administrator denies an appeal in whole or in part, it shall give written notice of the decision to the Participant, which notice shall set forth, in a manner calculated to be understood by the Participant, the specific reasons for such denial and which shall make specific reference to the pertinent provisions of the Plan on which the Administrator's decision is based. EX-12 11 EXHIBIT 12 American Home Products Corporation Computation of Ratio of Earnings To Fixed Charges (Thousands of dollars, except ratio amounts)
Years Ended December 31, Earnings: 1998 1997 1996 1995 1994 (1) Income from continuing operations before federal and foreign taxes $3,585,460 $2,814,707 $2,755,460 $2,438,698 $2,029,760 Add: Fixed charges 376,253 518,661 605,011 705,047 155,187 Minority interests 2,177 721 18,084 717 (12,570) Distributed equity income 920 0 0 0 0 Amortization of capitalized interest 1,487 1,057 5,621 768 497 Less: Equity income/(loss) 522 10,840 10,431 8,129 (1,691) Capitalized interest 9,497 12,898 0 7,681 9,792 Total earnings as defined $3,956,278 $3,311,408 $3,373,745 $3,129,420 $2,164,773 Fixed Charges: Interest and amortization of debt expense $ 322,970 $ 461,370 $ 571,414 $ 665,021 $ 116,661 Capitalized interest 9,497 12,898 0 7,681 9,792 Interest factor of rental expense (2) 43,786 44,393 33,597 32,345 28,734 Total fixed charges as defined $ 376,253 $ 518,661 $ 605,011 $ 705,047 $ 155,187 Ratio of earnings to fixed charges 10.5 6.4 5.6 4.4 13.9
(1) - The 1994 results include one month of results of American Cyanamid Company which was acquired by American Home Products Corporation effective December 1, 1994. Assuming the acquisition took place January 1, 1994, the pro forma ratio of earnings to fixed charges would be 2.9 for the year ended December 31, 1994. (2) - A 1/3 factor was utilized to compute the portion of rental expenses deemed representative of the interest factor. EX-13 12 [PHOTO] First in Class, Best in Class: Breakthrough Therapies from AHP's Pipeline American Home Products Corporation 1998 Annual Report American Home Products [GRAPHIC] American Home Products is one of the world's largest research-based health care and agricultural products companies, with leading positions in prescription and non-prescription medications, nutritionals, crop protection products, and veterinary pharmaceuticals and biologicals. Our Company is focused on the discovery and development of breakthrough products through a significant investment in research and development. Millions of people worldwide benefit from AHP's broad and diverse lines of pharmaceutical products. These include women's health care products, neuroscience and cardiovascular therapies, vaccines, agents for pain and arthritis, anti-infectives and treatments for use in oncology and hematology. AHP also is recognized for its consumer health care products, holding one of the largest global over-the-counter product franchises and demonstrating growth in the area of nutritional supplements. [GRAPHIC] AHP is among the major agricultural products companies in the world with a presence in all significant agricultural markets. Our Company produces innovative crop protection products that meet stringent environmental safety standards worldwide. [GRAPHIC] American Home Products also is a leading worldwide provider of animal health care products for livestock and companion animals. [GRAPHIC] Contents 2 Chairman's Report 7 From Research to Results 18 Pharmaceutical Pipeline 20 AHP at a Glance 24 Research: Advancing AHP's Pharmaceutical Pipeline 25 Financial Section 53 Directors and Officers 54 Corporate Data 55 Principal Products - United States Financial Highlights
YEARS ENDED DECEMBER 31, 1998 1997 (In thousands except per share amounts) ----------- ----------- Net Sales $13,462,687 $14,196,026 Net Income 2,474,338 2,043,123 Diluted Earnings per Share 1.85 1.56 Dividends per Common Share 0.87 0.83 Total Assets 21,079,068 20,825,111 Stockholders' Equity 9,614,796 8,175,252
Per share data for both years reflect the two-for-one stock split in April 1998. See Note 7 to the Consolidated Financial Statements. Net Sales ($ millions)
YEARS ENDED DECEMBER 31, 1998 1997 1996 1995 1994 1993 1992 1991 ----------- ----------- ----------- ----------- ---------- ---------- ---------- ---------- SUMMARY OF SALES AND EARNINGS Net sales $13,462,687 $14,196,026 $14,088,326 $13,376,089 $8,966,214 $8,304,851 $7,873,687 $7,079,443 Net income 2,474,338 2,043,123 1,883,403 1,680,418 1,528,254 1,469,300 1,460,842 1,375,273 Diluted earnings per share 1.85 1.56 1.46 1.34 1.24 1.17 1.15 1.08 Dividends per common share 0.87 0.83 0.7825 0.755 0.735 0.715 0.665 0.5938
YEARS ENDED DECEMBER 31, 1990 1989 ---------- ---------- SUMMARY OF SALES AND EARNINGS Net sales $6,775,182 $6,747,016 Net income 1,230,597 1,102,158 Diluted earnings per share 0.97 0.88 Dividends per common share 0.5375 0.4875
On the Cover [PHOTO] "Life before Enbrel wasn't any life at all. You go to bed, you hurt. You wake up, you hurt. It hurt to hold a book, let alone take care of four young children. They took care of me! My rheumatoid arthritis made even the simplest activities intolerable, let alone being able to make a living or just having fun. The way I see it, Enbrel gave me a second chance. Now I can enjoy my kids, work all day on my feet and even hike in my spare time." Lindagail Dixon, age 44 1 CHAIRMAN'S REPORT 1998 was an eventful and challenging year for American Home Products. Substantial progress was made in focusing the Company's resources on areas of highest growth potential and best strategic fit, as we refined our portfolio of businesses by divesting our medical devices businesses and acquiring the Solgar Vitamin and Herb business. Each of the Company's ongoing businesses - pharmaceuticals, consumer health care, agricultural products and animal health care - delivered sales increases through new product launches and global expansion of existing product lines. AHP's pharmaceutical research and development efforts advanced strongly, and, as a result, we believe that our product pipeline is the best it has ever been, with products in all stages of development, providing us with near- and long-term growth opportunities. A REVIEW OF 1998 These achievements notwithstanding, last year was a difficult one given the loss of U.S. revenues due to the voluntary market withdrawal of our antiobesity products in September 1997 and Duract in June 1998 coupled with intense generic competition for Oruvail and Lodine, two of our [PHOTO] John R. Stafford Chairman, President and Chief Executive Officer [GRAPHIC] "AHP'S PHARMACEUTICAL RESEARCH AND DEVELOPMENT EFFORTS ADVANCED STRONGLY, AND, AS A RESULT, WE BELIEVE THAT OUR PRODUCT PIPELINE IS THE BEST IT HAS EVER BEEN, WITH PRODUCTS IN ALL STAGES OF DEVELOPMENT, PROVIDING US WITH NEAR- AND LONG-TERM GROWTH OPPORTUNITIES." 2 anti-inflammatory drugs, and for Cordarone, an antiarrhythmia medication. Additionally, the U.S. agricultural products industry experienced unfavorable weather conditions and increased competition from genetically engineered products, which affected AHP's domestic agricultural products business. Despite all of these circumstances, pro forma net sales for AHP increased 2 percent versus 1997. Net income and diluted earnings per share for 1998 were $2.5 billion and $1.85, respectively, compared with $2.0 billion and $1.56 in 1997. These results include: the 1998 gain on the sale of the Sherwood-Davis & Geck medical devices business; the 1998 restructuring charge related to the reorganization of our pharmaceutical and nutritional supply chains; and other special items that are more fully discussed in the financial section of this report. Excluding these items, 1998 net income for AHP increased 10 percent compared with 1997, and diluted earnings per share increased 8 percent. Additionally, AHP's stock price advanced by nearly 50 percent, significantly outperforming the Standard & Poor's 500 Index. A DECADE OF PROGRESS Over the past 10 years, American Home Products has transformed itself from a diversified company with $6.7 billion in net sales to a world leader in health care and agricultural products with $13.5 billion in net sales. AHP today has 82 percent of net sales coming from prescription pharmaceuticals, vaccines, nutritionals, consumer health care and animal health care products. Net income also has risen sharply, increasing from $1.1 billion 10 years ago to nearly $2.5 billion today. The current annualized dividend of $0.90 per common share paid to shareholders has risen steadily in the past decade and, in fact, has increased for 47 consecutive years. Through continual efforts to improve its business portfolio and its operating efficiency, AHP has been able to sustain income and dividend growth while also dramatically increasing investment in research and development. The Company's R&D spending has risen from $345 million in 1989 to a record $1.65 billion in 1998, of which more than 80 percent was dedicated to pharmaceutical innovation, with emphasis on biotechnology. This substantial expenditure underscores our commitment to grow sales by identifying, developing and marketing breakthrough products in major worldwide therapeutic categories. AHP is positioned to deliver new, advanced therapies through its R&D skills, combining expertise in small chemical molecules, protein biopharmaceuticals and vaccines. The productivity of our efforts has allowed us to double the number of Investigational New Drug applications filed compared with five years ago. To supplement our internal discovery capabilities, we have formed important strategic alliances with outside partners. A DECADE OF PROGRESS
1989 NET SALES $6.7 BILLION Consumer Health Care 19% Food and Household 22% Medical Devices 10% Pharmaceuticals 49%
1998 NET SALES $13.5 BILLION Consumer Health Care 16% Agricultural Products 16% Other 2% Pharmaceuticals 66%
"AHP TODAY HAS 82 PERCENT OF NET SALES COMING FROM PRESCRIPTION PHARMACEUTICALS, VACCINES, NUTRITIONALS, CONSUMER HEALTH CARE AND ANIMAL HEALTH CARE PRODUCTS." 3 STRATEGIES FOR GROWTH Several highly differentiated pharmaceutical products that will provide growth for AHP are awaiting global approval in 1999. These include Sonata, for the treatment of general insomnia; ReFacto, a recombinant blood-clotting factor for hemophilia A; Protonix, for erosive esophagitis (to be marketed in the United States only); and Rapamune, an immunosuppressive therapy for prophylaxis of renal transplant rejection. Expedited regulatory review of pneumococcal conjugate vaccine, for the prevention of pneumococcal disease in infants and young children, will begin in 1999. In addition, we expect Effexor XR to receive market clearance for the treatment of general anxiety disorder as well as labeling for rapid onset of action. In 1999, we expect our consumer health care business to strengthen its presence in the fast-growing U.S. nutritional supplements market and to continue its worldwide expansion. Growth for our agricultural products business will be driven by the products introduced in the last two years, by continued global expansion of imidazolinone-tolerant technologies and crops and by licensing agreements, including those signed in 1998 with leading seed breeders and researchers. ETHICAL PHARMACEUTICALS Worldwide pharmaceutical sales increased to approximately $8.1 billion in 1998 as Wyeth-Ayerst Global Pharmaceuticals remained a leader in a broad range of therapeutic categories, including: women's health care; neuroscience therapies; vaccines; therapies for pain and arthritis; and oncology and hematology medications. The company's largest selling product - Premarin - led the worldwide hormone replacement therapy market and remained the number one dispensed prescription medication in the United States. The Premarin family of products, including Prempro - which experienced fast growth as the leading combination estrogen and progestin hormone replacement product - exceeded $1.6 billion in worldwide sales during 1998. Wyeth-Ayerst's worldwide pharmaceutical sales in 1998 also were driven by strong demand for its oral contraceptives and the Effexor family of products, which experienced double-digit percentage sales growth worldwide. In 1998, Wyeth-Ayerst launched new products, including: - - Neumega, a blood platelet growth factor that promotes production of the body's platelet supply in cancer patients undergoing chemotherapy; - - RotaShield, the first vaccine for use in the prevention of rotavirus gastroenteritis; - - Enbrel, a first-in-class, breakthrough product for the treatment of rheumatoid arthritis, discovered by Immunex Corporation, an AHP majority-owned company, and jointly marketed in the United States by [GRAPHIC] "AHP IS POSITIONED TO DELIVER NEW, ADVANCED THERAPIES THROUGH ITS R&D SKILLS, COMBINING EXPERTISE IN SMALL CHEMICAL MOLECULES, PROTEIN BIOPHARMACEUTICALS AND VACCINES." 4 Wyeth-Ayerst and Immunex. Wyeth-Ayerst has exclusive marketing rights for Enbrel outside the United States and expects European approval and launch during 1999. CONSUMER HEALTH CARE Whitehall-Robins Healthcare remained a global leader in consumer health care products, recording approximately $2.2 billion in 1998 sales. It maintained one of the largest over-the-counter (OTC) product franchises in the United States, marketing three of the five top-selling brands in the U.S. OTC market: Advil, Robitussin and Centrum. In the international OTC market, Advil, Centrum and Caltrate continued to increase sales through geographic expansion. In 1998, the company introduced new products, including Advil Liqui-Gels, the first and only OTC single-ingredient pain reliever available in liqui-gel form, and Centrum Herbals, a new line of herbal supplements. With the acquisition of the Solgar Vitamin and Herb business in July 1998, Whitehall-Robins Healthcare broadened its leadership position in the growing nutritional supplements market. Solgar manufactures and markets a broad line of premium products in this category. AGRICULTURAL PRODUCTS Cyanamid Global Agricultural Products, which recorded approximately $2.2 billion in 1998 sales, is the third largest crop protection company in the United States and the ninth largest in the world. Cyanamid manufactures and markets herbicides, insecticides and fungicides to help protect the world's crop and food supply. Cyanamid's Lightning herbicide for Imi-Corn hybrids and Raptor herbicide for soybeans achieved significant growth in the United States in 1998. Expansion of Fastac insecticide in Europe and Latin America, coupled with sales increases for Odyssey canola herbicide in Canada and Utopia rice herbicide in Japan, contributed to growth internationally. New registrations included Acrobat MZ fungicide in the United States, Caramba fungicide in Germany, and Intrepid and Secure pyrrole insecticides in Australia. Animal Health Care Achieving approximately $800 million in 1998 sales, our Fort Dodge Animal Health business maintained its position in the top tier of animal health companies through new product launches in the United States. The integration of the Solvay animal health business, acquired in 1997, allowed Fort Dodge to expand its presence internationally. The Board of Directors and Management On October 31, 1998, Robin Chandler Duke retired from the Board of Directors. Mrs. Duke provided valuable guidance to our Company for [GRAPHIC] "Cyanamid Global Agricultural Products, which recorded approximately $2.2 billion in 1998 sales, is the third largest crop protection company in the United States and the ninth largest in the world." 5 23 years, and we are grateful for her contributions. We wish her continued success in her many endeavors. Jean-Claude Leroux, President, Whitehall International, Inc., retired in August 1998 after 13 years of exemplary service. He is succeeded by Bruce I. Macphail. Among key management actions at Wyeth-Ayerst Global Pharmaceuticals, Mark M. Larsen was named President, Intercontinental Region; Robert N. Power was named President, Europe, Middle East and Africa; Kevin L. Reilly was named President, Wyeth Vaccines and Nutrition; and Kenneth J. Martin, formerly President of Whitehall-Robins Healthcare, was named Senior Vice President and Chief Financial Officer. LOOKING AHEAD American Home Products is entering the most exciting period in its history, introducing new therapies that will improve or save the lives of millions of people around the world. While sales in 1999 are expected to start slowly, we anticipate that they will accelerate as the year progresses, driven by the new products we introduced in the fourth quarter of 1998 and by new product launches in the second and third quarters of 1999. Sales in 2000 are expected to grow at a faster rate as the full-year benefits of these new products are realized. While significant growth opportunities in world markets led us to consider a merger of AHP and the Monsanto Company in 1998, the Board of Directors of each of the companies later determined that the merger would not be in the best interests of their shareholders. In the coming year, we will remain open to opportunities to expand our Company, but we are confident that AHP, on a stand-alone basis, will continue its history of growth. Our success is possible only through the extraordinary commitment of our employees who earn us distinction in health care and agricultural markets worldwide. The Company strives to provide a work environment supportive of their efforts, including excellent compensation and benefit programs. AHP was among the earliest companies to offer financial assistance with dependent care and adoption expenses, and in 1998, we were proud to be named by Working Mother magazine as one of the best companies in the United States for working mothers. The Board of Directors joins me in expressing gratitude to our employees for their outstanding efforts and to our shareholders for their continued support. /s/ John R. Stafford John R. Stafford Chairman, President and Chief Executive Officer March 2, 1999 "AHP was among the earliest companies to offer financial assistance with dependent care and adoption expenses, and in 1998, we were proud to be named by Working Mother magazine as one of the best companies in the United States for working mothers." 6 From Research to Results: New, Breakthrough Therapies from AHP A significant number of new products from AHP recently have been introduced or are pending regulatory approval. The new treatment options have the potential to save lives and to offer relief from painful, life-threatening or disabling diseases. [GRAPHIC] Enbrel(R) Rheumatoid arthritis (RA) is a chronic inflammatory disease affecting millions of people worldwide. Discovered by Immunex and co-marketed by Wyeth-Ayerst and Immunex, Enbrel, introduced in November 1998, is a breakthrough bioengineered product that offers the first major therapeutic advance for RA in more than a decade. [GRAPHIC] RotaShield(R) Before the availability of RotaShield in September 1998, there was no means to protect infants and young children from rotaviral infections. RotaShield is the first vaccine to prevent the symptoms of rotaviral gastroenteritis, a cause of diarrhea and vomiting so severe that it can lead to dehydration and even death. [GRAPHIC] Sonata(R) One in two adult Americans has difficulty sleeping. Sonata, a new, non-benzodiazepine therapy filed for worldwide approval in 1998, is intended to provide a good night's sleep with reduced risk of next-day residual sedation. [GRAPHIC] Rapamune(R) Rapamune, a novel immunosuppressive agent awaiting global market clearance, will decrease the risk of organ rejection in kidney transplantation. Because of its unique profile, the use of Rapamune is not expected to be associated with many of the common toxicities of currently available agents. [GRAPHIC] ReFacto(R) People with hemophilia A soon may have a more advanced treatment option - ReFacto. Currently under global regulatory review, ReFacto is the first albumin-free formulated recombinant factor VIII product. [GRAPHIC] Protonix(R) When gastric acid - produced by "proton pumps" - damages the lining of the esophagus, severe pain and discomfort result. Protonix, a new proton-pump inhibitor awaiting U.S. Food and Drug Administration (FDA) approval, will be the first U.S. product in its class available both in intravenous and oral formulations. [GRAPHIC] Pneumococcal Currently, infants and very young children have no Conjugate defense against streptococcus pneumoniae, a Vaccine bacteria that causes life-threatening illnesses. AHP's pneumococcal conjugate vaccine, marked for fast-track regulatory filing in the United States, is intended to offer safe and effective prevention. 7 Enbrel Targeting Rheumatoid Arthritis Where It Hurts As a writer, Susan Scott frequently was at a computer. As an avid tennis player, she was regularly on the courts. This all changed when Susan began to have symptoms of rheumatoid arthritis (RA). One by one, the disease robbed Susan of her livelihood, her hobbies and her vitality. She's not alone - over 2 million Americans, three-quarters of them women, suffer from this disease that generally strikes people in the prime of their lives. When Enbrel (etanercept) was approved by the FDA in November 1998, it became the first entirely new approach to treating serious RA available in the last 10 years. Discovered by Immunex - a majority-owned subsidiary of AHP - and co-marketed by Wyeth-Ayerst and Immunex, Enbrel is used to treat moderate to severe RA in people who have not responded adequately to disease-modifying medicines. Enbrel is self-administered by patients twice weekly as a subcutaneous injection. Belonging to an emerging therapeutic class of drugs called biologic response modifiers, Enbrel is a genetically engineered copy of the protein that naturally inhibits tumor necrosis factor (TNF) - a known mediator of inflammation. Enbrel captures excess TNF, suspending the cycle of reactions involved in inflammation and cartilage destruction. The results from Enbrel, according to Susan Scott and the physicians who have studied this drug in clinical trials, are remarkable. They report the swift and often complete relief of symptoms such as stiffness, swelling and pain. 8 [PICTURE] "When I was 40, I had some swelling in my fingers. I thought it must be from years and years of playing competitive tennis. Over the next few years, more symptoms appeared. My knees swelled and then my toes. I thought something really was wrong. It was. I had rheumatoid arthritis. I tried 10 different drugs and was taking up to 20 pills a day. It was a bad time. My doctor felt Enbrel just might be the medication I needed. I began taking it as soon as it was approved. For the first time in years, I could bend my fingers. During my third week of therapy, the pain in my left elbow was gone. My toes weren't swollen. My friends can't believe the change in me. I can't believe the change in me." Susan Scott, age 49 9 [PICTURE] RotaShield Stopping a Toxic Virus in Toddlers "They got sick so fast. I thought it was the usual stomach virus, but the vomiting and diarrhea were nonstop. By the time we got Claudia to the emergency room, she was dehydrated - her eyes were sunken, and she looked so bad. Within hours, her younger sister Chloe was just as ill. No child should ever have to go through this. With RotaShield, they won't have to." Alex Young, Jr., father of Claudia and Chloe 10 In January 1996, Claudia and Chloe Young contracted rotavirus - the most common cause of severe diarrhea and vomiting in young children in the United States. Claudia was almost three years old; Chloe was barely one year old. Worldwide, rotavirus infects more than 125 million young children and is responsible for approximately 870,000 deaths annually. In the United States, 160,000 infected children will need emergency room care each year, and 50,000 will be hospitalized. Rotavirus is extremely contagious, symptoms develop quickly and, in severe cases, a young child may experience as many as 20 vomiting and diarrhea episodes per day - potentially fatal if the child becomes severely dehydrated. In August 1998, the FDA licensed RotaShield - the first vaccine to help prevent the severe symptoms of rotaviral disease. Developed by Wyeth-Ayerst Laboratories through a Cooperative Research and Development Agreement with the National Institute of Allergy and Infectious Diseases, RotaShield - a vaccine given in three oral doses at two, four and six months of age - was studied in more than 10,000 infants, demonstrating a 65 percent to 82 percent reduction in the need for medical intervention and a 97 percent to 100 percent efficacy against dehydration. The Centers for Disease Control and Prevention recommend the routine use of RotaShield for all healthy, full-term infants. "I wish RotaShield had been available when Claudia and Chloe were born," says their mother Belinda Young. "After what we went through, we can only encourage parents to make sure their infant gets the vaccine." [PHOTO] "Insomnia truly impairs quality of life. People who suffer from insomnia experience the despair of sleeplessness at night and significant fatigue and difficulties with performance during the day. Sleep quality is just as important as sleep quantity." Gary Zammit, Ph.D., Director, Sleep Disorders Institute, New York City Sonata Overcoming the Struggle for Sleep According to the National Sleep Foundation, as many as one in two adult Americans has difficulty sleeping. Most of them are women, with insomnia reported as their most common sleep problem. Left untreated, sleep problems can cause chronic fatigue, produce mood changes and impair daytime performance. Sleep deprivation also leads to lost productivity, medical expenses and sick leave. Despite the enormity of the problem, most sufferers do not seek help or are wary of taking sleep medications. They often are concerned about rebound insomnia or residual drug sedation, side effects that are known to accompany many currently available medications. Sonata (zaleplon) - a new non-benzodiazepine hypnotic agent developed by Wyeth-Ayerst for the short-term treatment of insomnia - is intended to help people with insomnia get a good night's sleep and, equally as important, to enable them to wake up without hangover or grogginess in the morning. Sonata is expected to receive market clearance in the United States and internationally in mid-year 1999. 11 [PHOTO] "Before I learned I needed a transplant, I just assumed my fatigue was related to working hard. Other than feeling tired, I had no symptoms whatsoever. Fortunately, my older brother was able to be a donor, and I needed dialysis only for a short while. My surgery went extraordinarily well. That was a year ago. Now my energy has returned, and I'm back in shape." Richard Johnson, age 32 12 RAPAMUNE REDUCING THE RISK OF TRANSPLANT REJECTION Richard Johnson services commercial air conditioners. A routine test for blood pressure during a company physical in 1998 began a cascade of events that led to a kidney transplant a few months later. Although the operation was a success, Richard's next challenge was to overcome the possibility of rejection of the implanted life-saving organ and to face the potentially serious side effects of the drugs that are used to prevent rejection. Richard was placed on an experimental drug regimen that included Rapamune (sirolimus), a novel medication developed by Wyeth-Ayerst that selectively blocks the proliferation of T cells- essential components in the body's immune response. Richard's challenge is similar to the one faced by the 250,000 patients worldwide who continue to use immunosuppressant drugs after their transplant. Although progress in technology has increased the number of patients receiving solid organ transplants, researchers continue to look for advancements in therapies to improve the long-term survival of the transplanted organ. Because of its unique mechanism of action, Rapamune is intended to reduce both the risk and the severity of acute rejection with minimal toxic effects. In two of the largest kidney transplant studies ever conducted, Rapamune, in combination with a standard immunosuppressive therapy regimen - cyclosporine and corticosteroids - had impressive results versus other standard immunosuppressive drug regimens. Rapamune now is undergoing priority review by the FDA and has been filed in Canada and Europe. 13 REFACTO ADDING A SAFETY MEASURE TO TREATMENT [PHOTO] "When my friends were over at my house, I had to take some medicine. It gives me the things I need to make me stop bleeding. They asked me, 'How can you stand that thing going in your hand?' I told them I'm used to it. I tell the kids, 'I don't feel bad about having hemophilia - that's what makes me unique.' " Christopher Ayad, age 11 14 Hemophilia, an inherited blood-clotting disorder, is caused by a deficiency in specialized proteins that promote the normal clotting process. Approximately 40,000 people in North America, Europe and Japan suffer from hemophilia A--the result of a deficiency of the factor VIII protein. Another 8,000 people have hemophilia B, in which the factor IX protein is the missing link in the clotting chain. Until the early 1990s, human plasma-derived products that carried the possibility of viral transmission were the only therapies available to treat hemophilia, prompting efforts to produce products by recombinant DNA technology. In 1992, the first recombinant factor VIII product, cloned and discovered by Genetics Institute (G.I.), a unit of Wyeth-Ayerst, became the first such treatment commercially available. Not only was it a breakthrough for patients with hemophilia A, but the product represented one of the most significant technical achievements within the biotechnology industry. In 1997, G.I. again launched a breakthrough recombinant product - BeneFIX Coagulation Factor IX (Recombinant) - which provided hemophilia B patients with the first plasma-free as well as albumin-free treatment option. Now G.I. is planning to introduce ReFacto Antihemophilic Factor (Recombinant) - a second-generation recombinant factor VIII for hemophilia A sufferers, which, unlike other recombinant factor VIII products, is formulated without the use of human serum albumin and reduces the potential for disease from blood-borne viral contamination. FDA and European regulatory review of ReFacto is actively under way. [PHOTO] "For several years, I thought I had indigestion. There would be times when I literally couldn't swallow my food. I tried drinking milk or taking antacids, but they provided only temporary relief." Robert Lowe, age 54 PROTONIX RECOVERING FROM REFLUX For some people, it feels like mild heartburn. Others think they have suffered a heart attack. In actuality, both extremes represent the symptoms of gastroesophageal reflux disease (GERD) -- a condition in which gastric acid flows up from the stomach and damages the lining of the esophagus. The disease interferes with eating and sleeping and tends to dominate almost every aspect of life. GERD can occur for many reasons, including excess secretion of gastric acid. This acid is produced by "proton pumps"--an enzyme system in the cells of the stomach. While the stomach can handle acidic conditions, the esophagus cannot. When the walls of the esophagus are exposed to stomach acid, the result is sour taste, inflammation or irritation and, in severe cases, ulceration. In the early 1990s, proton pump inhibitor (PPI) drugs were developed to turn off the final pathway of acid production. Revolutionizing the field of acid control, this class of compounds today is the most effective treatment for GERD symptoms and for the healing of esophageal ulceration. In mid-1998, Wyeth-Ayerst filed two New Drug Applications with the FDA for a new PPI--Protonix (pantoprazole). Protonix suppresses acid production and has minimal potential for interacting with other medications. Protonix is the first U.S. product in its class that is formulated both in tablet and intravenous form, the latter for patients who cannot take medications orally or who are at increased risk of gastric ulceration and bleeding. 15 Pneumococcal Conjugate Vaccine Defending [Photo of two infants] Worldwide, more than 1.2 million children under the age of five die as a result of pneumococcal disease. And as pneumococcus bacteria have become increasingly resistant to the antibiotics most commonly used to treat its infection, there is an urgent need for a vaccine effective in infants and young children. In a Phase III clinical trial involving more than 38,000 children, Wyeth-Ayerst's pneumococcal conjugate vaccine - which contains the serotypes that have been shown to be most commonly associated with drug resistance - tested 100 percent effective against vaccine-type invasive pneumococcal disease. The special conjugation process used in making this vaccine dramatically enhances its ability to produce high protective levels of antibodies in infants and very young children relative to the current polysaccharide vaccine. This vaccine is formulated to protect against the seven strains of pneumococci that cause approximately 80 percent of invasive pneumococcal disease and 65 percent of pneumococcal otitis media infections among young children in the United States. With the pivotal clinical trial supporting U.S. licensure ending ahead of schedule because of these positive results, the FDA granted the vaccine fast-track regulatory filing status in January 1999. The product license application for meningitis and bacteremia is expected to be completed in May 1999; a supplemental filing is planned for otitis media. 16 the Young against Dangerous Diseases [Photo of three infants] Streptococcus pneumoniae is a bacteria that causes many serious and life-threatening illnesses, including pneumonia, meningitis and bacteremia. Infants and young children especially are at risk because no vaccine is available to prevent infection by the bacteria in this vulnerable population. 17 American Home Products Pharmaceutical Pipeline In 1998, AHP introduced several significant new pharmaceutical products, two of which are first in their classes: Enbrel for the treatment of rheumatoid arthritis and RotaShield for rotaviral gastroenteritis in infants. In 1999, AHP is expected to show strong momentum in bringing new products to the health care community with the anticipated approvals of Sonata, ReFacto, Protonix
PHASE II PHASE III REGISTRATION - ------------------------------------------------------------------------------------------------------------------------------------ Women's Health MINESSE(R) Low-dose oral contraceptive (international) ............... ------------------------------------------------------ PREMARIN(R), PREMPRO(TM), PREMPHASE(R) Alzheimer's disease ............................................. -------------------------------- Lower dosage for osteoporosis ................................... -------------------------------- TRIMEGESTONE With 17 (beta)-estradiol: hormone replacement therapy with endometrial protection (international) .................. -------------------------------- With Premarin(R): hormone replacement therapy with endometrial protection (United States) .................. -------------------------------- With ethinyl estradiol: oral contraception ...................... --------------- - ------------------------------------------------------------------------------------------------------------------------------------ Neuroscience Therapies EFFEXOR(R)/EFFEXOR(R) XR Generalized anxiety ............................................. ------------------------------------------------------ Fast onset in depression ........................................ ----------------------------------------------- Anxiety associated with depression .............................. ----------------------------------------------- Social phobia ................................................... -------------------------------- Panic ........................................................... -------------------------------- SONATA(R) Treatment of general insomnia .............................. ------------------------------------------------------ FIBLAST(R) Stroke (joint venture with Scios) ......................... --------------- GKE-841 Epilepsy ..................................................... --------------- - ------------------------------------------------------------------------------------------------------------------------------------ Infectious Diseases ZOSYN(R)/TAZOCIN(R) Intra-abdominal infections - (United States) .................... -------------------------------- Neutropenia - (United States) ................................... -------------------------------- Pediatric indications - (international) ......................... -------------------------------- Perioperative infections - (international) ...................... -------------------------------- rhIL-12 Hepatitis C .................................................. --------------- - ------------------------------------------------------------------------------------------------------------------------------------ Internal Medicine PROTONIX(R) (United States only) Acute erosive esophagitis - oral ................................ ----------------------------------------------- GERD maintenance - oral ......................................... ----------------------------------------------- NPO patients - intravenous ...................................... ----------------------------------------------- H. pylori eradication - oral .................................... -------------------------------- Zollinger-Ellison Syndrome - intravenous and oral ............... -------------------------------- ENBREL(R) (joint venture with Immunex) Congestive heart failure ........................................ --------------- VPA-985 Hyponatremia ................................................. --------------- - ------------------------------------------------------------------------------------------------------------------------------------
18 and Rapamune, expanded indications for Effexor XR and the filings for pneumococcal conjugate vaccine. Development continues on more than 80 new compounds, biologicals or significant line extensions, the majority of which have global potential. A number of promising worldwide products in post-Phase I trials are identified on these pages.
PHASE II PHASE III REGISTRATION - ------------------------------------------------------------------------------------------------------------------------------------ Vaccines ROTASHIELD(R) Rotavirus vaccine (international)* ..................... -------------------------------------------------------- PNEUMOCOCCAL CONJUGATE VACCINE Seven-valent vaccine ............................................ ------------------------------------------- Second-generation vaccine ....................................... --------------------------------- MENINGOCOCCAL CONJUGATE VACCINE (international) ...................... ------------------------------------------- RESPIRATORY SYNCYTIAL SUBUNIT VACCINE (high-risk patients) ........... ------------- - ------------------------------------------------------------------------------------------------------------------------------------ Hematology REFACTO(R) Hemophilia A .............................................. -------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------------------ Inflammatory Diseases and Immunology RAPAMUNE(R) Oral liquid - renal transplantation ............................. -------------------------------------------------------- Oral tablet - renal transplantation ............................. ------------------------------------------- Monotherapy maintenance ......................................... --------------------------------- Additional transplantation indications .......................... ------------- ENBREL(R) (joint venture with Immunex) *Rheumatoid arthritis (international) .......................... -------------------------------------------------------- Juvenile RA ................................................... -------------------------------------------------------- Modification of RA disease progression ........................ --------------------------------- SYNVISC(R) Duration of action .............................................. --------------------------------- Repeat courses .................................................. --------------------------------- Additional indications .......................................... --------------------------------- rhIL-11 Crohn's disease ................................................. ------------- Psoriasis ....................................................... ------------- - ------------------------------------------------------------------------------------------------------------------------------------ Oncology NEUMEGA(R) *Chemotherapy-induced thrombocytopenia (international) ......... ------------------------------------------- Acute myelogenous leukemia ..................................... ------------- Cancer treatment support ....................................... ------------- CMA-676 Adult, relapsed acute myelogenous leukemia ................... --------------------------------- CMB-401 Ovarian, lung and pancreatic cancers ......................... ------------- - ------------------------------------------------------------------------------------------------------------------------------------ Bone and Tissue Repair rhBMP-2 Orthopedic trauma ............................................... --------------------------------- Spinal fusion ................................................... --------------------------------- Oral/maxillofacial .............................................. ---------------------------------
*Launched in the United States 19 AHP AT A GLANCE American Home Products' portfolio includes a wide range of pharmaceutical, biological, consumer health care, agricultural and animal health care products that are well-known to consumers and professionals worldwide. AHP's product leadership is sustained through the research and development investments and marketing efforts of its key companies: Wyeth-Ayerst Global Pharmaceuticals, Whitehall-Robins Healthcare, Cyanamid Global Agricultural Products and Fort Dodge Animal Health. Highlighted here are some of the most important products in our major therapeutic categories and businesses. - - PHARMACEUTICALS - - CONSUMER HEALTH CARE - - AGRICULTURAL PRODUCTS - - ANIMAL HEALTH CARE Women's Health Care Wyeth-Ayerst is a global leader in women's health care and the leading provider of hormone replacement therapies, including Premarin and the fast-growing Prempro. Wyeth-Ayerst's oral contraceptive franchise continues to grow, driven by Alesse and by the gestodene family of products, including Minulet, Tri-Minulet and Harmonet. [GRAPHIC] Cardiovascular Therapies Wyeth-Ayerst offers a broad range of cardiovascular therapies for treating arrhythmia and hypertension. The company's top-selling anti-hypertensive product is Ziac. Cordarone and Cordarone I.V. lead the U.S. market for management of life-threatening ventricular arrhythmias. [GRAPHIC] 20 Neuroscience Therapies Depression and anxiety disorders are significant mental health concerns addressed by Wyeth-Ayerst. The Effexor family of products, approved in more than 60 countries, continues to grow as an important therapy for depression. Ativan, used in the treatment of short-term anxiety, continues to contribute sales within this therapeutic category. [GRAPHIC] Pain and Arthritis Wyeth-Ayerst offers innovative therapies for pain and arthritis, including Enbrel, a first-in-class biologic response modifer for treatment of rheumatoid arthritis; Synvisc, a synovial fluid supplement for osteoarthritis of the knee; and Lodine XL, a non-steroidal anti-inflammatory drug. Vaccines Wyeth-Ayerst is a major supplier of a broad range of pediatric and adult vaccines. Wyeth-Ayerst's vaccines address serious, life-threatening diseases such as diphtheria, influenza, meningitis, pneumonia, poliomyelitis, whooping cough and, with the 1998 FDA licensure of RotaShield, rotaviral gastroenteritis. [GRAPHIC] Oncology/Hematology AHP continues to make strides in the development of oncology products. Neumega, a blood platelet growth factor, promotes production of the body's platelet supply in cancer patients undergoing chemotherapy. In the field of hematology, BeneFIX remains the only recombinant clotting-factor treatment for hemophilia B. [GRAPHIC] Anti-Infectives Wyeth-Ayerst's portfolio includes important antibiotic products that are used to treat infectious diseases globally. Our anti-infective franchise includes Minocin, Pipracil, Zosyn and Suprax. Zosyn, an intravenous antibiotic used throughout the world to treat nosocomial (hospital-acquired) bacterial infections, is one of the fastest growing intravenous antibiotics in the United States. [GRAPHIC] Nutritionals The Wyeth-Ayerst nutritional franchise maintains a significant presence in the international marketplace. Our portfolio of products, led by S-26, Promil and SMA, was bolstered by the launches of S-26 Gold and Promise. Each of these products represents a strategic fit within an established line of first-, second-, third-age and problem-feeding formulas. [GRAPHIC] Consumer Health Care Whitehall-Robins has one of the largest consumer health care franchises in the world and markets three of the five top-selling over-the-counter products in the United States. The company expanded its leadership position with the acquisition of the Solgar Vitamin and Herb business -- a leading manufacturer of more than 450 nutritional supplements. [GRAPHIC] Agricultural Products Cyanamid's global growth is driven by a portfolio of products and technologies that meets the continually evolving needs of agricultural producers around the world. In 1998, Arsenal, Lightning and Raptor continued to gain market share within the United States while international growth was fueled by Fastac and Odyssey. [GRAPHIC] Animal Health Care A leader in developing products for the animal health care industry, Fort Dodge Animal Health launched several products in the United States in 1998, including: Cydectin Pour-On to treat beef cattle affected by parasites and EtoGesic, a non-steroidal anti-inflammatory to treat osteoarthritis in dogs. [GRAPHIC] Research: Advancing AHP's Pharmaceutical Pipeline [PHOTO] In laboratories around the world, thousands of AHP's scientists and technicians are committed to research and development efforts targeted on preventing illness, treating diseases and saving lives. The Company's R&D program, a powerful combination of scientific expertise and diverse technological resources, is producing a portfolio of superior products - many offering the potential of being first in class or best in class. With more than $1.3 billion dedicated to pharmaceutical research and development, AHP has created a scientific environment designed to produce important results. 1998 culminated in the integration of Wyeth-Ayerst's experience and creativity in small chemical molecules with the innovative biotechnological expertise of Genetics Institute in protein biopharmaceutical products and the proven successes of Wyeth-Lederle in vaccines. Immunex Corporation, an AHP majority-owned subsidiary, continued its progress in developing immune system science to protect human health. Products under development by Immunex include new treatments for cancer, asthma, rheumatoid arthritis, and inflammatory, infectious and cardiovascular disease. This unique blend of talent and technology-based discovery - available in-house and through relationships with strong partners in genomics, combinatorial chemistry and high-throughput robotic screening - significantly enhances AHP's drug discovery and development process. As a result, our pharmaceutical product pipeline contains an outstanding lineup of products in the later phases of clinical trials, including: CMA-676 A humanized monoclonal antibody linked to a potent cytotoxic agent targeted on acute myelogenous leukemia, this first-in-class drug is on the cutting edge of oncology therapy, showing promising results in the sickest of patients. rhBMP-2 This recombinant human bone morphogenetic protein-2 has shown encouraging results in accelerating bone repair in a variety of situations, including severe orthopedic trauma, oral and maxillofacial surgery, and spinal fusion. rhBMP-2 should provide entree to a whole new grouping of biopharmaceutical protein products. TRIMEGESTONE Co-developed by Hoechst Marion Roussel, trimegestone, to be used in hormone replacement therapy along with either 17 (beta)-estradiol or Premarin, is the first new progestin in many years. It may offer a more metabolically neutral profile, including improved blood lipids, better bleeding control and a reduction in nuisance side effects. VPA-985 This first-in-class vasopressin antagonist (aquaretic) may be important in the treatment of hyponatremia associated with congestive heart failure, cirrhosis of the liver and other diseases associated with impairment of water metabolism. rhIL-11 Recombinant human Interleukin-11 is a new immune modulator therapy with promising Phase II results in treating Crohn's disease. 24 Financial Section Contents 26 Ten-Year Selected Financial Data 28 Consolidated Balance Sheets 29 Consolidated Statements of Income 30 Consolidated Statements of Changes in Stockholders' Equity 31 Consolidated Statements of Cash Flows 32 Notes to Consolidated Financial Statements 44 Report of Independent Public Accountants 44 Management Report on Financial Statements 45 Quarterly Financial Data 45 Market Prices of Common Stock and Dividends 46 Management's Discussion and Analysis of Financial Condition and Results of Operations American Home Products Corporation and Subsidiaries 25 TEN-YEAR SELECTED FINANCIAL DATA DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS
YEARS ENDED DECEMBER 31, 1998 1997 1996 ----------- ----------- ----------- SUMMARY OF SALES AND EARNINGS Net sales ................................................. $13,462,687 $14,196,026 $14,088,326 Net income(1) ............................................. 2,474,338 2,043,123 1,883,403 Diluted earnings per share(1)(2) .......................... 1.85 1.56 1.46 Dividends per common share(2) ............................. 0.87 0.83 0.7825 ----------- ----------- ----------- YEAR-END FINANCIAL POSITION Current assets ............................................ $ 7,955,632 $ 7,361,326 $ 7,470,419 Current liabilities ....................................... 4,210,721 4,327,018 4,337,635 Ratio of current assets to current liabilities ............ 1.89 1.70 1.72 Total assets .............................................. 21,079,068 20,825,111 20,785,343 Long-term debt ............................................ 3,859,163 5,031,861 6,020,575 Average stockholders' equity .............................. 8,895,024 7,568,672 6,252,545 ----------- ----------- ----------- STOCKHOLDERS - OUTSTANDING SHARES Number of common stockholders ............................. 65,124 64,313 67,545 Average number of common shares outstanding used for diluted earnings per share calculation (in thousands)(2) 1,336,641 1,312,975 1,287,790 ----------- ----------- ----------- EMPLOYMENT DATA Number of employees at year-end ........................... 52,984 60,523 59,747 Wages and salaries ........................................ $ 2,468,823 $ 2,726,877 $ 2,729,662 Benefits (including social security taxes) ................ 647,406 692,648 688,766 ----------- ----------- -----------
(1) See Management's Discussion and Analysis of Financial Condition and Results of Operations for amounts related to gains on sales of businesses, restructuring charge and special charges for the years ended December 31, 1998, 1997 and 1996. (2) All references to average number of common shares outstanding and per share amounts have been restated retroactively to reflect the two-for-one common stock split effected in the form of a 100% stock dividend effective April 24, 1998. (3) The 1994 information reflects the acquisition of American Cyanamid Company for the one-month period ended December 31, 1994. 26 American Home Products Corporation and Subsidiaries
1995 1994(3) 1993 1992 1991 1990 1989 - ----------- ----------- ----------- ----------- ----------- ----------- ----------- $13,376,089 $ 8,966,214 $ 8,304,851 $ 7,873,687 $ 7,079,443 $ 6,775,182 $ 6,747,016 1,680,418 1,528,254 1,469,300 1,460,842 1,375,273 1,230,597 1,102,158 1.34 1.24 1.17 1.15 1.08 0.97 0.88 0.755 0.735 0.715 0.665 0.5938 0.5375 0.4875 - ----------- ----------- ----------- ----------- ----------- ----------- ----------- $ 7,986,137 $ 7,821,246 $ 4,807,684 $ 4,552,077 $ 4,119,057 $ 3,826,075 $ 3,532,786 4,556,248 4,618,086 1,584,411 1,492,717 1,270,135 1,693,852 1,108,895 1.75 1.69 3.03 3.05 3.24 2.26 3.19 21,362,923 21,674,812 7,687,353 7,141,405 5,938,797 5,637,107 5,681,487 7,808,757 9,973,240 859,278 601,934 104,710 111,430 1,895,796 4,898,550 4,065,295 3,719,539 3,431,568 2,987,885 2,322,623 1,651,050 - ----------- ----------- ----------- ----------- ----------- ----------- ----------- 68,763 71,223 72,664 73,064 71,209 69,907 70,904 1,250,902 1,234,100 1,252,990 1,267,240 1,273,390 1,266,696 1,256,927 - ----------- ----------- ----------- ----------- ----------- ----------- ----------- 64,712 74,759 51,399 50,653 47,938 48,700 50,816 $ 2,757,664 $ 1,820,450 $ 1,654,984 $ 1,575,615 $ 1,388,397 $ 1,398,721 $ 1,391,233 703,756 441,768 396,045 367,899 300,810 312,750 256,458 - ----------- ----------- ----------- ----------- ----------- ----------- -----------
American Home Products Corporation and Subsidiaries 27 Consolidated Balance Sheets In thousands except share amounts
DECEMBER 31, 1998 1997 ------------ ------------ ASSETS Cash and cash equivalents ................................................. $ 1,182,319 $ 1,051,372 Marketable securities ..................................................... 119,210 48,363 Accounts receivable less allowances (1998 - $222,540 and 1997 - $197,155) . 3,276,597 2,843,099 Inventories ............................................................... 2,237,918 2,412,406 Other current assets including deferred taxes ............................. 1,139,588 1,006,086 ------------ ------------ Total Current Assets ...................................................... 7,955,632 7,361,326 Property, plant and equipment: Land .................................................................... 147,611 152,942 Buildings ............................................................... 2,901,355 2,865,501 Machinery and equipment ................................................. 3,669,398 3,703,606 ------------ ------------ 6,718,364 6,722,049 Less accumulated depreciation ............................................. 2,428,699 2,425,143 ------------ ------------ 4,289,665 4,296,906 Goodwill and other intangibles, net of accumulated amortization (1998 - $1,964,546 and 1997 - $1,863,773) .............................. 7,995,082 8,338,695 Other assets including deferred taxes ..................................... 838,689 828,184 ------------ ------------ Total Assets .............................................................. $ 21,079,068 $ 20,825,111 ============ ============ LIABILITIES Loans payable ............................................................. $ 79,728 $ 89,041 Trade accounts payable .................................................... 680,961 794,291 Accrued expenses .......................................................... 3,037,239 3,019,805 Accrued federal and foreign taxes ......................................... 412,793 423,881 ------------ ------------ Total Current Liabilities ................................................. 4,210,721 4,327,018 Long-term debt ............................................................ 3,859,163 5,031,861 Other noncurrent liabilities .............................................. 2,312,261 2,248,282 Accrued postretirement benefits other than pensions ....................... 860,908 833,916 Minority interests ........................................................ 221,219 208,782 STOCKHOLDERS' EQUITY $2 convertible preferred stock, par value $2.50 per share; 5,000,000 shares authorized ....................................................... 64 72 Common stock, par value $0.33 1/3 per share; 2,400,000,000 shares authorized (outstanding shares: 1998 - 1,312,399,000 and 1997 - 1,300,755,000) ..... 437,466 435,298 Additional paid-in capital ................................................ 3,072,874 2,530,696 Retained earnings ......................................................... 6,432,729 5,489,292 Accumulated other comprehensive loss ...................................... (328,337) (280,106) ------------ ------------ Total Stockholders' Equity ................................................ 9,614,796 8,175,252 ------------ ------------ Total Liabilities and Stockholders' Equity ................................ $ 21,079,068 $ 20,825,111 ============ ============
The accompanying notes are an integral part of these Consolidated Balance Sheets. 28 American Home Products Corporation and Subsidiaries Consolidated Statements of Income In thousands except per share amounts
YEARS ENDED DECEMBER 31, 1998 1997 1996 ------------ ------------ ------------ Net Sales .................................. $ 13,462,687 $ 14,196,026 $ 14,088,326 ------------ ------------ ------------ Cost of goods sold ......................... 3,616,832 4,101,309 4,449,783 Selling, general and administrative expenses 4,924,919 5,292,585 5,232,830 Research and development expenses .......... 1,654,745 1,558,035 1,429,056 Interest expense, net ...................... 207,157 370,696 433,034 Other income, net .......................... (277,942) (121,306) (96,159) Gains on sales of businesses ............... (592,084) -- (813,532) Special charges ............................ -- 180,000 697,854 Restructuring charge ....................... 343,600 -- -- ------------ ------------ ------------ 9,877,227 11,381,319 11,332,866 ------------ ------------ ------------ Income before federal and foreign taxes .... 3,585,460 2,814,707 2,755,460 Provision for taxes: Federal .................................. 627,071 309,981 437,682 Foreign .................................. 484,051 461,603 434,375 ------------ ------------ ------------ 1,111,122 771,584 872,057 ------------ ------------ ------------ Net Income ................................. $ 2,474,338 $ 2,043,123 $ 1,883,403 ------------ ------------ ------------ Basic Earnings per Share ................... $ 1.88 $ 1.58 $ 1.48 ------------ ------------ ------------ Diluted Earnings per Share ................. $ 1.85 $ 1.56 $ 1.46 ------------ ------------ ------------
The accompanying notes are an integral part of these Consolidated Financial Statements. American Home Products Corporation and Subsidiaries 29 Consolidated Statements of Changes In thousands except per share amounts in Stockholders' Equity
ACCUMULATED $2 CONVERTIBLE ADDITIONAL OTHER TOTAL PREFERRED COMMON PAID-IN RETAINED COMPREHENSIVE STOCKHOLDERS' STOCK STOCK CAPITAL EARNINGS LOSS EQUITY -------------- ------ ---------- -------- ------------- ------------- Balance at January 1, 1996 ............. $85 $428,514 $1,515,154 $ 3,652,403 $ (53,158) $5,542,998 === ======== ========== =========== ========== ========== Net income ............................. 1,883,403 1,883,403 Currency translation adjustments ....... 15,551 15,551 Unrealized gain on marketable securities 1,334 1,334 ---------- Comprehensive income ................ 1,900,288 ---------- Cash dividends declared: Preferred stock (per share: $2.00) .. (65) (65) Common stock (per share: $0.7825) ... (993,487) (993,487) Treasury stock acquired ................ (71) (1,172) (10,139) (11,382) Common stock issued for stock options .. 4,161 408,036 412,197 Conversion of preferred stock and other exchanges ................. (6) (770) 112,319 111,543 --- -------- ---------- ----------- ---------- ---------- Balance at December 31, 1996 ........... 79 431,834 2,034,337 4,532,115 (36,273) 6,962,092 === ======== ========== =========== ========== ========== Net income ............................. 2,043,123 2,043,123 Currency translation adjustments ....... (241,278) (241,278) Unrealized loss on marketable securities (2,555) (2,555) ---------- Comprehensive income ................ 1,799,290 ---------- Cash dividends declared: Preferred stock (per share: $2.00) .. (60) (60) Common stock (per share: $0.83) ..... (1,073,140) (1,073,140) Treasury stock acquired ................ (52) (1,079) (10,204) (11,335) Common stock issued for stock options .. 3,251 366,310 369,561 Conversion of preferred stock and other exchanges ................. (7) 265 131,128 (2,542) 128,844 --- -------- ---------- ----------- ---------- ---------- Balance at December 31, 1997 ........... 72 435,298 2,530,696 5,489,292 (280,106) 8,175,252 === ======== ========== =========== ========== ========== Net income ............................. 2,474,338 2,474,338 Currency translation adjustments ....... (45,803) (45,803) Unrealized loss on marketable securities (2,428) (2,428) ---------- Comprehensive income ................ 2,426,107 ---------- Cash dividends declared: Preferred stock (per share: $2.00) .. (54) (54) Common stock (per share: $0.87) ..... (1,143,198) (1,143,198) Treasury stock acquired ................ (2,521) (34,984) (377,098) (414,603) Common stock issued for stock options .. 4,342 399,488 403,830 Conversion of preferred stock and other exchanges ................. (8) 347 177,674 (10,551) 167,462 --- -------- ---------- ----------- ---------- ---------- Balance at December 31, 1998 ........... $64 $437,466 $3,072,874 $ 6,432,729 $(328,337) $9,614,796 === ======== ========== =========== ========== ==========
The accompanying notes are an integral part of these Consolidated Financial Statements. 30 American Home Products Corporation and Subsidiaries Consolidated Statements of Cash Flows In thousands
YEARS ENDED DECEMBER 31, 1998 1997 1996 ----------- ----------- ----------- OPERATING ACTIVITIES Net income ...................................................... $ 2,474,338 $ 2,043,123 $ 1,883,403 Adjustments to reconcile net income to net cash provided from operating activities: Gains on sales of businesses ................................. (592,084) -- (813,532) Special and restructuring charges ............................ 343,600 180,000 697,854 Gains on sales of other assets ............................... (445,485) (375,925) (98,809) Depreciation ................................................. 371,057 394,287 367,834 Amortization ................................................. 293,598 307,738 290,232 Deferred income taxes ........................................ 74,472 (220,214) 101,592 Changes in working capital, net of businesses acquired or sold: Accounts receivable ....................................... (601,627) (329,537) 18,675 Inventories ............................................... (121,414) (50,927) (213,037) Other current assets ...................................... (198,815) 28,143 65,901 Trade accounts payable and accrued expenses ............... (164,648) (171,666) (354,132) Accrued federal and foreign taxes ......................... (4,008) (80,873) 154,271 Other items, net ............................................. 85,675 (28,695) 298,003 ----------- ----------- ----------- Net cash provided from operating activities ..................... 1,514,659 1,695,454 2,398,255 =========== =========== =========== INVESTING ACTIVITIES Purchases of property, plant and equipment ...................... (809,774) (830,351) (652,226) Purchases of businesses, net of cash acquired ................... (425,041) (479,694) -- Purchase of remaining equity interest in Genetics Institute, Inc. and another subsidiary ....................................... -- -- (1,326,351) Proceeds from sales of businesses ............................... 1,770,000 380,000 1,361,969 Proceeds from sales of other assets ............................. 592,034 494,850 121,740 Proceeds from sales of/(purchases of) marketable securities, net (72,397) 172,236 (7,924) ----------- ----------- ----------- Net cash provided from/(used for) investing activities .......... 1,054,822 (262,959) (502,792) =========== =========== =========== FINANCING ACTIVITIES Net repayments of debt .......................................... (1,179,657) (976,926) (1,783,825) Dividends paid .................................................. (1,143,252) (1,073,200) (993,552) Purchases of treasury stock ..................................... (414,603) (11,335) (11,382) Exercise of stock options ....................................... 403,830 369,561 412,197 Termination of interest rate swap agreements .................... (96,655) -- -- ----------- ----------- ----------- Net cash used for financing activities .......................... (2,430,337) (1,691,900) (2,376,562) ----------- ----------- ----------- Effects of exchange rates on cash balances ...................... (8,197) (11,520) 999 ----------- ----------- ----------- Increase/(decrease) in cash and cash equivalents ................ 130,947 (270,925) (480,100) Cash and cash equivalents, beginning of year .................... 1,051,372 1,322,297 1,802,397 ----------- ----------- ----------- Cash and cash equivalents, end of year .......................... $ 1,182,319 $ 1,051,372 $ 1,322,297 =========== =========== ===========
The accompanying notes are an integral part of these Consolidated Financial Statements. American Home Products Corporation and Subsidiaries 31 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation: The accompanying consolidated financial statements include the accounts of American Home Products Corporation and its majority-owned subsidiaries (the Company). The financial statements have been prepared in accordance with generally accepted accounting principles and necessarily include amounts based on judgments and estimates made by management. Description of Business: The Company is a U.S.-based multinational corporation engaged in the discovery, development, manufacture, distribution and sale of a diversified line of products in three primary businesses: Pharmaceuticals, Consumer Health Care and Agricultural Products. Pharmaceuticals include branded and generic ethical pharmaceuticals, biologicals, nutritionals, and animal biologicals and pharmaceuticals. Principal products include women's health care products, infant nutritionals, cardiovascular products, neuroscience therapies, anti-inflammatory and gastroenterology drugs, anti-infectives, vaccines, biopharmaceuticals and oncology therapies. Principal animal health products include vaccines, pharmaceuticals, endectocides and growth implants. Consumer Health Care products include analgesics, cough/cold/allergy remedies, vitamins, mineral and nutritional supplements, herbal products, and hemorrhoidal, antacid and asthma relief items sold over-the-counter. Agricultural Products include crop protection and pest control products such as herbicides, insecticides, fungicides and plant growth regulators. The Company sells its diversified line of products to wholesalers, pharmacies, hospitals, physicians, retailers and other health care institutions located in various markets in more than 150 countries throughout the world. The Company is not dependent on any single or major group of customers for its sales. The Company is not dependent on any one patent-protected product or line of products for a substantial portion of its sales or results of operations. However, Premarin, one of the Company's conjugated estrogens products, which has not had patent protection for many years, does contribute significantly to sales and results of operations. See "Competition" in Management's Discussion and Analysis of Financial Condition and Results of Operations on pages 50 and 51 for further details. Cash Equivalents, for purposes of reporting cash flows, consist primarily of certificates of deposit, time deposits and other short-term, highly liquid securities with original maturities of three months or less and are stated at cost, which approximates fair value. The carrying value of cash equivalents approximates fair value due to the short-term, highly liquid nature of the cash equivalents. Marketable Securities consist of U.S. government or agency issues, commercial paper and corporate bonds and are stated at fair value, which approximates cost. The fair values are estimated based on quoted market prices. Inventories are valued at the lower of cost or market. Inventories valued under the last-in, first-out (LIFO) method amounted to $751,691,000 and $764,409,000 at December 31, 1998 and 1997, respectively. Current value exceeded LIFO value by $76,104,000 and $73,411,000 at December 31, 1998 and 1997, respectively. The remaining inventories are valued under the first-in, first-out (FIFO) or the average cost method. Inventories at December 31 consisted of:
- -------------------------------------------------------------------------------- (In thousands) 1998 1997 - -------------------------------------------------------------------------------- Finished goods ..................... $1,012,679 $1,042,065 Work in progress ................... 604,647 657,033 Materials and supplies ............. 620,592 713,308 ---------- ---------- $2,237,918 $2,412,406 ---------- ---------- - --------------------------------------------------------------------------------
Property, Plant and Equipment is carried at cost. Depreciation is provided over the estimated useful lives of the related assets, principally on the straight-line method. Goodwill, the excess of cost over the fair value of net assets acquired, is being amortized using the straight-line method over various periods not exceeding 40 years. The Company continually reviews goodwill to evaluate whether changes have occurred that would suggest goodwill may be impaired based on the estimated undiscounted cash flows of the entity acquired over the remaining amortization period. If this review indicates that the remaining estimated useful life of goodwill requires revision or that the goodwill is not recoverable, the carrying amount of the goodwill is reduced by the estimated shortfall of cash flows on a discounted basis. Foreign Currency Agreements: The Company enters into short-term foreign currency agreements to manage specifically identifiable risks. The short-term (approximately 30 days) foreign exchange forward contracts are part of the Company's management of foreign currency exposures. The Company does not speculate on foreign currency exchange rates. The fair value of foreign currency agreements is based on market prices. The fair value represents the estimated amount the Company would receive/pay to terminate the agreements taking into consideration current currency exchange rates. Foreign currency agreements are accounted for under the fair value method. The fair value of the foreign currency agreements is carried on the balance sheet with changes in fair value recognized in results of operations offsetting any gains and losses recognized on the underlying hedged transactions. 32 American Home Products Corporation and Subsidiaries Currency Translation: The majority of the Company's international operations are translated into U.S. dollars using current exchange rates with currency translation adjustments reflected in accumulated other comprehensive loss in stockholders' equity. Translation adjustments related to international operations in highly inflationary economies are included in results of operations. Earnings per Share: The following table sets forth the computations of Basic Earnings per Share and Diluted Earnings per Share:
- -------------------------------------------------------------------------------- (In thousands except per share amounts) 1998 1997 1996 - -------------------------------------------------------------------------------- Net income less preferred dividends ...... $2,474,284 $2,043,063 $1,883,338 Denominator: Average number of common shares ............ 1,314,580 1,293,765 1,270,852 ---------- ---------- ---------- Basic earnings per share .... $ 1.88 $ 1.58 $ 1.48 ---------- ---------- ---------- Net income .................. $2,474,338 $2,043,123 $1,883,403 Denominator: Average number of common shares ............ 1,314,580 1,293,765 1,270,852 Common share equivalents of outstanding stock options and deferred contingent common stock awards ............. 22,061 19,210 16,938 ---------- ---------- ---------- Total shares ................ 1,336,641 1,312,975 1,287,790 ---------- ---------- ---------- Diluted earnings per share .. $ 1.85 $ 1.56 $ 1.46 ========== ========== ========== - --------------------------------------------------------------------------------
Reclassifications: Effective January 1, 1998, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 130 - "Reporting Comprehensive Income," SFAS No. 131 - "Disclosures about Segments of an Enterprise and Related Information" and SFAS No. 132 - "Employers' Disclosures about Pensions and Other Postretirement Benefits." These standards increased financial reporting disclosures and had no impact on the Company's financial position or results of operations. Certain reclassifications have been made to the December 31, 1997 and 1996 Consolidated Financial Statements to conform with the financial reporting requirements of SFAS No. 130 (see Consolidated Statements of Changes in Stockholders' Equity and Note 7), SFAS No. 131 (see Note 11) and SFAS No. 132 (see Note 6). Recently Issued Accounting Standards: In June 1998, SFAS No. 133 - "Accounting for Derivative Instruments and Hedging Activities" was issued and is effective for fiscal years beginning after June 15, 1999 although earlier application is permitted. SFAS No. 133 requires all derivatives to be measured at fair value and recognized as assets or liabilities on the balance sheet. Changes in the fair value of derivatives should be recognized in either net income or other comprehensive income, depending on the designated purpose of the derivative. SFAS No. 133 is not expected to have a material impact on the Company's financial position or results of operations. In February 1998, Statement of Position (SOP) 98-1 - "Accounting for Costs of Computer Software Developed or Purchased for Internal Use" was issued and is effective for fiscal years beginning after December 15, 1998. SOP 98-1 is not expected to have a material impact on the Company's financial position or results of operations. 2. ACQUISITIONS AND DIVESTITURES During 1998, 1997 and 1996, the Company acquired and divested various businesses and other assets as follows: In July 1998, the Company purchased the vitamin and nutritional supplement products business of Solgar Vitamin and Herb Company Inc. and its related affiliates for $425,041,000 in cash. The purchase price exceeded the net assets acquired by $397,568,000, which is being amortized over periods of four to 25 years. In February 1998, the Company sold the Sherwood-Davis & Geck medical devices business for approximately $1.770 billion, resulting in a pre-tax gain of $592,084,000. The proceeds from the sale were used primarily to reduce outstanding commercial paper. Net income and diluted earnings per share for 1998 included an after-tax gain on the sale of $330,782,000 and $0.25. In December 1997, the Company sold the stock of Storz Instrument Company and affiliated companies, a global manufacturer and marketer of ophthalmic products, and certain assets relating to the Storz business for approximately $380,000,000, resulting in a pre-tax gain of $71,861,000 ($46,710,000 after-tax), which was recorded in other income, net. In February 1997, the Company purchased the worldwide animal health business of Solvay S.A. for approximately $460,000,000. The purchase price exceeded the net assets acquired by $368,303,000 and is being amortized over periods of 10 to 25 years. In December 1996, the Company purchased the remaining equity interest in Genetics Institute, Inc. (G.I.) by exercising its option to purchase the outstanding capital stock from public shareholders at $85 per share. The total consideration paid for the remaining equity interest in G.I. was $1.279 billion (see Note 3). In November 1996, the Company sold a majority interest (80%) in the American Home Foods business for approximately $1.209 billion, resulting in a pre-tax gain of $813,532,000. The proceeds from the sale were used primarily to purchase the remaining equity interest in G.I. Net income and diluted earnings per share for 1996 included an after-tax gain on the sale of $706,279,000 and $0.55. During 1998 and 1997, the Company sold its remaining equity interest in the foods business, resulting in pre-tax gains of $135,000,000 ($87,750,000 after-tax) and $66,939,000 ($43,510,000 after-tax), respectively, which were recorded in other income, net. In March 1996, the Company sold Symbiosis Corp. for $148,672,000, resulting in a pre-tax gain of $22,677,000 ($14,740,000 after-tax), which was recorded in other income, net. Symbiosis Corp. develops and manufactures disposable laparoscopic and endoscopic surgical products. The Company had other acquisitions and divestitures during 1998, 1997 and 1996, the effects of which, individually and in the aggregate, were not material to the Company's consolidated American Home Products Corporation and Subsidiaries 33 financial position or results of operations. The operations of all businesses acquired and divested during 1998, 1997 and 1996, individually and in the aggregate, were not material to the Company's consolidated financial position or results of operations in any of these years. 3. RESTRUCTURING AND SPECIAL CHARGES In December 1998, the Company recorded a charge for restructuring and related asset impairments of $343,600,000 ($240,500,000 after-tax or $0.18 per share - diluted) to recognize the costs of the reorganization of the pharmaceutical and nutritional supply chains (primarily in the Asian-Pacific and Latin American regions), the reorganization of the U.S. pharmaceutical and consumer health care distribution systems and a reduction in personnel from the globalization of certain business units. The reorganization of the pharmaceutical and nutritional supply chains will result in the closure of 14 plants (nine pharmaceuticals and five nutritionals). The reorganization of the U.S. pharmaceutical and consumer health care distribution systems will result in the closure of three distribution centers. Workforce reductions as a result of these plans, including the elimination of vacant positions, are expected to result in the elimination of approximately 3,100 positions worldwide. The components of this charge were as follows: personnel costs of $142,375,000, fixed asset write-offs of $115,225,000 and other closure/exit costs of $86,000,000. The majority of these costs will be incurred within one year of the announcement date; however, due to regulatory requirements for product transfers, some of the restructuring costs will not be incurred until after 1999. This charge included noncash costs to reduce the carrying value of certain fixed assets related to manufacturing and distribution operations aggregating $115,225,000. Cash expenditures, primarily for production and distribution facility closure/exit costs, aggregating $1,449,000 as of December 31, 1998 were applied against the restructuring accruals. In September 1997, the Company announced the voluntary market withdrawal of fenfluramine HCl, manufactured and sold under the name Pondimin, and dexfenfluramine HCl, marketed under the name Redux. The 1997 results of operations included special charges aggregating $180,000,000 ($117,000,000 after-tax or $0.09 per share -diluted) to record the one-time costs associated with the voluntary market withdrawal. The special charges included provisions for product returns, notification and administrative handling fees, the writedown of inventory and supplies, and other related costs. These costs did not include provisions for any subsequent charges which may result from legal actions related to these products (see Note 10). As of December 31, 1998, these accruals have been utilized. In December 1996, the Company completed a study and evaluation of the purchase price allocation related to the acquisition of the remaining equity interest in G.I. (see Note 2). The purchase price exceeded the net assets acquired by $1.057 billion, resulting in the recognition of goodwill related to the commercial operations of $359,513,000 and a special charge of $470,000,000 for the portion of the G.I. goodwill attributable to acquired in-process research and development. G.I. also recorded a special charge of $227,854,000 for the liquidation of its outstanding stock options as of December 31, 1996. The goodwill recognized in this acquisition was based on the estimated future cash flows of existing approved products of G.I. attributed to the remaining equity interest acquired. Net income and diluted earnings per share for 1996 included total special charges related to the acquisition of the remaining equity interest in G.I. of $697,854,000 and $0.54. In 1995 and 1994, the Company recorded restructuring charges related to the American Cyanamid Company (ACY) acquisition and the U.S. pharmaceutical and consumer health care businesses, respectively. As of December 31, 1998, these restructuring programs have been substantially completed, and the related accruals have been utilized for these programs. 34 American Home Products Corporation and Subsidiaries 4. DEBT AND FINANCING ARRANGEMENTS The Company's debt at December 31 consisted of:
- --------------------------------------------------------------------------------- (In thousands) 1998 1997 - --------------------------------------------------------------------------------- Commercial paper .............................. $1,213,470 $2,340,357 Notes payable: 7.70% notes due 2000 ....................... 1,000,000 1,000,000 6.50% notes due 2002 ....................... 250,000 250,000 7.90% notes due 2005 ....................... 1,000,000 1,000,000 7.25% debentures due 2023 .................. 250,000 250,000 Pollution control and industrial revenue bonds: 3.75% - 7.00% due 1999 - 2020 .............. 110,865 123,900 Other debt: 1.27% - 22.75% due 1999 - 2009 ............. 114,556 156,645 ---------- ---------- 3,938,891 5,120,902 Less current portion .......................... 79,728 89,041 ---------- ---------- $3,859,163 $5,031,861 ========== ========== - ---------------------------------------------------------------------------------
The fair value of the Company's long-term debt, excluding the interest rate swap agreements discussed below, was $4,123,938,000 and $5,255,737,000 at December 31, 1998 and 1997, respectively. The fair value of the Company's long-term debt is estimated based on market prices. The weighted average interest rate on the commercial paper outstanding at December 31, 1998 and 1997 was 5.10% and 5.76%, respectively. The commercial paper has original maturities not exceeding 270 days and a weighted average remaining maturity of 45 days and 35 days as of December 31, 1998 and 1997, respectively. In 1998, the Company reduced its $5.0 billion of revolving credit facilities to $2.0 billion by terminating the $2.5 billion, 364-day credit facility in its entirety and reducing the $2.5 billion, five-year credit facility to $2.0 billion. The remaining $2.0 billion, five-year credit facility supports the Company's commercial paper program and has a maturity date of July 31, 2002. The interest rate on borrowings under the credit facility is based on various rate options available to the Company. The proceeds of the credit facility may be used to support commercial paper and the Company's general corporate and working capital requirements. The credit facility contains a financial covenant and various other customary covenants, representations, warranties, conditions and default provisions. As of December 31, 1998 and 1997, there were no borrowings outstanding under the credit facility. Commercial paper outstanding at December 31, 1998 and 1997 was classified as long-term debt since the Company intends, and has the ability, to re-finance these obligations through the issuance of additional commercial paper, through the use of its credit facility or through the issuance of long-term debt. At December 31, 1997, the Company had interest rate swap agreements outstanding with a notional amount of $2.3 billion under which the Company paid a fixed rate of interest and received a floating rate of interest over the term of the interest rate swap agreements without the exchange of the underlying notional amounts. The interest rate swap agreements converted a portion of the commercial paper from a floating rate obligation to a fixed rate obligation. The fair value of the $2.3 billion of interest rate swap agreements outstanding at December 31, 1997 was $98,463,000. The fair value of the interest rate swap agreements was not recognized in the Consolidated Financial Statements at that time since the agreements were accounted for as hedges. In 1998, proceeds from the sale of the Sherwood-Davis & Geck medical devices business were used primarily to reduce outstanding commercial paper and terminate the $2.3 billion of interest rate swap agreements. The cost to unwind these interest rate swap agreements was charged against the gain on the sale. The Company has outstanding $1.0 billion of 7.70% notes due February 2000 and $1.0 billion of 7.90% notes due February 2005 under a $3.5 billion shelf registration statement. The non-callable notes, which have semiannual interest payments due on February 15 and August 15, are unsecured and unsubordinated. The Company also has outstanding $250,000,000 of 6.50% notes due October 2002 and $250,000,000 of 7.25% debentures due March 2023. The 6.50% non-callable notes have semiannual interest payments due on April 15 and October 15. The 7.25% non-callable debentures have semiannual interest payments due on March 1 and September 1. The non-callable notes and debentures are unsecured and unsubordinated. The aggregate maturities of debt during the next five years as of December 31, 1998 are as follows:
- ------------------------------------------------------------------- (In thousands) - ------------------------------------------------------------------- 1999 ............................................ $ 79,728 2000 ............................................ 1,024,053 2001 ............................................ 16,946 2002 ............................................ 252,919 2003 ............................................ 8,003 Thereafter ...................................... 1,343,772 ---------- 2,725,421 Commercial paper ................................ 1,213,470 ---------- Total debt ...................................... $3,938,891 ========== - -------------------------------------------------------------------
Interest payments in connection with the Company's debt obligations, excluding the termination of interest rate swap agreements, for the years ended December 31, 1998, 1997 and 1996 amounted to $316,018,000, $471,120,000 and $562,733,000, respectively. Interest expense, net in the Consolidated Statements of Income includes interest income of $115,813,000, $90,674,000 and $138,380,000 for the years ended December 31, 1998, 1997 and 1996, respectively. American Home Products Corporation and Subsidiaries 35 The Company enters into short-term foreign exchange forward contracts as part of its management of foreign currency exposures. The Company does not engage in speculation on foreign currency. At December 31, 1998 and 1997, the Company had notional amounts of $799,255,000 and $977,459,000, respectively, of foreign exchange forward contracts outstanding. At December 31, 1998 and 1997, the fair value of the foreign exchange forward contracts was a net payable of $453,000 and a net receivable of $14,368,000, respectively. As foreign exchange rates change from period to period, the fluctuations in the fair value of the foreign exchange forward contracts are offset by fluctuations in the fair value of the underlying hedged transactions. The Company believes that the risk of loss associated with the foreign currency agreements, from non-performance by the counterparties or due to fluctuations in foreign exchange rates, is not material to its financial position or results of operations. 5. OTHER NONCURRENT LIABILITIES Other noncurrent liabilities include reserves for contingencies relating to income taxes, environmental matters, product liability and other litigation, as well as restructuring, pension and other employee benefit liabilities. The Company has responsibility for environmental, safety and cleanup obligations under various local, state and federal laws, including the Comprehensive Environmental Response, Compensation and Liability Act, commonly known as Superfund. As of December 31, 1998, the Company was a party to, or otherwise involved in, legal proceedings directed at the cleanup of 61 Superfund sites. It is the Company's policy to accrue environmental cleanup costs if it is probable that a liability has been incurred and an amount is reasonably estimable. In many cases, future environmental-related expenditures cannot be quantified with a reasonable degree of accuracy. Environmental expenditures that relate to an existing condition caused by past operations that do not contribute to current or future results of operations are expensed. As investigations and cleanups proceed, environmental-related liabilities are reviewed and adjusted as additional information becomes available. The aggregate environmental-related accruals were $385,040,000 and $424,330,000 at December 31, 1998 and 1997, respectively. Environmental-related accruals have been recorded without giving effect to any possible future insurance proceeds or the timing of the payments. See Note 10 for a discussion of contingencies. The Company's Management Incentive Plan provides for cash and deferred contingent common stock awards to key employees. The maximum number of shares of common stock issuable under the plan is 48,000,000, of which 36,688,924 have been awarded through December 31, 1998. Deferred contingent common stock awards plus accrued dividends totaling 1,731,004 shares were outstanding at December 31, 1998. The value of awards for 1998, 1997 and 1996 was $65,847,000, $67,045,000 and $60,306,000, which included deferred contingent common stock of $15,516,000 (284,244 shares), $14,834,000 (396,832 shares) and $12,283,000 (411,162 shares), respectively. 6. PENSIONS AND OTHER POSTRETIREMENT BENEFITS Pensions: The Company sponsors various retirement plans for most full-time employees. Total pension expense for 1998, 1997 and 1996 was $112,209,000, $146,403,000 and $120,621,000, respectively. The Company sponsors defined benefit and defined contribution plans for most domestic and certain foreign locations. Pension plan benefits for defined benefit plans are based primarily on participants' compensation and years of credited service. It has been the Company's policy to fund all current and prior year service costs under defined benefit retirement plans. Contributions to defined contribution plans are based on a percentage of employees' compensation. Pension expense recognized for defined contribution plans totaled $64,006,000 in 1998, $65,645,000 in 1997 and $66,674,000 in 1996. Other Postretirement Benefits: The Company provides postretirement health care and life insurance benefits for retired employees of most domestic locations and Canada. Most full-time employees become eligible for these benefits after attaining specified age and service requirements. The change in benefit obligation, change in plan assets and reconciliation of funded status (principally U.S. plans) for 1998 and 1997 were as follows:
- ---------------------------------------------------------------------------------------------------------------------- PENSIONS OTHER POSTRETIREMENT BENEFITS ------------------------------ ------------------------------ Change in Benefit Obligation (In thousands) 1998 1997 1998 1997 - ---------------------------------------------------------------------------------------------------------------------- Benefit obligation at January 1 ........... $ 3,069,613 $ 2,858,544 $ 980,998 $ 982,172 Service cost .............................. 70,902 66,236 18,963 19,494 Interest cost ............................. 219,852 213,055 66,722 70,791 Amendments ................................ -- 4,806 -- -- Net actuarial loss/(gain) ................. 152,505 166,829 63,092 (48,686) Acquisitions/(divestitures) ............... -- 7,921 -- 9,623 Curtailments/settlements .................. (23,281) (2,892) (46,427) -- Benefits paid ............................. (262,296) (244,886) (58,062) (52,396) ----------- ----------- ----------- ----------- Benefit obligation at December 31 ......... $ 3,227,295 $ 3,069,613 $ 1,025,286 $ 980,998 =========== =========== =========== =========== - ----------------------------------------------------------------------------------------------------------------------
36 American Home Products Corporation and Subsidiaries
- ---------------------------------------------------------------------------------------------------------------------- PENSIONS OTHER POSTRETIREMENT BENEFITS ------------------------------ ------------------------------ Change in Benefit Obligation (In thousands) 1998 1997 1998 1997 - ---------------------------------------------------------------------------------------------------------------------- Fair value of plan assets at January 1 . $ 2,723,177 $ 2,332,432 -- -- Actual return on plan assets ........... 396,366 419,424 -- -- Acquisitions/(divestitures) ............ -- -- -- -- Curtailments/settlements ............... -- (1,062) -- -- Company contributions .................. 34,363 217,269 $ 58,062 $ 52,396 Benefits paid .......................... (262,296) (244,886) (58,062) (52,396) ----------- ----------- ----------- ----------- Fair value of plan assets at December 31 $ 2,891,610 $ 2,723,177 $ -- $ -- =========== =========== =========== =========== - ----------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------- PENSIONS OTHER POSTRETIREMENT BENEFITS ------------------------------- ------------------------------- Reconciliation of Funded Status (In thousands) 1998 1997 1998 1997 - -------------------------------------------------------------------------------------------------------------------------- Benefit obligation in excess of plan assets .. $ 335,685 $ 346,436 $ 1,025,286 $ 980,998 Unrecognized net actuarial gain/(loss) ....... (1,950) (7,400) (106,772) (89,118) Unrecognized prior service cost .............. (85,903) (111,780) (2,606) (2,964) Unrecognized net transition obligation ....... (7,176) (8,713) -- -- ----------- ----------- ----------- ----------- Accrued benefit liability .................... $ 240,656 $ 218,543 $ 915,908 $ 888,916 =========== =========== =========== =========== - --------------------------------------------------------------------------------------------------------------------------
At December 31, 1998 and 1997, the Company had nine unfunded pension plans with aggregate accumulated benefit obligations of $256,611,000 and $208,982,000, respectively. In addition, at December 31, 1997, the Company had four underfunded pension plans with aggregate accumulated benefit obligations and plan assets of $175,359,000 and $160,787,000, respectively. There were no plan assets for the Company's other postretirement benefit plans at December 31, 1998 and 1997 as postretirement benefits are funded by the Company when the claims are paid. The current portion of the accrued benefit liability for other postretirement benefits was $55,000,000 at December 31, 1998 and 1997. Assumptions used in developing the benefit obligations as of December 31 were as follows:
- ----------------------------------------------------------------------------------------------------------------------------------- PENSIONS OTHER POSTRETIREMENT BENEFITS --------------------------- ----------------------------------------- Weighted Average Assumptions as of December 31, 1998 1997 1996 1998 1997 1996 - ----------------------------------------------------------------------------------------------------------------------------------- Discount rate ..................................... 7.0% 7.25% 7.5% 7.0% 7.25% 7.5% Rate of compensation increase ..................... 4.0% 4.0% 4.0% -- -- -- Expected return on plan assets .................... 9.5% 9.5% 9.0% -- -- -- Increase in per capita cost of health care benefits that gradually decreases and is held constant thereafter beginning in 2004 for 1998, 2004 for 1997 and 2002 for 1996 ......................... -- -- -- 8.0%-5.0% 8.5%-5.0% 9.0%-6.0% - -----------------------------------------------------------------------------------------------------------------------------------
The assumed health care cost trend rates have a significant effect on the amounts reported. A one percentage point increase in the assumed health care cost trend rates would increase the postretirement benefit obligation by $130,225,000 and the total service and interest cost components by $12,442,000. A one percentage point decrease in the assumed health care cost trend rates would decrease the postretirement benefit obligation by $106,250,000 and the total service and interest cost components by $9,965,000. American Home Products Corporation and Subsidiaries 37 Net periodic benefit cost for 1998, 1997 and 1996 was as follows (principally U.S. plans):
- ---------------------------------------------------------------------------------------------------------------------------------- PENSIONS OTHER POSTRETIREMENT BENEFITS ------------------------------------ ----------------------------------- Components of Net Periodic Benefit Cost (In thousands) 1998 1997 1996 1998 1997 1996 - ---------------------------------------------------------------------------------------------------------------------------------- Service cost ......................................... $ 70,902 $ 66,236 $ 58,434 $ 18,963 $ 19,494 $ 20,474 Interest cost ........................................ 219,852 213,055 194,056 66,722 70,791 68,902 Expected return on plan assets ....................... (253,034) (214,812) (193,701) -- -- -- Amortization of prior service cost ................... 11,880 13,888 1,373 357 357 357 Amortization of transition obligation ................ 1,143 324 47 -- -- -- Recognized net actuarial loss/(gain) ................. 3,200 2,067 527 (103) 1,923 4,079 Curtailment loss/(gain) .............................. (5,740) -- (6,789) -- -- -- --------- --------- --------- --------- --------- --------- Net periodic benefit cost ............................ $ 48,203 $ 80,758 $ 53,947 $ 85,939 $ 92,565 $ 93,812 ========= ========= ========= ========= ========= ========= - ----------------------------------------------------------------------------------------------------------------------------------
Net periodic pension benefit cost was lower in 1998 compared with 1997 due primarily to the unusually high actual return on plan assets in 1997 and a $200,000,000 contribution to the American Home Products Corporation Retirement Plan - U.S. in late 1997. Net periodic pension benefit cost was higher in 1997 compared with 1996 due primarily to a plan amendment which revised the benefit formula of the American Home Products Corporation Retirement Plan - U.S. from a final 10-year average to an average of the five highest paid years within the final 10 years of service. 7. CAPITAL STOCK At the Company's April 23, 1998 Annual Meeting of Stockholders, an increase in the number of authorized shares of common stock from 1,200,000,000 to 2,400,000,000 was approved enabling the Company to complete a two-for-one common stock split effected in the form of a 100% stock dividend which was declared by the Company's Board of Directors in March 1998. The par value of the common stock was maintained at the pre-split amount of $0.33-1/3 per share. All references to retained earnings, common stock, common shares outstanding, average numbers of common shares outstanding, stock options and per share amounts in these Consolidated Financial Statements, Notes to Consolidated Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations prior to the record date of the stock split have been restated to reflect the two-for-one common stock split on a retroactive basis. There were 5,000,000 shares of preferred stock authorized at December 31, 1998 and 1997. Of the authorized preferred shares, there is a series of shares (25,480 and 28,845 outstanding at December 31, 1998 and 1997, respectively) which is designated as $2 convertible preferred stock. Each share of the $2 series is convertible at the option of the holder into 36 shares of common stock. This series may be called for redemption at $60 per share plus accrued dividends. Changes in outstanding common shares during 1998, 1997 and 1996 were as follows:
- --------------------------------------------------------------------------------------- (IN THOUSANDS EXCEPT SHARES OF PREFERRED STOCK) 1998 1997 1996 - --------------------------------------------------------------------------------------- Balance, beginning of year ... 1,300,755 1,279,966 1,254,800 Issued for stock options ..... 19,811 20,723 24,989 Purchases of shares for treasury .............. (8,284) (419) (424) Conversions of preferred stock (3,365, 2,588 and 2,709 shares in 1998, 1997 and 1996, respectively) and other exchanges ....... 117 485 601 --------- --------- --------- Balance, end of year ......... 1,312,399 1,300,755 1,279,966 ========= ========= ========= - ---------------------------------------------------------------------------------------
The Company has a common stock repurchase program under which the Company is authorized to repurchase 33,132,860 shares at December 31, 1998. 8. STOCK OPTIONS The Company has two Stock Option Plans and three Stock Incentive Plans. No further grants will be made under the two Stock Option Plans. Under the three Stock Incentive Plans, options to purchase a maximum of 60,000,000, 56,000,000 and 48,000,000 shares, respectively, may be granted at prices not less than 100% of the fair market value at the date of option grant. At December 31, 1998, 14,104,550 shares were available for future grants under the Stock Incentive Plans. In January 1999, the Board of Directors adopted, subject to stockholder approval at the Company's annual meeting on April 22, 1999, the 1999 Stock Incentive Plan under which 65,000,000 shares are available for future grants. The plans provide for the granting of incentive stock options as defined under the Internal Revenue Code. Under the plans, grants may be made to selected officers and employees of non-qualified stock options with a 10-year term or incentive stock options with a term not exceeding 10 years. The plans provide for the granting of stock appreciation rights (SAR), which permit the optionee to surrender an exercisable option for an amount 38 American Home Products Corporation and Subsidiaries equal to the excess of the market price of the common stock over the option price when the right is exercised. As of December 31, 1998, there were no outstanding SARs. The Stock Incentive Plans, among other things, provide for the issuance of up to 8,000,000 of the shares covered by the plans as restricted stock performance awards under each plan. Restricted stock performance awards representing 68,400, 88,400 and 107,000 units were granted in 1998, 1997 and 1996, respectively, under the plans to certain key executives. These units are converted to shares of restricted stock based on the achievement of certain performance criteria related to performance years 1996 through 2000. Transactions involving the plans were as follows:
- ---------------------------------------------------------------------------------------------------------------------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE OPTION SHARES 1998 PRICE 1997 PRICE 1996 PRICE - ---------------------------------------------------------------------------------------------------------------------------------- Outstanding January 1 .... 83,306,276 $24.86 80,278,690 $19.03 94,973,568 $17.06 ---------- ---------- ---------- Granted .................. 15,167,210 50.13 27,868,770 36.20 15,941,900 26.58 Canceled ................. (2,872,314) 37.03 (4,118,604) 22.89 (5,647,778) 18.54 Exercised (1998 - $8.90 to $36.22 per share) ..... (19,810,543) 20.79 (20,722,580) 17.93 (24,989,000) 16.45 ---------- ---------- ---------- Outstanding December 31 (1998 - $11.80 to $56.31 per share) ..... 75,790,629 30.53 83,306,276 24.86 80,278,690 19.03 ---------- ---------- ---------- Exercisable December 31 .. 54,471,524 24.51 53,472,180 19.28 60,985,222 17.13 ========== ========== ========== - ----------------------------------------------------------------------------------------------------------------------------------
The following table summarizes information regarding stock options outstanding at December 31, 1998:
- --------------------------------------------------------------------------------------------------------------------------------- OPTIONS OUTSTANDING OPTIONS EXERCISABLE - -------------------------------------------------------------------------------- --------------------------------------------- WEIGHTED AVERAGE WEIGHTED AVERAGE WEIGHTED AVERAGE RANGE OF NUMBER REMAINING EXERCISE NUMBER EXERCISE EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE PRICE EXERCISABLE PRICE - -------------------------------------------------------------------------------- --------------------------------------------- $11.80 to 19.99 29,797,094 5.0 years $17.56 29,797,094 $17.56 20.00 to 29.99 8,348,921 7.1 years 26.40 8,348,921 26.40 30.00 to 39.99 22,727,234 8.1 years 36.18 16,255,099 36.18 40.00 to 49.99 652,080 9.2 years 46.24 -- -- 50.00 to 56.31 14,265,300 9.3 years 50.32 70,410 50.06 ---------- ---------- 11.80 to 56.31 75,790,629 7.0 years 30.53 54,471,524 24.51 ========== ========== - ---------------------------------------------------------------------------------------------------------------------------------
Under the 1994 Restricted Stock Plan for Non-Employee Directors, a maximum of 100,000 restricted shares may be granted to non-employee directors. The restricted shares will not be delivered prior to the end of the five-year restricted period. The Company accounts for stock-based compensation using the intrinsic value method. Accordingly, no compensation expense has been recognized for stock options other than for SARs granted in tandem with stock options. If compensation expense for the Company's stock options issued in 1998, 1997 and 1996 had been determined based on the fair value method of accounting, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below:
- ------------------------------------------------------------------------------------------- (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) 1998 1997 1996 - ------------------------------------------------------------------------------------------- Net income less preferred dividends: As reported ............ $ 2,474,284 $ 2,043,063 $ 1,883,338 Pro forma .............. $ 2,412,431 $ 1,981,826 $ 1,841,092 Basic earnings per share: As reported ............ $ 1.88 $ 1.58 $ 1.48 Pro forma .............. $ 1.84 $ 1.53 $ 1.45 Net income: As reported ............ $ 2,474,338 $ 2,043,123 $ 1,883,403 Pro forma .............. $ 2,412,485 $ 1,981,886 $ 1,841,157 Diluted earnings per share: As reported ............ $ 1.85 $ 1.56 $ 1.46 Pro forma .............. $ 1.80 $ 1.51 $ 1.43 - -------------------------------------------------------------------------------------------
American Home Products Corporation and Subsidiaries 39 The fair value of issued stock options is estimated on the date of grant using a variant of the Black-Scholes option pricing model incorporating the following assumptions for stock options granted in 1998, 1997 and 1996, respectively: expected volatility (the amount by which the stock price is expected to fluctuate) of 24.2%, 18.3% and 15.0%; expected dividend yield of 2.8%, 3.7% and 4.3%; risk-free interest rate of 5.6%, 6.5% and 6.4%; and expected life of four years. The weighted average fair value of stock options granted during 1998, 1997 and 1996 was $10.03, $5.86 and $3.42 per option share, respectively. 9. INCOME TAXES The provision for income taxes consisted of:
- -------------------------------------------------------------------- (IN THOUSANDS) 1998 1997 1996 - -------------------------------------------------------------------- Current: Federal ... $ 518,450 $ 531,770 $348,649 Foreign ... 518,200 460,028 421,816 ----------- --------- -------- 1,036,650 991,798 770,465 Deferred: Federal ... 108,621 (221,789) 89,033 Foreign ... (34,149) 1,575 12,559 ----------- --------- -------- 74,472 (220,214) 101,592 ----------- --------- -------- $ 1,111,122 $ 771,584 $872,057 =========== ========= ======== - --------------------------------------------------------------------
Net deferred tax assets, inclusive of valuation allowances for certain deferred tax assets, were reflected in the Consolidated Balance Sheets at December 31 as follows:
- ----------------------------------------------------------------------- (IN THOUSANDS) 1998 1997 - ----------------------------------------------------------------------- Net current deferred tax assets .. $ 674,518 $ 721,811 Net noncurrent deferred tax assets 480,913 508,092 ---------- ---------- Net deferred tax assets .......... $1,155,431 $1,229,903 ========== ========== - -----------------------------------------------------------------------
Deferred income taxes are provided for the temporary differences between the financial reporting basis and the tax basis of the Company's assets and liabilities. Deferred tax assets result principally from the recording of certain accruals and reserves, which currently are not deductible for tax purposes. Deferred tax liabilities result principally from the use of accelerated depreciation for tax purposes. The components of the Company's deferred tax assets and liabilities at December 31 were as follows:
- -------------------------------------------------------------------------------- (In thousands) 1998 1997 - -------------------------------------------------------------------------------- Deferred tax assets: Product and environmental liabilities and other operating accruals ..... $ 751,140 $ 787,656 Postretirement, pension and other employee benefits ................ 455,999 496,905 Net operating loss and other tax credit carryforwards ............. 157,034 207,664 Restructuring and reorganization accruals .......... 283,614 201,104 Inventory reserves .................. 161,252 188,749 Investments and advances ............ 45,608 45,838 Other ............................... 20,537 43,089 ----------- ----------- Total deferred tax assets .............. 1,875,184 1,971,005 ----------- ----------- Deferred tax liabilities: Investments ......................... (9,514) (13,595) Depreciation ........................ (311,645) (287,658) Pension benefits and other employee benefits ................ (68,911) (77,429) Other ............................... (80,632) (62,996) ----------- ----------- Total deferred tax liabilities ......... (470,702) (441,678) ----------- ----------- Deferred tax asset valuation allowances ................ (249,051) (299,424) ----------- ----------- Net deferred tax assets ................ $ 1,155,431 $ 1,229,903 =========== =========== - --------------------------------------------------------------------------------
Valuation allowances have been established for certain deferred tax assets related primarily to net operating loss carryforwards and portions of other deferred tax assets as the Company determined that it was more likely than not that these benefits will not be realized. During 1998, the valuation allowance decreased by $50,373,000 due primarily to the utilization of net operating loss carryforwards. During 1997, the valuation allowance increased by $4,584,000 due primarily to additional allowances related to net operating loss carryforwards. Reconciliations between the Company's effective tax rate and the U.S. statutory rate were as follows:
- ----------------------------------------------------------------------------- TAX RATE 1998 1997 1996 - ----------------------------------------------------------------------------- U.S. statutory rate .......... 35.0% 35.0% 35.0% Effect of Puerto Rico and Ireland manufacturing operations ................ (5.5) (6.1) (5.6) Research credits ............. (1.2) (1.8) (0.6) ACY goodwill amortization .... 2.0 2.7 2.8 Gains on sales of businesses and other assets .......... 2.7 -- (6.4) Special charges related to the acquisition of G.I ........ -- -- 8.5 Other, net ................... (2.0) (2.4) (2.1) ---- ---- ---- Effective tax rate ........... 31.0% 27.4% 31.6% ==== ==== ==== - -----------------------------------------------------------------------------
40 Home Products Corporation and Subsidiaries The effective tax rate increased in 1998 due primarily to basis differences for tax and financial reporting purposes, primarily goodwill, related to the gain on the sale of the Sherwood-Davis & Geck medical devices business (see Note 2) and gains on the sales of certain non-core product rights in 1998. The effective tax rate decreased in 1997 due primarily to the reinstatement of the U.S. research tax credit in 1997 and the net tax impact of the gain on the sale of a majority interest in the foods business (see Note 2) and the special charges related to the acquisition of the remaining equity interest in G.I. in 1996 (see Note 3). The tax impact related to the gain on the sale of a majority interest in the foods business in 1996 was due to basis differences for tax and financial reporting purposes. No tax benefit was recorded with regard to the special charges related to the acquisition of the remaining equity interest in G.I. in 1996 due to the non-deductibility of the acquired in-process research and development and the uncertainty of the realizability of G.I. net operating loss carryforwards. Total income tax payments, net of tax refunds, for the years ended December 31, 1998, 1997 and 1996 amounted to $897,361,000, $1,021,505,000 and $435,069,000, respectively. 10. CONTINGENCIES The Company is involved in various legal proceedings, including product liability and environmental matters of a nature considered normal to its business. See Note 5 for a discussion of environmental matters. It is the Company's policy to accrue for amounts related to these legal matters if it is probable that a liability has been incurred and an amount is reasonably estimable. The Company has been named as a defendant in numerous legal actions, many of which are purported class actions, relating to Pondimin and/or Redux, which the Company estimates were used in the United States prior to their voluntary market withdrawal by approximately 6 million people. These actions typically allege, among other things, that the use of Pondimin and/or Redux, independently or in combination with the prescription drug phentermine (which the Company does not manufacture, distribute or market), causes certain serious conditions, including valvular heart disease. The Company believes that it has meritorious defenses to these actions and that it has acted properly at all times in dealing with Pondimin and Redux matters. The Company is a defendant in numerous cases that have been consolidated in federal district court in Illinois as Brand Name Prescription Drugs Antitrust Litigation (MDL 997) relating to claims made by certain retail pharmacies against the Company and other pharmaceutical manufacturers. The Company and other pharmaceutical manufacturers also are defendants in similar litigation brought on behalf of consumers and in some cases on behalf of pharmacies in various state courts. The Company has settled the class action case in MDL 997 and certain other cases but remains as a defendant in other cases. The Company believes it has complied with the antitrust laws and other applicable laws and settled these cases in order to avoid the costs and risks of litigation. The settlement agreements are not admissions of any violation of law. The Company is self-insured against ordinary product liability risks and has liability coverage in excess of certain limits from various insurance carriers. In the opinion of the Company, although the outcome of any legal proceedings cannot be predicted with certainty, the ultimate liability of the Company in connection with its legal proceedings will not have a material adverse effect on the Company's financial position but could be material to the results of operations in any one accounting period. The Company leases certain property and equipment for varying periods under operating leases. Future minimum rental payments under non-cancelable operating leases with terms in excess of one year in effect at December 31, 1998 are as follows:
- ------------------------------------------------------------------ (IN THOUSANDS) - ------------------------------------------------------------------ 1999 $109,184 2000 101,109 2001 88,209 2002 82,344 2003 79,430 Thereafter 121,579 ------- Total rental commitments $581,855 ======== - ------------------------------------------------------------------
Rental expense for all operating leases was $131,358,000 in 1998, $133,179,000 in 1997 and $121,147,000 in 1996. 11. COMPANY DATA BY OPERATING AND GEOGRAPHIC SEGMENT The Company has four reportable segments: Pharmaceuticals, Consumer Health Care, Agricultural Products, and Corporate and All Other. The Pharmaceuticals segment manufactures, distributes and sells branded and generic ethical pharmaceuticals, biologicals, nutritionals, and animal biologicals and pharmaceuticals. Principal products include women's health care products, infant nutritionals, cardiovascular products, neuroscience therapies, anti-inflammatory and gastroenterology drugs, anti-infectives, vaccines, biopharmaceuticals and oncology therapies. Principal animal health products include vaccines, pharmaceuticals, endectocides and growth implants. The Consumer Health Care segment manufactures, distributes and sells over-the-counter health care products whose principal products include analgesics, cough/cold/allergy remedies, vitamins, mineral and nutritional supplements, herbal products, and hemorrhoidal, antacid and asthma relief items. The Agricultural Products segment manufactures, distributes and sells crop protection and pest control products whose principal products include herbicides, insecticides, fungicides and plant growth regulators. Corporate is responsible for the treasury, tax, legal and compliance operations of the Company's businesses and incurs and maintains certain assets, liabilities, expenses, gains and losses related to the overall management of the Company which are not allocated to the other reportable segments. These items include interest expense, net, gains on the sales of businesses, investments and other Corporate assets, certain litigation provisions and other miscellaneous items. All Other consists of certain American Home Products Corporation and Subsidiaries 41 divested businesses. Prior to December 31, 1998, the Company operated in the medical devices and food products businesses. The medical devices business, which the Company exited completely in February 1998, manufactured, distributed and sold medical devices products, which included needles and syringes, tubes, catheters, wound closure products, ophthalmic surgical equipment, enteral feeding systems, microsurgical equipment and other hospital products. The food products business, which was sold in November 1996, manufactured, distributed and sold food products, which included prepared pastas and other entrees, regional specialty foods, condiments, snack products, spreadable fruit products and other food products. The accounting policies of the segments described above are the same as those described in the summary of significant accounting policies. The Company evaluates performance based on income from operations before income taxes after goodwill amortization, special charges, gains on the sales of operating assets and certain other items. It does not include interest expense, net, gains on the sales of businesses, investments and other Corporate assets, certain litigation provisions and other miscellaneous items which are accumulated in Corporate. The Company's reportable segments are strategic business units that offer different products and services. The reportable segments are managed separately because they manufacture, distribute and sell distinct products and provide services which require various technologies and marketing strategies. The Company is not dependent on any single or major group of customers for its sales. The Company currently manufactures, distributes and sells a diversified line of products in the reportable segments as outlined above. COMPANY DATA BY OPERATING SEGMENT
- ---------------------------------------------------------------------------------------------- (IN MILLIONS) YEARS ENDED DECEMBER 31, 1998 1997 1996 - ---------------------------------------------------------------------------------------------- NET SALES TO CUSTOMERS - ---------------------------------------------------------------------------------------------- Pharmaceuticals ......................... $ 8,901.8 $ 8,669.1 $ 7,924.0 Consumer Health Care .................... 2,174.7 2,091.3 2,054.6 Agricultural Products ................... 2,194.1 2,119.4 1,988.9 Corporate and All Other ................. 192.1 1,316.2 2,120.8 --------- --------- --------- Consolidated Total ...................... $13,462.7 $14,196.0 $14,088.3 ========= ========= ========= INCOME BEFORE TAXES - ---------------------------------------------------------------------------------------------- Pharmaceuticals(1) (4) .................. $ 2,488.3 $ 2,169.6 $ 2,149.6 Consumer Health Care(1) ................. 509.7 505.1 426.1 Agricultural Products(1) ................ 494.9 429.9 337.7 Corporate and All Other (1) (2) (3) (5) . 92.6 (289.9) (157.9) --------- --------- --------- Consolidated Total ...................... $ 3,585.5 $ 2,814.7 $ 2,755.5 ========= ========= ========= DEPRECIATION AND AMORTIZATION EXPENSE - ---------------------------------------------------------------------------------------------- Pharmaceuticals ......................... $ 443.8 $ 416.0 $ 386.2 Consumer Health Care .................... 52.3 40.0 31.3 Agricultural Products ................... 153.2 154.8 145.5 Corporate and All Other ................. 15.4 91.2 95.1 --------- --------- --------- Consolidated Total ...................... $ 664.7 $ 702.0 $ 658.1 ========= ========= ========= TOTAL ASSETS - ---------------------------------------------------------------------------------------------- Pharmaceuticals ......................... $11,158.2 $10,758.8 $10,335.3 Consumer Health Care .................... 1,809.6 1,319.2 1,232.2 Agricultural Products ................... 5,026.4 4,763.9 4,727.5 Corporate and All Other ................. 3,084.9 3,983.2 4,490.3 --------- --------- --------- Consolidated Total ...................... $21,079.1 $20,825.1 $20,785.3 ========= ========= ========= EXPENDITURES FOR LONG-LIVED ASSETS (6)(7) - ---------------------------------------------------------------------------------------------- Pharmaceuticals ......................... $ 571.3 $ 568.4 $ 471.4 Consumer Health Care .................... 100.3 95.8 26.0 Agricultural Products ................... 119.3 115.8 48.6 Corporate and All Other ................. 20.5 111.9 106.2 --------- --------- --------- Consolidated Total ...................... $ 811.4 $ 891.9 $ 652.2 ========= ========= ========= - ----------------------------------------------------------------------------------------------
42 American Home Products Corporation and Subsidiaries COMPANY DATA BY GEOGRAPHIC SEGMENT
- ---------------------------------------------------------------------------------------- (IN MILLIONS) YEARS ENDED DECEMBER 31, 1998 1997 1996 - ---------------------------------------------------------------------------------------- NET SALES TO CUSTOMERS(7) - ---------------------------------------------------------------------------------------- United States ...................... $ 7,724.7 $ 8,063.0 $ 8,159.0 International ...................... 5,738.0 6,133.0 5,929.3 --------- --------- --------- Consolidated Total ................. $13,462.7 $14,196.0 $14,088.3 ========= ========= ========= LONG-LIVED ASSETS AT DECEMBER 31,(7) - ---------------------------------------------------------------------------------------- United States ...................... $ 8,582.4 $ 8,705.4 $ 8,595.1 International ...................... 3,981.2 4,147.0 4,291.1 --------- --------- --------- Consolidated Total ................. $12,563.6 $12,852.4 $12,886.2 ========= ========= ========= - ----------------------------------------------------------------------------------------
(1) Income before taxes includes goodwill amortization for 1998, 1997 and 1996 as follows: Pharmaceuticals - $158.2, $145.1 and $140.6, Consumer Health Care - $22.6, $16.9 and $12.0, Agricultural Products - $97.1, $96.2 and $91.8, and Corporate and All Other - $0.9, $14.4 and $16.5, respectively. (2) 1998 Corporate and All Other includes the gain on the sale of the Sherwood-Davis & Geck medical devices business of $592.1 (see Note 2). (3) 1998 Corporate and All Other includes the charge for restructuring and related asset impairments of $343.6. The charge relates to the operating segments as follows: Pharmaceuticals - $294.9, Consumer Health Care - $26.3 and Agricultural Products - $22.4 (see Note 3). (4) 1997 Pharmaceuticals includes the special charges of $180.0 associated with the voluntary market withdrawal of Pondimin and Redux (see Note 3). (5) 1996 Corporate and All Other includes the gain on the sale of a majority interest in the foods business of $813.5 (see Note 2) and the special charges of $697.9 associated with the acquisition of the remaining equity interest in G.I. (see Note 3). (6) Expenditures for long-lived assets exclude expenditures for goodwill and long-lived assets acquired in purchase business combinations as follows: 1998 - Consumer Health Care - $408.6, 1997 -Pharmaceuticals - $413.5 and 1996 - Pharmaceuticals - $390.9, Consumer Health Care - $4.2, Agricultural Products - $17.4, and Corporate and All Other - $2.8. (7) Other than the United States, no other country in which the Company operates had net sales or long-lived assets greater than 5% of the respective consolidated totals. The basis for attributing net sales to geographic areas is the location of the customer. Long-lived assets consist of property, plant and equipment, goodwill and other intangibles, and other assets excluding deferred taxes, net investments in equity companies and other investments. American Home Products Corporation and Subsidiaries 43 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS - -------------------------------------------------------------------------------- To the Board of Directors and Shareholders of American Home Products Corporation: We have audited the accompanying consolidated balance sheets of American Home Products Corporation (a Delaware corporation) and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of American Home Products Corporation and subsidiaries as of December 31, 1998 and 1997, and the results of their operations and cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles. Arthur Andersen LLP New York, N.Y. January 26, 1999 MANAGEMENT REPORT ON FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Management has prepared and is responsible for the Company's consolidated financial statements and related notes. They have been prepared in accordance with generally accepted accounting principles and necessarily include amounts based on judgments and estimates made by management. All financial information in this Annual Report is consistent with the financial statements. The Company maintains internal accounting control systems and related policies and procedures designed to provide reasonable assurance that assets are safeguarded, that transactions are executed in accordance with management's authorization and are properly recorded, and that accounting records may be relied upon for the preparation of financial statements and other financial information. The design, monitoring and revision of internal accounting control systems involve, among other things, management's judgment with respect to the relative cost and expected benefits of specific control measures. The Company also maintains an internal auditing function which evaluates and formally reports on the adequacy and effectiveness of internal accounting controls, policies and procedures. The Company's financial statements have been audited by independent public accountants who have expressed their opinion with respect to the fairness of these statements. The Audit Committee of the Board of Directors, composed of non-employee directors, meets periodically with the independent public accountants and internal auditors to evaluate the effectiveness of the work performed by them in discharging their respective responsibilities and to assure their independent and free access to the Committee. John R. Stafford Robert G. Blount Chairman, President and Senior Executive Vice Chief Executive Officer President and Chief Financial Officer 44 American Home Products Corporation and Subsidiaries QUARTERLY FINANCIAL DATA - --------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------ FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) 1998 1998 1998 1998 - ------------------------------------------------------------------------------------------------------------------------ Net Sales ............................. $3,666,395 $3,341,960 $3,224,119 $3,230,213 Gross Profit .......................... 2,661,965 2,421,719 2,414,535 2,347,636 Net Income ............................ 982,210(1) 523,511 618,995 349,622(2) Diluted Earnings per Share ............ 0.74(1) 0.39 0.46 0.26(2) - ------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------- FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER 1997 1997 1997 1997 - --------------------------------------------------------------------------------------------------------------------------- Net Sales ...................... $3,603,019 $3,499,758 $3,481,870 $3,611,379 Gross Profit ................... 2,571,081 2,440,756 2,511,204 2,571,676 Net Income ..................... 576,677 459,092 435,532(3) 571,822 Diluted Earnings per Share ..... 0.44 0.35 0.33(3) 0.43 - ---------------------------------------------------------------------------------------------------------------------------
(1) First Quarter 1998 includes the gain on the sale of the Sherwood-Davis & Geck medical devices business of $592,084 ($330,782 after-tax or $0.25 per share - diluted). (2) Fourth Quarter 1998 includes the charge for restructuring and related asset impairments of $343,600 ($240,500 after-tax or $0.18 per share - diluted). (3) Third Quarter 1997 includes the special charges aggregating $180,000 ($117,000 after-tax or $0.09 per share - diluted) associated with the voluntary market withdrawal of Pondimin and Redux. MARKET PRICES OF COMMON STOCK AND DIVIDENDS - --------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------- 1998 RANGE OF PRICES* 1997 RANGE OF PRICES* - -------------------------------------------------------------------------------------------------------------------- DIVIDENDS DIVIDENDS HIGH LOW PER SHARE HIGH LOW PER SHARE - -------------------------------------------------------------------------------------------------------------------- First Quarter $ 48.88 $ 37.75 $ 0.215 $ 34.44 $ 28.81 $ 0.205 Second Quarter 54.25 43.75 0.215 40.38 28.50 0.205 Third Quarter 58.75 46.19 0.215 42.44 34.19 0.205 Fourth Quarter 56.50 43.94 0.225 39.41 33.72 0.215 - --------------------------------------------------------------------------------------------------------------------
* Prices are those of the New York Stock Exchange - Composite Transactions. All amounts reflect the two-for-one common stock split effected in the form of a 100% stock dividend effective April 24, 1998. American Home Products Corporation and Subsidiaries 45 Management's Discussion and Analysis of Financial Condition and Results of Operations The following commentary should be read in conjunction with the Consolidated Financial Statements and Notes to Consolidated Financial Statements on pages 28 to 43. RESULTS OF OPERATIONS Management's discussion and analysis of results of operations for 1998 has been presented on an as-reported basis except for sales variation explanations which have been presented on an as-reported and a pro forma basis. The 1998 pro forma sales results reflect businesses acquired and divested in 1998 and 1997, assuming all transactions occurred as of January 1, 1997. This activity includes the divestitures of the Sherwood-Davis & Geck (effective February 27, 1998) and Storz Instrument Company (effective December 31, 1997) medical devices businesses and the acquisition of the worldwide animal health business of Solvay S.A. (effective February 28, 1997). The pro forma sales results also include the reclassification of certain retained ophthalmic pharmaceutical sales from the medical devices business to pharmaceuticals (effective January 1, 1998) assuming the reclassification had occurred as of January 1, 1997. Management's discussion and analysis of results of operations for 1997 has been presented on an as-reported basis except for sales variation explanations which have been presented on an as-reported and a pro forma basis. The 1997 pro forma sales results reflect businesses acquired and divested in 1997 and 1996 (except for the divestiture of Storz Instrument Company that was completed on December 31, 1997), assuming the transactions occurred as of January 1, 1996. This activity includes the acquisition of the worldwide animal health business of Solvay S.A. (effective February 28, 1997) and the divestitures of the foods business (effective November 1, 1996) and a surgical products business (effective March 14, 1996). Net sales decreased 5% to $13.5 billion in 1998 on an as-reported basis. On a pro forma basis, net sales increased 2%. The pro forma results reflect higher U.S. sales of pharmaceuticals and consumer health care and international sales of agricultural products offset, in part, by lower international sales of pharmaceuticals. The increase in pro forma 1998 sales was composed of unit volume growth of 3% and price increases of 1%, which were offset, in part, by unfavorable foreign exchange of 2%. Net sales increased 1% to $14.2 billion in 1997 on an as-reported basis. On a pro forma basis, net sales increased 5%. The pro forma results reflect higher U.S. sales of pharmaceuticals and worldwide sales of agricultural products. The increase in pro forma 1997 sales was composed of unit volume growth of 6% and price increases of 2%, which were offset, in part, by unfavorable foreign exchange of 3%. The following table sets forth 1998, 1997 and 1996 worldwide net sales results by operating segment together with the percentage changes in "As-Reported" and "Pro Forma" worldwide net sales from prior years:
1998 VERSUS 1997 1997 VERSUS 1996 ----------------------- ------------------------ (DOLLAR AMOUNTS IN MILLIONS) YEARS ENDED DECEMBER 31, AS-REPORTED PRO FORMA AS-REPORTED PRO FORMA ---------------------------------- % INCREASE % INCREASE % INCREASE % INCREASE NET SALES TO CUSTOMERS 1998 1997 1996 (DECREASE) (DECREASE) (DECREASE) (DECREASE) - ---------------------- ---- ---- ---- ----------- ---------- ----------- ---------- Operating Segment Pharmaceuticals $ 8,901.8 $ 8,669.1 $ 7,924.0 3% 2% 9% 7% Consumer Health Care 2,174.7 2,091.3 2,054.6 4% 4% 2% 2% Agricultural Products 2,194.1 2,119.4 1,988.9 4% 4% 7% 7% Corporate and All Other* 192.1 1,316.2 2,120.8 (85)% - (38)% - --------- --------- --------- Consolidated Net Sales $13,462.7 $14,196.0 $14,088.3 (5)% 2% 1% 5% --------- --------- ---------
* As discussed in Note 11 to the Consolidated Financial Statements, Corporate and All Other for 1998 and 1997 includes the net sales of the Company's divested medical devices business. Corporate and All Other for 1996 includes the net sales of the divested medical devices and food products businesses. 46 American Home Products Corporation and Subsidiaries Worldwide pharmaceutical sales increased 3% for the year ended 1998. U.S. pharmaceutical sales increased 5% for the year ended 1998. After adjusting for the acquisition of the animal health business of Solvay S.A. in 1997 and the reclassification of certain retained ophthalmic pharmaceutical sales from the medical devices business effective January 1, 1998, pro forma U.S. pharmaceutical sales also increased 5% for the year ended 1998 due primarily to higher sales of Premarin products, oral contraceptives, Effexor, Synvisc (introduced in 1997), generic pharmaceuticals, BeneFIX (introduced in 1997), Neumega (introduced in 1997), RotaShield (introduced in 1998) and Zosyn, which were offset, in part, by the voluntary market withdrawal of the Company's antiobesity products in 1997 and Duract in 1998 and lower sales of Oruvail (due to generic competition), Naprelan and Verelan (divested in 1998), Lodine products (due to generic competition) and vaccines. The increase in pro forma U.S. pharmaceutical sales for the year ended 1998 consisted of unit volume growth of 3% and price increases of 2%. Adjusting for the voluntary market withdrawals and divested products, U.S. pharmaceutical sales would have increased 13% in 1998. International pharmaceutical sales decreased 1% for the year ended 1998. After adjusting for the acquisition of the animal health business of Solvay S.A. in 1997 and the reclassification of certain retained ophthalmic pharmaceutical sales from the medical devices business effective January 1, 1998, pro forma international pharmaceutical sales decreased 3% for the year ended 1998. Higher sales of Effexor, Zoton, Premarin products, oral contraceptives and Tazocin were more than offset by lower sales of Minocin, infant nutritionals and other pharmaceutical products. The decrease in pro forma international pharmaceutical sales for the year ended 1998 consisted of unit volume growth of 2%, which was more than offset by unfavorable foreign exchange of 5%. Worldwide pharmaceutical sales increased 9% for the year ended 1997. U.S. pharmaceutical sales increased 15% for the year ended 1997. After adjusting for the acquisition of the animal health business of Solvay S.A. in 1997, pro forma U.S. pharmaceutical sales increased 13% for the year ended 1997 due primarily to higher sales of Premarin products, Effexor, Cordarone, Ziac, Naprelan (introduced in 1996), BeneFIX (introduced in 1997), Duract (introduced in 1997), Oruvail and veterinary products, which were offset, in part, by lower sales of Lodine and the voluntary market withdrawal of the Company's antiobesity products. The increase in pro forma U.S. pharmaceutical sales for the year ended 1997 consisted of unit volume growth of 11% and price increases of 2%. International pharmaceutical sales increased 3% for the year ended 1997. After adjusting for the acquisition of the animal health business of Solvay S.A. in 1997, pro forma international pharmaceutical sales decreased 1% for the year ended 1997. Higher sales of Zoton, Effexor, Premarin products and Tazocin were more than offset by lower sales of other pharmaceutical products. The decrease in pro forma international pharmaceutical sales for the year ended 1997 consisted of unit volume growth of 3% and price increases of 2%, which were more than offset by unfavorable foreign exchange of 6%. Worldwide consumer health care sales increased 4% for the year ended 1998. U.S. consumer health care sales increased 6% for the year ended 1998 due primarily to higher sales of nutritional supplements, including Centrum products, Solgar products (acquired in 1998) and Caltrate, and Advil, which were offset, in part, by lower sales of Axid AR and cough/cold products. The increase in U.S. consumer health care sales for the year ended 1998 consisted of unit volume growth of 5% and price increases of 1%. Solgar products contributed 3% to 1998 unit volume growth. International consumer health care sales increased 1% for the year ended 1998 due primarily to higher sales of nutritional supplements, including Centrum products, Caltrate and Solgar products (acquired in 1998), and Advil, which were offset, in part, by the effect of the disposal of several non-core products in 1997 and lower sales of cough/cold products. The increase in international consumer health care sales for the year ended 1998 consisted of unit volume growth of 5% and price increases of 1%, which were offset, in part, by unfavorable foreign exchange of 5%. Solgar products contributed 1% to 1998 unit volume growth. Worldwide consumer health care sales increased 2% for the year ended 1997. U.S. consumer health care sales decreased 2% for the year ended 1997. Higher sales of Advil and Centrum products were more than offset by the effect of the disposal of several non-core products in late 1996 and early 1997 and lower sales of Orudis KT. The decrease in U.S. consumer health care sales for the year ended 1997 consisted of unit volume declines of 3%, which were offset, in part, by price increases of 1%. American Home Products Corporation and Subsidiaries 47 International consumer health care sales increased 9% for the year ended 1997 due primarily to higher sales of Centrum products (which were launched in additional international markets) and Advil. The increase in international consumer health care sales for the year ended 1997 consisted of unit volume growth of 10% and price increases of 3%, which were offset, in part, by unfavorable foreign exchange of 4%. Worldwide agricultural products sales increased 4% for the year ended 1998. U.S. agricultural products sales for the year ended 1998 were comparable with the prior year. Higher sales of Raptor and Lightning herbicides (both introduced in 1997) and Counter insecticide were offset by lower sales of Pursuit, Scepter and Squadron herbicides (due primarily to unfavorable weather conditions, sales of Raptor and other competitive factors). U.S. agricultural products sales for the year ended 1998 consisted of unit volume declines of 4%, which were offset by price increases of 4%. Due to the seasonality of the U.S. agricultural products business, a majority of the U.S. agricultural products sales and results of operations are realized in the first half of the year. International agricultural products sales increased 6% for the year ended 1998 due primarily to higher sales of Odyssey (introduced in 1997), Squadron, Utopia (introduced in 1997) and other herbicides, and Acrobat fungicide, which were offset, in part, by lower sales of Scepter herbicide and other fungicides. The increase in international agricultural products sales for the year ended 1998 consisted of unit volume growth of 9% and price increases of 1%, which were offset, in part, by unfavorable foreign exchange of 4%. Worldwide agricultural products sales increased 7% for the year ended 1997. U.S. agricultural products sales increased 6% for the year ended 1997 due primarily to introductory sales of Steel and Lightning herbicides and higher sales of Prowl and Squadron herbicides due, in part, to increased soybean acreage. The increase in U.S. agricultural products sales for the year ended 1997 consisted of unit volume growth of 3% and price increases of 3%. International agricultural products sales increased 7% for the year ended 1997 due primarily to higher sales of Pursuit and Scepter herbicides, particularly in Latin America, resulting primarily from increased soybean acreage, Counter insecticide and Acrobat fungicide, which were offset, in part, by lower sales of other insecticides and fungicides. The increase in international agricultural products sales for the year ended 1997 consisted of unit volume growth of 11% and price increases of 2%, which were offset, in part, by unfavorable foreign exchange of 6%. All other sales, which consist of the Company's divested medical devices (1998, 1997 and 1996) and food products (1996) businesses, decreased 85% and 38% for the years ended 1998 and 1997, respectively. In February 1998, the Company sold the Sherwood-Davis & Geck medical devices business. This transaction completed the Company's exit from the medical devices business. In December 1997, the Company sold the stock of Storz Instrument Company and affiliated companies and certain assets related to the Storz business. In November 1996, the Company completed the sale of a majority interest (80%) in the American Home Foods business. During 1998 and 1997, the Company sold its remaining equity interest in the foods business. Cost of goods sold, as a percentage of net sales, decreased to 26.9% for the year ended 1998 compared with 28.9% for the year ended 1997 due primarily to an overall product mix improvement as increased sales of higher margin pharmaceuticals, consumer health care and agricultural products partially replaced the loss of lower margin medical devices sales resulting from the divestitures of the medical devices businesses, and, to a lesser extent, cost savings and synergies. Cost of goods sold, as a percentage of net sales, decreased to 28.9% for the year ended 1997 compared with 31.6% in 1996 due primarily to an overall product mix improvement as increased sales of higher margin pharmaceuticals and agricultural products replaced the loss of lower margin food products sales, a favorable pharmaceutical and agricultural products sales mix, and, to a lesser extent, cost savings and synergies. Cost savings and synergies resulted from the restructuring and consolidation of various manufacturing and quality control functions, primarily in the pharmaceutical business, related to the American Cyanamid Company (ACY) acquisition and the Company's previously announced Organizational Effectiveness and Supply Chain programs. Selling, general and administrative expenses, as a percentage of net sales, decreased to 36.6% for the year ended 1998 versus 37.3% for the year ended 1997. Lower selling, general and administrative expenses resulting from the divestitures of the medical devices businesses, lower marketing expenses due to pharmaceutical product withdrawals and divestitures, and lower promotional expenses for certain consumer health care products were offset, in part, by higher marketing and selling expenses for product launches and additional expenses relating to information technology initiatives. Selling, general and administrative 48 American Home Products Corporation and Subsidiaries expenses, as a percentage of net sales, increased to 37.3% for the year ended 1997 compared with 37.1% in 1996. Higher marketing and selling expenses related to pharmaceutical and agricultural product introductions were offset by the elimination of marketing and selling expenses associated with the divestiture of the foods business. Higher general and administrative expenses were due, in part, to increased pension costs and additional goodwill amortization related to the Genetics Institute, Inc. (G.I.) and Solvay S.A. animal health acquisitions. Research and development expenses increased 6% for the year ended 1998 due primarily to higher pharmaceutical research and development expenditures, particularly in the biopharmaceutical area, and operating costs related to pharmaceutical research and development facility expansions, which were offset, in part, by lower research and development expenses resulting from the divestitures of the medical devices businesses. Research and development expenses increased 9% for the year ended 1997 compared with 1996 due primarily to higher pharmaceutical research and development expenditures and operating costs related to pharmaceutical research and development facility expansions. Pharmaceutical research and development expenditures accounted for 84%, 80% and 78% of total research and development expenditures in 1998, 1997 and 1996, respectively. Pharmaceutical research and development expenses, as a percentage of worldwide pharmaceutical sales, exclusive of infant nutritional sales, were 17%, 16% and 15% in 1998, 1997 and 1996, respectively. Interest expense, net decreased 44% for the year ended 1998 due primarily to the reduction in long-term debt during 1998 as the proceeds from the sale of the Sherwood-Davis & Geck medical devices business were used primarily to reduce outstanding commercial paper. Interest expense, net decreased 14% for the year ended 1997 due primarily to the reduction in long-term debt during 1997 and 1996. Average long-term debt outstanding during 1998 and 1997 was $4,445.5 million and $5,526.2 million, respectively. Other income, net for 1998, 1997 and 1996 included gains on the sales of non-strategic assets, including certain generic and non-core product rights, and foreign exchange losses. Other income, net for 1998 also included a gain on the sale of the remaining portion of the equity interest in the foods business. Other income, net for the year ended 1997 also included gains on the sales of Storz Instrument Company, investments in the common stock of certain publicly traded insurance companies and a portion of the equity interest in the foods business, which were offset, in part, by the cost of the settlement of a lawsuit and other contingent liability adjustments (excluding any charges which may result from legal actions related to Pondimin and Redux). Other income, net for the year ended 1996 also included a gain on the sale of Symbiosis Corp. As discussed in Note 3 to the Consolidated Financial Statements, in December 1998, the Company recorded a charge for restructuring and related asset impairments of $343.6 million ($240.5 million after-tax or $0.18 per share - diluted) to recognize the costs of the reorganization of the pharmaceutical and nutritional supply chains (primarily in the Asian-Pacific and Latin American regions), the reorganization of the U.S. pharmaceutical and consumer health care distribution systems and a reduction in personnel from the globalization of certain business units. The restructuring charge included provisions for personnel costs, fixed asset write-offs and other closure/exit costs. Annual pre-tax savings from these initiatives are expected to be fully realized in 2002 and total approximately $160.0 million. As discussed in Note 3 to the Consolidated Financial Statements, in September 1997, the Company announced the voluntary market withdrawal of fenfluramine HCl, manufactured and sold under the name Pondimin, and dexfenfluramine HCl, marketed under the name Redux. The Company took this action and withdrew the products on the basis of new, preliminary information regarding heart valve abnormalities in patients using these medications. The 1997 results of operations included special charges aggregating $180.0 million ($117.0 million after-tax or $0.09 per share - diluted) to record the one-time costs associated with the voluntary market withdrawal. The special charges included provisions for product returns, notification and administrative handling fees, the writedown of inventory and supplies, and other related costs. These costs did not include provisions for any subsequent charges which may result from legal actions related to these products. As discussed in Note 10 to the Consolidated Financial Statements, the Company has been named as a defendant in numerous legal actions, many of which are purported class actions, relating to Pondimin and/or Redux. It is likely that additional legal actions, including purported class actions, will be filed. The Company believes that it has meritorious defenses to these actions and that it has acted properly at all times in dealing with Pondimin and Redux matters. In the opinion of the Company, although the outcome of any legal proceedings cannot be predicted with certainty, the ultimate liability of the Company in connection with these proceedings will not have a material adverse effect on the Company's financial position but could be material to the results of operations in any one accounting period. American Home Products Corporation and Subsidiaries 49 The effective tax rate increased to 31.0% in 1998 from 27.4% in 1997 due primarily to basis differences for tax and financial reporting purposes, primarily goodwill, related to the gain on the sale of the Sherwood-Davis & Geck medical devices business and gains on the sales of certain non-core product rights in 1998. The effective tax rate decreased to 27.4% in 1997 from 31.6% in 1996 due primarily to the reinstatement of the U.S. research tax credit in 1997 and the 1996 net tax impact of the gain on the sale of a majority interest in the foods business and the special charges related to the acquisition of the remaining equity interest in G.I. Net income and diluted earnings per share for the year ended 1998 on an as-reported basis increased 21% and 19%, respectively, above 1997 levels. Results for the year ended 1998 included the after-tax gain on the sale of the Sherwood-Davis & Geck medical devices business of $330.8 million ($0.25 per share - diluted) and the after-tax charge for restructuring and related asset impairments of $240.5 million ($0.18 per share - diluted) associated with the reorganization of the pharmaceutical and nutritional supply chains (primarily in the Asian-Pacific and Latin American regions), the reorganization of the U.S. pharmaceutical and consumer health care distribution systems and a reduction in personnel from the globalization of certain business units. Results for the year ended 1997 included the after-tax special charges aggregating $117.0 million ($0.09 per share - diluted) associated with the voluntary market withdrawal of Pondimin and Redux. Excluding the gain on the sale and restructuring charge from 1998 results and the special charges from 1997 results, net income and diluted earnings per share for the year ended 1998 increased 10% and 8%, respectively, over 1997 amounts. The increases in net income and diluted earnings per share, excluding the special items, were greater than the as-reported net sales results due primarily to increased sales of higher margin pharmaceuticals, consumer health care and agricultural products; lower selling, general and administrative expenses and interest expense; lower provisions for litigation and other accruals; and additional one-time gains from the sale of certain non-strategic assets, which were offset, in part, by the divestiture of lower margin medical devices sales and higher pharmaceutical research and development expenditures. Net income and diluted earnings per share for the year ended 1997 on an as-reported basis increased 8% and 7%, respectively, above 1996 levels. Results for the year ended 1997 included the after-tax special charges aggregating $117.0 million ($0.09 per share - diluted) associated with the voluntary market withdrawal of Pondimin and Redux. Results for the year ended 1996 included an after-tax gain on the sale of a majority interest in the foods business of $706.3 million ($0.55 per share - diluted) and the special charges related to the acquisition of the remaining equity interest in G.I. aggregating $697.9 million ($0.54 per share - diluted). Excluding the special charges from 1997 results and the gain on the sale of a majority interest in the foods business and the special charges from 1996 results, net income and diluted earnings per share for the year ended 1997 increased 15% and 13%, respectively, over 1996 amounts. The increases in net income and diluted earnings per share, excluding the special items, were greater than the as-reported net sales results due primarily to increased sales of higher margin pharmaceuticals and agricultural products, a favorable pharmaceutical and agricultural products sales mix, lower interest expense, and cost savings and synergies offset, in part, by the divestiture of lower margin food products sales and higher pharmaceutical research and development expenditures. EURO CURRENCY On January 1, 1999, 11 of the 15 member countries of the European Union adopted the "Euro" as a new common legal currency. The Company has evaluated the impact of the Euro conversion on its businesses. Critical areas of potential business impact were identified and appropriate strategies developed. The costs related to the Euro conversion will not have a material adverse effect on the Company's financial position or results of operations. However, the conversion to the Euro may have competitive implications on the Company's pricing and marketing strategies, the total impact of which is not known at this time. COMPETITION The Company operates in the highly competitive health care and agrochemical industries. The Company is not dependent on any one patent-protected product or line of products for a substantial portion of its sales or results of operations. However, Premarin, one of the Company's conjugated estrogens products manufactured from pregnant mare's urine, which has not had patent protection for many years, is the leader in its category and does contribute significantly to sales and results of operations. Premarin's principal uses are to treat the symptoms of menopause and osteoporosis, a condition involving a loss of bone mass in postmenopausal women. Estrogen-containing products manufactured by other companies have been marketed for many years for the treatment of menopausal symptoms, and some of these products also have obtained marketing approval for the treatment of osteoporosis. During the past several years, other manufacturers have introduced products for the treatment and/or prevention of osteoporosis. Some companies have attempted to obtain approval for generic versions of Premarin. These products, if approved, would be routinely substitutable for Premarin under many state laws and third-party insurance payer plans. In May 1997, the U.S. Food and Drug Administration (FDA) announced that it would not approve certain synthetic estrogen products as generic equivalents of Premarin given 50 American Home Products Corporation and Subsidiaries known compositional differences between the active ingredient of these products and Premarin. Although the FDA has not approved any generic equivalent to Premarin to date, Premarin will continue to be subject to competition from existing and new competing estrogen and other products for its approved indications and may be subject to some form of generic competition from either natural or synthetic generic conjugated estrogens products in the future. LIQUIDITY, FINANCIAL CONDITION AND CAPITAL RESOURCES Cash and cash equivalents increased $130.9 million in 1998 to $1,182.3 million. Proceeds from the sale of the Sherwood-Davis & Geck medical devices business and sales of other assets of $2,362.0 million, cash flows from operating activities of $1,514.7 million and proceeds from the exercise of stock options of $403.8 million were used principally for long-term debt reduction of $1,179.7 million, dividend payments of $1,143.3 million, capital expenditures of $809.8 million, the purchase of the vitamin and nutritional supplement business of Solgar Vitamin and Herb Company Inc. for $425.0 million and common stock repurchases of $414.6 million. Capital expenditures included strategic investments in manufacturing and distribution facilities worldwide and the expansion of the Company's research and development facilities. The Company believes that the foreign currency risks to which it is exposed are not reasonably likely to have a material adverse effect on the Company's cash flows, results of operations or financial position given the concentration of sales in the United States. No single foreign currency accounted for more than 5% of 1998 worldwide sales. However, the Company anticipates that the Euro will account for more than 5% of worldwide sales in future periods. Asian-Pacific financial instability did not have a material impact on the Company's results of operations in 1998 since these operations are not material to the Company's consolidated operations. In addition, the Company believes that if Asian-Pacific financial instability continues, it will not have a material impact on the Company's future results of operations. In 1998, the Company reduced its $5.0 billion of revolving credit facilities to $2.0 billion by terminating the $2.5 billion, 364-day credit facility in its entirety and by reducing the $2.5 billion, five-year credit facility to $2.0 billion. The Company has outstanding $1.0 billion of 7.70% notes due February 2000 and $1.0 billion of 7.90% notes due February 2005 under a $3.5 billion shelf registration statement. The non-callable notes are unsecured and unsubordinated. Proceeds from the sale of the Sherwood-Davis & Geck medical devices business were used primarily to reduce outstanding commercial paper and to terminate the Company's $2.3 billion of interest rate swap agreements. The cost to unwind these interest rate swap agreements was charged against the gain on the sale. At December 31, 1998, the carrying values of cash and cash equivalents approximate fair value due to the short-term, highly liquid nature of the cash equivalents which have original maturities of three months or less. Interest rate fluctuations would not have a significant effect on the fair value of cash equivalents held by the Company. At December 31, 1998, the fair value of the Company's long-term debt, including the current portion, was $4,123.9 million. If interest rates were to increase or decrease by one percentage point, the fair value of the long-term debt would decrease or increase by approximately $114.2 million. At December 31, 1998, the fair value of the $799.3 million notional amount of foreign exchange forward contracts was a net payable of $0.5 million. As foreign exchange rates change from period to period, the fluctuations in the fair value of the foreign exchange forward contracts are offset by fluctuations in the fair value of the underlying hedged transactions. If the value of the U.S. dollar were to increase or decrease by 10% in relation to all hedged foreign currencies, the net payable would decrease or increase by approximately $68.7 million. The ratio of earnings to fixed charges increased to 10.5 in 1998 from 6.4 in 1997. The increase was due to increased income before federal and foreign taxes and reduced fixed charges, which resulted from lower interest expense due to the reduction in long-term debt. Excluding the gain on the sale and the restructuring charge from 1998 results and the special charges from 1997 results, the ratio of earnings to fixed charges increased to 9.8 in 1998 from 6.7 in 1997. The Company has a common stock repurchase program under which the Company is authorized to repurchase 33,132,860 shares at December 31, 1998. Depending upon, among other things, market conditions, the Company intends to continue to repurchase common stock during 1999. The Company's objectives are to continue to further reduce its current debt position, including, but not limited to, additional sales of non-strategic assets. Management is confident that cash flows from operating activities will be adequate to repay both the principal and interest on the remaining ACY acquisition financing without requiring the disposition of any significant strategic core businesses or assets and, further, to allow the Company to continue to fund its operations, pay dividends and maintain its ongoing programs of capital expenditures, including the amount already committed at December 31, 1998 of approximately $278.5 million, without restricting its ability to make further acquisitions as may be appropriate. American Home Products Corporation and Subsidiaries 51 YEAR 2000 As described below, the Company has recognized the importance of addressing Year 2000 problems and has committed certain resources to identify and correct potential problems in order to minimize the impact on its business. The Company's Year 2000 program is organized into three functional areas: Information Technology (IT), which includes computer systems and related application software; Embedded Chips (EC), which are hidden internal components of many non-computer devices and machinery; and Business Partners (BP), which include suppliers, customers and governmental agencies. The program methodology is organized into three phases: Phase I: Inventory, Assessment and Project Planning; Phase II: Remediation and Testing; and Phase III: Certification, Implementation and Contingency Planning. Phase I activities for IT have been completed. Various Phase II activities for IT are in process or have been substantially completed with the application software returned to production. Certain Phase III activities for IT currently are under way. A substantial amount of Phase I activities for EC have been completed. Several Phase II activities for EC have commenced with some remediation and testing completed. The inventory of critical BP at most locations has been substantially completed, and assessment and project planning currently are under way. For all three functional areas, Phase I activities are expected to be completed by the end of the 1999 first quarter, Phase II activities are expected to be completed by the end of the 1999 second quarter and Phase III activities are expected to be completed by the end of the 1999 third quarter. The costs of remediation and appropriate replacement projects for Year 2000 activities are estimated to be, in the aggregate, approximately $150 million. The costs include operating and capital costs of approximately $100 million and $50 million, respectively, for all phases within each functional area. These costs do not include any internal costs. Through December 31, 1998, $38 million and $11 million have been incurred for operating and capital costs, respectively, related to the Year 2000 program. The costs related to Year 2000 are not expected to have a material adverse effect on the Company's results of operations or financial position. The Company has not yet formulated its most reasonably likely worst-case scenario with respect to possible losses related to Year 2000 problems. The Company has initiated the Contingency Planning process. The Company will be developing business continuity plans for those areas that are critical to the Company's business. These business continuity plans will be designed to mitigate significant disruptions to business flows beyond the end of 1999. The Company anticipates that the required modifications and replacements of its critical systems and applications will be completed prior to the Year 2000. However, the Company may be unable to implement these modifications and replacements on a timely basis, and, even if the Company does make these modifications and replacements, they may not be effective in addressing the problems identified. If the required modifications and replacements are not completed in a timely manner or are not successful, there could be a material adverse effect on the Company's results of operations. The Company currently has limited information on Year 2000 compliance by its key third-party suppliers, service providers, distributors, wholesalers and certain other entities with which the Company has a business relationship (business partners). There could be a material adverse effect on the Company's business partners' operations if they do not successfully and timely achieve Year 2000 compliance. If the Company's business partners experience Year 2000 compliance issues, there could be a material adverse effect on the Company's results of operations. The Company cannot guarantee that its remediation efforts will adequately address Year 2000 problems in a timely manner or that it will be able to modify and replace any or all of the Company's critical systems and applications in accordance with its plans. In addition, the Company cannot assure that any modifications and replacements will effectively address Year 2000 problems. If the Company does not complete the required conversions on time, or if it is not successful, there could be a material adverse effect on the Company's results of operations. Furthermore, the Company cannot guarantee that other companies will make necessary, timely and successful conversions to their systems on which the Company's systems and business flows depend. Although the Company intends in the second and third quarters of 1999 to develop contingency plans detailing actions that the Company will take in the event the execution of its Year 2000 remediation efforts are not successfully completed on a timely basis, the Company has not yet developed such plans. As discussed below, the Company will identify additional risk factors related to Year 2000 problems in Exhibit 99 to the Company's 1998 Annual Report on Form 10-K, which will be filed by March 31, 1999. COMPANY STATEMENTS FOR FORWARD-LOOKING INFORMATION This Annual Report, including management's discussion and analysis set forth above, contains certain forward-looking statements, including statements regarding the Company's results of operations, Euro currency, competition, liquidity, financial condition and capital resources, and Year 2000. These forward-looking statements are based on current expectations. Certain factors which could cause the Company's actual results to differ materially from expected and historical results have been identified by the Company in Exhibit 99 to the Company's 1997 Annual Report on Form 10-K and the Company's 1998 Annual Report on Form 10-K, which will be filed by March 31, 1999. 52 American Home Products Corporation and Subsidiaries Directors and Officers BOARD OF DIRECTORS John R. Stafford (1),(5) Chairman, President and Chief Executive Officer Clifford L. Alexander, Jr. (2),(4),(5) President, Alexander & Associates, Inc. Frank A. Bennack, Jr. (1),(3),(5) President and Chief Executive Officer, The Hearst Corporation Robert G. Blount (1) Senior Executive Vice President Robert Essner Executive Vice President John D. Feerick (2),(3),(5) Dean, Fordham University School of Law John P. Mascotte (3),(5) President and CEO, Blue Cross and Blue Shield of Kansas City Mary Lake Polan, M.D., Ph.D. (4),(5) Professor and Chairman, Department of Gynecology and Obstetrics, Stanford University School of Medicine Ivan G. Seidenberg (2),(5) Chairman and Chief Executive Officer, Bell Atlantic Corporation John R. Torell III (4),(5) Chairman, Torell Management Inc. William Wrigley (2),(5) President and Chief Executive Officer, Wm. Wrigley Jr. Company DIRECTORS EMERITI John W. Culligan Retired - Former Chairman of the Board William F. Laporte Retired - Former Chairman of the Board PRINCIPAL CORPORATE OFFICERS John R. Stafford (6),(7) Chairman, President and Chief Executive Officer Robert G. Blount (6),(7) Senior Executive Vice President Robert Essner (6),(7) Executive Vice President Joseph J. Carr (6),(7) Senior Vice President Louis L. Hoynes, Jr. (6),(7) Senior Vice President and General Counsel Robert I. Levy, M.D. (6),(7) Senior Vice President - Science and Technology William J. Murray (6),(7) Senior Vice President David M. Olivier (6),(7) Senior Vice President John B. Adams Vice President - Corporate Development Egon E. Berg Vice President and Associate General Counsel Thomas G. Cavanagh Vice President - Investor Relations John R. Considine (6),(7) Vice President - Finance Bruce Fadem Vice President - Corporate Systems and Chief Information Officer Leo C. Jardot Vice President - Government Relations Gerald A. Jibilian Vice President and Associate General Counsel Paul J. Jones (6) Vice President and Comptroller Rene R. Lewin (6) Vice President - Human Resources Thomas M. Nee (6) Vice President - Taxes Marily H. Rhudy Vice President - Public Affairs Steven A. Tasher Vice President - Environmental Affairs and Associate General Counsel Jack M. O'Connor Treasurer Eileen M. Lach Secretary PRINCIPAL DIVISION AND SUBSIDIARY OFFICERS Global Agricultural Products, American Cyanamid Company Howard L. Minigh, Ph.D. (7) President Global Agricultural Products Research Division Mark W. Atwood, Ph.D. President Fort Dodge Animal Health Division E. Thomas Corcoran (7) President Immunex Corporation* Edward V. Fritzky Chairman and Chief Executive Officer Specialty Pharmaceuticals Division David G. Strunce President Whitehall International, Inc. Bruce I. Macphail (7) President Whitehall-Robins Healthcare David M. Olivier (6),(7) Senior Vice President, AHP Wyeth-Ayerst Global Pharmaceuticals Bernard Poussot (7) President Wyeth-Ayerst Global Pharmaceuticals - Europe, Middle East and Africa Robert N. Power President Wyeth-Ayerst Global Pharmaceuticals - Intercontinental Region Mark M. Larsen President Wyeth-Ayerst Global Pharmaceuticals - North America Joseph M. Mahady (7) President Wyeth-Ayerst Research L. Patrick Gage, Ph.D.(7) President Wyeth Vaccines and Nutrition Kevin L. Reilly President (1) Executive Committee (2) Audit Committee (3) Compensation and Benefits Committee (4) Corporate Issues Committee (5) Nominating Committee (6) Finance Committee (7) Operations Committee - ---------- * AHP is majority owner American Home Products Corporation and Subsidiaries 53 Corporate Data EXECUTIVE OFFICES American Home Products Corporation Five Giralda Farms Madison, NJ 07940 (973) 660-5000 STOCK TRADING INFORMATION American Home Products stock is listed on the New York Stock Exchange (ticker symbol: AHP). INDEPENDENT PUBLIC ACCOUNTANTS Arthur Andersen LLP 1345 Avenue of the Americas New York, NY 10105 ANNUAL MEETING The Annual Meeting of Stockholders will be held on Thursday, April 22, 1999, at the Headquarters Plaza Hotel in Morristown, New Jersey. FORM 10-K A copy of the Company's Annual Report on Form 10-K may be obtained by any shareholder without charge upon request to: American Home Products Corporation Treasurer's Department Five Giralda Farms Madison, NJ 07940 (973) 660-6936 SHAREHOLDER ACCOUNT INFORMATION ChaseMellon Shareholder Services, L.L.C. is the transfer agent, registrar, dividend disbursing agent and dividend reinvestment agent for the Company. Shareholders of record with questions about lost certificates, lost or missing dividend checks, or notification of change of address should contact: ChaseMellon Shareholder Services, L.L.C. Overpeck Center 85 Challenger Road Ridgefield Park, NJ 07660 (800) 565-2067 For the hearing impaired: (800) 231-5469 (TDD) Internet address: http://www.chasemellon.com MASTER INVESTMENT PLAN The plan provides shareholders of record with the opportunity to automatically reinvest dividends or to make cash purchases of additional shares of the Company's common stock. Inquiries should be directed to ChaseMellon Shareholder Services, L.L.C. EQUAL EMPLOYMENT OPPORTUNITY Our established affirmative action and equal employment programs demonstrate our long-standing commitment to provide job and promotional opportunities for all qualified persons regardless of age, color, disability, national origin, race, religion, sex, sexual orientation, status as a Vietnam-era veteran or a special disabled veteran, or any military uniformed services obligation. POLICY ON HEALTH, SAFETY AND ENVIRONMENTAL PROTECTION A copy of the Company's "Policy on Health, Safety and Environmental Protection" may be obtained upon written request to: American Home Products Corporation Department of Environment and Safety Five Giralda Farms Madison, NJ 07940 AHP ON THE INTERNET American Home Products' Internet address is: http://www.ahp.com TRADEMARKS Product designations appearing in differentiated type are trademarks. 54 American Home Products Corporation and Subsidiaries Principal Products - United States ETHICAL PHARMACEUTICALS AND VACCINES Women's Health Pain and Arthritis Alesse Enbrel Crinone Lodine XL Lo/Ovral Oruvail Nordette Synvisc Premarin Premarin Vaginal Cream Vaccines Premphase Acel-Imune Prempro FluShield Triphasil HibTITER Orimune Cardiovascular Pnu-Imune 23 Cordarone RotaShield Cordarone I.V. Tetramune Inderal LA ISMO Oncology Therapies Isordil Leukine Quinidex Neumega Sectral Novantrone Tenex Thioplex Zebeta Ziac Anti-Infectives Bicillin Neuroscience Therapies Minocin Ativan Pipracil Effexor Suprax Effexor XR Zosyn Serax Other Products BeneFIX Diamox Phenergan CONSUMER HEALTH CARE Analgesics and Cough/Cold/Allergy Advil Advil Cold & Sinus Anacin Children's Advil Dimetapp Dristan Robitussin Nutritional Supplements Caltrate Centrum Centrum Herbals Centrum Silver Solgar Other Products Anbesol Axid AR Chap Stick Denorex FiberCon Preparation H Primatene AGRICULTURAL PRODUCTS Herbicides Arsenal Assert Cadre Lightning Prowl Pursuit Raptor Scepter Squadron Steel Fungicides and Insecticides Acrobat Amdro Counter Thimet ANIMAL HEALTH CARE Veterinary Pharmaceuticals and Biologicals Cydectin Dicural Duramune EtoGesic Fel-O-Vax Fluvac GiardiaVax Ketaset LymeVax Nolvasan Panalog PolyFlex PYRAMID Quest Suvaxyn Synanthic Synovex ToDAY ToMORROW Torbugesic Triangle The above principal products are identified as trademarks used by American Home Products Corporation and its subsidiaries. Design: Arnold Saks Associates Text: Linda Errante [RECYCLE LOGO] This report is printed on recycled paper. American Home Products Corporation and Subsidiaries 55 EX-21 13 EXHIBIT 21 SUBSIDIARIES OF THE COMPANY DECEMBER 31, 1998
State or Country Name of Incorporation Domestic AHP Subsidiary Holding Corporation Delaware American Cyanamid Company Maine Ayerst-Wyeth Pharmaceuticals Incorporated Delaware Berdan Insurance Company Vermont Cyanamid Agricultural de Puerto Rico, Inc. New Jersey Cyanamid International Corporation Limited Delaware Genetics Institute, Inc. Delaware Immunex Corporation Washington Lederle Parenterals, Inc. New Jersey Lederle Piperacillin, Inc. New Jersey Route 24 Holdings, Inc. Delaware Wyeth-Ayerst International Inc. New York Wyeth-Ayerst Pharmaceuticals, Inc. New York Wyeth Nutritionals, Inc. Delaware Wyeth-Whitehall Pharmaceuticals, Inc. Puerto Rico Foreign AHP Finance B.V. Netherlands AHP Manufacturing B.V. Netherlands Cyanamid Agro France Cyanamid de Argentina S.A. Delaware Cyanamid Agrar GmbH & Co. KG Germany Cyanamid Iberica, S.A. Spain Cyanamid (Japan) Ltd. Japan Cyanamid of Great Britain Limited Great Britain Cyanamid Quimica do Brasil Ltda. Brazil Cyanamid Taiwan Corporation Taiwan Dimminaco AG Switzerland John Wyeth & Brother Limited Great Britain Laboratorios Wyeth-Whitehall Ltda. Brazil Wyeth (H.K.) Limited Hong Kong Wyeth Australia Pty. Limited Australia Wyeth-Ayerst Canada Inc. Canada Wyeth-Lederle France Wyeth-Lederle S.p.A. Italy Wyeth Lederle Portugal (Farma), Lda. Portugal Wyeth-Pharma GmbH Germany Wyeth Philippines, Inc. Philippines Wyeth S.A. de C.V. Mexico
There have been omitted from the above list the names of subsidiaries which, considered in the aggregate as a single subsidiary, would not constitute a significant subsidiary. EX-23 14 EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference in this Form 10-K of our report dated January 26, 1999 included in American Home Products Corporation's (the Company) Annual Report to Shareholders for the year ended December 31, 1998. Furthermore, we consent to the incorporation of our reports dated January 26, 1999 included in or made part of this Form 10-K, into the Company's previously filed Registration Statements on Form S-3 (File Nos. 33-45324 and 33-57339) and on Form S-8 (File Nos. 2-96127, 33-24068, 33-41434, 33-53733, 33-55449, 33-45970, 33-14458, 33-50149, 33-55456 and 333-15509). ARTHUR ANDERSEN LLP New York, N.Y. March 29, 1999 EX-27 15
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AMERICAN HOME PRODUCTS CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1998 AND CONSOLIDATED STATEMENT OF INCOME FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS DEC-31-1998 DEC-31-1998 1,182,319 119,210 3,499,137 222,540 2,237,918 7,955,632 6,718,364 2,428,699 21,079,068 4,210,721 3,859,163 437,466 0 64 9,177,266 21,079,068 13,462,687 13,462,687 3,616,832 3,616,832 1,654,745 0 207,157 3,585,460 1,111,122 2,474,338 0 0 0 2,474,338 1.88 1.85 This amount represents Basic Earnings per Share in accordance with the requirements of Statement of Financial Accounting Standards No. 128 - "Earnings per Share." This amount represents Diluted Earnings per Share in accordance with the requirements of Statement of Financial Accounting Standards No. 128 - "Earnings per Share."
EX-99 16 Exhibit No. 99 Exhibit 99 to the Annual Report on Form 10-K for the Fiscal Year Ended December 31, 1998 Cautionary Statements Regarding "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995 The Company may from time to time make written or verbal forward-looking statements. Forward-looking statements may appear in periodic reports filed with the Securities and Exchange Commission (including the Company's Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q), in press releases, in the Company's Annual Report to Shareholders and other reports to shareholders, and in other communications made by the Company. These forward- looking statements can be identified by their use of words such as "anticipates," "expects," "plans," "could," "will," " believes," "estimates," "forecasts," "projects" and other words of similar meaning. These forward- looking statements address various matters including the Company's results of operations, Euro Currency, competition, liquidity, financial condition and capital resources, Year 2000, market position and product development. These forward-looking statements are based on current expectations. The Company undertakes no obligation to update any forward-looking statements, but investors are advised to consult any further disclosures by the Company on these forward-looking statements in its subsequent filings pursuant to the Securities Exchange Act of 1934. As permitted by the Private Securities Litigation Reform Act of 1995, the Company is hereby filing the following cautionary statements identifying important factors which, among others, could cause the Company's actual results to differ materially from expected and historical results: The Company's Year 2000 remediation efforts are based on numerous expectations which are subject to uncertainties. Certain risk factors which could have a material adverse effect on the Company's results of operations include but are not limited to: failure to identify critical systems which will experience failures, errors in the remediation efforts, unexpected failures by key business partners, inability to obtain new replacements for non-compliant systems or equipment, failures by governmental agencies causing delays in approval of new products or sales of approved products, general economic downturn relating to Year 2000 failures in the U.S. and in other countries, failures in global banking systems and capital markets, or extended failures by public and private utility companies or common carriers supplying services to the Company. Competitive implications on the Company's pricing and marketing strategies due to the conversion to the Euro. Competitive factors including managed care groups, institutions and government agencies seeking price discounts; technological advances attained by competitors; patents granted to competitors; potential generic competition for PREMARIN and for other health care and agricultural products as such products mature. In the U.S., among other developments, consolidation among managed care organizations may increase price pressure and may result in managed care organizations having greater influence over prescription decisions through formulary decisions and other policies. Government laws and regulations affecting U.S. and international operations, including trade, monetary and fiscal policies, taxes (including the Section 936 income tax credit), price controls, changes in governments and legal systems, as well as actions affecting approvals of products and licensing. Uncertainties of the FDA approval process and the regulatory approval processes of other non-U.S. countries, including, without limitation, delays in approval of new products. Governmental factors including laws, regulations and judicial decisions at the state and federal level related to Medicare, Medicaid and health care reform; and laws and regulations affecting international pricing and pharmaceutical reimbursement. Inherent uncertainty of pharmaceutical research, difficulties or delays in product development and commercialization including, but not limited to, the inability to identify viable new chemical compounds, successfully complete clinical trials, and gain and maintain market acceptance of approved products. Difficulties or delays in product development can also affect the Company's other businesses. New product candidates that appear promising in development may fail to reach market for numerous reasons. They may be found to be ineffective or to have harmful side effects in clinical or pre-clinical testing. Unexpected safety or efficacy concerns arising with respect to marketed products, whether or not scientifically justified, leading to product recalls, withdrawals or declining sales. Growth in costs and expenses, including changes in product mix, and the impact of any acquisitions or divestitures, restructuring and other unusual items that could result from evolving business strategies, evaluation of asset realization, and changing organizational structures. Product liability litigation related to the Company's health care and other products including, without limitation, litigation associated with the Company's antiobesity products, PONDIMIN and REDUX. Other legal factors include, without limitation, antitrust litigation, environmental concerns and patent disputes with competitors, any of which could preclude commercialization of products or negatively affect the profitability of existing products. Changes in accounting standards promulgated by the Financial Accounting Standards Board, the Securities and Exchange Commission, and the American Institute of Certified Public Accountants which are adverse to the Company. Continued consolidation in the health care and agrochemical industries could affect the Company's competitive position. Changing business conditions including inflation and fluctuations in interest rates and foreign currency exchange rates. Factors such as changes in business strategies and the impact of restructurings, impairments in asset carrying values and business combinations. -----END PRIVACY-ENHANCED MESSAGE-----