-----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, Q6fqagmyb/5twoc0JuBnFQlI9UDhRZiUZKMV5Dbl9jGdhbePxHXg1sAgzPuA51vl 7mEh16aj8JSuvqtVMJgHkw== 0000005187-01-500006.txt : 20010516 0000005187-01-500006.hdr.sgml : 20010516 ACCESSION NUMBER: 0000005187-01-500006 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20010331 FILED AS OF DATE: 20010515 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-Q SEC ACT: SEC FILE NUMBER: 001-01225 FILM NUMBER: 1636213 BUSINESS ADDRESS: STREET 1: 5 GIRALDA FARMS CITY: MADISON STATE: NJ ZIP: 07940 BUSINESS PHONE: 9736605000 MAIL ADDRESS: STREET 1: 5 GIRALDA FARMS CITY: MADISON STATE: NJ ZIP: 07940 10-Q 1 q1st2001.txt ===================================================================== UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2001 Commission file number 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 No.) incorporation or organization) Five Giralda Farms, Madison, N.J. 07940 --------------------------------- ----- (Address of principal executive (Zip Code) offices) Registrant's telephone number, including area code (973) 660-5000 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 ------ -- The number of shares of Common Stock outstanding as of the close of business on April 30, 2001: Number of Class Shares Outstanding ----- ------------------ Common Stock, $0.33-1/3 par value 1,314,431,905 ====================================================================== AMERICAN HOME PRODUCTS CORPORATION AND SUBSIDIARIES INDEX Page No. Part I -Financial Information 2 Item 1. Consolidated Condensed Financial Statements: Consolidated Condensed Balance Sheets - March 31, 2001 and December 31, 2000 3 Consolidated Condensed Statements of Operations - Three Months Ended March 31, 2001 and 2000 4 Consolidated Condensed Statements of Changes in Stockholders' Equity - Three Months Ended March 31, 2001 and 2000 5 Consolidated Condensed Statements of Cash Flows - Three Months Ended March 31, 2001 and 2000 6 Notes to Consolidated Condensed Financial Statements 7-11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12-20 Part II - Other Information 21 Item 1. Legal Proceedings 21-22 Item 6. Exhibits and Reports on Form 8-K 23 Signature 24 Exhibit Index EX-1 Items other than those listed above have been omitted because they are not applicable. 1 Part I - Financial Information ------------------------------ AMERICAN HOME PRODUCTS CORPORATION AND SUBSIDIARIES The consolidated condensed financial statements included herein have been prepared by American Home Products Corporation (the "Company"), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations; however, the Company believes that the disclosures are adequate to make the information presented not misleading. In the opinion of management, the consolidated condensed financial statements include all adjustments necessary to present fairly the financial position of the Company as of March 31, 2001 and December 31, 2000, and the results of its operations, cash flows and changes in stockholders' equity for the three months ended March 31, 2001 and 2000. It is suggested that these consolidated condensed financial statements and management's discussion and analysis of financial condition and results of operations be read in conjunction with the financial statements and the notes thereto included in the Company's 2000 Annual Report on Form 10-K. In the 2000 fourth quarter, the Company sold a portion of its ownership in Immunex Corporation (Immunex) common stock, which reduced the Company's ownership interest below 50%. As a result, the financial results of Immunex, which previously were consolidated in the financial results of the Company, were deconsolidated and included in the financial results of the Company on an equity basis retroactive to January 1, 2000. Accordingly, alliance revenue relating to co-promotion agreements between the Company and Immunex was included in pharmaceutical net revenue for both the 2001 and 2000 first quarters. The 2000 first quarter financial results were restated to reflect the deconsolidation of Immunex, which had no effect on income from continuing operations. As of January 1, 2001, the Company early adopted new authoritative accounting guidance reflecting certain rebates and sales incentives (i.e., coupons and other rebate programs) as reductions of revenues instead of selling and marketing expenses. Financial information for all prior periods presented has been reclassified to comply with the income statement classification requirements of the new guidance. 2 AMERICAN HOME PRODUCTS CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (In Thousands Except Per Share Amounts) March 31, December 31, 2001 2000 ----------- ------------- ASSETS Cash and cash equivalents $3,512,218 $2,644,306 Marketable securities 404,572 341,031 Accounts receivable less allowances 2,484,847 2,740,272 Inventories: Finished goods 580,027 585,123 Work in progress 651,465 586,656 Materials and supplies 351,587 359,948 ----------- ------------- 1,583,079 1,531,727 Other current assets including deferred taxes 2,343,951 2,923,475 ----------- ------------- Total Current Assets 10,328,667 10,180,811 Property, plant and equipment 7,798,622 7,578,233 Less accumulated depreciation 2,582,062 2,543,409 ----------- ------------- 5,216,560 5,034,824 Goodwill and other intangibles, net of accumulated amortization 3,993,082 4,052,410 Other assets including deferred taxes 2,489,926 1,824,421 ----------- ------------- Total Assets $22,028,235 $21,092,466 =========== ============= LIABILITIES Loans payable $57,473 $58,717 Trade accounts payable 512,778 595,233 Accrued expenses 5,139,851 8,831,459 Accrued federal and foreign taxes 297,247 256,650 ----------- ------------- Total Current Liabilities 6,007,349 9,742,059 Long-term debt 7,334,314 2,394,790 Other noncurrent liabilities 4,535,309 5,226,495 Accrued postretirement benefit obligations other than pensions 929,739 911,029 STOCKHOLDERS' EQUITY $2 convertible preferred stock, par value $2.50 per share 54 55 Common stock, par value $0.33-1/3 per share 437,984 437,258 Additional paid-in capital 4,004,394 3,952,457 Accumulated deficit (469,070) (899,118) Accumulated other comprehensive loss (751,838) (672,559) ----------- ------------- Total Stockholders' Equity 3,221,524 2,818,093 ----------- ------------- Total Liabilities and Stockholders' Equity $22,028,235 $21,092,466 =========== ============= The accompanying notes are an integral part of these consolidated condensed financial statements. 3 AMERICAN HOME PRODUCTS CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (In Thousands Except Per Share Amounts) Three Months Ended March 31, -------------------------- 2001 2000 ----------- ----------- Net revenue $3,449,176 $3,195,852 ----------- ----------- Cost of goods sold 798,603 781,992 Selling, general and administrative expenses 1,285,468 1,164,204 Research and development expenses 450,989 408,218 Interest expense, net 3,939 50,884 Other income, net (70,811) (66,400) Termination fee - (1,709,380) ----------- ----------- Income from continuing operations before federal and foreign taxes 980,988 2,566,334 Provision for federal and foreign taxes 247,434 820,325 ----------- ----------- Income from continuing operations 733,554 1,746,009 ----------- ----------- Discontinued Operations: Income from operations of agricultural products business (net of federal and foreign taxes of $57,289) - 103,346 Loss on disposal of agricultural products business (including federal and foreign tax charges of $855,248) - (1,572,993) ----------- ----------- Loss from discontinued operations - (1,469,647) ----------- ----------- Net income $733,554 $276,362 =========== =========== Basic earnings per share from continuing operations $0.56 $1.34 Basic loss per share from discontinued operations - (1.13) ----------- ----------- Basic earnings per share $0.56 $0.21 =========== =========== Diluted earnings per share from continuing operations $0.55 $1.32 Diluted loss per share from discontinued operations - (1.11) ----------- ----------- Diluted earnings per share $0.55 $0.21 =========== =========== Dividends per share of common stock $0.23 $0.23 =========== =========== The accompanying notes are an integral part of these consolidated condensed financial statements. 4 AMERICAN HOME PRODUCTS CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (In Thousands)
Three Months Ended March 31, 2001: $2 Accumulated Convertible Additional Other Total Preferred Common Paid-in Accumulated Comprehensive Stockholders' Stock Stock Capital Deficit Loss Equity ------------ --------- ----------- ------------ ------------- ------------- Balance at January 1, 2001 $55 $437,258 $3,952,457 ($899,118) ($672,559) $2,818,093 Net income 733,554 733,554 Currency translation adjustments (112,279) (112,279) Unrealized gain on derivative contracts 31,683 31,683 Unrealized gain on marketable securities 1,317 1,317 ------------- Comprehensive income 654,275 ------------- Cash dividends declared (302,036) (302,036) Common stock issued for stock options 645 51,811 52,456 Conversion of preferred stock and other exchanges (1) 81 126 (1,470) (1,264) ------------ --------- ----------- ------------ ------------- ------------- Balance at March 31, 2001 $54 $437,984 $4,004,394 ($469,070) ($751,838) $3,221,524 ============ ========= =========== ============ ============= ============= Three Months Ended March 31, 2000: $2 Accumulated Convertible Additional Other Total Preferred Common Paid-in Retained Comprehensive Stockholders' Stock Stock Capital Earnings Loss Equity ------------ --------- ----------- ------------ ------------- ------------- Balance at January 1, 2000 $61 $434,639 $3,392,705 $3,000,827 ($613,485) $6,214,747 Net income 276,362 276,362 Currency translation adjustments 119,388 119,388 Unrealized gain on marketable securities 14,686 14,686 ------------- Comprehensive income 410,436 ------------- Cash dividends declared (300,084) (300,084) Common stock acquired for treasury (817) (5,310) (114,232) (120,359) Common stock issued for stock options 620 40,781 41,401 Conversion of preferred stock and other exchanges (2) 76 8,266 (2,096) 6,244 ------------ --------- ----------- ------------ ------------- ------------- Balance at March 31, 2000 $59 $434,518 $3,436,442 $2,860,777 ($479,411) $6,252,385 ============ ========= =========== ============ ============= ============= The accompanying notes are an integral part of these consolidated condensed financial statements.
5 AMERICAN HOME PRODUCTS CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (In Thousands) Three Months Ended March 31, 2001 2000 ----------- ----------- Operating Activities - -------------------- Income from continuing operations $733,554 $1,746,009 Adjustments to reconcile income from continuing operations to net cash provided from (used for) operating activities of continuing operations: Gains on sales of assets (8,728) (49,078) Depreciation and amortization 149,644 137,485 Deferred income taxes 53,398 184,613 Changes in working capital, net (99,361) 732,732 Diet drug litigation payments (4,141,615) (639,639) Deconsolidation of Immunex - (236,768) Other items, net (99,717) (17,645) ----------- ----------- Net cash provided from (used for) continuing operations (3,412,825) 1,857,709 Net cash used for discontinued operations - (260,680) ----------- ----------- Net cash provided from (used for) operating activities (3,412,825) 1,597,029 ----------- ----------- Investing Activities - -------------------- Purchases of property, plant and equipment (361,749) (238,730) Proceeds from sales of assets 24,573 65,504 Proceeds from sales and maturities of marketable securities 53,300 58,000 Purchases of marketable securities (116,841) (64,288) ----------- ----------- Net cash used for investing activities (400,717) (179,514) ----------- ----------- Financing Activities - -------------------- Net proceeds from/(repayments of) debt 4,942,467 (1,036,295) Dividends paid (302,036) (300,084) Exercises of stock options 52,456 41,401 Purchases of common stock for treasury - (120,359) ----------- ----------- Net cash provided from (used for) financing activities 4,692,887 (1,415,337) ----------- ----------- Effects of exchange rates on cash balances (11,433) (4,622) ----------- ----------- Increase (decrease) in cash and cash equivalents 867,912 (2,444) Cash and cash equivalents, beginning of period 2,644,306 1,892,715 ----------- ----------- Cash and cash equivalents, end of period $3,512,218 $1,890,271 =========== =========== Supplemental Information - ------------------------ Interest payments $76,297 $161,581 Income tax payments, net of refunds 162,097 133,226 The accompanying notes are an integral part of these consolidated condensed financial statements. 6 AMERICAN HOME PRODUCTS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS Note 1. Credit Facilities and Term Debt Financing ----------------------------------------- In addition to the Company's existing $2,000.0 million credit facility, in March 2001, the Company obtained new credit facilities totaling $6,000.0 million. The new credit facilities include a $3,000.0 million, 364-day credit facility (which support borrowings under the commercial paper program). Any borrowings actually drawn from the credit facility are extendible for an additional year. The portion of commercial paper outstanding at March 31, 2001 supported by the $3,000.0 million credit facility was classified as long-term debt since the Company intends, and has the ability, to refinance these obligations through the issuance of additional commercial paper or through the use of its $3,000.0 million credit facility as described above. The credit facility contains substantially identical financial and other covenants, representations, warranties, conditions and default provisions as the Company's existing $2,000.0 million credit facility, which terminates on July 31, 2002. In addition, the new credit facilities include a $3,000.0 million, 364-day bridge facility, which facility was terminated when the Company issued $3,000.0 million of Senior Notes (the "Notes") on March 30, 2001. On March 30, 2001, the Company issued three tranches of Notes in a transaction exempt from registration pursuant to Rule 144A under the Securities Act of 1933, as amended, as follows: - $500.0 million 5.875% Notes due March 15, 2004 - $1,000.0 million 6.25% Notes due March 15, 2006 - $1,500.0 million 6.70% Notes due March 15, 2011 In connection with the Notes, the Company filed a Registration Statement on Form S-4 with the Securities and Exchange Commission (SEC) on April 27, 2001 in order to offer the holders of the Notes the ability to exchange the outstanding Notes for new notes with substantially identical terms, but which are registered under the Securities Act. The Company's Registration Statement was declared effective by the SEC on May 8, 2001. Interest on the Notes is payable semi-annually, on March 15 and September 15, and is subject to adjustment under certain circumstances. The Company entered into two $750.0 million notional amount interest rate swaps relating to the $1,500.0 million 6.70% Notes. The interest rate swaps are contracts under which the Company converted the fixed rate on the $1,500.0 million 6.70% Notes to a floating rate of interest over the term of the swap agreements, which is the same term as the underlying debt. Any proceeds from commercial paper supported by the credit facilities and the proceeds from the issuance of the Notes will be used for the Company's general corporate and working capital requirements, including payments related to the REDUX and PONDIMIN diet drug litigation. 7 Note 2. Discontinued Operations ----------------------- On March 20, 2000, the Company signed a definitive agreement with BASF Aktiengesellschaft (BASF) to sell the agricultural products business which manufactures, distributes and sells crop protection and pest control products worldwide. On June 30, 2000, the sale was completed and BASF paid the Company $3,800.0 million in cash and assumed certain debt. As a result, the Company recorded an after-tax loss on the sale of this business of $1,573.0 million or $1.19 per share-diluted and reflected this business as a discontinued operation in the 2000 first quarter. Note 3. Contingencies and Litigation Settlement --------------------------------------- The Company is involved in various legal proceedings, including product liability and environmental matters of a nature considered normal to its business. 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. In the 2000 fourth quarter, the Company recorded a $7,500.0 million litigation charge for the estimated final amount required to resolve all REDUX and PONDIMIN diet drug litigation, including all anticipated payments in connection with the nationwide, class action settlement, payments to the opt out claimants with whom the Company has agreed to settle, and all anticipated payments to resolve the claims of the remaining opt outs and any primary pulmonary hypertension (PPH) claimants, as well as all legal fees and other costs. The Company recorded an initial litigation charge of $4,750.0 million, net of insurance, related to the diet drug litigation in the 1999 third quarter. As of April 15, 2001, the Company has reached agreements or agreements in principle to settle the claims of 85% of the individuals who initially opted out of the Company's nationwide, class action settlement. During the 2001 first quarter, payments to the nationwide, class action settlement funds, individual settlement payments, legal fees and other costs totaling $4,141.6 million were paid and applied against the litigation accrual. As of March 31, 2001, $4,024.0 million of the litigation accrual remained. 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 or cash flows in any one accounting period. Note 4. Restructuring Programs ---------------------- In December 1998, the Company recorded a special charge for restructuring and related asset impairments of $321.2 million to recognize costs of the reorganization of its worldwide supply chains and U.S. distribution systems, and the globalization of certain business units. The restructuring will ultimately result in the elimination of 3,600 positions 8 worldwide offset, in part, by 1,000 newly created positions in the same functions at other locations. At March 31, 2001, approximately 3,550 positions had been eliminated, and two distribution centers owned by the Company and a leased distribution center had been closed. The Company anticipates closing 14 manufacturing plants, eight of which were closed in 2000. These plants are continuing their phase-out period. The Company currently anticipates closing three plants by the end of 2001, two of which were closed in April 2001, and the remaining facilities in 2002, assuming no further delays in regulatory approvals. The activity in the restructuring accruals was as follows: Personnel Other Closure/ (In thousands) Costs Exit Costs Total ---------------------- --------- -------------- ------- Restructuring accruals at December 31, 2000 $6,249 $59,635 $65,884 Cash expenditures (5,632) (4,388) (10,020) --------- -------------- ------- Restructuring accruals at March 31, 2001 $617 $55,247 $55,864 ========= ============== ======= Note 5. Foreign Currency Risk Management Programs ----------------------------------------- As of January 1, 2001, the Company adopted Statement of Financial Accounting Standards Nos. 133 and 138, which require that all derivative financial instruments be measured at fair value and be recognized as assets or liabilities on the balance sheet with changes in the fair value of the derivatives recognized in either net income (loss) or accumulated other comprehensive income (loss), depending on the designated purpose of the derivative. The impact on the Company's financial results, upon the adoption of these pronouncements, was immaterial. The Company currently engages in two primary programs to manage its exposure to foreign currency risk: 1. Short-term foreign exchange forward contracts to manage foreign currency balance sheet exposures. As of March 31, 2001, the Company recorded $20.2 million in its Statement of Operations relating to gains on these foreign exchange forward contracts. The $20.2 million consists of gains from contracts settled during the 2001 first quarter, as well as contracts outstanding that are marked-to-market. 2. Cash flow hedging programs to cover currency risk related to intercompany inventory sales denominated in foreign currencies through the purchase of primarily foreign currency put options. As of March 31, 2001, the Company has recorded gains of $31.7 million in Accumulated other comprehensive loss relating to the cash flow hedging programs. Refer to the "Quantitative and Qualitative Disclosures About Market Risk" section on pages 19 and 20 for further discussion and disclosures relating to the Company's foreign currency risk management programs. 9 Note 6. Company Data by Operating Segment --------------------------------- The Company has three reportable segments: Pharmaceuticals, Consumer Health Care and Corporate. The Company's Pharmaceuticals and Consumer Health Care reportable segments are strategic business units that are managed separately because they manufacture, distribute and sell distinct products and provide services, which require various technologies and marketing strategies. Income from Continuing Operations Net Revenue (1) before Taxes (2) -------------------- -------------------- Three Months Three Months (In millions) Ended March 31, Ended March 31, -------------------- -------------------- Operating Segment 2001 2000 2001 2000 --------------------- -------- -------- ------- -------- Pharmaceuticals (3) $2,879.3 $2,602.9 $915.5 $744.0 Consumer Health Care 569.9 593.0 124.0 130.4 -------- -------- -------- -------- 3,449.2 3,195.9 1,039.5 874.4 Corporate (4) - - (58.5) 1,691.9 -------- -------- -------- -------- Total $3,449.2 $3,195.9 $981.0 $2,566.3 ======== ======== ======== ======== (1) The Company early adopted new authoritative accounting guidance as of January 1, 2001 reflecting certain rebates and sales incentives (i.e., coupons and other rebate programs) as reductions of revenues instead of selling and marketing expenses. Financial information for all prior periods presented has been reclassified to comply with the income statement classification requirements of the new guidance. These reclassifications had no effect on total net revenue growth between the periods presented. (2) Includes goodwill amortization for 2001 and 2000 as follows: Pharmaceuticals - $34.6 and $38.9, and Consumer Health Care - $6.0 and $8.0, respectively. (3) Effective January 1, 2000, the financial results of Immunex, which previously were consolidated in the results of the Company, were deconsolidated and included in the financial results of the Company on an equity basis. As a result, alliance revenue relating to co-promotion agreements between the Company and Immunex is included in pharmaceutical net revenue for both 2001 and 2000. The 2000 first quarter pharmaceutical net revenue was restated to reflect the deconsolidation. (4) Corporate for the 2000 first quarter included income of $1,709.4 resulting from the receipt of a $1,800.0 termination fee provided for under the merger agreement with Warner-Lambert Company offset, in part, by certain related expenses. 10 Note 7. Earnings per Share ------------------ The following table sets forth the computations of Basic Earnings per Share and Diluted Earnings per Share:
Three Months Ended March 31, ---------------------- (In thousands except per share amounts) 2001 2000 ------------------------------------------------------ ---------- ---------- Income from continuing operations less preferred dividends $733,543 $1,745,997 Loss from discontinued operations - (1,469,647) ---------- ---------- Net income less preferred dividends $733,543 $276,350 Denominator: Average number of common shares outstanding 1,313,855 1,305,213 ---------- ---------- Basic Earnings per Share from Continuing Operations $0.56 $1.34 Basic Loss per Share from Discontinued Operations - (1.13) ---------- ---------- Basic Earnings per Share $0.56 $0.21 ========== ========== Income from continuing operations $733,554 $1,746,009 Loss from discontinued operations - (1,469,647) ---------- ---------- Net income $733,554 $276,362 Denominator: Average number of common shares outstanding 1,313,855 1,305,213 Common share equivalents of outstanding stock options and deferred common stock awards 14,200 14,459 ---------- ---------- Total shares 1,328,055 1,319,672 ---------- ---------- Diluted Earnings per Share from Continuing Operations $0.55 $1.32 Diluted Loss per Share from Discontinued Operations - (1.11) ---------- ---------- Diluted Earnings per Share $0.55 $0.21 ========== ==========
11 Management's Discussion and Analysis of Financial Condition and Results of Operations Three Months Ended March 31, 2001 Results of Operations --------------------- Effective January 1, 2000, the financial results of Immunex, which previously were consolidated in the financial results of the Company, were deconsolidated and included in the financial results of the Company on an equity basis. Accordingly, alliance revenue relating to co-promotion agreements between the Company and Immunex was included in pharmaceutical net revenue for both the 2001 and 2000 first quarters. The 2000 first quarter financial results were restated to reflect the deconsolidation of Immunex, which had no effect on income from continuing operations. In addition, the Company early adopted new authoritative accounting guidance as of January 1, 2001 reflecting certain rebates and sales incentives (i.e., coupons and other rebate programs) as reductions of revenues instead of selling and marketing expenses. Financial information for all prior periods presented has been reclassified to comply with the income statement classification requirements of the new guidance. These reclassifications had no effect on total net revenue growth between the periods presented. Worldwide net revenue for the 2001 first quarter was 8% higher compared with prior year levels. The increase in worldwide net revenue for the 2001 first quarter was due primarily to higher worldwide net revenue of human pharmaceuticals. Excluding the negative impact of foreign exchange, worldwide net revenue increased 11% for the 2001 first quarter. The following table sets forth worldwide net revenue results by operating segment together with the percentage changes from the comparable period in the prior year: Net Revenue --------------------- Three Months ($ in Millions) Ended March 31, --------------------- % Increase Operating Segment 2001 2000 (Decrease) ----------------- -------- -------- ------------ Pharmaceuticals $2,879.3 $2,602.9 11% Consumer Health Care 569.9 593.0 (4)% -------- -------- ------------ Total Net Revenue $3,449.2 $3,195.9 8% ======== ======== ============ Pharmaceuticals --------------- Worldwide pharmaceutical net revenue increased 11% for the 2001 first quarter due primarily to higher sales of human pharmaceuticals offset, in part, by decreased sales of animal health products. Excluding the negative impact of foreign exchange, worldwide pharmaceutical net revenue increased 14% for the 2001 first quarter. Worldwide human pharmaceutical net revenue increased 12% for the 2001 first quarter due primarily to higher sales of PREVNAR (introduced in the 2000 first quarter), PROTONIX (introduced in the 2000 second quarter), PREMARIN products and EFFEXOR XR (as a result of higher volume and additional market share of new prescriptions) offset, in part, by lower sales of MENINGITEC, oral contraceptives and ZIAC (due to generic competition). Excluding the negative impact of foreign exchange, worldwide human pharmaceutical net 12 revenue increased 15% for the 2001 first quarter. MENINGITEC, the Company's meningococcal meningitis vaccine, was launched in the United Kingdom in the fourth quarter of 1999 as the first vaccine for this disease. The Company successfully obtained a majority of the meningococcal meningitis vaccine market, with a significant volume of sales occurring in the 2000 first quarter, and by the end of 2000 most children and adolescents in the United Kingdom had been vaccinated. The product is currently being launched in other European countries. This second round of mutual recognition could encompass up to eight European markets for MENINGITEC; however, the Company does not currently anticipate that any of these markets, individually, will provide sales volume equivalent to that generated in the United Kingdom. Worldwide animal health net revenue decreased 4% in the 2001 first quarter due primarily to lower sales of animal health biologicals and pharmaceuticals offset, in part, by higher sales of CYDECTIN, the Company's topical parasite control product for beef and dairy cattle. Excluding the negative impact of foreign exchange, worldwide animal health net revenue was flat for the 2001 first quarter. Consumer Health Care -------------------- Worldwide consumer health care net revenue decreased 4% for the 2001 first quarter due primarily to lower sales of the CENTRUM product line and ADVIL offset, in part, by higher sales of CHAP STICK. Excluding the negative impact of foreign exchange, worldwide consumer health care net revenue decreased 2% for the 2001 first quarter. 13 The following table sets forth the percentage changes in worldwide net revenue by operating segment compared to the prior year, including the effect volume, price and foreign exchange had on these percentage changes: % Increase (Decrease) Three Months Ended March 31, 2001 ----------------------------------------------- Foreign Total Volume Price Exchange Net Revenue ----------- ----------- ---------- ----------- Pharmaceuticals -------------------- United States 18% 5% - 23% International 2% - (8%) (6%) ----------------------------------------------- Total 11% 3% (3%) 11% =============================================== Consumer Health Care -------------------- United States (3%) 1% - (2%) International (2%) 2% (7%) (7%) ----------------------------------------------- Total (3%) 1% (2%) (4%) =============================================== Total -------------------- United States 14% 4% - 18% International 2% - (8%) (6%) ----------------------------------------------- Total 9% 3% (4%) 8% =============================================== Cost of goods sold, as a percentage of Net revenue, decreased more than one percentage point to 23.2% for the 2001 first quarter compared with 24.5% for the 2000 first quarter due primarily to an increase in sales volume on higher margin products in the pharmaceuticals segment. Selling, general and administrative expenses increased 10% for the 2001 first quarter. Higher expenses were due primarily to higher selling and marketing expenses, including increased headcount, related to recent pharmaceutical product launches and direct-to-consumer promotional costs for significant established pharmaceutical products. Research and development expenses increased 10% for the 2001 first quarter due primarily to increased headcount and other research operating expenses, including higher chemical and material costs, and cost sharing expenditures from pharmaceutical collaborations commencing in 2000 offset, in part, by lower payments for licensing agreements. Interest expense, net decreased 92% for the 2001 first quarter due primarily to lower interest expense as a result of lower average debt levels and more favorable interest rates on the debt outstanding, primarily commercial paper, as well as additional capitalized interest recognized during the 2001 first quarter compared with the prior year. As described in Note 1 to the Consolidated Condensed Financial Statements, the commercial paper issuance associated with the new $3,000.0 million credit facility and the $3,000.0 million Notes occurred in late March 14 2001 and, therefore, was not outstanding for a majority of the 2001 first quarter. As a result, weighted average long-term debt outstanding during the 2001 and 2000 first quarters was $3,920.2 million and $4,843.3 million, respectively. In addition, the Company generated higher interest income due to higher average levels of cash on hand throughout the 2001 first quarter. The following table sets forth worldwide income from continuing operations before taxes by operating segment together with the percentage changes from the comparable period in the prior year: Income from Continuing Operations before Taxes (1) ---------------------------- Three Months ($ in millions) Ended March 31, -------------------------- % Increase Operating Segment 2001 2000 (Decrease) -------------------- ----------- ------------ ---------- Pharmaceuticals $915.5 $744.0 23% Consumer Health Care 124.0 130.4 (5)% ----------- ------------ ---------- 1,039.5 874.4 19% Corporate (2) (58.5) 1,691.9 - ----------- ------------ ---------- Total (3) $981.0 $2,566.3 (62)% =========== ============ ========== (1) Includes goodwill amortization for 2001 and 2000 as follows: Pharmaceuticals - $34.6 and $38.9, and Consumer Health Care - $6.0 and $8.0, respectively. (2) Corporate for the 2000 first quarter included income of $1,709.4 resulting from the receipt of a $1,800.0 termination fee provided for under the merger agreement with Warner-Lambert Company offset, in part, by certain related expenses. Excluding the termination fee, Corporate expenses, net increased for the 2001 first quarter. (3) Excluding the termination fee, total income from continuing operations before taxes increased 14% for the 2001 first quarter. Worldwide pharmaceutical income from continuing operations before taxes increased 23% (25% for human pharmaceuticals) for the 2001 first quarter due primarily to increased worldwide sales of human pharmaceuticals and higher other income, net offset, in part, by higher selling, general and administrative expenses and research and development expenses. The Company experienced greater growth of worldwide pharmaceutical income from continuing operations before taxes (23%) than growth of worldwide pharmaceutical net revenue (11%). This difference was due primarily to product mix of human pharmaceuticals, which improved margins by more than one percentage point for the 2001 first quarter, and other expense incurred in the 2000 first quarter compared to higher other income generated in the 2001 first quarter. Other expense recorded in the 2000 first quarter included a one-time access fee paid pursuant to a collaboration agreement with Elan Pharmaceuticals, with which 15 the Company has formed an alliance for the development of a treatment for mild to moderate Alzheimer's disease. Other income generated in the 2001 first quarter included gains on sales of non-strategic assets, mostly non-core product rights, and higher equity income related to Immunex. Worldwide consumer health care income from continuing operations before taxes decreased 5% for the 2001 first quarter due primarily to lower worldwide consumer health care sales offset, in part, by lower selling, general and administrative expenses. Corporate expenses, net, excluding the Warner-Lambert Company termination fee, increased for the 2001 first quarter due primarily to lower other income relating to a one-time insurance recovery of environmental costs recorded in the 2000 first quarter offset, in part, by lower interest expense in the 2001 first quarter. The effective tax rate of continuing operations decreased to 25.2% for the 2001 first quarter compared with 25.9% for the 2000 first quarter (excluding the effect of the Warner-Lambert Company termination fee). The tax rate reduction occurring in the 2001 first quarter was due to an increased benefit from products manufactured in lower taxed jurisdictions. Income and diluted earnings per share from continuing operations for the 2001 first quarter increased to $733.6 million and $0.55 compared to $634.9 million and $0.48 in the prior year (excluding the Warner-Lambert Company termination fee), increases of 16% and 15%, respectively. Exclusive of the Warner-Lambert Company termination fee, the increases in income and diluted earnings per share from continuing operations for the 2001 first quarter were due to additional worldwide sales of human pharmaceuticals and lower interest expense offset, in part, by higher selling, general and administrative expenses, and research and development expenses. Euro Currency ------------- As of January 1, 2001, 12 of the 15 member countries of the European Union adopted the Euro as a new common legal currency. However, the legacy currencies of the member countries are scheduled to remain legal tender as sub-denominations of the Euro between January 1, 1999 and January 1, 2002 (the transition period). Critical areas impacted by the conversion to the Euro have been identified and appropriate strategies developed, which are currently being implemented to facilitate the adoption of the Euro and to facilitate business transactions during the transition period. The costs related to the Euro conversion and transition period will not have a material adverse effect on the Company's financial position or results of operations. However, the Euro conversion may have competitive implications on the Company's pricing and marketing strategies, the total impact of which is not known at this time. 16 Competition ----------- The Company operates in the highly competitive pharmaceutical and consumer health care industries. The Company is not dependent on any one patent-protected product or line of products for a substantial portion of its net revenue or results of operations. PREMARIN, the Company's principal conjugated estrogens product manufactured from pregnant mare's urine, and related products PREMPRO and PREMPHASE (which are single tablet combinations of the conjugated estrogens in PREMARIN and the progestin medroxyprogesterone acetate), are the leaders in their categories and contribute significantly to net revenue and results of operations. Premarin's natural composition is not subject to patent protection (although PREMPRO has patent protection). The principal uses of PREMARIN, PREMPRO and PREMPHASE are to manage the symptoms of menopause and to prevent 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 several of these products also have an approved indication for the prevention of osteoporosis. During the past several years, other manufacturers have introduced products for the treatment and/or prevention of osteoporosis. New products containing different estrogens than those found in PREMPRO and PREMPHASE and having many forms of the same indications have also been introduced. Some companies have attempted to obtain approval for generic versions of PREMARIN. These products, if approved, would be routinely substitutable for PREMARIN and related products 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 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 generic competition from either synthetic or natural conjugated estrogens products in the future. At least one other company has announced that it is in the process of developing a generic version of PREMARIN from the same natural source, and the Company currently cannot predict the timing or outcome of these or any other efforts. 17 Liquidity, Financial Condition and Capital Resources ---------------------------------------------------- The Company generated operating cash inflows totaling $1,194.1 million during the 2001 first quarter due primarily to income from continuing operations and collections on outstanding receivables. These cash inflows were more than offset by payments made on outstanding payables and accrued expenses and $4,141.6 million of payments relating to the diet drug litigation (see Note 3 to the Consolidated Condensed Financial Statements). The Company used $478.6 million of cash relating to investments in property, plant and equipment and marketable securities. The capital expenditures made during the 2001 first quarter were consistent with the Company's commitment to expand existing manufacturing and research and development facilities worldwide, and build new biotechnology facilities. The Company received investment proceeds through the sales and maturities of marketable securities and the sales of non-strategic assets totaling $77.9 million. As described in Note 1 to the Consolidated Condensed Financial Statements, the Company obtained new credit facilities totaling $6,000.0 million in March 2001. The new credit facilities include a $3,000.0 million, 364-day credit facility (which support borrowings under the commercial paper program). Any borrowings actually drawn from the credit facility are extendible for an additional year. In addition, the new credit facilities include a $3,000.0 million, 364-day bridge facility, which facility was terminated when the Company issued $3,000.0 million of Notes on March 30, 2001. On March 30, 2001, the Company issued three tranches of Notes in a transaction exempt from registration pursuant to Rule 144A under the Securities Act as follows: - $500.0 million, 5.875% Notes due March 15, 2004 - $1,000.0 million, 6.25% Notes due March 15, 2006 - $1,500.0 million, 6.70% Notes due March 15, 2011 The interest rate payable on each series of Notes is subject to an increase of .25 percentage points each time Moody's or Standard & Poor's downgrades the Company's credit rating. The total adjustment to the interest rate for the series of Notes cannot exceed two percentage points. The Company would incur approximately a total of $7.5 million of additional annual interest expense for every .25 percentage point increase in the interest rate. The $3,000.0 million, 364-day facility is combined with the Company's existing $2,000.0 million five-year credit facility (termination date of July 31, 2002) to provide $5,000.0 million of credit facilities to support the Company's commercial paper program. The Company offers its commercial paper in a very liquid market commensurate with its long term credit ratings from Moody's (A3) and Standard & Poor's (single-A). The proceeds received from the combined Notes and commercial paper supported by the credit facilities totaled $24,179.3 million for the 2001 first quarter. These proceeds were offset by repayments of $19,236.4 million of commercial paper during the 2001 first quarter. The Company will use the proceeds from the Notes and commercial paper supported by the credit facilities for general corporate 18 and working capital requirements, including the capital expenditures identified above, and payments related to the REDUX and PONDIMIN diet drug litigation. The Company also used cash for financing activities related to dividend payments of $302.0 million. Management remains confident that cash flows from operating activities and available financing resources will be adequate to fund the Company's operations, pay opt out settlement payments and fund the nationwide, class action settlement relating to the REDUX and PONDIMIN diet drug litigation, pay dividends, maintain the ongoing programs of capital expenditures, and repay both the principal and interest on its outstanding obligations, without requiring the disposition of any significant strategic core businesses. Quantitative and Qualitative Disclosures About Market Risk ---------------------------------------------------------- The market risk disclosures appearing on pages 58 and 59 of the Company's 2000 Annual Report on Form 10-K have not materially changed from December 31, 2000 except as follows: - In conjunction with the Notes issued by the Company on March 30, 2001, the Company entered into interest rate swap agreements related to the $1,500.0 million 6.70% Notes due March 15, 2011. - The interest rate swap agreements are contracts under which the Company converted the fixed rate of the $1,500.0 million 6.70% Notes to a floating rate of interest over the term of the interest rate swap agreements, which is the same term as the underlying debt. - The interest rate swap agreements are effective fair value hedges, as the terms of the interest rate swaps are the same as the underlying debt and therefore the current market interest rate fluctuations on the debt will be completely offset by the effectiveness of the interest rate swap. At March 31, 2001, the fair values of the Company's financial instruments were as follows: ($ in millions) Notional/ Description Contract Amount Carrying Value Fair Value --------------- --------------- -------------- ---------- Forward contracts (1) $394.5 $16.2 $16.2 Option contracts (1) 956.4 34.1 34.1 Interest rate swaps 1,500.0 (1.3) (1.3) Outstanding debt (2) 7,394.3 7,391.8 7,482.3 (1) If the value of the U.S. dollar were to increase or decrease by 10%, in relation to all hedged foreign currencies, the net receivable on the forward and option contracts would decrease or increase by approximately $48.9 million. (2) If the interest rates were to increase or decrease by one percentage point, the fair value of the outstanding debt would increase or decrease by approximately $233.9 million. 19 The estimated fair values approximate amounts at which these financial instruments could be exchanged in a current transaction between willing parties. Therefore, fair values are based on estimates using present value and other valuation techniques that are significantly affected by the assumptions used concerning the amount and timing of estimated future cash flows and discount rates that reflect varying degrees of risk. Specifically, the fair value of outstanding debt instruments reflects a current yield valuation based on observed market prices as of March 31, 2001; the fair value of interest rate swaps and forward contracts reflects the present value of the future potential gain or (loss) if settlement were to take place on March 31, 2001; and the fair value of option contracts reflects the present value of future cash flows if the contracts were settled on March 31, 2001. ENBREL Supply ------------- ENBREL is a biological treatment for juvenile, early stage and moderate to severe rheumatoid arthritis. ENBREL was discovered by Immunex and is being co-promoted in North America by Immunex and the Company. The Company has exclusive marketing rights to ENBREL outside of North America. Although the market demand for ENBREL is increasing, the sales growth is currently constrained by limits on the existing source of supply. This is anticipated to continue until the retrofitting of a Rhode Island facility is completed and approved, which is expected to occur in 2002. If the market demand continues to grow, there may be further supply constraints even after the Rhode Island facility begins producing ENBREL. The current plan for the longer term includes a new manufacturing facility which will be constructed in Ireland. Cautionary Statements for Forward Looking Information ----------------------------------------------------- This Form 10-Q, including management's discussion and analysis set forth above, contains certain forward-looking statements, including, among other things, statements regarding the Company's results of operations, Euro currency, competition, liquidity, financial condition and capital resources, ENBREL supply, MENINGITEC sales, foreign currency and interest rate risk, the nationwide, class action settlement relating to REDUX and PONDIMIN, and additional litigation charges related to REDUX and PONDIMIN including those for opt outs. 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 2000 Annual Report on Form 10-K, which exhibit is incorporated herein by reference. 20 Part II - Other Information --------------------------- Item 1. 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, the most significant of which are described in the Company's Annual Report on Form 10-K for the year ended December 31, 2000. As of April 15, 2001, the Company had reached agreements or agreements in principle to settle the claims of approximately 85% of the individuals who initally opted out of the Company's nationwide, class action settlement of claims brought by individuals who allege injury as a result of their use of PONDIMIN and/or REDUX. On April 3, 2001, a jury in Alice, Texas hearing the case of Lopez v. American Home Products Corporation, et al., No. 99-07-37723, 79th Judicial District Court, returned a verdict in favor of the plaintiff for $11.55 million in compensatory damages and $45 million in punitive damages for injuries allegedly sustained by the plaintiff due to her use of PONDIMIN. The trial court indicated following the verdict that it does not expect to enter a judgment in the case for several months, while it considers the Company's post-trial motions. If a verdict is entered in favor of the plaintiff, the Company intends to pursue an appeal. In the litigation involving the Company's DIMETAPP and ROBITUSSIN cough/cold products that contained the ingredient phenylpropanolamine ("PPA"), three additional class actions have been filed. The allegations in Kaen, et al. v. Novartis Consumer Health, Inc. et al., No. GIC 764315, Calif. Super. Ct., San Diego Cty., a putative statewide class action for disgorgement, restitution and other economic relief, are similar to the previously-reported class actions seeking relief under the false advertising provisions of the California Business & Professions Code. Giunta, et al. v. American Home Products Corporation, No. L-512-01, N.J. Super. Ct., Gloucester Cty., is a putative statewide class action for economic damages brought under the New Jersey Consumer Fraud Act. Risti, et al. v. Novartis, et al., No. L-4053-01, N.J. Super. Ct., Middlesex Cty., is a putative nationwide class action seeking damages for economic loss. In addition to these and the previously reported putative class actions, there are a total of 23 individual personal injury suits against the Company that have been filed alleging injury as a result of ingestion of PPA-containing products. The Company expects that additional PPA cases may be filed in the future against it and the other companies which marketed PPA-containing products. The Company intends to defend all such cases vigorously. In the litigation involving DURACT, the Company's non-narcotic analgesic pain reliever which was voluntarily withdrawn from the market, the Company's appeal to the United States Court of Appeals for the Fifth Circuit from the decision granting class certification in Rivera, et al. v. Wyeth-Ayerst Laboratories Company, et al., No. G-00-345, U.S.D.C., S.D.Tex., an economic damage and refund case, is expected to be argued this year with a decision expected later this year. In addition to Rivera and the other putative class actions discussed in prior filings, there are currently a total of 20 filed lawsuits pending involving former DURACT users alleging myriad injuries, from gastrointestinal upset and distress to liver transplant and 21 death. The Company expects that a number of additional DURACT cases may be filed in the future. The Company intends to defend all such cases vigorously. On March 30, 2001, the Federal Trade Commission issued an administrative complaint (in the matter of Schering-Plough Corporation, et al., Docket No. 9297) alleging that the Company violated Section 5 of the Federal Trade Commission Act. The complaint alleges, among other things, that the Company's agreement to settle a patent infringement case relating to its generic version of Schering-Plough Corporation's K-Dur potassium supplement product unlawfully restrained trade. The complaint alleges further that the settlement was an agreement allowing Schering-Plough to monopolize potassium chloride supplement markets in violation of Section 5 of the FTC Act. The relief sought is a cease and desist order which would include, among other things, a requirement that the Company not be a party to an agreement in which an NDA holder provides anything of value to an alleged infringer and the alleged infringer agrees to refrain from selling the drug for any period of time. Subsequently, purported class action cases (HIP Health Plan of Fla., Inc. v. Schering-Plough Corp., No. 01-CV-1652; United Food and Commercial Workers Local 56 Health and Welfare Fund v. Schering-Plough Corp., et al., No. 01-CV-1769; Wallace v. Schering-Plough Corp., et al., No. 01-CV-1771; and Reichert v. Schering-Plough Corp., et al., No. 01-1170) were filed in the federal district court of New Jersey alleging on behalf of end users and/or end payors of potassium supplements violations of federal antitrust laws as well as state law conspiracy and unjust enrichment claims. The relief sought includes damages, disgorgement and injunctive relief. A purported class action (Maffei v. Schering-Plough Corp., et al., E.D., PA, No. 01-CV-2012) has also been filed in federal district court in Pennsylvania on behalf of indirect purchaser end users of potassium chloride. This case seeks declaratory and injunctive relief for violations of sections 1 and 2 of the Sherman Act and restitution and disgorgement as well as a constructive trust for unjust enrichment. Also purported class action cases were filed in California state courts (Sutin v. Schering-Plough Corp., et al., Sup. Ct., L.A. Cty., Civ. Act. No. BC248047; Cundiff v. Schering-Plough Corp., Sup. Ct., Alameda Cty., Civ. Act. No. 837776; and Travers v. Schering-Plough Corp. et al., Sup. Ct., Alameda Cty., No. 840186-5), in Florida (Grossman v. Schering-Plough Corp., Cir. Ct., Palm Beach Cty., Case No. CL 01-3504AE), one in Alabama (Steadman v. Schering-Plough Corp., et al., Cir. Ct., Walker Cty., No. CV01-211), in Minnesota (Roseen v. Schering-Plough Corp., et al., Dist. Ct., Hennepin Cty., No. CT01-6345) and in Tennessee (Bellows v. Schering-Plough Corp., et al., Cir. Ct., Shelby Cty., No. CT-002465-01, D2; and Randolph v. Schering-Plough Corp., et al., Cir. Ct., Cocke Cty., No. 27,038IV) on behalf of consumers of potassium chloride supplements. The complaints in these cases contain similar allegations of violations of state antitrust and consumer protection laws. The relief sought in these cases includes unspecified treble damages and injunctive relief. Other cases may be filed with similar allegations. The Company believes it has meritorious defenses to these actions and intends to defend them vigorously. 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. 22 Item 6. Exhibits and Reports on Form 8-K -------------------------------- (a) Exhibits -------- Exhibit No. Description ----------- ----------- (4.1) Second Supplemental Indenture, dated as of March 30, 2001, between the Corporation and The Chase Manhattan Bank (as successor to Manufacturers Hanover Trust Company) is incorporated by reference to Exhibit 4.3 of the Registration Statement on Form S-4 of the Corporation filed on April 27, 2001. (4.2) Exchange and Registration Rights Agreement, dated March 30, 2001, among the Corporation and Chase Securities Inc., Salomon Smith Barney Inc., as Representatives of the several Initial Purchasers, is incorporated by reference to Exhibit 4.4 of the Registration Statement on Form S-4 of the Corporation filed on April 27, 2001. (10.1) Agreement, dated as of March 6, 2001 by and between the Corporation and John R. Stafford. (10.2) Amendatory Agreement, dated as of March 6, 2001, by and between the Corporation and John R. Stafford. (12) Computation of Ratio of Earnings to Fixed Charges. (b) Reports on Form 8-K ------------------- On April 26, 2001, the Company filed a Current Report on Form 8-K (including disclosure under items 5 and 7) relating to the 2001 First Quarter Earnings Press Release. 23 Signature --------- Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. AMERICAN HOME PRODUCTS CORPORATION ---------------------------------- (Registrant) By /s/ Paul J. Jones ------------------------------- Paul J. Jones Vice President and Comptroller (Duly Authorized Signatory and Chief Accounting Officer) Date: May 15, 2001 24 Exhibit Index Exhibit No. Description ----------- ----------- (10.1) Agreement, dated as of March 6, 2001 by and between the Corporation and John R. Stafford. (10.2) Amendatory Agreement, dated as of March 6, 2001, by and between the Corporation and John R. Stafford. (12) Computation of Ratio of Earnings to Fixed Charges. EX-1 EX-1 EX-10.1 2 staffagr.txt AGREEMENT dated as of March 6, 2001 by and between AMERICAN HOME PRODUCTS CORPORATION, a Delaware corporation, having its principal place of business at Five Giralda Farms, Madison, New Jersey 07940 (the "Company") and JOHN R. STAFFORD (the "Executive"). BACKGROUND The Executive has been employed by the Company since June 1970 and has served as the Company's Chairman and Chief Executive Officer since 1986. The Executive and the Company have determined that the parties shall make provision for the Executive to step down as Chief Executive Officer of the Company, to continue to serve as Chairman of the Company until December 31, 2002, and, thereafter, to continue rendering services to the Company as a consultant during a specified consulting period. The Company and the Executive have therefore entered into this Agreement on the terms and conditions set forth herein. 1. Employment. The Executive shall continue to serve as Chairman and Chief Executive Officer of the Company until May 1, 2001. Thereafter, the Executive will serve as Chairman of the Company until December 31, 2002 (the "Transition Date"), at which time, the Executive shall (a) cease to be Chairman of the Company; (b) cease to be a member of the Board of Directors of the Company (the "Board") and its affiliated companies, unless otherwise determined by the Board and the then Chairman of the Company; and (c) commence rendering consulting services to the Company during the "Consulting Period" as set forth in Section 4 hereof. All of the foregoing employment and consulting terms are subject to earlier termination in accordance with Sections 6, 7 and 8 hereof. 2. Duties and Responsibilities as Chairman and Chief Executive Officer. The Executive's titles, duties and responsibilities shall remain unchanged until May 1, 2001. Thereafter, the Executive's duties and responsibilities as Chairman shall be as the Board and the then Chief Executive Officer shall reasonably request; provided, however, that for so long as the Executive remains Chairman of the Company, the Executive shall continue to be the chairman of the Board, the chairman of the Executive Committee of the Board, and the chairman of all meetings of the Company's shareholders that will occur while the Executive remains Chairman. 3. Compensation and Benefits until the Transition Date. (a) Salary; Short-Term and Long-Term Incentive Compensation. From the date hereof until the Transition Date, the Company shall continue to pay the Executive his annual base salary and short-term and long-term incentive compensation awards (including, without limitation, all annual bonuses and equity grants), in each case at a level that is not less than the highest level paid or granted to the Executive in any of the three calendar years immediately preceding the date hereof during which the Executive was employed as the Chief Executive Officer of the Company, which amounts shall be paid through the Transition Date in accordance with the Company's past practice of paying compensation to senior executives. (b) Fringe Benefits. Through the Transition Date, the Company shall continue to provide the Executive all fringe benefits and support services to which the Executive is entitled and enjoys as of the date hereof. (c) Welfare Benefit Plans. Through the Transition Date, the Executive shall continue to participate in and receive benefits under all of the Company's medical and other welfare benefit plans, including, without limitation, the Company's life insurance and disability insurance benefit plans, at the same levels as other senior executives (and their dependants) of the Company are entitled to participate in and receive benefits under such plans. (d) Retirement Plans. Through the Transition Date, the Executive shall continue to participate in and/or receive benefits under all qualified and nonqualified pension plans (including, without limitation, the Company's Supplemental Executive Retirement Plan, Executive Retirement Plan and Deferred Compensation Plan). Except as otherwise provided in this Agreement, any such participation shall be in accordance with the provisions of such plans and nothing contained in this Agreement is intended to, or shall be deemed to, affect adversely any of Executive's rights as a participant under any such plans. (e) Other Benefit Plans. Through the Transition Date, Executive shall continue to participate in or receive benefits under any other benefit plan generally made available by the Company to senior executives. Except as otherwise provided in this Agreement, any such participation shall be in accordance with the provisions of such plans and nothing contained in this Agreement is intended to, or shall be deemed to, affect adversely any of Executive's rights as a participant under any such plans. (f) Expense Reimbursement. Through the Transition Date, the Company shall reimburse Executive for the ordinary and necessary business expenses reasonably incurred by Executive in the performance of his duties under this Agreement in accordance with the Company's customary practices applicable to senior executives. 4. Consulting Period. The Executive shall be employed by the Company as a consultant to render advice to the Company on an "as needed" basis (but in no event more than twenty-five (25) business days in any given calendar year) during the period beginning on the day following the Transition Date and ending on December 31, 2007 (the "Consulting Period"). During the Consulting Period, the Executive's duties shall be as requested by the Company's then Chief Executive Officer or the Board but shall in all events be consistent with the duties to be performed by a person of the Executive's experience and stature as a former Chief Executive Officer and Chairman of the Company, shall be subject to reasonable advance notice to the Executive, and shall be designed to accommodate the Executive's reasonable scheduling needs. Subject to the covenants set forth in Section 10 hereof, nothing contained herein shall preclude the Executive from devoting substantial time and attention to his own personal investments or to pursuing other business or investment opportunities during the Consulting Period. 5. Compensation and Benefits During and After the Consulting Period. (a) Consulting Fee. During the Consulting Period, the Company shall pay the Executive an annual consulting fee of $250,000, payable in quarterly installments. (b) Fringe Benefits. During the Consulting Period, the Company shall provide the Executive with substantially the same benefits set forth in Section 3(b) above, subject to such modifications as the Company and the Executive may otherwise agree from time to time. All of the fringe benefits provided hereunder shall be provided to the Executive (and his spouse, as applicable), at no cost to the Executive or his spouse. The benefits described in this Section 5(b) shall hereinafter be referred to as the "Consulting Fringe Benefits". (c) Welfare, Retirement and other Benefit Plans. During and after the Consulting Period, the Executive (and his spouse, as applicable) shall continue to participate in or receive benefits under all pension, medical, welfare and other benefit plans generally made available by the Company to retired senior executives and their spouses, at levels that are in effect for other retired senior executives and their spouses as of the date hereof (or, if more favorable, at any time hereafter), for the Executive's and his spouse's respective lifetimes. Except as otherwise provided in this Agreement, any such participation shall be in accordance with the provisions of such plans and nothing contained in this Agreement is intended to, or shall be deemed to, affect adversely any of Executive's rights as a participant under any such plans. The benefits described in this Section 5(c) shall hereinafter be referred to as the "Retiree Benefits". (d) Replacement Benefits. Notwithstanding anything contained in Section 3 or this Section 5 to the contrary, in the event that applicable law or the terms of any Company benefit plan prohibit the provision of any of the benefits set forth in subsections 3(a), (b), (c), (d) or (e) of this Agreement, or in subsections 5 (b) or (c) above, the Company shall provide such benefits to the Executive (and his spouse, as applicable) outside of any such Company benefit plan, which benefits shall be at the same levels and shall be economically equivalent to the prohibited benefits (the "Replacement Benefits"). The Replacement Benefits shall be provided to the Executive (and his spouse, as applicable), at no additional cost to the Executive or his spouse. 6. Termination of Employment on Account of Executive's Death or Disability. (a) Termination. Executive's employment under this Agreement (whether prior to the Transition Date or during the Consulting Period) shall terminate upon Executive's death or Disability. In the event of a termination as a result of the Executive's Disability, either the Company or the Executive (or the Executive's representative) shall give thirty (30) days' advance written notice of such termination. For purposes of this Agreement, "Disability" shall mean permanent and total disability, as such term is defined under Section 22(e)(3) of the Internal Revenue Code of 1986, as amended (the "Code"). Any question as to the existence of the Executive's Disability upon which the Company and the Executive cannot agree shall be determined by a qualified independent physician selected by the Executive (or, if the Executive is unable to make such selection, such selection shall be made by any adult member of the Executive's immediate family or the Executive's legal representative), and approved by the Company, which approval shall not be unreasonably withheld. The determination of such physician shall be made in writing to the Company and to the Executive and shall be final and conclusive for all purposes of this Agreement. (b) Compensation Due by Reason of Death or Disability. Subject to Section 10 of this Agreement, in the event that Executive's employment is terminated by reason of Executive's death or Disability (whether prior to the Transition Date or during the Consulting Period), the Company shall provide the following payments and benefits to the Executive (and his spouse, as applicable) (or in the case of death, to the Executive's beneficiary or estate): (i) Earned But Unpaid Compensation. (A) Any accrued but unpaid compensation for services rendered to the date of termination, (B) any accrued but unpaid expenses required to be reimbursed under this Agreement and (C) any vacation accrued to the date of termination (such compensation in (A), (B) and (C), collectively, the "Accrued Compensation"). (ii) Severance Payment. An amount equal to the cash compensation for services that would have been payable to the Executive if the Executive had continued in employment through the Transition Date (if applicable) and had continued to provide consulting services through the end of the Consulting Period. This amount will be paid in a single lump sum within thirty (30) days after the date of death or Disability, or, at the Company's option, can be paid in installments through the Transition Date (if applicable) and through the end of the Consulting Period, at the same time as payments would otherwise have been made to the Executive. (iii) Benefits. The Consulting Fringe Benefits (other than the provision of office space and support staff) and the Retiree Benefits to which the Executive (or his spouse, as applicable) may be entitled pursuant to Sections 5(b) and (c) of this Agreement. 7. Termination for Cause by the Company; Without Good Reason by the Executive. (a) Notice of Termination. The Company may terminate the Executive's employment and provision of consulting services for Cause, and the Executive may terminate the Executive's employment and provision of consulting services without Good Reason (other than as a result of death or Disability), at any time after the date hereof until the end of the Consulting Period after written notice of such termination is given to the other party. (b) Compensation and Benefits in the Event of a Termination for Cause by the Company or Without Good Reason by the Executive. Subject to Section 10 of this Agreement, in the event that the Executive's employment is terminated for Cause by the Company or by the Executive without Good Reason (other than as a result of death or Disability), in either case whether prior to the Transition Date or during the Consulting Period), the Company shall provide the Executive with the Accrued Compensation and the Retiree Benefits. (c) Definitions. For purposes of this Agreement, the following terms shall have the following meanings: "Cause" shall mean: (i) On or prior to the Transition Date, (A) the Executive's conviction of, or plea of guilty or nolo contendere to, a felony or (B) the Executive willfully engages in gross misconduct, which is materially and demonstrably injurious to the Company. (ii) After the Transition Date through the Consulting Period, (x) the Executive's conviction of, or plea of guilty or nolo contendere to, a felony or (y) the Executive's consistent, willful and unreasonable refusal to provide the services as reasonably requested pursuant to Section 4 above, after the Board provides the Executive with written demand for substantial performance and reasonable opportunity to perform such duties. Notwithstanding the foregoing, the Executive shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters (3/4) of the Incumbent Directors (as hereinafter defined) of the Board at a meeting of the Board called and held for such purpose (after reasonable notice to the Executive and an opportunity for the Executive, together with the Executive's counsel, to be heard before the Board), finding that, in the good faith opinion of the Board, Executive was guilty of conduct set forth above in this Section 7(c) and specifying the particulars thereof in detail. For purposes hereof, "Incumbent Directors" shall mean the persons who were members of the Board prior to the date hereof, or their successors (if their successors were approved by at least a majority of such persons who were members of the Board prior to the date hereof). "Change in Control" shall have the same meaning as such term is defined in the Severance Agreement dated as of July 31, 1998 by and between the Company and the Executive (the "Change in Control Agreement"). "Good Reason" shall mean, without the Executive's express written consent, the Company's breach of any material term of this Agreement, including, without limitation, the terms contained in Sections 1 through 5 and Sections 9, 12, and 15(a) of this Agreement; provided, however, that in the case of a breach, if the Company fully corrects such breach prior to the date specified as the date of termination in the written notice of termination delivered by the Executive to the Company given in respect thereof, the Executive shall not have Good Reason to terminate his employment (or consulting services, as applicable). The Company expressly acknowledges that the Executive's continued employment or provision of consulting services under this Agreement shall not constitute consent to, or a waiver of rights with respect to, any circumstances constituting Good Reason. 8. Termination Without Cause by the Company or for Good Reason by the Executive. The Company may terminate this Agreement and the Executive's employment and provision of consulting services without Cause, and the Executive may terminate this Agreement and the Executive's employment and provision of consulting services for Good Reason, at any time after the date hereof until the end of the Consulting Period after thirty (30) days' advance written notice of termination is delivered to the other party. Subject to Section 10 of this Agreement, in the event that the Executive's employment is terminated without Cause by the Company or by the Executive for Good Reason (in either case whether prior to the Transition Date or during the Consulting Period), the Company shall provide the Executive with the following payments and benefits: (a) Severance Payments. An amount equal to the Accrued Compensation plus the compensation for services which would have been payable to the Executive if the Executive had continued in employment through the Transition Date (if applicable) and had continued to provide consulting services through the end of the Consulting Period. This amount will be paid in installments through the Transition Date (if applicable) and through the end of the Consulting Period, at the same time as payments would otherwise have been made to the Executive. (b) Other Benefits. All benefits as provided in Sections 5(b) and (c), above, to which the Executive (and his spouse, as applicable) would have been entitled if the Executive had continued in employment through the Transition Date (if applicable) and had continued to provide consulting services through the end of the Consulting Period, and thereafter as provided in Sections 5(b) and (c), above. 9. Occurrence of a Change in Control. In the event of a Change in Control: (a) If a Change in Control occurs on or prior to the Transition Date, (i) the Executive shall be entitled to continue to receive the compensation and benefits provided for in Sections 3 and 5 of this Agreement and (ii) in addition to the payments and benefits provided for under Sections 6, 7, or 8, as applicable, the Executive shall be entitled to exercise his rights pursuant to the Change in Control Agreement and to receive the compensation and benefits provided for in such Change in Control Agreement; or (b) If a Change in Control occurs during the Consulting Period, (i) the Company may not terminate this Agreement other than for Cause, (ii) the Executive shall continue to receive all compensation and benefits provided for in Section 5 of this Agreement and (iii) effective as of the Transition Date, the Change in Control Agreement shall be of no further force and effect, and Executive shall have no rights thereunder. 10. Restrictive Covenants. (a) Confidential Information. The Executive recognizes and acknowledges that he has had access to confidential or proprietary information concerning the Company and entities affiliated with the Company (collectively, the "Protected Information"). The Executive therefore covenants and agrees that the Executive shall not, without the prior written consent of the Company, use, divulge, disclose or make accessible to any other person, firm, partnership, corporation or other entity any Confidential Information pertaining to the business of the Company or any of its affiliates, except (i) while employed by the Company, in the business of and for the benefit of the Company, or (ii) when required to do so by a court of competent jurisdiction, by any governmental agency having supervisory authority over the business of the Company, or by any administrative body or legislative body (including a committee thereof) with jurisdiction to order the Executive to divulge, disclose or make accessible such information. For purposes of this Section 10, "Confidential Information" shall mean any trade secret or other non-public information concerning the financial data, strategic business plans, product development (or other proprietary product data), customer lists, marketing plans and other non-public, proprietary and confidential information of the Company or its affiliates, that, in any case, is not otherwise available to the public (other than by the Executive's breach of the terms hereof) or known to persons in the industry generally. (b) Competitive Activity. The Executive covenants and agrees that at all times during his period of employment with the Company, including during the Consulting Period, he will not, directly or indirectly, engage in, or have any active interest or involvement whether as an employee, agent, consultant, officer, or director, in any person, firm, or business entity which is engaged in, the same business as that conducted and principally carried on by the Company without the Company's specific written consent to do so, all of the foregoing in any geographic area in which the Company does business. (c) Non-solicitation. The Executive covenants and agrees that at all times during his period of employment with the Company, including during the Consulting Period, he will not, without the Company's prior written consent, directly or indirectly, offer, solicit or encourage to leave the employment or other service of the Company, or any of its affiliates, any employee of the Company or its affiliates or any person who was so employed within the six months prior to such offer or solicitation. 11. Enforcement of Covenants. (a) Right to Injunction. The Executive acknowledges that a breach of the covenants set forth in Section 10 hereof will cause irreparable damage to the Company with respect to which the Company's remedy at law for damages will be inadequate. Therefore, in the event of a breach or an anticipatory breach of the covenants set forth in this section by the Executive, the Executive and the Company agree that the Company shall be entitled to cease making any cash payments due hereunder and shall also be entitled to the following particular forms of relief, in addition to remedies otherwise available to it at law or equity: injunctions, both preliminary and permanent, enjoining or retraining such breach or anticipatory breach and the Executive hereby consents to the issuance thereof forthwith and without bond by any court of competent jurisdiction; provided, however, that the Company shall only be entitled to take any of the foregoing actions after providing the Executive with (i) reasonable notice of its intention to take such action, (ii) the reasonable opportunity to cure the behavior or conduct in question and (iii) the opportunity to meet with the Board (after consultation with legal counsel) to be heard in defense of such behavior or conduct. (b) Separability of Covenants. The covenants contained in Section 10 hereof constitute a series of separate covenants, one for each county and city included within each State in the United States and the District of Columbia, and one for each applicable foreign city or province included within each foreign country. If in any judicial proceeding, a court shall hold that any of the covenants set forth in Section 10 exceed the time, geographic, or occupational limitations permitted by applicable laws, the Executive and the Company agree that such provisions shall and hereby reformed to the maximum time, geographic, or occupational limitations permitted by such laws. Further, in the event a court shall hold unenforceable any of the separate covenants deemed included herein, then such unenforceable covenant or covenants shall be deemed eliminated from the provisions of this Agreement for the purpose of such proceeding to the extent necessary to permit the remaining separate covenants to be enforced in such proceedings. 12. Withholding; Tax Gross-Up. (a) Withholding Taxes. The Company shall withhold from any compensation and benefits payable under this Agreement all applicable federal, state, local or other taxes. (b) Benefits Tax Gross-Up. In the event that the Company's provision of the Replacement Benefits pursuant to Section 5(d) and/or the fringe benefits to the Executive (and his spouse, as applicable) pursuant to Sections 3(b) and 5(b) results in the Executive incurring income or other employment tax liability on such benefits, the Company shall pay to the Executive an additional amount such that after payment of all such taxes (and including the payment of any taxes imposed on such additional amount), the Executive shall have received the Replacement Benefits and the fringe benefits at no cost to the Executive (or his spouse, as applicable) (other than as may be otherwise required pursuant to Section 5(b) above). (c) Excise Taxes. (i) In the event that any payment or benefit received or to be received by the Executive pursuant to the terms of this Agreement (the "Contract Payments") or in connection with the Executive's termination of employment or contingent upon a change in ownership or control of the Company (as defined in Section 280G of the Code) pursuant to any plan or arrangement or other agreement with the Company (or any affiliate thereof) ("Other Payments" and, together with the Contract Payments, the "Payments") would be subject to the excise tax (the "Excise Tax") imposed by Section 4999 of the Code, as determined as provided below, the Company shall pay to Executive, at the time specified in Section 12(c)(ii) below, an additional amount (the "Gross-Up Payment") such that the net amount retained by Executive, after deduction of the Excise Tax on Contract Payments and Other Payments and any federal, state and local income or other tax and Excise Tax upon the payment provided for by this Section 12(c)(i), and any interest, penalties or additions to tax payable by the Executive with respect thereto, shall be equal to the total present value of the Contract Payments and Other Payments at the time such Payments are to be made. For purposes of determining whether any of the Payments will be subject to the Excise Tax and the amounts of such Excise Tax, (1) the total amount of the Payments shall be treated as "parachute payments" within the meaning of Section 280G(b)(2) of the Code, and all "excess parachute payments" within the meaning of Section 280G(b)(1) of the Code shall be treated as subject to the Excise Tax, except to the extent that, in the opinion of independent tax counsel selected by the Company's independent auditors and reasonably acceptable to the Executive ("Tax Counsel"), a Payment (in whole or in part) does not constitute a "parachute payment" within the meaning of Section 280G(b)(2) of the Code, or such "excess parachute payments" (in whole or in part) are not subject to the Excise Tax, (2) the amount of the Payments that shall be treated as subject to the Excise Tax shall be equal to the lesser of (A) the total amount of the Payments or (B) the amount of "excess parachute payments" within the meaning of Section 280G(b)(1) of the Code (after applying clause (1) hereof), and (3) the value of any noncash benefits or any deferred payment or benefit shall be determined by Tax Counsel in accordance with the principles of Sections 280G(d)(3) and (4) of the Code. For purposes of determining the amount of the Gross-Up Payment, the Executive shall be deemed to pay federal income tax at the highest marginal rates of federal income taxation applicable to individuals in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest effective rates of taxation applicable to individuals as are in effect in the state and locality of the Executive's residence in the calendar year in which the Gross-Up Payment is to be made, net of the maximum reduction in federal income taxes that can be obtained from deduction of such state and local taxes, taking into account any limitations applicable to individuals subject to federal income tax at the highest marginal rates. (ii) The Gross-Up Payments provided for in Section 12(c)(i) hereof shall be made upon the earlier of (x) the payment to the Executive of any Contract Payment or Other Payment or (y) the imposition upon the Executive or payment by the Executive of any Excise Tax. (iii) The Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of a Gross-Up Payment. Such notification shall be given as soon as practicable but no later than 10 business days after the Executive is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which the Executive gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall: 1) give the Company any information reasonably requested by the Company relating to such claim; 2) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company and reasonably satisfactory to the Executive; 3) cooperate with the Company in good faith in order to effectively contest such claim; and 4) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including, but not limited to, additional interest and penalties and related legal, consulting or other similar fees) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or other tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. (iv) The Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs the Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Executive on an interest-free basis, and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or other tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and provided, further, that if the Executive is required to extend the statute of limitations to enable the Company to contest such claim, the Executive may limit this extension solely to such contested amount. The Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. In addition, no position may be taken nor any final resolution be agreed to by the Company without the Executive's consent if such position or resolution could reasonably be expected to adversely affect the Executive (including any other tax position of the Executive unrelated to the matters covered hereby). (v) As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Company or the Tax Counsel hereunder, it is possible that Gross-Up Payments, which will not have been made by the Company, should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies and the Executive thereafter is required to pay to the Internal Revenue Service an additional amount in respect of any Excise Tax, the Company or the Tax Counsel shall determine the amount of the Underpayment that has occurred and any such Underpayment shall promptly be paid by the Company to or for the benefit of the Executive. (vi) If, after the receipt by Executive of the Gross-Up Payment or an amount advanced by the Company in connection with the contest of an Excise Tax claim, the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Company in connection with an Excise Tax claim, a determination is made that Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest the denial of such refund prior to the expiration of 30 days after such determination, such advance shall be forgiven and shall not be required to be repaid. 13. Source of Payments; Indemnification. (a) Source of Payments. All payments provided under this Agreement, other than payments made pursuant to a plan which provides otherwise, shall be paid from the general funds of the Company, and no special or separate fund shall be required to be established, and no other segregation of assets shall be required to be made, to assure payment; provided, however, that nothing herein shall prevent or preclude the Company from establishing any trust or other arrangement which it deems necessary or desirable to provide for the payments required hereunder. (b) Indemnification and Insurance Coverage. The Company shall at all times maintain in full force and effect all agreements, provisions and insurance coverage necessary to provide to the Executive indemnification in respect of all positions held by the Executive at the Company (or any of its affiliates) to the fullest extent permitted by state law and the articles of incorporation and the by-laws of the Company as in effect on the date hereof, or, if more favorable to the Executive, as in effect at any time thereafter. 14. Facility of Payment; Entire Agreement; No Mitigation; Further Action. (a) Facility of Payment. In the event of the Executive's legal incapacity, the Company may make any payments due under this Agreement to his legal representative. In the event of Executive's death, the Company may make any payment due under this Agreement to his surviving spouse or, if none, to the Executive's estate, subject to Sections 15(b) and (c) hereof. (b) Entire Agreement. Except for the Change in Control Agreement, no agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. Except for the Change in Control Agreement, this Agreement constitutes the entire understanding between the parties with respect to the Executive's severance pay in the event of a termination of the Executive's employment with the Company, superseding all negotiations, prior discussions and preliminary agreements, written or oral, concerning said severance pay. Further, notwithstanding any provision of this Agreement: (i) the Executive shall not be required to mitigate the amount of any payment provided by this Agreement by seeking other employment or otherwise, nor shall the amount of any payment or benefit provided by this Agreement be reduced by any compensation earned by the Executive as the result of employment by another employer or by retirement benefits received after the date the Executive ceases to perform services hereunder or otherwise, and (ii) except as otherwise provided in this Agreement, the obligations of the Company to make payments to the Executive and to make the arrangements provided for herein are absolute and unconditional and may not be reduced by any circumstances, including without limitation any set-off, counterclaim, recoupment, defense or other right which the Company may have against the Executive or any third party at any time. (c) Further Action. The Company shall take any further action necessary or desirable to implement the provisions of this Agreement or perform its obligations hereunder (including, without limitation, amending the Company's Supplemental Executive Retirement Plan, the Employee Retirement Plan, any stock option or stock bonus plan, or any other applicable plan, program or arrangement or obtaining any necessary consents or approvals in connection therewith). 15. Successors Assignment. (a) Company Successor. The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company is required to perform it. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. (b) Executive's Successor. The payments and benefits to be provided to the Executive (or his spouse) under this Agreement shall inure to the benefit of, and the right of the Executive (or his spouse) to receive any payments and/or benefits to which either of them becomes entitled shall be enforceable by, the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive should die while any amount would still be payable to the Executive hereunder if Executive had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the Executive's devisee, legatee or other designee or, if there is no such designee, to the Executive's estate. (c) Assignment. Nothing in this Section 15 shall preclude the Executive from designating a beneficiary or beneficiaries to receive any benefit payable on his death or from transferring any of his rights and benefits hereunder to (i) his executors, administrators, testamentary trustees, legatees or beneficiaries, (ii) the executors, administrators, testamentary trustees, legatees or beneficiaries of any of the persons in clause (i) above or (iii) a trust or custodianship, the beneficiaries of which include only the Executive, his spouse or his lineal descendants by blood or adoption. 16. Governing Law; Jurisdiction. (a) Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New Jersey applicable to agreements made and to be performed in that State, without regard to its conflict of laws provisions. (b) Jurisdiction; Venue. Any suit, action or proceeding against the Executive or the Company, with respect to this Agreement, or any judgment entered by any court in respect of any thereof, may only be brought in any court of competent jurisdiction in the State of New Jersey, and the Company and the Executive each hereby submits to the exclusive jurisdiction of such courts for the purpose of any such suit, action, proceeding or judgment. The Company and the Executive hereby irrevocably waive any objections which either of them may now or hereafter have to the laying of the venue of any suit, action or proceeding arising out of or relating to this Agreement brought in any court of competent jurisdiction in the State of New Jersey, and hereby further irrevocably waive any claim that any such suit, action or proceeding brought in any such court has been brought in any inconvenient forum. Each of the Company and the Executive hereto hereby irrevocably and unconditionally waives trial by jury in any legal action or proceeding in relation to this Agreement and for any counterclaim therein. 17. Notices. Any notice, consent, request or other communication made or given in connection with this Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by registered or certified mail, return receipt requested, or by facsimile or by hand delivery, to those listed below at their following respective addresses or at such other address as each may specify by notice to the others: To the Company: American Home Products Corporation Five Giralda Farms Madison, New Jersey 07940 Attention: General Counsel Fax: (973) 660-7050 With a copy to: Simpson Thacher & Bartlett 425 Lexington Avenue New York, New York 10017-3954 Attention: Alvin H. Brown, Esq. Fax: (212) 455-2000 To Executive: At the most recent address set forth in the personnel records of the Company. 18. Miscellaneous. (a) Waiver. The failure of a party to insist upon strict adherence to any term of this Agreement on any occasion shall not be considered a waiver thereof or deprive that party of the right thereafter to insist upon strict adherence to that term or any other terms of this Agreement. (b) Amendment. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the Executive and such officer as may be specifically designated by the Board. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any conditions or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. (c) Separability. If any term or provision of this Agreement is declared illegal or unenforceable by any court of competent jurisdiction and cannot be modified to be enforceable, such term or provision shall immediately become null and void, leaving the remainder of this Agreement in full force and effect. (d) Headings. Section headings are used herein for convenience of reference only and shall not affect the meaning of any provision of this Agreement. (e) Rules of Construction. Whenever the context so requires, the use of the singular shall be deemed to include the plural and vice versa. (f) Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. [Continued on next page.] IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year set forth below. AMERICAN HOME PRODUCTS CORPORATION: By: /s/ Louis L. Hoynes, Jr. Name: Louis L. Hoynes, Jr. Title: Executive Vice President and General Counsel EXECUTIVE: /s/ John R. Stafford - ------------------------ John R. Stafford EX-10.2 3 amendator.txt AMENDATORY AGREEMENT THIS AGREEMENT (the "Amendment") is made as of March 6, 2001, by and between American Home Products Corporation, a Delaware corporation (the "Company") and John R. Stafford ("Executive"). WHEREAS, the Executive and the Company entered into a Severance Agreement dated as of July 31, 1998 (the "Severance Agreement"), pursuant to which the Executive would be entitled to certain severance benefits in the event his employment is terminated under certain circumstances following the occurrence of a Change in Control (as defined in the Severance Agreement; WHEREAS, the Executive and the Company, concurrently with the execution of this Agreement, are entering into an agreement regarding the terms and conditions of the Executive's current and future employment and of the Executive's eventual retirement from his employment with the Company (the "2001 Agreement"); WHEREAS, the parties desire to amend the Severance Agreement to be in accordance with the terms of the 2001 Agreement, and pursuant to Section 8 of the Severance Agreement, the Severance Agreement may only be amended by written document executed by the Executive and such officer as may be specifically designated by the board of directors of the Company. NOW, THEREFORE, in consideration of the mutual covenants contained herein and for other valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and pursuant to Section 8 of the Severance Agreement, the parties hereby agree as follows: 1. Section 1 of the Severance Agreement is amended by inserting at the end of such section the following sentence: "For the avoidance of doubt, this Agreement shall terminate on the Transition Date (as such term is defined in that certain agreement entered into by and between Executive and the Company dated as of March 6, 2001 (the "2001 Agreement")." 2. Section 13 of the Severance Agreement is amended by deleting the first and second sentences of such section in their entirety and replacing them with the following (additions in italics for purposes of clarification of amendment): "Except for the 2001 Agreement, no agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. Except for the 2001 Agreement, this Agreement constitutes the entire understanding between the parties with respect to Executive's severance pay in the event of a termination of Executive's employment with the Company, superseding all negotiations, prior discussions and preliminary agreements, written or oral, concerning said severance pay; provided, however, that any payments or benefits provided in respect of severance, or indemnification for loss of employment, pursuant to any severance, employment or similar agreement between the Company or any of its subsidiaries and Executive, or as required by applicable law outside the United States, other than any payments or benefits provided for under the 2001 Agreement, shall reduce any payments or benefits provided pursuant to this Agreement, except that the payments or benefits provided pursuant to this Agreement shall not be reduced below zero. 2. Except as expressly amended hereby, the terms and conditions of the Severance Agreement shall continue in full force and effect. 3. This Amendment shall be governed by, and construed in accordance with, the laws of the State of New York, applicable to contracts executed in and to be performed entirely within that State. 4. This Amendment may be executed in one or more counterparts and by the different parties hereto in separate counterparts, each of which when executed shall be deemed to be an original but all of which taken together shall constitute one and the same agreement. IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the day and year first above written. AMERICAN HOME PRODUCTS CORPORATION By: /s/ Louis L. Hoynes, Jr. Title: Executive Vice President and General Counsel Name: Louis L. Hoynes, Jr. EXECUTIVE: /s/ John R. Stafford -------------------------- John R. Stafford EX-12 4 exhibit12.txt Exhibit 12 American Home Products Corporation Computation of Ratio of Earnings to Fixed Charges (3) (Thousands of dollars, except ratio amounts)
Three Months Ended --------------------------------------------------------------------- March 31, 2001 2000 1999 1998 1997 1996 ------------------ ---------- ---------- ---------- ---------- ---------- Earnings Income (loss) from continuing operations before federal and foreign taxes (2) $980,988 ($1,101,040) ($1,907,299) $3,089,936 $2,364,753 $2,398,866 Add: Fixed charges 83,887 324,887 403,694 371,986 513,860 601,927 Minority interests 7,551 26,784 30,301 620 2,421 13,677 Distributed equity income 0 0 0 771 0 0 Amortization of capitalized interest 611 1,917 1,803 1,487 1,057 5,621 Less: Equity income 16,499 55,991 2,122 473 9,777 8,448 Capitalized interest 20,271 43,303 15,375 9,497 12,898 0 ----------- ---------- ---------- ---------- ---------- ---------- Total earnings (loss) as defined $1,036,267 ($846,746) ($1,488,998) $3,454,830 $2,859,416 $3,011,643 =========== ========== ========== ========== ========== ========== Fixed Charges: Interest and amortization of debt expense $52,642 $238,840 $343,271 $322,970 $461,370 $571,414 Capitalized interest 20,271 43,303 15,375 9,497 12,898 0 Interest factor of rental expense (1) 10,974 42,744 45,048 39,519 39,592 30,513 ----------- ---------- ---------- ---------- ---------- ---------- Total fixed charges as defined $83,887 $324,887 $403,694 $371,986 $513,860 $601,927 =========== ========== ========== ========== ========== ========== Ratio of earnings to fixed charges (2) 12.4 -- -- 9.3 5.6 5.0 (1) A 1/3 factor was used to compute the portion of rental expenses deemed representative of the interest factor. (2) The results of operations for the year ended December 31, 1999 are inadequate to cover total fixed charges as defined. The coverage deficiency for the year ended December 31, 1999 is $403,694. Excluding the charge for the REDUX and PONDIMIN diet drug litigation of $4,750,000, the pro forma ratio of earnings to fixed charges would be 8.1 for the year ended December 31, 1999. The results of operations for the year ended December 31, 2000 are inadequate to cover total fixed charges as defined. The coverage deficiency for the year ended December 31, 2000 is $324,887. Excluding the charge for the REDUX and PONDIMIN diet drug litigation of $7,500,000, the gain on sale of Immunex common stock of $2,061,204 and the Warner-Lambert Company termination fee of $1,709,380, the pro forma ratio of earnings to fixed charges would be 8.9 for the year ended December 31, 2000. (3) Amounts have been restated to reflect the Cyanamid Agricultural Products business as a discontinued operation.
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