-----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, MEbazoyqBocJVnZDcN+MwAgPGwU3xT+KINIq8jh6GW1wU/OCUXI+jkOZSpAMK2u8 O0lysxq4UfpveKH24nNn5Q== 0000005187-01-500012.txt : 20010815 0000005187-01-500012.hdr.sgml : 20010815 ACCESSION NUMBER: 0000005187-01-500012 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010814 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: 1934 Act SEC FILE NUMBER: 001-01225 FILM NUMBER: 1712613 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 e10q201.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 Commission file number 1-1225 June 30, 2001 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 offices) (Zip Code) 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 July 31, 2001: Number of Class Shares Outstanding --------------------------------- ------------------ Common Stock, $0.33-1/3 par value 1,317,594,283 ================================================================================ AMERICAN HOME PRODUCTS CORPORATION AND SUBSIDIARIES INDEX Page No. -------- Part I - Financial Information 2 Item 1. Consolidated Condensed Financial Statements: Consolidated Condensed Balance Sheets - June 30, 2001 and December 31, 2000 3 Consolidated Condensed Statements of Operations - Three and Six Months Ended June 30, 2001 and 2000 4 Consolidated Condensed Statements of Changes in Stockholders' Equity - Six Months Ended June 30, 2001 and 2000 5 Consolidated Condensed Statements of Cash Flows - Six Months Ended June 30, 2001 and 2000 6 Notes to Consolidated Condensed Financial Statements 7-13 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 14-23 Part II - Other Information 24 Item 1. Legal Proceedings 24-25 Item 4. Submission of Matters to a Vote of Security-Holders 26 Item 6. Exhibits and Reports on Form 8-K 27 Signature 28 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 June 30, 2001 and December 31, 2000, and the results of its operations, changes in stockholders' equity and cash flows for the three months and six months ended June 30, 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 and Quarterly Report on Form 10-Q for the quarter ended March 31, 2001. 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 second quarters and first halves. The 2000 second quarter and first half 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)
June 30, December 31, 2001 2000 ----------- ------------ ASSETS Cash and cash equivalents $2,393,349 $2,644,306 Marketable securities 755,880 341,031 Accounts receivable less allowances 2,388,758 2,740,272 Inventories: Finished goods 650,611 585,123 Work in progress 661,699 586,656 Materials and supplies 397,996 359,948 ----------- ------------ 1,710,306 1,531,727 Other current assets including deferred taxes 2,607,754 2,923,475 ----------- ------------ Total Current Assets 9,856,047 10,180,811 Property, plant and equipment 7,995,138 7,578,233 Less accumulated depreciation 2,581,014 2,543,409 ----------- ------------ 5,414,124 5,034,824 Goodwill and other intangibles, net of accumulated amortization 3,942,136 4,052,410 Other assets including deferred taxes 2,165,998 1,824,421 ----------- ------------ Total Assets $21,378,305 $21,092,466 =========== ============ LIABILITIES Loans payable $52,165 $58,717 Trade accounts payable 874,503 595,233 Accrued expenses 4,651,135 8,831,459 Accrued federal and foreign taxes 244,075 256,650 ----------- ------------ Total Current Liabilities 5,821,878 9,742,059 Long-term debt 8,023,186 2,394,790 Other noncurrent liabilities 3,483,461 5,226,495 Accrued postretirement benefit obligations other than pensions 927,365 911,029 STOCKHOLDERS' EQUITY $2.00 convertible preferred stock, par value $2.50 per share 53 55 Common stock, par value $0.33-1/3 per share 438,908 437,258 Additional paid-in capital 4,092,308 3,952,457 Accumulated deficit (598,579) (899,118) Accumulated other comprehensive loss (810,275) (672,559) ----------- ------------ Total Stockholders' Equity 3,122,415 2,818,093 ----------- ------------ Total Liabilities and Stockholders' Equity $21,378,305 $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 Six Months Ended June 30, Ended June 30, -------------------------- -------------------------- 2001 2000 2001 2000 ---------- ---------- ---------- ---------- Net Revenue $3,216,420 $3,026,215 $6,665,596 $6,222,067 ---------- ---------- ---------- ---------- Cost of goods sold 791,041 771,042 1,589,644 1,553,034 Selling, general and administrative expenses 1,291,455 1,242,953 2,576,923 2,407,157 Research and development expenses 477,533 412,773 928,522 820,991 Interest expense, net 49,554 51,990 53,493 102,874 Other income, net (25,053) (7,063) (95,864) (73,463) Termination fee - - - (1,709,380) ---------- ---------- ---------- ---------- Income from continuing operations before federal and foreign taxes 631,890 554,520 1,612,878 3,120,854 Provision for federal and foreign taxes 154,894 141,786 402,328 962,111 ---------- ---------- ---------- ---------- Income from continuing operations 476,996 412,734 1,210,550 2,158,743 ---------- ---------- ---------- ---------- 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 $476,996 $412,734 $1,210,550 $689,096 ========== ========== ========== ========== Basic earnings per share from continuing operations $0.36 $0.32 $0.92 $1.66 Basic loss per share from discontinued operations - - - (1.13) ---------- ---------- ---------- ---------- Basic earnings per share $0.36 $0.32 $0.92 $0.53 ========== ========== ========== ========== Diluted earnings per share from continuing operations $0.36 $0.31 $0.91 $1.63 Diluted loss per share from discontinued operations - - - (1.11) ---------- ---------- ---------- ---------- Diluted earnings per share $0.36 $0.31 $0.91 $0.52 ========== ========== ========== ========== Dividends per share of common stock $0.23 $0.23 $0.46 $0.46 ========== ========== ========== ========== 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 Except Per Share Amounts)
Six Months Ended June 30, 2001: $2.00 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 1,210,550 1,210,550 Currency translation adjustments (155,729) (155,729) Unrealized gain on derivative contracts 16,135 16,135 Unrealized gain on marketable securities 1,878 1,878 ------------ Comprehensive income 1,072,834 ------------ Cash dividends declared * (907,287) (907,287) Common stock issued for stock options 1,548 127,337 128,885 Conversion of preferred stock and other exchanges (2) 102 12,514 (2,724) 9,890 ---------- -------- ---------- ---------- ------------- ------------ Balance at June 30, 2001 $53 $438,908 $4,092,308 ($598,579) ($810,275) $3,122,415 ========== ======== ========== ========== ============= ============ Six Months Ended June 30, 2000: $2.00 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 689,096 689,096 Currency translation adjustments (490) (490) Unrealized gain on marketable securities 15,380 15,380 ------------ Comprehensive income 703,986 ------------ Cash dividends declared (599,949) (599,949) Common stock acquired for treasury (2,261) (14,884) (341,901) (359,046) Common stock issued for stock options 1,948 144,880 146,828 Conversion of preferred stock and other exchanges (4) 104 21,164 (3,697) 17,567 ---------- -------- ---------- ---------- ------------ ------------ Balance at June 30, 2000 $57 $434,430 $3,543,865 $2,744,376 ($598,595) $6,124,133 ========== ======== ========== ========== ============ ============ * Includes the 2001 third quarter common stock cash dividend of $0.23 per share ($302,847 in the aggregate) declared on June 21, 2001 and payable on September 1, 2001, and the 2001 second and third quarter preferred stock cash dividends of $0.50 per share ($21 in the aggregate) paid on July 1, 2001 and payable on October 1, 2001, respectively. 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)
Six Months Ended June 30, ------------------------- 2001 2000 ---------- ---------- Operating Activities - -------------------- Income from continuing operations $1,210,550 $2,158,743 Adjustments to reconcile income from continuing operations to net cash provided from (used for) operating activities of continuing operations: Gains on sales of assets (102,577) (78,093) Depreciation and amortization 294,924 270,507 Deferred income taxes 163,360 355,784 Changes in working capital, net 55,314 492,247 Diet drug litigation payments (5,948,929) (1,273,927) Deconsolidation of Immunex - (236,768) Other items, net (52,058) (156,430) ---------- ---------- Net cash provided from (used for) continuing operations (4,379,416) 1,532,063 Net cash provided from discontinued operations - 127,574 ---------- ---------- Net cash provided from (used for) operating activities (4,379,416) 1,659,637 ---------- ---------- Investing Activities - -------------------- Purchases of property, plant and equipment (843,225) (553,716) Proceeds from sale of the agricultural products business - 3,800,000 Proceeds from sales of assets 253,350 99,321 Proceeds from sales and maturities of marketable securities 114,298 187,300 Purchases of marketable securities (529,147) (375,490) ---------- ---------- Net cash provided from (used for) investing activities (1,004,724) 3,157,415 ---------- ---------- Financing Activities - -------------------- Net proceeds from (repayments of) debt 5,626,438 (3,110,414) Dividends paid (604,419) (599,949) Exercises of stock options 128,885 146,828 Purchases of common stock for treasury - (359,046) ---------- ---------- Net cash provided from (used for) financing activities 5,150,904 (3,922,581) ---------- ---------- Effects of exchange rates on cash balances (17,721) (18,440) ---------- ---------- Increase (decrease) in cash and cash equivalents (250,957) 876,031 Cash and cash equivalents, beginning of period 2,644,306 1,892,715 ---------- ---------- Cash and cash equivalents, end of period $2,393,349 $2,768,746 ========== ========== Supplemental Information - ------------------------ Interest payments $120,469 $235,751 Income tax payments, net of refunds 241,287 343,792 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 June 30, 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 included 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 under the Securities Act of 1933, as amended (the "Securities Act"), pursuant to Rule 144A, as follows: o $500.0 million 5.875% Notes due March 15, 2004 o $1,000.0 million 6.25% Notes due March 15, 2006 o $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. As of June 15, 2001, the date the offer to exchange the Notes concluded, substantially all the Notes had been exchanged for the new notes registered under the Securities Act. 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 (the LIBOR swap rate) over the term of the swap agreements, which is the same term as the underlying debt. The interest rate swaps function as fair value hedges of the risk of changes in the fair value of the Notes attributable to changes in the benchmark interest rate (the LIBOR swap rate). Any proceeds from commercial paper supported by the credit facilities and the proceeds from the issuance of the Notes are being used for the Company's general corporate and working capital requirements, including payments related to the REDUX and PONDIMIN diet drug litigation. 7 AMERICAN HOME PRODUCTS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS 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. During the 2001 first half, payments to the nationwide, class action settlement funds, individual settlement payments, legal fees and other costs totaling $5,948.9 million were paid and applied against the litigation accrual. As of June 30, 2001, $2,216.6 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 8 AMERICAN HOME PRODUCTS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS elimination of approximately 3,900 positions worldwide offset, in part, by 1,000 newly created positions in the same functions at other locations. At June 30, 2001, approximately 3,670 positions had been eliminated, and two distribution centers owned by the Company and a leased distribution center had been closed. The Company anticipates closing a total of 14 manufacturing plants; eight were closed in 2000 and two were closed during the first six months of 2001. The Company currently anticipates closing another plant by the end of 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 (8,063) (8,672) (16,735) Redistributions 14,000 (14,000) -- ------- ------- ------- Restructuring accruals at June 30, 2001 $12,186 $36,963 $49,149 ======= ======= =======
During the 2001 second quarter, the Company made redistribution adjustments between categories to increase accrual balances for personnel costs by $14.0 million and decrease other closure/exit costs by $14.0 million. These redistributions were necessary due to higher than expected enhanced pension benefits and outplacement costs for non-U.S. employees, updated forecasts of employees within the affected facilities, and lower than expected other closure and exit costs. The original scope of the restructuring projects remains substantially unchanged. Note 5. Derivative Instruments and Foreign Currency Risk Management Programs -------------------------------------------------------------------- As of January 1, 2001, the Company adopted Statement of Financial Accounting Standards (SFAS) 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. On the date that the Company enters into a derivative contract, it designates the derivative as: (1) a hedge of the fair value of a recognized asset or liability (fair value hedge), (2) a hedge of a forecasted transaction or the variability of cash flows that are to be received or paid in connection with a recognized asset or liability 9 AMERICAN HOME PRODUCTS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (cash flow hedge), (3) a foreign currency fair value or cash flow hedge (foreign currency hedge) or (4) an instrument that is not designated for hedge accounting treatment. For derivative contracts that are designated and qualify as fair value hedges (including foreign currency fair value hedges), the derivative instrument is marked-to-market with gains and losses recognized in current period earnings to offset the respective losses and gains recognized on the underlying exposure. For derivative contracts that are designated and qualify as cash flow hedges (including foreign currency cash flow hedges), the effective portion of gains and losses on these contracts are reported as a component of accumulated other comprehensive income (loss) and reclassified into earnings in the same period the hedged transaction affects earnings. Any hedge ineffectiveness on cash flow hedges is immediately recognized in earnings. In certain circumstances the Company enters into derivative contracts that are not designated as hedging instruments. These derivative contracts are recorded at fair value with the gain or loss recognized in current period earnings. The Company does not hold any derivative instruments for trading purposes. The Company currently engages in two primary programs to manage its exposure to foreign currency risk, as well as interest rate swaps to manage its exposure to interest rate fluctuations. The derivative contracts outstanding as of June 30, 2001 are as follows: 1. Short-term foreign exchange forward contracts to manage foreign currency balance sheet exposures. These contracts do not have a hedging designation and are recorded at fair value with any gains or losses recognized in current period earnings. For the six months ended June 30, 2001, the Company recorded $24.7 million in Other income, net relating to gains on these foreign exchange forward contracts. The $24.7 million consists of gains from contracts settled during the 2001 first half, as well as contracts outstanding at June 30, 2001 that are marked to fair value. 2. Cash flow hedging program to cover currency risk related to intercompany inventory sales denominated in foreign currencies through the purchase of primarily foreign currency put options. As of June 30, 2001, $16.1 million of gains relating to the cash flow hedging program was included in Accumulated other comprehensive loss. The Company also purchases foreign currency put options outside of the cash flow hedging program to protect additional intercompany inventory sales. These put options do not have a hedging designation and are recorded at fair value with all gains or losses recognized in current period earnings. For the six months ended June 30, 2001, the company has recorded gains of $4.8 million in Other income, net relating to these foreign currency put options. 3. Fair value interest rate swaps to manage interest rate exposures. The Company strives to achieve an acceptable balance between fixed- and floating-rate debt and investment positions and has entered into effective fair value interest rate swaps to maintain that balance. The fair value interest rate swaps converted a portion of the Company's fixed-rate debt into floating-rate debt. The fair value of the Company's two $750.0 million notional amount interest rate swaps relating to the $1,500.0 million 6.70% Notes, as of June 30, 2001, is $40.7 million. The $40.7 million has been recorded in Other noncurrent liabilities, offset by the change in the fair value of the $1,500.0 million 6.70% Notes of $40.7 million included in Long-term debt. Refer to the "Quantitative and Qualitative Disclosures about Market Risk" section on pages 21 and 22 for further discussion and disclosures relating to the Company's derivative instruments and foreign currency risk management programs. 10 AMERICAN HOME PRODUCTS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS Note 6. Company Data by Operating Segment --------------------------------- The Company has three reportable segments: Pharmaceuticals, Consumer Health Care and Corporate. The Company's Pharmaceuticals and Consumer Health Care reportable segments are strategic business units that are managed separately because they manufacture, distribute, and sell distinct products and provide services which require various technologies and marketing strategies. Net Revenue (1) ----------------------------------------- Three Months Six Months Ended June 30, Ended June 30, ($ in millions) ------------------- ------------------- Operating Segment 2001 2000 2001 2000 -------------------- -------- -------- -------- -------- Pharmaceuticals (2) $2,694.0 $2,523.3 $5,573.3 $5,126.3 Consumer Health Care 522.4 502.9 1,092.3 1,095.8 -------- -------- -------- -------- Total $3,216.4 $3,026.2 $6,665.6 $6,222.1 ======== ======== ======== ======== Income from Continuing Operations Before Taxes (3) ----------------------------------------- Three Months Six Months Ended June 30, Ended June 30, ($ in millions) ------------------- ------------------- Operating Segment 2001 2000 2001 2000 --------------------- -------- -------- -------- -------- Pharmaceuticals $601.2 $549.0 $1,516.7 $1,293.0 Consumer Health Care 112.1 96.9 236.1 227.4 -------- -------- -------- -------- 713.3 645.9 1,752.8 1,520.4 Corporate (4) (81.4) (91.4) (139.9) 1,600.5 -------- -------- -------- -------- Total $631.9 $554.5 $1,612.9 $3,120.9 ======== ======== ======== ======== (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) 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 second quarter and first half pharmaceutical net revenue was restated to reflect the deconsolidation. (3) The second quarter results included goodwill amortization for 2001 and 2000 as follows: Pharmaceuticals - $34.1 and $36.7, and Consumer Health Care - $5.9 and $8.0, respectively. The first half results included goodwill amortization for 2001 and 2000 as follows: Pharmaceuticals - $68.7 and $75.6, Consumer Health Care - $11.9 and $16.0, respectively. (4) Corporate expenses for the 2000 first half 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. 11 AMERICAN HOME PRODUCTS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS Note 7. Earnings per Share ------------------ The following table sets forth the computations of basic earnings per share and diluted earnings per share:
Three Months Six Months Ended June 30, Ended June 30, ----------------------- ------------------------ (In thousands except per share amounts) 2001 2000 2001 2000 ---------------------------------------------------------- --------- --------- ---------- ---------- Income from continuing operations less preferred dividends $476,975 $412,723 $1,210,518 $2,158,720 Loss from discontinued operations - - - (1,469,647) --------- --------- ---------- ---------- Net income less preferred dividends $476,975 $412,723 $1,210,518 $689,073 Denominator: Average number of common shares outstanding 1,316,008 1,304,049 1,314,938 1,304,631 --------- --------- ---------- ---------- Basic earnings per share from continuing operations $0.36 $0.32 $0.92 $1.66 Basic loss per share from discontinued operations - - - (1.13) --------- --------- ---------- ---------- Basic earnings per share $0.36 $0.32 $0.92 $0.53 ========= ========= ========== ========== Income from continuing operations $476,996 $412,734 $1,210,550 $2,158,743 Loss from discontinued operations - - - (1,469,647) --------- --------- ---------- ---------- Net income $476,996 $412,734 $1,210,550 $689,096 Denominator: Average number of common shares outstanding 1,316,008 1,304,049 1,314,938 1,304,631 Common share equivalents of outstanding stock options and deferred contingent common stock awards 14,649 17,375 14,423 15,917 --------- --------- ---------- ---------- Total shares 1,330,657 1,321,424 1,329,361 1,320,548 --------- --------- ---------- ---------- Diluted earnings per share from continuing operations $0.36 $0.31 $0.91 $1.63 Diluted loss per share from discontinued operations - - - (1.11) --------- --------- ---------- ---------- Diluted earnings per share $0.36 $0.31 $0.91 $0.52 ========= ========= ========== ==========
Note 8. Accumulated Other Comprehensive Loss ------------------------------------ Accumulated other comprehensive loss consists of changes in foreign currency translation adjustments, unrealized gains on derivative contracts, and unrealized gains on marketable securities. The following table sets forth the changes in each component and the applicable tax effect, if any. Reclassification adjustments represent items that are included in net income in the current period but previously were reported in Accumulated other comprehensive loss. 12 AMERICAN HOME PRODUCTS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Six Months Ended June 30, 2001 ---------------------------------- (In thousands) Pre-tax Tax After Tax ---------------------------------------------------- --------- ------ --------- Foreign currency translation adjustments ($155,729) - ($155,729) --------- ------ --------- Unrealized gains on derivative contracts: Unrealized holding gains arising during the period 32,556 11,804 20,752 Less: reclassification adjustments for gains realized in net income 7,103 2,486 4,617 --------- ------ --------- Net unrealized gains on derivative contracts 25,453 9,318 16,135 Unrealized gains on marketable securities 1,878 - 1,878 --------- ------ --------- Other comprehensive loss ($128,398) $9,318 ($137,716) ========= ====== ========= Foreign currency translation adjustments are not recorded net-of-tax because such adjustments relate to permanent investments in international subsidiaries.
Note 9. Recently Issued Accounting Standards ------------------------------------ In July 2001, the Financial Accounting Standards Board issued Statement Nos. 141 and 142. The new standards require the following: o SFAS No. 141, Business Combinations, requires that all business combinations initiated after June 30, 2001 be accounted for using the purchase method; the pooling method of accounting has been eliminated. SFAS No. 141 supersedes Accounting Principles Board (APB) Opinion No. 16, Business Combinations, but does not change many of the provisions of APB Opinion 16, including the basic principles of the purchase method. o SFAS No. 142, Goodwill and Other Intangibles, supersedes APB Opinion No. 17, Intangible Assets, and addresses how intangible assets that are acquired individually or with a group of other assets should be accounted for in financial statements upon their acquisition. The statement also addresses how goodwill and other intangibles should be accounted for after they have been initially recognized in the financial statements. With the adoption of SFAS No. 142, goodwill is no longer amortized over its estimated useful life, but is subject to at least an annual assessment for impairment by applying a fair-value-based test. The Company will adopt SFAS No. 142 as of January 1, 2002. In accordance with the adoption of SFAS No. 142, as of January 1, 2002, the Company will cease amortizing goodwill and other intangibles which will result in estimated lower annual Selling, general and administrative expenses of approximately $163.0 million ($154.0 million after-tax or $0.12 per share-diluted). The Company is currently assessing the impact the adoption of the additional requirements of SFAS No. 142 may have on its financial position, results of operations and cash flows. 13 Management's Discussion and Analysis of Financial Condition and Results of Operations Three Months and Six Months Ended June 30, 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 second quarter and first half. The 2000 second quarter and first half 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 second quarter and first half were 6% and 7% higher, respectively, compared with prior year levels. The increase in worldwide net revenue for the 2001 second quarter and first half was due primarily to higher worldwide net revenue of human pharmaceuticals, with consumer health care also contributing revenue growth for the 2001 second quarter. Excluding the negative impact of foreign exchange, worldwide net revenue increased 10% for the 2001 second quarter and 11% for the 2001 first half. 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 Ended June 30, ($ in millions) ------------------------- Operating Segment 2001 2000 % Increase - -------------------- -------- -------- ---------- Pharmaceuticals $2,694.0 $2,523.3 7% Consumer Health Care 522.4 502.9 4% -------- -------- ---------- Total $3,216.4 $3,026.2 6% ======== ======== ========== Net Revenue ------------------------- Six Months Ended June 30, ($ in millions) ------------------------- Operating Segment 2001 2000 % Increase - -------------------- -------- -------- ---------- Pharmaceuticals $5,573.3 $5,126.3 9% Consumer Health Care 1,092.3 1,095.8 - -------- -------- ---------- Total $6,665.6 $6,222.1 7% ======== ======== ========== 14 Management's Discussion and Analysis of Financial Condition and Results of Operations Three Months and Six Months Ended June 30, 2001 Pharmaceuticals - --------------- Worldwide pharmaceutical net revenue increased 7% for the 2001 second quarter and 9% for the 2001 first half 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 11% for the 2001 second quarter and 13% for the 2001 first half. Worldwide human pharmaceutical net revenue increased 8% for the 2001 second quarter and 10% for the 2001 first half 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 offset, in part, by lower sales of MENINGITEC, ZIAC (due to generic competition) and oral contraceptives (2001 first half only). Excluding the negative impact of foreign exchange, worldwide human pharmaceutical net revenue increased 12% for the 2001 second quarter and 14% for the 2001 first half. 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 by this product. The product is currently being launched in ten other European countries; 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 9% for the 2001 second quarter and 7% for the 2001 first half due primarily to a decline in the United States livestock market causing a reduction in the use of certain animal health biological and pharmaceutical cattle products. Also contributing to the decline in animal health product revenues was lower demand for certain pharmaceutical cattle products internationally resulting from the outbreak of foot-and-mouth disease and the continued concerns about mad-cow disease. The decrease in revenues was partially offset by the domestic launch, in June 2001, of ProHeart 6, a new single dose, canine heartworm protection product that provides six months of continuous heartworm protection. Excluding the negative impact of foreign exchange, worldwide animal health net revenue decreased 6% and 3% for the 2001 second quarter and first half, respectively. Consumer Health Care - -------------------- Worldwide consumer health care net revenue increased 4% for the 2001 second quarter and was flat for the 2001 first half. The increase in the 2001 second quarter was due primarily to higher sales of CENTRUM products, ADVIL, cough/cold/allergy products and CHAP STICK offset, in part, by lower sales of FLEXAGEN. The same factors affected the 2001 first half; however, lower sales of CENTRUM products and ADVIL in the 2001 first quarter contributed to the flat results for the first half. Excluding the negative impact of foreign exchange, worldwide consumer health care net revenue increased 7% and 2% for the 2001 second quarter and first half, respectively. 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: 15 Management's Discussion and Analysis of Financial Condition and Results of Operations Three Months and Six Months Ended June 30, 2001
% Increase (Decrease) % Increase (Decrease) Three Months Ended June 30, 2001 Six Months Ended June 30, 2001 ------------------------------------------ ------------------------------------------ Foreign Total Foreign Total Volume Price Exchange Net Revenue Volume Price Exchange Net Revenue ------ ----- -------- ----------- ------ ----- -------- ----------- Pharmaceuticals - -------------------- United States 9% 4% - 13% 14% 4% - 18% International 6% 1% (8%) (1%) 4% - (8%) (4%) --- --- --- --- --- --- --- --- Total 8% 3% (4%) 7% 10% 3% (4%) 9% === === === === === === === === Consumer Health Care - -------------------- United States 9% 1% - 10% 1% 2% - 3% International (5%) 6% (8%) (7%) (3%) 4% (8%) (7%) --- --- --- --- --- --- --- --- Total 4% 3% (3%) 4% (1%) 3% (2%) - === === === === === === === === Total - -------------------- United States 9% 4% - 13% 11% 4% - 15% International 4% 2% (8%) (2%) 3% 1% (8%) (4%) --- --- --- --- --- --- --- --- Total 7% 3% (4%) 6% 8% 3% (4%) 7% === === === === === === === ===
Cost of goods sold, as a percentage of Net revenue, decreased to 24.6% for the 2001 second quarter compared to 25.5% for the 2000 second quarter and decreased to 23.8% for the 2001 first half compared to 25.0% for the 2000 first half. These decreases were due primarily to a favorable product mix in the pharmaceuticals segment, as well as a small impact relating to increased alliance revenue recorded in 2001 net revenue compared to 2000 net revenue. There are no costs of goods sold relating to alliance revenue, and therefore any net revenue fluctuations impacted by alliance revenues will also impact gross margins. Selling, general and administrative expenses increased 4% for the 2001 second quarter and 7% for the 2001 first half. 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 16% for the 2001 second quarter and 13% for the 2001 first half 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 under licensing agreements. Interest expense, net decreased 5% for the 2001 second quarter and 48% for the 2001 first half, despite the rise in weighted average debt levels. The decrease in Interest expense, net was due primarily to lower interest expense as a result of favorable interest rates on the debt outstanding, primarily commercial paper, 16 Management's Discussion and Analysis of Financial Condition and Results of Operations Three Months and Six Months Ended June 30, 2001 as well as higher capitalized interest, resulting from additional capital projects, recognized during the 2001 second quarter and first half compared with the same periods in the prior year. In addition, the Company generated higher interest income due to higher average levels of cash and marketable securities throughout the 2001 second quarter and first half compared to prior year levels. The Company currently anticipates higher interest expense for both the 2001 third quarter and full year, due to higher weighted average long-term debt levels compared to the same periods in the prior year. Weighted average long-term debt outstanding during the 2001 and 2000 second quarters was $7,511.6 million and $4,910.9 million, respectively. Weighted average long-term debt outstanding during the 2001 and 2000 first half was $5,720.8 million and $4,887.2 million, respectively. The following table sets forth worldwide income from continuing operations before taxes by operating segment together with the percentage changes from the comparable periods in the prior year:
Income from Continuing Operations Before Taxes (1) ------------------------------------------------------------------------------------ Three Months Six Months Ended June 30, Ended June 30, --------------------------------------- ---------------------------------------- ($ in millions) % Increase Operating Segment 2001 2000 (Decrease) 2001 2000 % Increase - -------------------- ------ ------ ---------- -------- -------- ---------- Pharmaceuticals $601.2 $549.0 10% $1,516.7 $1,293.0 17% Consumer Health Care 112.1 96.9 16% 236.1 227.4 4% ------ ------ ---- -------- -------- ---- 713.3 645.9 10% 1,752.8 1,520.4 15% Corporate (2) (81.4) (91.4) (11%) (139.9) 1,600.5 - ------ ------ ---- -------- -------- ---- Total (3) $631.9 $554.5 14% $1,612.9 $3,120.9 - ====== ====== ==== ======== ======== ==== (1) The second quarter results included goodwill amortization for 2001 and 2000 as follows: Pharmaceuticals - $34.1 and $36.7, and Consumer Health Care - $5.9 and $8.0, respectively. The first half results included goodwill amortization for 2001 and 2000 as follows: Pharmaceuticals - $68.7 and $75.6, and Consumer Health Care - $11.9 and $16.0, respectively. (2) Corporate expenses for the 2000 first half 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 28% for the 2001 first half. (3) Excluding the termination fee, total income from continuing operations before taxes increased 14% for the 2001 first half.
Worldwide pharmaceutical income from continuing operations before taxes increased 10% (16% for human pharmaceuticals) for the 2001 second quarter and 17% (21% for human pharmaceuticals) for the 2001 first half 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. 17 Management's Discussion and Analysis of Financial Condition and Results of Operations Three Months and Six Months Ended June 30, 2001 The Company experienced a higher growth rate of worldwide pharmaceutical income from continuing operations before taxes (17%) than the growth rate of net revenue (9%) during the 2001 first half due primarily to improved margins relating to the human pharmaceutical product mix, increased gains on sales of non-strategic assets, higher equity income relating to Immunex and 2000 first half other expenses that were non-recurring in 2001. Worldwide consumer health care income from continuing operations before taxes increased 16% for the 2001 second quarter and 4% for the 2001 first half. The 2001 second quarter increase was due primarily to higher worldwide consumer health care sales and slightly improved gross margins. The Company experienced a higher growth rate of worldwide consumer health care income from continuing operations before taxes (16%) than the growth rate of net revenue (4%) during the 2001 second quarter due primarily to certain asset write-offs in the 2000 first half that were non-recurring in 2001. Corporate expenses, net, decreased 11% for the 2001 second quarter due primarily to lower general and administrative expenses. Corporate expenses, net, excluding the Warner-Lambert Company termination fee, increased 28% for the 2001 first half 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 half. The effective tax rate of continuing operations decreased to 24.5% for the 2001 second quarter compared with 25.6% for the 2000 second quarter. The effective tax rate decreased to 24.9% for the 2001 first half compared to 25.8% for the 2000 first half (excluding the effect of the Warner-Lambert Company termination fee). The tax rate reduction occurring in the 2001 second quarter and first half was due primarily to an increased benefit from products manufactured in lower taxed jurisdictions. Consolidated Income and Diluted Earnings Per Share Results - ---------------------------------------------------------- Income and diluted earnings per share from continuing operations for the 2001 second quarter both increased by 16% to $477.0 million and $0.36 compared to $412.7 million and $0.31, respectively, for the prior year. The increases in income and diluted earnings per share from continuing operations for the 2001 second quarter were due to additional worldwide sales of human pharmaceuticals and, to a lesser extent, consumer health care products offset, in part, by higher selling, general and administrative expenses, and research and development expenses. Income and diluted earnings per share from continuing operations for the 2001 first half increased 16% and 15%, respectively, to $1,210.6 million and $0.91 compared to $1,047.6 million and $0.79, respectively, for the same period last year (excluding the Warner-Lambert Company termination fee). Income and diluted earnings per share from continuing operations for the 2000 first half included income of $1,111.1 million and $0.84, respectively, resulting from the Warner- Lambert Company termination fee. The increases in income and diluted earnings 18 Management's Discussion and Analysis of Financial Condition and Results of Operations Three Months and Six Months Ended June 30, 2001 per share from continuing operations for the 2001 first half were due primarily 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 until 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, results of operations or cash flows. However, the conversion to the Euro may have competitive implications on the Company's pricing and marketing strategies, the total impact of which is not known at this time. Competition and Manufacturing - ----------------------------- 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 19 Management's Discussion and Analysis of Financial Condition and Results of Operations Three Months and Six Months Ended June 30, 2001 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. The Company has been experiencing inconsistent results on dissolution testing of certain dosage forms of PREMARIN and is working with the FDA to resolve this issue. Until this issue is resolved, supply shortages of one or more dosage strengths may occur. Although these shortages may adversely affect PREMARIN sales in one or more reporting periods, the Company believes that, as a result of current inventory levels and the Company's enhanced process controls, testing protocols and ongoing formulation improvement project, overall PREMARIN Family sales will not be significantly impacted. Liquidity, Financial Condition and Capital Resources - ---------------------------------------------------- The Company generated operating cash inflows totaling $1,995.7 million during the 2001 first half due primarily to income from continuing operations, collections on accounts receivables and timing of certain selling programs, and favorable timing of payments made on accounts payables and accrued expenses. These cash inflows were more than offset by an increase in inventories of $229.3 million and payments of $5,948.9 million relating to the diet drug litigation (see Note 3 to the Consolidated Condensed Financial Statements). The Company used $1,372.4 million of cash for investments in property, plant and equipment and marketable securities. The capital expenditures made during the 2001 first half 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 $367.6 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 included 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 under the Securities Act pursuant to Rule 144A, as follows: o $500.0 million, 5.875% Notes due March 15, 2004 o $1,000.0 million, 6.25% Notes due March 15, 2006 o $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 per level of downgrade in the Company's credit rating by Moody's and Standard & Poor's. However, the total adjustment to the interest rate for the series of Notes cannot exceed two percentage points. The Company would incur a total of approximately $7.5 million of additional annual interest expenses for every .25 percentage point increase in the interest rate. If Moody's and Standard & Poor's subsequently increase the Company's credit rating, the interest rate payable on each series of Notes is subject to a decrease of .25 percentage points for each level of increase. The interest rate payable for the series of Notes cannot be reduced below the original coupon rate of each series of Notes. There is no adjustment to the interest rate payable on each series of Notes for the first single level downgrade in the Company's credit rating by Standard & Poor's. Any interest rate increase or decrease, as described herein, will take effect from the first day of the interest period during which a ratings change requires an adjustment in the interest rate. In the case of the $1,500.0 million, 6.70% Notes, the interest rate in effect on March 15, 2006 for such Notes will, thereafter, become the effective interest rate until maturity on March 15, 2011. 20 Management's Discussion and Analysis of Financial Condition and Results of Operations Three Months and Six Months Ended June 30, 2001 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 net proceeds received from the combined Notes and commercial paper supported by the credit facilities totaled $5,626.4 million. The Company is using the proceeds from the Notes and commercial paper supported by the credit facilities for general corporate 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 $604.4 million, which was partially offset by $128.9 million of cash provided by stock option exercises. 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 in the Company's 2000 Annual Report on Form 10-K have not materially changed from December 31, 2000 except as follows: o 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. o The interest rate swap agreements are contracts under which the Company converted the fixed rate of the $1,500.0 million 6.70% Notes to a floating rate of interest over the term of the interest rate swap agreements, which is the same term as the underlying debt. 21 Management's Discussion and Analysis of Financial Condition and Results of Operations Three Months and Six Months Ended June 30, 2001 o The interest rate swap agreements are effective fair value hedges, as the terms of the interest rate swaps are the same as the underlying debt and therefore the current market interest rate fluctuations on the debt will be completely offset by the effectiveness of the interest rate swap. At June 30, 2001, the fair values of the Company's financial instruments were as follows: ($ in millions) Notional/ Description Contract Amount Carrying Value Fair Value --------------------- --------------- -------------- ---------- Forward contracts (1) $514.4 $15.2 $15.2 Option contracts (1) 583.2 26.5 26.5 Interest rate swaps 1,500.0 (40.7) (40.7) Outstanding debt (2) 8,119.5 8,075.4 8,158.6 (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 $71.2 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 $222.5 million. 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 forward contracts and interest rate swaps reflects the present value of the future potential gain or (loss) if settlement were to take place on June 30, 2001; the fair value of option contracts reflects the present value of future cash flows if the contracts were settled on June 30, 2001; and the fair value of outstanding debt instruments reflects a current yield valuation based on observed market prices as of June 30, 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 targeted to occur in the second half of 2002. There can be no assurance, however, that any estimated date will prove to be accurate. 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 is being constructed in Ireland. 22 Management's Discussion and Analysis of Financial Condition and Results of Operations Three Months and Six Months Ended June 30, 2001 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, PREMARIN, 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 of future events that involve risks and uncertainties including, without limitation, risks associated with the inherent uncertainty of pharmaceutical research, product development, manufacturing, and commercialization, economic conditions including interest and currency exchange rate fluctuations, the impact of competitive or generic products, product liability and other types of lawsuits, the impact of legislative and regulatory compliance and obtaining approvals, and patents. The Company assumes no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. 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. 23 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 and Quarterly Report on Form 10-Q for the period ended March 31, 2001. On July 10, 2001, the District Court of Jim Wells County, Texas for the 79th Judicial District entered a final judgment in the case of Lopez v. American Home Products Corporation, et al., No. 99-07-37723. The jury in the Lopez case had returned a verdict in favor of the plaintiff in April 2001 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. In entering the final judgment, the court applied the Texas statutory cap on punitive damages and granted the plaintiff's request to voluntarily remit certain amounts awarded as compensatory damages. The final judgment included approximately $4.8 million in compensatory damages, $3.4 million in punitive damages and $1 million in pre-judgment interest, for a total of approximately $9 million. The Company intends to pursue an appeal from the final judgment. The Company continues to resolve the remaining claims of those individuals who have opted out of the Company's nationwide, class action settlement of the diet drug litigation involving PONDIMIN and/or REDUX (see Note 3 to the Consolidated Condensed Financial Statements). In the litigation involving the Company's DIMETAPP and ROBITUSSIN cough/cold products that contained the ingredient phenylpropanolamine ("PPA"), one additional class action has been filed. Sims, et al. v. The Delaco Company f/k/a/ Thompson Medical Co., Inc., et al., No. 3-01-0509 (U.S.D.C., M.D. Tenn.), is a putative class action against the Company and seven other defendants seeking economic damages, a court-supervised medical monitoring program and a court-supervised educational program to fully apprise plaintiffs and class members of the alleged adverse health effects and risks of PPA. In addition to the Sims case and the previously reported putative class actions, there are a total of 62 individual personal injury lawsuits 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 that marketed PPA-containing products. The Company intends to defend all such cases vigorously. In University of Colorado et al. v. American Cyanamid Company, described in the Annual Report on Form 10-K, a trial on potential damages was held in March 2001 and, in July 2001, the District Court awarded plaintiffs damages of approximately $24 million, together with pre-judgment interest, bringing the damages award to between approximately $45 million and $55 million. The Company intends to appeal the damages award to the U.S. Court of Appeals for the Federal Circuit. 24 A purported class action on behalf of "end-payors" (defined as the last persons and entities in the chain of distribution) was filed in federal district court in Cincinnati, alleging that the Company violated federal and state antitrust laws through alleged exclusionary practices relating to PREMARIN and that these practices resulted in unjust enrichment. (Mattoon, et al. v. Wyeth-Ayerst Laboratories, U.S.D.C. W.D., No. C-1-01447, July 6, 2001.) The relief requested includes injunctive relief, damages and disgorgement of profits. The Company intends to vigorously defend this action. In the Brand Name Prescription Drugs Antitrust Litigation MDL 997, the Company settled the complaint brought by Rite Aid, Revco and certain other pharmacies for an undisclosed amount that is not material to the Company. In the litigation relating to the settlement by the Company of a patent dispute with Schering-Plough Corporation regarding the Company's proposed generic version of Schering's K-Dur potassium chloride supplement product, a total of approximately 35 purported class actions have been filed in various federal and state courts, primarily on behalf of alleged classes of indirect purchasers. The allegations in these cases are similar to the allegations in the FTC complaint in In the Matter of Schering-Plough Corp. et al., Docket No. 9297. The complaints challenge as violations of federal and state antitrust and/or consumer protection laws the Company's agreement with Schering-Plough to settle a patent case that alleged that the Company's generic version of Schering's K-Dur product infringed Schering's valid patent. The relief sought includes treble damages, disgorgement and injunctive relief. The Company believes that its settlement with Schering-Plough did not violate the FTC Act or the antitrust laws and intends to vigorously defend these cases. 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. 25 Item 4. Submission of Matters to a Vote of Security-Holders --------------------------------------------------- (a) The matters described under item 4(c) below were submitted to a vote of security-holders, through the solicitation of proxies pursuant to Section 14 under the Securities Exchange Act of 1934, as amended, at the Annual Meeting of Stockholders held on April 26, 2001 (the "Annual Meeting"). (b) Not applicable. (c) The following describes the matters voted upon at the Annual Meeting and sets forth the number of votes cast for, against or withheld and the number of abstentions as to each such matter (there were no broker non-votes): (i) Election of directors: Nominee For Withheld --------------------------- -------------- ---------- Clifford L. Alexander, Jr. 1,107,244,048 10,821,999 Frank A. Bennack, Jr. 1,107,643,370 10,422,677 Richard L. Carrion 1,107,142,864 10,923,183 Robert Essner 1,107,992,740 10,073,307 John D. Feerick 1,107,626,669 10,439,378 John P. Mascotte 1,107,759,835 10,306,212 Mary Lake Polan, M.D., Ph.D 1,107,891,670 10,174,377 Ivan G. Seidenberg 1,079,861,533 38,204,514 Walter V. Shipley 1,107,599,744 10,471,091 John R. Stafford 1,107,298,696 10,767,351 John R. Torell III 1,107,808,864 10,257,183 (ii) Ratification of the appointment of Arthur Andersen LLP as principal independent public accountants for 2001: For Against Abstain ------------- ---------- --------- 1,094,252,290 18,720,484 4,517,957 26 Item 6. Exhibits and Reports on Form 8-K -------------------------------- (a) Exhibits -------- Exhibit No. Description ----------- ----------- (10.1) American Home Products Corporation Deferred Compensation Plan as amended to date. (10.2) American Home Products Corporation Stock Option Plan for Non-Employee Directors as amended to date. (10.3) American Home Products Corporation 1994 Restricted Stock Plan For Non-Employee Directors as amended to date. (10.4) American Home Products Corporation Directors' Deferral Plan as amended to date. (12) Computation of Ratio of Earnings to Fixed Charges. (b) Reports on Form 8-K ------------------- None 27 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: August 14, 2001 28 Exhibit Index ------------- Exhibit No. Description - ---------- ----------- (10.1) American Home Products Corporation Deferred Compensation Plan as amended to date. (10.2) American Home Products Corporation Stock Option Plan for Non-Employee Directors as amended to date. (10.3) American Home Products Corporation 1994 Restricted Stock Plan For Non-Employee Directors as amended to date. (10.4) American Home Products Corporation Directors' Deferral Plan as amended to date. (12) Computation of Ratio of Earnings to Fixed Charges. EX-1 EX-10.1 3 defcmp.txt DEFERRED COMPENSATION PLAN AMERICAN HOME PRODUCTS CORPORATION DEFERRED COMPENSATION PLAN Amended and Restated as of April 1, 2001 PURPOSE The American Home Products Corporation Deferred Compensation Plan (the "Plan") is an unfunded deferred compensation plan, that provides certain key employees of American Home Products Corporation, a Delaware corporation ("AHPC") and its wholly-owned Subsidiaries in the United States, including Puerto Rico (together with AHPC, the "Company") with the opportunity to voluntarily defer receipt of a portion of their compensation. AHPC adopted the Plan to enable the Company to attract and retain a select group of management and highly compensated Employees. SECTION ONE - DEFINITIONS Whenever used in the Plan, unless clearly apparent from the context, the following terms shall have the following meanings: (a) "Administrator" means the Committee or such entity or person to whom the Committee may delegate responsibility for administration of the Plan. (b) "AHPC ERP" means the American Home Products Corporation Executive Retirement Plan, as amended from time to time. (c) "AHPC SERP" means the American Home Products Corporation Supplemental Executive Retirement Plan, as amended from time to time. (d) "AHPC SESP" means the American Home Products Corporation Supplemental Employee Savings Plan, as amended from time to time. (e) "Amended and Restated Effective Date" means April 1, 2001. (f) "Base Salary" means, except as set forth in the next sentence, for purposes of deferrals under the Plan, the annual base cash compensation to be paid during a Plan Year by the Company to an Eligible Employee for services rendered during such Plan Year. Notwithstanding the foregoing, solely for purposes of determining whether an Employee is an Eligible Employee, "Base Salary" means the annual base compensation from all sources (i.e., regardless of whether United States source or foreign source) to be paid during a Plan Year by AHPC and its Subsidiaries to an Employee for services rendered during such Plan Year. (g) "Beneficiary" means one or more persons or entities (including a trust or estate) designated by a Participant to receive payment of any unpaid balance in the Participant's Deferral Account under the Plan in the event of the Participant's death. Such designation shall be made on a form provided by the Recordkeeper and approved by the Administrator in accordance with its rules as provided in Section 9(i). (h) "Board of Directors" means the Board of Directors of AHPC. (i) "Bonus Compensation" means cash compensation to be paid during a Plan Year to an Eligible Employee by the Company for services rendered under any incentive compensation or bonus plan, program or arrangement which is maintained or which may be adopted by the Company. (j) "Change in Control" means the first to occur of any of the following events: (i) any person or persons acting in concert (excluding AHPC benefit plans) becomes the beneficial owner of securities of AHPC having at least twenty percent (20%) of the voting power of AHPC's then outstanding securities (unless the event causing the twenty percent (20%) threshold to be crossed is an acquisition of voting common securities directly from AHPC); or (ii) the consummation of any merger or other business combination of AHPC, sale or lease of AHPC's assets, or combination of the foregoing transactions (the "Transactions"), other than a Transaction immediately following which the shareholders of AHPC who owned shares immediately prior to the Transaction (including any trustee or fiduciary of any AHPC employee benefit plan) own, by virtue of their prior ownership of AHPC's shares, at least sixty-five percent (65%) of the voting power, directly or indirectly, of (a) the surviving corporation in any such merger or other business combination; (b) the purchaser or lessee of the AHPC's assets; or (c) both the surviving corporation and the purchaser or lessee in the event of any combination of Transactions; or (iii)within any twenty-four (24) month period, the persons who were directors immediately before the beginning of such period (the "Incumbent Directors") shall cease (for any reason other than death) to constitute at least a majority of the Board of Directors or the board of directors of a successor to AHPC. For this purpose, any director who was not a director at the beginning of such period shall be deemed to be an Incumbent Director if such director was elected to the Board of Directors by, or on the recommendation of or with the approval of, at least two-thirds of the directors who then qualified as Incumbent Directors (so long as such director was not nominated by a person who has expressed an intent to effect a Change in Control or engage in a proxy or other control contest). (k) "Code" means the Internal Revenue Code of 1986, as amended from time to time. (l) "Committee" means the Compensation and Benefits Committee of the Board of Directors. (m) "Company" means American Home Products Corporation, a Delaware corporation ("AHPC"), together with its wholly owned Subsidiaries in the United States, including Puerto Rico. (n) "Deemed Interest" means the amount of interest that would have been earned had an amount deferred hereunder been invested at the Deemed Rate of Interest. (o) "Deemed Rate of Interest" - means (i) prior to June 1, 1999, the average of the quarter end yields for a ten (10) year period ending September 30 of the prior year of the ten (10) year U.S. Treasury notes plus two percent (2%); and (ii) thereafter, ten percent (10%) per annum, compounded quarterly. The Deemed Rate of Interest in subparagraph (ii) above may be increased or decreased from time to time by the Board of Directors as it may deem appropriate; provided that no such decrease shall be effective for Deemed Interest accruing prior to the latest of: (i) April 1, 2004, (ii) the date of the Board of Directors action implementing such decrease, and (iii) the date such decrease is communicated generally to Participants; and provided, further, that, if effective on or after April 1, 2004 the Board of Directors decreases the Deemed Rate of Interest below ten percent (10%) per annum, such decrease shall not apply to any amounts which were deferred as of April 1, 2004 and with respect to which the Deemed Rate of Interest has been selected at all times from April 1, 2004 through the date of such decrease, and the ten percent (10%) per annum rate shall continue to apply with respect to such amounts (unless and until another Investment Option is subsequently elected). (p) "Deferral Account" means a bookkeeping account (including all subaccounts) maintained by the Recordkeeper for each Participant to record his or her balance under the Plan. A Participant's Deferral Account shall consist of the sum of: (i) all of a Participant's deferrals under the Plan, whether made before or after the Amended and Restated Effective Date, including amounts rolled into the Predecessor Plan as of the Original Effective Date, plus or minus (ii) Investment Earnings/Losses on those amounts in accordance with the applicable crediting provisions of the Plan that relate to the Participant's Deferral Account, minus (iii) all distributions or withdrawals made to a Participant or his or her Beneficiary pursuant to the Plan that relate to his or her Deferral Account. (q) "Disability" means a period of disability during which a Participant qualifies for permanent disability benefits under the Company's long-term disability plan, or, if a Participant does not participate in such a plan, a period of disability during which the Participant would have qualified for permanent disability benefits under such a plan had the Participant been a Participant in such a plan, as determined in the sole discretion of the Administrator. If the Company does not sponsor such a plan, or discontinues to sponsor such a plan, Disability shall be determined by the Administrator in its sole discretion. (r) "Election Form" means the form or forms established from time to time by the Administrator, that a Participant completes, signs and returns to the Recordkeeper to make an election under the Plan. (s) "Eligible Employee" means an active Employee of the Company who is scheduled to receive Base Salary for the Plan Year of not less than one hundred fifty-five thousand dollars ($155,000) or such other amount as may be determined from time to time by the Administrator. The determination of whether an Employee is an Eligible Employee shall be made at the sole discretion of the Administrator. (t) "Employee" means any employee of the Company. (u) "Executive Retirement Payments" means the payments an Eligible Employee is eligible to receive from the AHPC ERP, the AHPC SERP, and the AHPC SESP. (v) "Investment Earnings/Losses" means the income, gains and losses that would have been realized had an amount deferred hereunder actually been invested in the Investment Option or Options selected by a Participant. (w) "Investment Options" means the investment options as listed in Appendix A, which is attached hereto and incorporated herein by this reference, that are used as hypothetical investment options among which the Participant may allocate all or a portion of his or her Deferral Account. The Administrator may amend or change available Investment Options (other than the Deemed Rate of Interest Investment Option) from time to time as it deems appropriate in its sole discretion, as provided for in Section 7(f); it being understood that the Deemed Rate of Interest may be amended only by the Board of Directors in accordance with Section 1(o) above. (x) "Normal Retirement Date" shall have the same meaning as set forth in the American Home Products Corporation Retirement Plan - United States. (y) "Original Effective Date" means the original effective date for the Predecessor Plan, which was July 31, 1997. (z) "Participant" means an Employee or Retiree (for so long as he or she retains a Deferral Account under the Plan): (i) who at the time of commencement of his or her participation in the Plan was an Eligible Employee, (ii) who elects to participate in the Plan, (iii) who signs and returns all enrollment forms required by the Recordkeeper, and (iv) whose signed form(s) are accepted by the Recordkeeper. The term "Participant" shall include an individual, including a Retiree, who is not making deferrals but retains a Deferral Account in the Plan (including through the Predecessor Plan). (aa) "Plan" means the American Home Products Corporation Deferred Compensation Plan as set forth herein and as it may be amended and/or restated from time to time. (bb) "Plan Year" means the calendar year. (cc) "Predecessor Plan" means the AHPC Deferred Compensation Plan, which was effective as of July 31, 1997, and which replaced and subsumed all Company sponsored deferral plans or programs that existed for members of a select group of management Employees prior to July 31, 1997. (dd) "Recordkeeper" means the entity selected by the Administrator from time to time to maintain records of the Deferral Accounts of Participants and provide administrative services. (ee) "Retiree" - means an individual who is Retired. (ff) "Retirement", "Retire(s)" or "Retired" means separation from employment from the Company for any reason other than a leave of absence, death or Disability on or after the earlier of the attainment of (i) age sixty-five (65) or (ii) age fifty-five (55) with five (5) Years of Service. (gg) "Retirement Benefit" means the type and form of payments available to a Participant upon Retirement as described in Section 8(b). (hh) "Retirement Benefit Installment Payout Dates" means, with respect to a deferral made by a Participant, the first day of the calendar quarter elected (initially or upon re-deferral pursuant to Section 8(b)(3)) by the Participant for the commencement of installment payments and, in the case of annual installments, the anniversary dates thereof and, in the case of quarterly installments, the first day of each calendar quarter thereafter, in each case through the final installment payout date elected by the Participant with respect to such deferral; provided that the first of such dates shall be (A) with respect to Executive Retirement Payments, not less than twelve (12) months after the Participant's Retirement date and (B) with respect to all other Retirement Benefit payments, on or after the Participant's Retirement date; and provided, further, that the final installment payout date with respect to such deferral occurs (X) no earlier than the second anniversary of the first installment payment and (Y) no later than the earlier of (I) the quarter prior to the fifteenth anniversary of the first installment payment and (II) the fifteenth anniversary of the Participant's Normal Retirement Date. (ii) "Retirement Benefit Lump Sum Payout Date" means, with respect to a deferral made by a Participant, the first day of the calendar quarter elected (initially or upon re-deferral pursuant to Section 8(b)(3)) by the Participant for a lump sum payout of a Retirement Benefit; provided that such date shall be (A) with respect to Executive Retirement Payments, not less than twelve (12) months after the Participant's Retirement date and (B) with respect to all other Retirement Benefit payments, on or after the Participant's Retirement date; and provided, further, that such date shall be no later than the fifteenth anniversary of the Participant's Normal Retirement Date. (jj) "Retirement Eligible" means a Participant who is an Employee and who has attained the earlier of (i) age sixty-five (65), or (ii) age fifty-five (55) with five (5) Years of Service. (kk) "Severance Payments" means severance payments (including pension enhancements) payable pursuant to Change in Control severance agreements entered into between AHPC and members of the Finance Committee, Operations Committee, and other principal elected corporate officers and key Employees of AHPC, which provide for severance benefits to such Employees in the event of their termination of employment following a Change in Control. (ll) "Short-Term Payout" means the type of payout available to a Participant as described in Section 8(a). (mm) "Short-Term Payout Date" means, with respect to a deferral made by a Participant, the first day of the calendar quarter elected by the Participant for payment of a Short-Term Payout; provided that such date shall be in a Plan Year which, in the case of an initial election, is at least three (3) but no more than fifteen (15) years after the end of the Plan Year in which the deferral occurs and in the case of a re-deferral pursuant to Section 8(a)(2), is at least three (3) but not more than fifteen (15) years after the date on which the Short-Term Payout, but for the re-deferral, would have been paid; and provided, further, that in each case such date shall be no later than the fifteenth anniversary of the Participant's Normal Retirement Date. (nn) "Subsidiary(ies)" means, as to any person, any corporation, partnership or joint venture, of which (or in which) such person, together with one or more of its subsidiaries, directly or indirectly owns more than fifty percent (50%) of the interest in the capital or profits of such corporation, partnership or joint venture. (oo) "Trust Agreement" means an agreement between the Trustee and AHPC covering a grantor trust which AHPC may, in its sole discretion, establish in connection with the Plan as described in Section 9(g). (pp) "Trustee" means the trustee named by AHPC from time to time as the trustee for the Trust Agreement. (qq) "Year of Service" shall have the same meaning as in the AHPC Retirement Plan. (rr) "Yearly or Quarterly Installment Method" means a yearly (or quarterly) installment payment over the number of years (or quarters) selected by the Participant in accordance with the Plan, calculated as follows: the Deferral Account of the Participant shall be calculated as of the close of business on the date of reference (or, if the date of reference is not a business day, on the immediately following business day). The date of reference with respect to the first yearly (or quarterly) installment payment dates shall be as provided in Section 1(hh), and the date of reference with respect to subsequent yearly (or quarterly) installment payment dates shall be the anniversary date or dates thereof in the applicable year. The yearly (or quarterly) installment shall be calculated by multiplying the portion of the Deferral Account not allocated to the Deemed Interest Investment Option by a fraction, the numerator of which is one (1), and the denominator of which is the remaining number of yearly (or quarterly) payments due the Participant. By way of example, if the Participant elects ten (10) yearly (or forty (40) quarterly) installment payments, the first payment shall be one-tenth (1/10) (or one-fortieth (1/40)) of the Deferral Account, calculated as described in this definition. For the following payment, the payment shall be one-ninth (1/9) (or one thirty-ninth (1/39)) of the Deferral Account, calculated as described in this definition. SECTION TWO - DEFERRALS UNDER THE PREDECESSOR PLAN Prior to the Amended and Restated Effective Date of the Plan, AHPC maintained the Predecessor Plan, which allowed members of a select group of management or highly compensated employees to defer receipt of various types of compensation. In addition, some of those employees had separate non-qualified plan balances consolidated into the Predecessor Plan as of the Original Effective Date. Except as otherwise provided herein, any Participant who has a Deferral Account as of the Amended and Restated Effective Date shall continue to have that portion of his or her Deferral Account that is in existence as of that date governed under the Plan by the distribution provisions of the Predecessor Plan as elected by the Participant prior to the Amended and Restated Effective Date. Notwithstanding the foregoing, a Participant with such a balance who is an Eligible Employee on March 31, 2001, shall have the right (1) by June 1, 2001 to amend any distribution election made prior to the Amended and Restated Effective Date to conform with the distribution options allowed under Section 8, provided that (i) such election is in a form and manner approved by the Administrator, (ii) to the extent that such amendment relates to the deferrals of Base Salary for the 2001 Plan Year, the distribution election designated by the Participant in such amendment shall govern all deferrals of Base Salary during the 2001 Plan Year and (iii) any such election does not apply (A) to the portion of each balance that is otherwise payable under a prior election within six (6) months of June 1, 2001, or (B) to the extent that it would accelerate the payment of any distribution to a date on or before December 1, 2001; and (2) thereafter, to amend any distribution election in accordance with and subject to the provisions of Section 8. Further, notwithstanding the foregoing, a Participant with such a balance may elect Investment Options with respect thereto in accordance with and subject to the provisions of Section 7(d). SECTION THREE - PARTICIPATION IN THE PLAN (a) Participation on the Amended and Restated Effective Date. A Participant in the Predecessor Plan on the Amended and Restated Effective Date shall continue to be a Participant in the Plan. An Employee who is not a Participant as of the Amended and Restated Effective Date but is an Eligible Employee, shall become a Participant as of the Amended and Restated Effective Date if he or she completes and files in a timely manner all forms required to become a Participant in the Plan in accordance with the enrollment procedures set forth below. (b) Participation after the Amended and Restated Effective Date. An Employee who is an Eligible Employee on the Amended and Restated Effective Date, and who does not initially elect to become a Participant, or an Employee who first becomes an Eligible Employee after the Amended and Restated Effective Date during a Plan Year, may commence participation in the Plan as set forth in Section 3(c) and (d) below. (c) Enrollment Requirements. As a condition to participation, each Eligible Employee who elects to participate in the Plan shall complete, execute, and return to the Recordkeeper such forms as are required from time to time by the Administrator, and all such forms must be submitted to the Recordkeeper within thirty (30) days (or such other time period as the Administrator determines in its sole discretion) of the date that an Employee is first notified that he or she is an Eligible Employee. In addition, the Administrator may establish from time to time such other enrollment requirements as it determines in its sole discretion are appropriate. (d) Commencement of Participation. Except as provided in Section 3(a) above, once an Eligible Employee has met all of the enrollment requirements set forth in the Plan, including returning all required documents within the specified time period, the Eligible Employee shall commence participation in the Plan on the first day of the month following the month in which the Eligible Employee completes all enrollment requirements; provided, however that the Administrator may designate, in its sole discretion, another commencement date that is administratively reasonable. If an Eligible Employee fails to meet all of the enrollment requirements within the period required in accordance with Section 3(c), that Employee shall not be eligible to participate in the Plan again until the first day of the following Plan Year, again subject to timely delivery to and acceptance by the Recordkeeper of the required forms. SECTION FOUR - DEFERRALS UNDER THE PLAN (a) Deferral of Base Salary and/or Bonus Compensation. (1) Subject to the following sentence, for each Plan Year, a Participant may designate a percentage of his or her Base Salary and/or Bonus Compensation that is payable in a Plan Year to be deferred in accordance with Section 6. To be eligible to make a deferral of Base Salary (but not Bonus Compensation) into the Plan, six percent (6%) of the amount of Base Salary elected must be deferred in accordance with the Plan for a Plan Year to be deferred under the AHPC SESP for the same Plan Year in accordance with the AHPC SESP's rules. The remaining elected deferral amount under the Plan shall then be deferred into the Plan. (2) For each Base Salary and/or Bonus Compensation deferral (adjusted to reflect Investment Earnings/Losses with respect thereto), a Participant shall make appropriate distribution elections in accordance with Section 8 below with respect to such deferral amounts. Notwithstanding any provision of the Plan to the contrary, all elections with respect to the 2002 Plan Year and each Plan Year thereafter shall be required to provide for the same Short-Term Payout Date, Retirement Benefit Lump Sum Payout Date or Retirement Benefit Installment Payout Dates, as the case may be, for all deferrals of Base Salary and Bonus Compensation in the same Plan Year. (3) A deferral election described above in this Section 4(a) with respect to any Plan Year may not be revoked, except that a Participant may revoke completely a deferral election for Base Salary not yet earned at the time of the Participant's revocation election (which revocation will itself be irrevocable for the remainder of the Plan Year). (b) Deferral of Severance Payments. (1) A Participant may designate a percentage of any Severance Payment that is payable in a Plan Year to be deferred in accordance with Section 6, provided, however, that such designation shall be given effect only if the Participant is Retirement Eligible at the time of his or her termination of employment. (2) For any Severance Payment deferral (adjusted to reflect Investment Earnings/Losses with respect thereto), a Participant shall make appropriate distribution elections in accordance with Section 8 below with respect to each such deferral. (c) Deferral of Executive Retirement Payments. (1) A Participant may designate a percentage of his or her Executive Retirement Payments to be deferred in accordance with Section 6, provided, however, that such designation shall be given effect only if the Participant is Retirement Eligible at the time of his or her termination of employment. (2) For each Executive Retirement Payment deferral (adjusted to reflect Investment Earnings/Losses with respect thereto), a Participant shall make appropriate distribution elections in accordance with Section 8 below. A Participant shall be permitted to make a separate deferral election with respect to amounts transferred to the Plan from the AHPC SERP, the AHPC ERP and/or the AHPC SESP. (d) Minimum/Maximum Amount of Deferral. For each Plan Year, a Participant may elect to defer Base Salary, Bonus Compensation, Severance Payments and/or Executive Retirement Payments, if applicable, under Section 4(a)-(c) in increments of at least five percent (5%) (unless the Administrator determines otherwise in its sole discretion) up to a maximum deferral of one hundred percent (100%) of each type of deferral the Participant elects to make with respect to that Plan Year. SECTION FIVE - INVESTMENT EARNINGS/LOSSES (a) Deemed Interest Prior to the Amended and Restated Effective Date. Prior to the Amended and Restated Effective Date, amounts credited to the Predecessor Plan shall be deemed to have earned interest at the Deemed Rate of Interest then in effect, as adjusted. Such Deemed Interest shall be credited to the Deferral Accounts of Participants in accordance with the crediting provisions of Section 7(g). (b) Investment Earnings/Losses On and After the Amended and Restated Effective Date. On and after the Amended and Restated Effective Date: (i) amounts in the Plan on the Amended and Restated Effective Date, (ii) Base Salary and/or Bonus Compensation deferred under the Plan, (iii) Executive Retirement Payments deferred under the Plan, and (iv) Severance Payments deferred under the Plan, shall be deemed to have realized Investment Earnings/Losses based on the Investment Option or Options selected from time to time by the respective Participants. Such Investment Earnings/Losses shall be credited and debited to the Deferral Accounts of Participants in accordance with the debiting and crediting provisions of Section 7(g). SECTION SIX - DEFERRAL ELECTIONS (a) Deferral Elections. All deferrals made in accordance with Section 4 shall be evidenced by the Participant's properly executing and submitting such Election Forms and other forms as may be required by the Recordkeeper in accordance with its rules and the rules set forth in this Section 6. (b) Deferrals of Base Salary and/or Bonus Compensation. Except for a Participant's first year of Plan participation, a Participant's election to defer Base Salary and/or Bonus Compensation in accordance with Section 4(a) with respect to a particular Plan Year must be received by the Recordkeeper no later than the last day of the preceding Plan Year. For a Participant's first year of Plan participation, deferral elections must be made in accordance with Section 3(c) and shall only apply to Base Salary earned and Bonus Compensation first determined after the election. Each Participant must designate on the Election Form the timing and form of distribution of such Base Salary and/or Bonus Compensation (adjusted to reflect Investment Earnings/Losses with respect thereto) in accordance with the distribution options described in Section 8. (c) Deferrals of Severance Payments. A Participant's election to defer a Severance Payment in accordance with Section 4(b) must be received by the Recordkeeper prior to the date the applicable Change in Control following which a Participant becomes entitled to receive such Severance Payment. The Participant must designate on the Election Form the timing and form of distribution of the Severance Payment (adjusted to reflect Investment Earnings/Losses with respect thereto) in accordance with the options described in Section 8. (d) Deferrals of Executive Retirement Payments. A Participant's election to defer Executive Retirement Payments in accordance with Section 4(c) must be received by the Recordkeeper prior to the date of the Participant's Retirement. The Participant must designate on the Election Form the timing and form of such distribution of Executive Retirement Payments (adjusted to reflect Investment Earnings/Losses with respect thereto) in accordance with the options described in Section 8. Notwithstanding any other provision of the Plan to the contrary, an election to defer such payments made after the Amended and Restated Effective Date shall not apply (i) unless the payment elected is scheduled to commence not less than twelve (12) months after the election is made, or (ii) to any payment scheduled to commence within twelve (12) months of such election. SECTION SEVEN - DEFERRAL ACCOUNTS (a) Establishment of Deferral Accounts.The Recordkeeper shall establish and maintain an individual Deferral Account under the Plan on behalf of each Participant by or on behalf of whom deferrals have been made under Section 4 to track the Investment Earnings/Losses or other elections applicable to the Deferral Account of the Participant. The Deferral Account of each Participant may have subaccounts established and maintained as appropriate to reflect the Investment Option(s) and/or distribution elections selected by the Participant. (b) Crediting of Amounts Deferred. A Participant's Deferral Account shall be credited by the Recordkeeper for deferral amounts after such amounts are withheld and deferred pursuant to a Participant's elections on the appropriate Election Form with an amount equal to the amounts deferred by the Participant in accordance with Section 7(g). Such amounts shall be allocated among the available Investment Options in accordance with the selections made by the Participant among the Investment Options pursuant to Section 7(f). (c) Crediting/Debiting of Deferral Account. In accordance with Section 7(g) and subject to the rules and procedures that are established from time to time by the Administrator and/or the Recordkeeper (which may or may not be in writing), Investment Earnings/Losses shall be credited or debited to a Participant's Deferral Account. (d) Election of Investment Options. A Participant, in connection with his or her initial deferral election under the Plan or in connection with the amendment and restatement of the Plan, shall elect, on the Election Form(s), one or more Investment Option(s) as described in Section 7(f) below to be used to determine the additional amounts to be credited or debited to his or her Deferral Account. Such elections shall continue to apply to his or her Deferral Account unless changed in accordance with the next sentence. The Participant may (but is not required to) elect on any business day, by submitting an Election Form(s) to the Recordkeeper that is accepted by the Recordkeeper (which submission may take the form of an electronic or telephonic transmission, if required or permitted by the Administrator), to add or delete one or more Investment Option(s) to be used to determine the additional amounts to be credited or debited to his or her Deferral Account, or to change the portion of his or her Deferral Account allocated to each previously or newly elected Investment Option(s). If an election is made in accordance with the previous sentence, it shall apply the next business day (unless otherwise determined by the Administrator) and shall continue until the Participant makes any changes to those elections in accordance with the previous sentence. Notwithstanding the foregoing, in no event may a Participant elect to add or delete the Deemed Rate of Interest as an Investment Option or add amounts to or transfer amounts from that Investment Option, once any Retirement Benefit payment as described in Section 8(b) has commenced. (e) Proportionate Allocation. In making any election described in Section 7(d) above, the Participant shall specify on the Election Form(s), in percentage increments of at least five percent (5%) (unless the Administrator determines otherwise in its sole discretion) the percentage of his or her Deferral Account to be allocated to an Investment Option. (f) Investment Options. The Administrator may, in its sole discretion, amend or change available Investment Options in accordance with Section 1(w) and subject to Section 1(o). Any discontinuation of an Investment Option shall not take effect prior to the first day of the calendar quarter that follows by at least thirty (30) days the day on which the Administrator generally gives Participants written notice of such change. If any Investment Option is discontinued, Participants having selected such Investment Option must designate another Investment Option for the portion by his or her Deferral Account allocated thereto within the timeframe designated by the Administrator. A Participant may elect any new Investment Option added by the Administrator ten (10) business days after being notified that the Investment Option was added. If the Recordkeeper receives an initial Election Form that it deems to be incomplete, unclear or improper, the Participant shall be deemed to have filed no direction with respect thereto. If the Recordkeeper receives a revised Election Form that it deems to be incomplete, unclear or improper, or fails to receive a revised Election Form when one is required to be filed, the Participant's Investment Option election then in effect shall remain in effect, except in the case of a discontinued Investment Option, in which case the Participant shall be deemed to have filed no direction with respect thereto. If the Recordkeeper possesses (or is deemed to possess as provided in the previous sentence) at any time directions as to Investment Options of less than all of the Participant's Deferral Account, the Participant shall be deemed to have elected for the undesignated portion of his or her Deferral Account the Deemed Interest Investment Option or such other Investment Option as determined by the Administrator in its sole discretion. Each Participant hereunder, as a condition to his or her participation hereunder, agrees to indemnify and hold harmless the Committee, the Administrator, and the Company, and their agents and representatives, from any losses or damages of any kind relating to the Investment Options made available hereunder. (g) Crediting or Debiting Method. The performance of each elected Investment Option (either positive or negative) will be determined by the Recordkeeper, in accordance with the rules established by the Administrator in its sole discretion, based on the performance of the actual Investment Options themselves. A Participant's Deferral Account shall be credited or debited on each business day, or as otherwise determined by the Recordkeeper in accordance with the rules established by the Administrator in its sole discretion, as though: (i) the amounts of the Participant's deferral election were actually deferred no later than the close of business on the third business day after the day on which (x) such amounts were otherwise payable to the Participant as Base Salary, Bonus Compensation, or a Severance Payment and (y) in the case of Executive Retirement Payments the date of the Participant's Retirement; (ii) a Participant's Deferral Account was actually invested in the Investment Options(s) selected by the Participant, in the percentages elected by the Participant as of such date, at the closing price on such date; and (iii) any distribution made to a Participant that decreases such Participant's Deferral Account ceased being invested in the Investment Options(s), in the percentages applicable to such day, no earlier than three (3) business days prior to the distribution, at the closing price on such date. (h) No Actual Investment. Notwithstanding any other provision of the Plan, the Investment Options are to be used for measurement purposes only, and a Participant's election of any such Investment Options, the allocation to his or her Deferral Account thereto, the calculation of additional amounts and the crediting or debiting of such amounts to a Participant's Deferral Account shall not be considered or construed in any manner as an actual investment of his or her Deferral Account in any such Investment Options. In the event that AHPC, in its discretion, decides to invest funds in any or all of the Investment Options, no Participant shall have any rights in or to such investments themselves. Without limiting the foregoing, a Participant's Deferral Account shall at all times be a bookkeeping entry only and shall not represent any investment made on his or her behalf by AHPC or the Trust. The Participant shall at all times remain an unsecured creditor of AHPC. SECTION EIGHT- DISTRIBUTIONS (a) Short-Term Payouts. (1) Commencement of Payment of Short-Term Payouts. In connection with each election to defer Base Salary and/or Bonus Compensation, a Participant may elect to receive a "Short-Term Payout" with respect to each such elected deferral. Each Short-Term Payout shall be a lump-sum payment equal to the deferred amount, plus or minus Investment Earnings/Losses debited or credited thereto in the manner provided in Section 7(g), determined at the time the Short-Term Payout becomes payable. Each Short-Term Payout elected shall be payable on the Short-Term Payout Date designated by the Participant on the Election Form with respect thereto. Short-Term Payouts shall be made as soon as practicable after the applicable Short-Term Payout Date elected by the Participant on the applicable Election Form, provided, that in no event shall such payment be made later than thirty (30) days after the relevant elected date. (2) Re-Deferral of Short Term Payout. Notwithstanding anything in the Plan to the contrary, a Participant who is an active Employee, may, with respect to each elected Short-Term Payout, on a form designated by the Recordkeeper, elect (on one or more occasions) to re-defer such Short-Term Payout to another allowable Short-Term Payout Date; provided, however, that any such re-deferral election shall not apply (i) unless it is accepted by the Recordkeeper in accordance with the rules established by the Administrator in its sole discretion, and (ii) to any payment that would have been made under a prior election within twelve (12) months of the date of such new election. In the event that a scheduled Short-Term Payout, if paid, would (or in the judgment of the Administrator, acting in its sole discretion, would be reasonably likely to) result in the loss of deductibility for federal income tax purposes of any compensation paid by the Company due to the limitations of Section 162(m) of the Code in any given year, then the scheduled Short-Term Payout shall be automatically re-deferred for a period of three (3) years. Subject to the foregoing, the last Election Form accepted by the Recordkeeper shall govern the Short-Term Payout Date of that Short-Term Payout (adjusted to reflect Investment Earnings/Losses with respect thereto). (3) Changing a Short-Term Payout to a Retirement Benefit. A Participant may change any Short-Term Payout election up to the date of Retirement to an allowable Retirement Benefit payout by submitting a new Election Form to the Recordkeeper; provided that any such Election Form is (i) submitted at least twelve (12) months prior to the Retirement Benefit Lump Sum Payout Date or the initial Retirement Benefit Installment Payout Date, as the case may be, elected by the Participant, and (ii) accepted by the Recordkeeper in accordance with the rules established by the Administrator in its sole discretion; provided, further, that such election shall not apply to any payment that would have been made under a prior election within twelve (12) months of the date of such new election. (b) Retirement Benefit Payout. (1) Commencement of Retirement Benefit. A Participant who Retires shall receive, as a "Retirement Benefit", the portion of his or her Deferral Account that he or she has not elected to be distributed in the form of a Short-Term Payout, or that is not distributed in accordance with another provision of the Plan as a result of the Participant's death, Disability or termination of employment prior to Retirement. (2) Time of Payment of Retirement Benefit. An active Participant, in connection with each type of deferral of Retirement Benefits, shall elect to receive that deferral (adjusted to reflect Investment Earnings/Losses with respect thereto) on either a Retirement Benefit Lump Sum Payout Date or on Retirement Benefit Installment Payout Dates elected by such Participant. A Participant may change any Retirement Benefit payout election up to the date of Retirement to an allowable alternative Retirement Benefit payout date or dates by submitting a new Election Form to the Recordkeeper; provided that any such Election Form is (i) submitted at least twelve (12) months prior to the Retirement Benefit Lump Sum Payout Date or the initial Retirement Benefit Installment Payout Date, as the case may be, elected by the Participant, and (ii) accepted by the Recordkeeper in accordance with rules established by the Administrator in its sole discretion; and provided, further, that such election shall not apply to any payments that would have been made under a prior election or the terms of any other plan within twelve (12) months of the date of such new election. The last Election Form accepted by the Recordkeeper shall govern the payout date or dates of that Retirement Benefit (adjusted to reflect Investment Earnings/Losses with respect thereto). (3) Re-deferral of Retirement Benefits. A Retired Participant who Retires on or after the Amended and Restated Effective Date may elect to re-defer Retirement Benefits prior to the commencement of any payments thereof to another allowable Retirement Benefit Lump Sum Payout Date or other allowable Retirement Benefit Installment Payout Dates; provided that such re-deferral election shall not apply (i) to any Retiree to whom payment of any Retirement Benefit has already commenced and (ii) unless it is accepted by the Recordkeeper in accordance with the rules established by the Administrator in its sole discretion; and provided, further, that such re-deferral election shall not apply to any payments that would have been made under a prior election or the terms of any other plan within twelve (12) months of the date of such new election. (4) Form of Distribution of Retirement Benefits. A Participant, in connection with each deferral of Retirement Benefits, shall elect to receive the deferral (adjusted to reflect Investment Earnings/Losses with respect thereto) in a lump sum on a Retirement Benefit Lump Sum Payout Date elected by the Participant or in quarterly or yearly installment payments on Retirement Benefit Installment Payout Dates elected by the Participant. A Participant may change his or her election up to the date of Retirement to an allowable alternative form of payout by submitting a new Election Form to the Recordkeeper; provided that any such Election Form is (i) submitted at least twelve (12) months prior to the Retirement Benefit Lump Sum Payout Date or the initial Retirement Benefit Installment Payout Date, as the case may be, elected by the Participant, and (ii) accepted by the Recordkeeper in accordance with rules established by the Administrator in its sole discretion; and provided, further, that such election shall not apply to any payments that would have been made under a prior election or the terms of any other plan within twelve (12) months of the date of such new election. (Changes may not be made after Retirement except in accordance with Section 8(b)(3).) The Election Form last accepted by the Recordkeeper shall govern the form of a Retirement Benefit (adjusted to reflect Investment Earnings/Losses with respect thereto). Retirement Benefit payments shall be made as soon as practicable after the applicable Retirement Benefit Lump Sum Payout Date or Retirement Benefit Installment Payout Dates elected by the Participant on the applicable Election Form; provided, that in no event shall such payments be made later than thirty (30) days after the relevant elected dates. (5) Installment Payments for Retirement Benefits Allocated to Investment Options (Other than the Deemed Interest Investment Option). The amount of each installment payment with respect to the portion of a Deferral Account that is allocated to an Investment Option (other than the Deemed Interest Investment Option) shall be determined by the Yearly installment method, if the Participant elected to receive annual installments or the Quarterly Installment Method, if the Participant elected to receive quarterly installments. (6) Installment Payments for Retirement Benefits Allocated to the Deemed Interest Investment Option. The amount of each installment payment with respect to the portion of a Deferral Account that is allocated to the Deemed Interest Investment Option shall be determined by the following annuity methodology. The amount of each installment payment shall be calculated as an annuity at the beginning of the installment payout period elected by the Participant, based on: (i) the balance of the applicable portion of the Deferral Account that is allocated to the Deemed Interest Investment Option (adjusted to reflect Deemed Interest with respect thereto) on the business day prior to the payout date of each installment, (ii) the number of remaining installments, (iii) the Deemed Rate of Interest then in effect, and (iv) a final value of zero dollars ($0). To illustrate, assume a retiring Participant has a Plan balance of $100,000 as of June 30 and has elected to receive his/her payout over a ten-year period quarterly installments, commencing July 1. Assume further that the annual Deemed Rate of Interest is 10%, compounded quarterly. The amount of the installment payments to commence July 1 would be calculated based on a June 30 Plan balance of $100,000, an interest rate of 2.5% (i.e., the annual interest rate of 10% divided by four), and forty (40) payments (i.e., ten years times four quarters). Calculating an annuity at the beginning of the installment period selected by the Participant, and assuming the Deemed Rate of Interest remains unchanged throughout the payout period, the Participant would receive forty quarterly payments of $3,886.46. Over the ten-year payout period, the Participant would receive payments totaling $155,458.40, of which $100,000 represents the deferred amount and $55,458.40 represents Deemed Interest with respect thereto. (c) Payment Upon Separation From Service. Notwithstanding anything in the Plan to the contrary, in the event a Participant terminates employment with the Company for reasons other than Retirement, death or Disability, or in the event that any Subsidiary that employs a Participant ceases to be a wholly-owned Subsidiary of AHPC, the entire balance of the Participant's Deferral Account (adjusted to reflect Investment Earnings/Losses with respect thereto) shall be distributed to the Participant in a single lump sum within ninety (90) days thereafter. The foregoing shall not apply in the case of a Participant who is Retirement Eligible as of his or her date of termination of employment or the date on which such Subsidiary ceases to be a wholly-owned Subsidiary of AHPC, as the case may be. (d) Payment Upon Death. Notwithstanding anything in the Plan to the contrary, in the event a Participant dies prior to the receipt of any or all of his or her Deferral Account, the balance of such account shall be distributed in a single lump sum to the Participant's Beneficiary(ies) within ninety (90) days following his or her death. (e) Acceleration of Payments. Notwithstanding anything in the Plan to the contrary, during the twenty-four (24) month period following a Change in Control, a Participant may elect to accelerate any or all payments not currently due under the Plan to a single sum payment to be made on (i) a date that is at least twelve (12) months subsequent to such election, without a penalty or forfeiture, or (ii) with the imposition of a withdrawal penalty equal to six percent (6%) of the accelerated payment, any date within twelve (12) months of such election. Payments shall be made as soon as practicable after the date elected for payment; provided, that in no event shall payment be made later than thirty (30) days thereafter. (f) Disability Waiver. (1) Waiver of Deferral. A Participant who is determined by the Administrator to be suffering from a Disability shall be excused from fulfilling that portion of any current deferral election that would otherwise have been withheld for the Plan Year during which the Participant first suffers a Disability. During the period of Disability, the Participant shall not be allowed to make any additional deferral elections, but will continue to be considered a Participant for all other purposes of the Plan. (2) Return to Work. If a Participant returns to employment with the Company after a Disability ceases, the Participant may elect to defer additional amounts in accordance with the Plan for the Plan Year following his or her return to employment or service and for every Plan Year thereafter while an Eligible Employee and Participant, provided such deferral elections are otherwise allowed and an Election Form is delivered to and accepted by the Recordkeeper. (3) Continued Eligibility; Disability Benefit. A Participant suffering a Disability shall, for benefit purposes under the Plan, continue to be considered to remain a Participant to be eligible for the benefits provided for in this Section 8 in accordance with its provisions. Notwithstanding the above, the Administrator shall have the right to, in its sole discretion and for purposes of the Plan only, with respect to a Participant who has been determined to have suffered a Disability, pay out his or her Deferral Account balance in a lump-sum. (g) Other Distributions. Any distributions that are required to be made due to the provisions of the Predecessor Plan with respect to a type of deferral no longer eligible to be deferred as of the Amended and Restated Effective Date, shall be made in accordance with Section 2. SECTION NINE - MISCELLANEOUS (a) Funding of the Plan. The Plan is unfunded and AHPC has no obligation to set aside, earmark, or place in trust any funds with which to pay its obligations under the Plan. AHPC's obligation under the Plan shall not be secured in any way and a Participant's rights shall not be secured in any way and a Participant's rights shall in no way be preferred over the general creditors of AHPC. (b) Employment. Neither the Plan nor any agreement, document, form or instrument delivered or entered into pursuant hereto constitutes an employment contract between the Company and a Participant. Nothing herein or therein shall be construed to give a Participant the right to be retained in the service of the Company, nor interfere with the right of the Company to terminate or discipline a Participant at any time. (c) Governing Law. The Plan shall be construed and interpreted under the laws of the State of New Jersey (without giving effect to the principles of conflicts of laws) and applicable provisions of federal law. (d) Taxes. The Company shall have the right to deduct from distributions otherwise payable from any deferral under the Plan any taxes required to be withheld under federal, state, or local law. For each Plan Year in which a deferral is being deducted for a Participant, the Company shall withhold from that portion of the Participant's Base Salary and/or Bonus Compensation that is not being deferred, in a manner determined by the Company, the Participant's share of FICA and other employment taxes on such deferral amounts. If necessary, the Company may reduce any amount deferred in order to comply with this Section. (e) Non-Assignable. A Participant's right to receive the amounts in his or her Deferral Account under the Plan may not be anticipated, assigned (either at law or equity), alienated, pledged, encumbered, or subjected to attachment, garnishment, levy, execution, or other legal process, and any attempt to effect any of the foregoing shall be void. (f) Minors and Incompetents. If the Administrator determines that any person to whom a payment is due hereunder is a minor or incompetent by reason of physical or mental disability, the Administrator shall have the power to cause the payments then due to such person to be made to another for the benefit of the minor or incompetent, without responsibility of the Company, the Committee, the Administrator or the Recordkeeper to see to the application of such payment, unless claim prior to such payment is made therefor by a duly appointed legal representative. Payments made pursuant to such power shall operate as a complete discharge of the Company, the Committee, and the Administrator. (g) Trust Fund. In connection with the Plan, AHPC may, but shall not be required to, establish a grantor trust for the purpose of accumulating funds to satisfy the obligations incurred by AHPC under the Plan. At any time, AHPC may transfer assets to the trust to satisfy all or part of the obligations incurred by AHPC, subject to the return of such assets at a time as determined in accordance with the terms of such trust. Any assets of the trust shall remain at all times subject to the claims of creditors of AHPC in the event of AHPC's insolvency, and no asset or other funding medium used to pay benefits accrued under the Plan shall result in the Plan not being considered as "unfunded" under ERISA. Notwithstanding the establishment of the trust, the right of any Participant to receive future payments under the Plan shall remain an unsecured claim against the general assets of AHPC. (h) Severability. In the event any provision of the Plan shall be held illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining provisions of the Plan, and the Plan shall be constructed and enforced as if the illegal or invalid provision had not been included in the Plan. (i) Beneficiary. Each Participant shall have the right, at any time, to designate his or her Beneficiary(ies) (both primary as well as contingent) to receive any benefits payable under the Plan upon the death of a Participant. The Beneficiary(ies) designated under the Plan may be the same as or different from the Beneficiary designation under any other plan of AHPC in which the Participant participates. A Participant shall designate his or her Beneficiary(ies) by completing and signing the beneficiary designation form, and returning it to the Administrator or its designated agent. A Participant shall have the right to change his or her Beneficiary(ies) by completing, signing and otherwise complying with the terms of the beneficiary designation form and the Administrator's rules and procedures, as in effect from time to time. Upon the acceptance by the Administrator of a new beneficiary designation form, all Beneficiary designations previously filed shall be canceled. The Administrator shall be entitled to rely on the last beneficiary designation form filed by the Participant and accepted by the Administrator prior to his or her death. No designation or change in designation of a Beneficiary shall be effective until received and acknowledged in writing by the Administrator or its designated agent. If a Participant fails to designate a Beneficiary(ies) as provided above or, if all designated Beneficiaries predecease the Participant or die prior to complete distribution of the Participant's benefits, then the benefits remaining under the Plan to be paid to a Beneficiary shall be payable to the executor or personal representative of the Participant's estate. (j) Insurance. AHPC, on its own behalf or on behalf of the Trustee of the trust, and, in its sole discretion, may apply for and procure insurance on the life of some or all Participants, in such amounts and in such forms as AHPC may choose. AHPC or the Trustee of the trust, as the case may be, shall be the sole owner and beneficiary of any such insurance. The Participant shall have no interest whatsoever in any such policy or policies, and at the request of AHPC shall submit to medical examinations and supply such information and execute such documents as may be required by the insurance company or companies to whom AHPC has applied for insurance. SECTION TEN - EMERGENCY BENEFIT In the event that the Administrator, upon the written request of the Participant, determines that the Participant has suffered an unforeseeable financial emergency, the Administrator shall in accordance with the request of the Participant (i) pay to the Participant as soon as possible following such determination, an amount not in excess of the amount needed to satisfy the emergency and any taxes payable on those amounts, and/or (ii) suspend any deferrals required to be made to the Plan by the Participant. For this purpose, an "unforeseeable financial emergency" means an unanticipated emergency that is caused by an event beyond the control of the Employee that would result in severe financial hardship if the emergency distribution were not permitted and would include (i) a sudden and unexpected illness or accident of the Participant or a dependent of the Participant, (ii) a loss of the Participant's property due to casualty, or (iii) such other extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant, all as determined in the sole discretion of the Administrator. SECTION ELEVEN - ADMINISTRATION OF THE PLAN The Plan shall be administered by the Administrator which shall have full discretionary authority to interpret the Plan; to make all determinations as may be necessary or advisable; and to adopt, amend or rescind any rules, regulations, and procedures as it deems necessary or appropriate for the administration of the Plan. The interpretations, determinations, actions, and decisions of the Administrator shall be binding and conclusive for all purposes and upon all persons. The Administrator may delegate part or all of its responsibilities under the Plan to such party or parties as it may deem necessary or appropriate. SECTION TWELVE - AMENDMENT AND TERMINATION The Board of Directors may amend or revise the terms of the Plan from time to time, or may discontinue the Plan, in whole or in part, at any time. However, such amendment, revision or discontinuance of the Plan may not adversely affect a Participant's benefit(s) accrued under the Plan prior to the date of such action. SECTION THIRTEEN - CLAIMS PROCEDURE If a Participant does not receive the timely payment of the benefits that he or she believes are due under the Plan, the Participant may make a claim for benefits in the manner hereinafter provided. All claims for benefits under the Plan shall be made in writing and shall be signed by the Participant. Claims shall be submitted to the Administrator. If the Participant does not furnish sufficient information with the claim for the Administrator to determine the validity of the claim, the Administrator shall indicate to the Participant any additional information, which is necessary for the Administrator to determine the validity of the claim. Each claim hereunder shall be acted on and approved or disapproved by the Administrator within ninety (90) days following the receipt by the Administrator of the information necessary to process the claim. In the event the Administrator denies a claim for benefits in whole or in part, the Administrator shall notify the Participant in writing of the denial of the claim and notify the Participant of his right to a review of the Administrator's decision by the Committee or such entity or person delegated such authority by the Committee. Such notice by the Administrator shall also set forth, in a manner calculated to be understood by the Participant, the specific reason for such denial, the specific provisions of the Plan on which the denial is based, and a description of any additional material or information necessary to perfect the claim, with an explanation of the Plan's appeals procedure as set forth in this Section 13. If the Administrator takes no action on a Participant's claim within ninety (90) days after receipt by the Administrator, such claim shall be deemed to be denied for purposes of the following appeals procedure. Any Participant whose claim for benefits is denied in whole or in part may appeal for a review of the decision by the Administrator. Such appeal must be made within three (3) months after the applicant has received actual or constructive notice of the denial as provided above. An appeal must be submitted in writing within such period and must: (a) request a review by the Administrator of the claim for benefits under the Plan; (b) set forth all of the grounds upon which the Participant's request for review is based or any facts in support thereof; and (c) set forth any issues or comments that the Participant deems pertinent to the appeal. The Administrator shall act upon each appeal within sixty (60) days after receipt thereof unless special circumstances require an extension of the time for processing, in which case a decision shall be rendered by the Administrator as soon as possible but not later than one hundred and twenty (120) days after the appeal is received. The Administrator may require the Participant to submit such additional facts, documents or other evidence as the Administrator in its discretion deems necessary or advisable in making its review. The Participant shall be given the opportunity to review pertinent documents or materials upon submission of a written request to the Administrator, provided the Administrator finds the requested documents or materials are pertinent to the appeal. On the basis of its review, the Administrator shall make an independent determination of the Participant's eligibility for benefits under the Plan. The decision of the Administrator on any appeal of a claim for benefits shall be final and conclusive upon all parties thereto. In the event the Administrator denies an appeal in whole or in part, it shall give written notice of the decision to the Participant, which notice shall set forth, in a manner calculated to be understood by the Participant, the specific reasons for such denial and which shall make specific reference to the pertinent provisions of the Plan on which the Administrator's decision is based. APPENDIX A AMERICAN HOME PRODUCTS CORPORATION DEFERRED COMPENSATION PLAN INVESTMENT OPTIONS 1. Balanced Portfolio 2. S&P 500 Index Portfolio or Total Stock Market Index Portfolio 3. International Equity Portfolio 4. Deemed Interest Option - a hypothetical investment option which earns interest at the Deemed Rate of Interest EX-10.2 4 diropt.txt STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS AMERICAN HOME PRODUCTS CORPORATION STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS (Effective as of March 2, 1999 and as amended by the Board of Directors on June 21, 2001) 1. Purpose. The purpose of the American Home Products Corporation Stock Option Plan for Non-Employee Directors (the "Plan") is to attract and retain qualified persons who are not employees or former employees of American Home Products Corporation (the "Company") or any of its subsidiaries or affiliates for service as members of the Board of Directors of the Company by providing such members with an interest in the Company's success and progress by granting them non-qualified options ("Options") to purchase shares of the Company's common stock, par value $.33 1/3 per share (the "Common Stock"). 2. Administration. The Plan shall be administered by the Compensation and Benefits Committee or any successor thereto (the "Committee") of the Board of Directors (the "Board") of the Company. Questions involving eligibility for grants of Options, entitlement to Options or the operation of the Plan shall be referred to the Committee. All determinations of the Committee shall be conclusive. The Committee may obtain such advice or assistance as it deems appropriate from persons not serving on the Committee. 3. Eligibility and Grants. To be eligible to participate in the Plan, a director must not be an employee or former employee of the Company or any of its subsidiaries or affiliates. On the date in each calendar year of the Annual Meeting of Stockholders of the Company, each eligible director elected at such Annual Meeting shall automatically be granted an Option to purchase 3,000 shares of Common Stock; provided, however, that such amount may be increased or decreased by the Committee in the first calendar quarter of each year to reflect the competitive environment with respect to director compensation. Each eligible director to whom Options are granted is hereinafter referred to as a "Participant." Each grant of Options shall be evidenced by a written agreement duly executed and delivered by or on behalf of the Company and the Participant. 4. Shares Available. Subject to adjustment as provided in Section 10, the maximum aggregate number of shares of Common Stock which shall be available under the Plan for the issuance upon the exercise of Options is 250,000 shares. 5. Term of Options. Each Option granted under the Plan shall have a term of ten years from the date of grant, subject to earlier termination as provided in Section 8. 6. Option Price. Options are priced at 100% of the fair market value of the Common Stock on the date of grant. Such price shall be subject to adjustment as provided in Section 10. The fair market value of a share of Common Stock shall be the mean between the highest and lowest sales prices of the Common Stock as reported on the Consolidated Transaction Reporting System ("Fair Market Value"). 7. Exercise of Options. (a) Subject to Section 8, each Option shall become 100% exercisable on the later of (i) the date upon which the Participant has served one term-year as a member of the Board since the date the Option was granted (which for these purposes shall mean the period from one Annual Meeting to the subsequent Annual Meeting), and (ii) the date on which the Participant completes two years of continuous service as a director. (b) An Option may be exercised at any time or from time to time, as to any or all full shares of Common Stock as to which the Option is then exercisable; provided, however, that any such exercise shall be for at least 100 shares of Common Stock or, if less, the total number of shares of Common Stock as to which the Option is then exercisable. (c) The purchase price of the Common Stock as to which an Option is exercised shall be paid in full at the time of exercise; payment may be made in cash or in shares of Common Stock valued at the number of shares to be purchased multiplied by the option price per share or in any other form of consideration which has been approved by the Committee under the most recent stock option or incentive plan applicable to the executive officers of the Company (the "Stock Incentive Plan"). 8. Completion of Directorship. (a) In the event of the death of a Participant or the termination of a Participant's service as a director upon retirement after having attained age 65 with at least 10 years of service or on account of disability, any outstanding Options held by a Participant who has completed at least two years of continuous service as a director which are not yet exercisable shall become exercisable on the day following the date of (i) death; (ii) retirement; or (iii) termination of the Participant's service as a director by reason of disability, as the case may be, and all outstanding Options held by such Participant shall remain exercisable until the tenth anniversary of the date of grant. (b) In the event of a resignation or a termination of the service of a Participant from the Board (i) for any reason prior to the completion of two years of continuous service as a director; or (ii) thereafter, for any reason other than death, disability or retirement as contemplated under subsection (a) above, any outstanding Options held by such Participant shall expire at the close of business on the effective date of such resignation or termination; provided, however, that the Board may, in its discretion, cause the Options of such Participant to become exercisable, and/or to remain exercisable, for a period of time subsequent to such resignation or termination, but in no event may the Options remain exercisable after the tenth anniversary of the date of grant. 9. Regulatory Compliance and Listing. The issuance or delivery of any shares of Common Stock upon the exercise of Options may be postponed by the Company for such period as may be required to comply with any applicable requirements under the federal securities laws, any applicable listing requirements of any national securities exchange and requirements under any other law or regulation applicable to the issuance or delivery of such shares, and the Company shall not be obligated to issue or deliver any shares of Common Stock if the issuance or delivery of such shares shall constitute a violation of any provision of any law or of any rule or regulation of any governmental authority or any national securities exchange. 10. Adjustment in Event of Changes in Capitalization. In the event of a recapitalization, stock split, stock dividend, combination or exchange of shares, merger, consolidation, rights offering, separation, reorganization or liquidation, or any other change in the corporate structure or shares of the Company, the number of shares of Common Stock that may be awarded as Options or that are subject to outstanding Option grants, and the option price per share under outstanding Options, shall be adjusted automatically to prevent dilution or enlargement of rights. 11. Termination or Amendment of the Plan. The Board may at any time terminate the Plan and may from time to time alter or amend the Plan or any part thereof (including any amendment deemed necessary to ensure that the Company may comply with any regulatory requirement referred to in Section 9), provided that, unless otherwise required by law, the rights of a Participant with respect to Options granted prior to such termination, alteration or amendment may not be impaired without the consent of such Participant. 12. Miscellaneous. (a) Nothing in the Plan shall be deemed to create any obligation on the part of the Board to nominate any director for reelection by the Company's shareholders. (b) The Company shall have the right to require, prior to the issuance or delivery of any Common Stock upon the exercise of Options, payment by the Participant of any taxes required by law with respect to the issuance or delivery of such shares. Such amount may be paid in cash, in shares of Common Stock previously owned by the Participant (based on the Fair Market Value), or a combination of cash and shares of Common Stock. (c) The shares of Common Stock to be issued upon the exercise of Options under the Plan shall, unless otherwise determined by the Committee, be shares which have been or may be reacquired by the Company. (d) The Options granted hereunder shall not be transferable by the Participants hereunder otherwise than by will or the laws of descent and distribution except to the extent permitted under the Stock Incentive Plan with respect to executive officers of the Company. (e) This Plan and Options granted hereunder shall be governed by and construed in accordance with the laws of Delaware and in accordance with such federal laws as may be applicable. 13. Change in Control. Upon the occurrence of a Change in Control, all Options granted under the Plan as of the date of such occurrence (which have not previously expired) will become vested and exercisable and, notwithstanding the provisions of Section 8(b) of the Plan or any other provisions to the contrary, will remain exercisable until the tenth anniversary of the date of grant. Furthermore, upon the occurrence of a Change in Control, the Committee, in its sole discretion and without liability to any person, may take such other actions, if any, as it deems necessary or desirable with respect to any Options granted hereunder so as to substantially preserve the value, rights and benefits thereof. For purposes of this provision, a Change in Control will be deemed to have occurred if: (a) any person or persons acting in concert (excluding Company benefit plans) becomes the beneficial owner of securities of the Company having at least 20% of the voting power of the Company's then outstanding securities (unless the event causing the 20% threshold to be crossed is an acquisition of voting common securities directly from the Company); or (b) the consummation of any merger or other business combination of the Company, sale or lease of the Company's assets or combination of the foregoing transactions (the "Transactions") other than a Transaction immediately following which the shareholders of the Company who owned shares immediately prior to the Transaction (including any trustee or fiduciary of any Company employee benefit plan) own, by virtue of their prior ownership of the Company's shares, at least 65% of the voting power, directly or indirectly, of (a) the surviving corporation in any such merger or other business combination; (b) the purchaser or lessee of the Company's assets; or (c) both the surviving corporation and the purchaser or lessee in the event of any combination of Transactions; or (c) within any 24 month period, the persons who were directors immediately before the beginning of such period (the "Incumbent Directors") shall cease (for any reason other than death) to constitute at least a majority of the Board or the board of directors of a successor to the Company. For this purpose, any director who was not a director at the beginning of such period shall be deemed to be an Incumbent Director if such director was elected to the Board by, or on the recommendation of or with the approval of, at least two-thirds of the directors who then qualified as Incumbent Directors (so long as such director was not nominated by a person who has expressed an intent to effect a Change in Control or engage in a proxy or other control contest). EX-10.3 5 dirres.txt 1994 RESTRICTED STOCK PLAN - DIRECTORS AMERICAN HOME PRODUCTS CORPORATION 1994 RESTRICTED STOCK PLAN FOR NON-EMPLOYEE DIRECTORS (Initially approved by stockholders on April 20, 1994 and as amended by the Board of Directors on June 21, 2001) Section 1. Purpose. The purpose of the Restricted Stock Plan for Non-Employee Directors of American Home Products Corporation is to attract and retain qualified persons who are not employees or former employees of the Company or any of its subsidiaries or affiliates for service as members of the Board of Directors by granting such Directors shares of the Company's Common Stock, which are restricted in accordance with the terms and conditions set forth below, and thereby encouraging ownership in the Company by non-employee Directors. Section 2. Definitions. Whenever used herein, unless the context otherwise indicates, the following terms shall have the respective meaning set forth below: Act: The Securities Exchange Act of 1934, as amended. Board Membership: The period of time during which a person serves on the Board of Directors, regardless of whether occurring before or after the Effective Date. Board of Directors (or Board): The Board of Directors of the Company. Committee: The Compensation and Benefits Committee of the Board of Directors appointed to administer the Plan in accordance with Section 7 hereof. Common Stock: Common Stock, par value $.33 1/3 per share, of American Home Products Corporation. Company: American Home Products Corporation or any successor to it in ownership of substantially all of its assets, whether by merger, consolidation or otherwise. Director: Any member of the Board of Directors. Disability: A medically determinable physical or mental impairment which renders a participant substantially unable to function as a Director. Effective Date: The date specified in Section 10 hereof. Eligible Director (or Non-Employee Director): Any Director who is not an employee or former employee of the Company or any of its subsidiaries or affiliates. Participant: Each Director to whom Restricted Stock is granted under the Plan. Plan: The 1994 Restricted Stock Plan for Non-Employee Directors of American Home Products Corporation. Restricted Period: The period of time from the date of grant of the Restricted Stock until the earliest to occur of the events described in Section 4(b) hereof. Retirement Benefit: A normal benefit payable under the Retirement Plan. Retirement Plan: The American Home Products Corporation Retirement Plan for Outside Directors, as amended. Restricted Stock: Common Stock granted under the Plan which is subject to restrictions in accordance with Section 4 hereof. Year of Board Membership: 365 consecutive days of Board Membership. Section 3. Eligibility and Grants. (a) Grants. To be eligible to participate in the Plan, a Director must not be an employee or former employee of the Company or any of its subsidiaries or affiliates. Each Eligible Director on the Effective Date of the Plan shall receive a grant of eight hundred (800) shares of Restricted Stock. In addition, each person who becomes an Eligible Director for the first time after the Effective Date of the Plan shall also receive a grant of eight hundred (800) shares of Restricted Stock, effective as of the date of such person's election as an Eligible Director. Thereafter, each Eligible Director shall be granted eight hundred (800) shares of Restricted Stock for each subsequent Year of Board Membership, up to a maximum of four thousand (4,000) shares of Restricted Stock per Eligible Director. Notwithstanding anything to the contrary contained in this Plan, if a Participant shall terminate service as a Director due to death or Disability prior to having been granted the maximum number of shares of Restricted Stock hereunder and provided the Participant is not then eligible for a Retirement Benefit under the Retirement Plan, then such Participant, or such Participant's beneficiary or estate, as the case may be, shall be granted additional shares of Restricted Stock which together with the shares previously granted under the Plan will equal such maximum number of shares and all restrictions applicable to such shares shall lapse on the later of the date of such termination of service or six months after the date of grant. If required by the Committee, each grant of Restricted Stock shall be evidenced by a written agreement duly executed by or on behalf of the Company and the Participant. b) Number of Shares. The total number of shares of Restricted Stock which may be granted under the Plan shall not exceed 100,000. The shares may be authorized and unissued or issued and reacquired shares, as the Board of Directors from time to time may determine. Shares of Restricted Stock that are forfeited before the restrictions lapse shall be available for subsequent grants of Restricted Stock under the Plan. (c) Non-Consecutive Terms. An Eligible Director who is elected to non-consecutive terms of Board Membership shall receive additional grants of shares of Restricted Stock at the time of such re-election to the Board and thereafter as provided in Section 3, provided that the amounts so granted, when aggregated with the number of shares of Restricted Stock previously granted to such Director with respect to which the restrictions thereon shall have lapsed, does not exceed four thousand (4,000) shares. Section 4. Terms and Conditions of Restricted Stock. The restrictions set forth in this section shall apply to each grant of Restricted Stock for the duration of the Restricted Period. (a) Restrictions. A stock certificate representing the number of shares of Restricted Stock granted shall be registered in the Participant's name but shall be held in custody by the Company for the Participant's account. The Participant shall have all rights and privileges of a stockholder as to such Restricted Stock, including the rights to vote and to receive dividends, except that, subject to the provisions of Sections 3(a) and 4(b), the following restrictions shall apply: (i) the Participant shall not be entitled to delivery of the certificate until the expiration of the Restricted Period; (ii) none of the shares of Restricted Stock may be sold, transferred, assigned, pledged or otherwise encumbered or disposed of during the Restricted Period; (iii) the Participant shall, if requested by the Company, execute and deliver to the Company, a stock power endorsed in blank. The Participant shall forfeit all shares of Restricted Stock with respect to which such restrictions do not lapse at the end of the Restricted Period. Upon the forfeiture (in whole or in part) of shares of Restricted Stock, such forfeited shares shall become treasury shares of the Company without further action by the Participant. The Participant shall have the same rights and privileges, and be subject to the same restrictions, with respect to any shares received pursuant to Section 6. (b) Events. The Restricted Period shall end upon the first to occur of the following events: (i) Five Years of Service. The Participant completes at least five (5) years of service from the date of the initial grant of Restricted Stock to the Participant under the Plan. (ii) Disability. The Participant ceases to be a Director by reason of Disability; provided, however, that if the Participant is at such time entitled to a Retirement Benefit, then the Restricted Period shall be deemed not to have lapsed. In such case, all shares of Restricted Stock will be forfeited. (iii)Death. The Participant ceases to be a Director by reason of death; provided, however, that if the Participant is at such time entitled to a Retirement Benefit, then the Restricted Period shall be deemed not to have lapsed. In such case, all shares of Restricted Stock will be forfeited. (c) Delivery of Restricted Shares. At the end of the Restricted Period as herein provided, subject to Section 3(a), a stock certificate for the number of shares of Restricted Stock with respect to which the restrictions have lapsed shall be delivered, free of all such restrictions, to the Participant or the Participant's beneficiary or estate, as the case may be, subject to the withholding requirements of Section 9 hereof. The Company shall not be required to deliver any fractional share of Common Stock but will pay, in lieu thereof, the fair market value (measured as of the date the restrictions lapse) of such fractional share to the Participant or the Participant's beneficiary or estate, as the case may be. Notwithstanding the foregoing, a Participant may make an irrevocable election to cause the Company to contribute such Restricted Shares to the Restricted Stock Trust which he or she otherwise would have received from the Plan by completing a deferral election form provided by the Company, wherein such shares shall be held, subject to the claims of the Company's creditors, until delivered to the Participant in accordance with such election. Section 5. Regulatory Compliance and Listing. The issuance or delivery of any shares of Restricted Stock may be postponed by the Company for such period as may be required to comply with any applicable requirements under the federal securities laws, any applicable listing requirements of any national securities exchange or any requirements under any other law or regulation applicable to the issuance or delivery of such shares and the Company shall not be obligated to issue or deliver any such shares if the issuance or delivery thereof shall constitute a violation of any provision of any law or any regulation of any governmental authority or any national securities exchange. Section 6. Adjustments. In the event of a recapitalization, stock split, stock dividend, combination or exchange of shares, merger, consolidation, rights offering, separation, reorganization or liquidation, or any other change in the corporate structure or shares of the Company, the Committee may make such equitable adjustments, to prevent dilution or enlargement of rights, as it may deem appropriate in the number and class of shares authorized to be granted hereunder. Section 7. Administration. The Plan shall be administered by the Compensation and Benefits Committee, consisting of three or more Directors each of whom shall be a "disinterested Director" within the meaning of Rule 16b-3 under the Act. All determinations of the Committee shall be conclusive. The Committee may obtain such advice or assistance as it deems appropriate from persons not serving on the Committee. Section 8. Termination or Amendment. The Board may at any time terminate the Plan and may from time to time alter or amend the Plan or any part thereof (including any amendment deemed necessary to ensure that the Company may comply with any regulatory requirement referred to in Section 5), provided, however, that, unless otherwise required by law, the rights of a Participant with respect to shares of Restricted Stock granted prior to such termination, alteration or amendment may not be impaired without the consent of such Participant and, provided further, without the approval of the Company's stockholders, no alteration or amendment may be made which would (i) increase the aggregate number of shares of Restricted Stock that may be granted under the Plan (except by operation of Section 6), or (ii) change the category of Directors eligible to receive shares of Restricted Stock under the Plan. Notwithstanding the foregoing, the Plan shall not be amended more than once every six months, other than to comport with changes in the Internal Revenue Code, the Employee Retirement Income Security Act or the rules thereunder. The Company intends that the Plan and the grants of Restricted Stock hereunder shall comply with the conditions of Rule 16b-3 of the Act and qualify for the exemption from Section 16(b) of the Act as a "formula plan". Should any provisions hereof not be necessary in order to comply with the requirements of such Rule or should any additional provisions be necessary in order to so comply, the Board of Directors may amend the Plan accordingly, without the necessity of obtaining the approval of the Company's stockholders. Section 9. Miscellaneous. (a) Right to Re-election. Nothing in the Plan shall be deemed to create any obligation on the part of the Board to nominate any Director for re-election by the Company's stockholders, nor confer upon any Director the right to remain a member of the Board of Directors. (b) Withholding and Responsibility For Taxes. The Company shall satisfy any tax withholding obligation required by law by reducing the number of shares of Common Stock otherwise deliverable to the Participant or the Restricted Stock Trust, as the case may be. To the extent no taxes are required to be withheld on the delivery of the shares of Common Stock to the Participant or the Restricted Stock Trust, the Participant shall be responsible for the payment of all applicable taxes. (c) Governing Law. This Plan shall be governed by the law of the State of Delaware and in accordance with such federal laws as may be applicable. (d) Construction. Wherever any words are used herein in the masculine gender they shall be construed as though they were also used in the feminine gender in all cases where they would so apply, and wherever any words are used herein in the singular form they shall be construed as though they were also used in the plural form in all cases where they would so apply. Section 10. Effective Date. The Plan shall be submitted to the stockholders of the Company for their approval at the Annual Meeting of Stockholders to be held on April 20, 1994. The Plan shall become effective upon the affirmative vote of the holders of a majority of the shares of Common Stock present, or represented, and entitled to vote at the meeting. Section 11. Change in Control. Upon the occurrence of a Change in Control, Restricted Stock that was previously granted under the Plan (which has not previously been forfeited) will become vested, and the Restricted Period with respect to such Restricted Stock will be deemed to have ended. For purposes of this provision, a Change in Control will be deemed to have occurred if: (a) any person or persons acting in concert (excluding Company benefit plans) becomes the beneficial owner of securities of the Company having at least 20% of the voting power of the Company's then outstanding securities (unless the event causing the 20% threshold to be crossed is an acquisition of voting common securities directly from the Company); or (b) the consummation of any merger or other business combination of the Company, sale or lease of the Company's assets or combination of the foregoing transactions (the "Transactions") other than a Transaction immediately following which the shareholders of the Company who owned shares immediately prior to the Transaction (including any trustee or fiduciary of any Company employee benefit plan) own, by virtue of their prior ownership of the Company's shares, at least 65% of the voting power, directly or indirectly, of (a) the surviving corporation in any such merger or other business combination; (b) the purchaser or lessee of the Company's assets; or (c) both the surviving corporation and the purchaser or lessee in the event of any combination of Transactions; or (c) within any 24 month period, the persons who were directors immediately before the beginning of such period (the "Incumbent Directors") shall cease (for any reason other than death) to constitute at least a majority of the Board or the board of directors of a successor to the Company. For this purpose, any director who was not a director at the beginning of such period shall be deemed to be an Incumbent Director if such director was elected to the Board by, or on the recommendation of or with the approval of, at least two-thirds of the directors who then qualified as Incumbent Directors (so long as such director was not nominated by a person who has expressed an intent to effect a Change in Control or engage in a proxy or other control contest). EX-10.4 6 dirdef.txt DIRECTORS' DEFERRAL PLAN AMERICAN HOME PRODUCTS CORPORATION DIRECTORS' DEFERRAL PLAN (as amended to June 21, 2001) SECTION 1. ESTABLISHMENT OF THE PLAN Effective May 1, 1997, there is hereby established a plan whereby Directors of the Company who are not current employees of the Company may voluntarily defer compensation (the "Deferred Compensation" portion of the Plan), and may share in the long-term growth of the Company (the "Deferred Stock" portion of the Plan). Prior to May 1, 1997, the Company maintained the Deferred Compensation portion of the Plan as a separate plan, The AHPC Nonfunded Deferred Compensation Plan for Directors (the "Prior Plan"). The Plan is deemed to consist, in part, of the amounts held under the Prior Plan and any election made by a Director under the Prior Plan, unless and until amended by the Director in accordance with this Plan, shall remain in effect under this Plan. SECTION 2. DEFINITIONS When used in the Plan, the following terms shall have the definitions set forth in this Section 2: 2.1. Average Closing Price. The term "Average Closing Price" means the average closing market price of the Shares on the Consolidated Transaction Reporting System for the New York Stock Exchange for the last five (5) consecutive trading days on which at least one sale of Shares took place on such System up to and including the date of determination. 2.2. Beneficiary. The term "Beneficiary" means the beneficiary or beneficiaries (including any contingent beneficiary or beneficiaries) designated by the Participant pursuant to Section 7.3 hereof. 2.3. Board of Directors. The term "Board of Directors" means the Board of Directors of the Company. 2.4. Company. The terms "Company" or "AHPC" mean American Home Products Corporation, a Delaware corporation. 2.5. Company Credit. The term "Company Credit" means an amount computed and credited to a Participant's Deferred Compensation Account, as described in Section 6.3, at an annual rate based on the average of the quarter-end yields for a ten-year period (ending September 30 of the prior year) of ten-year U.S. Treasury notes plus two percent (2%). 2.6. Compensation. The term "Compensation" means the retainer and the aggregate of all fees for service and attendance at Board of Director and committee meetings to which a Director is entitled for services rendered to the Company as a Director. 2.7. Deferral Allocation Date. The term "Deferral Allocation Date" means the third Monday of any month, or if Shares are not traded on the New York Stock Exchange on such third Monday of the month, the last day before the third Monday of the month on which Shares are traded on the New York Stock Exchange, that follows the date on which an amount deferred under the Plan would have been paid in cash if a deferral election had not been made hereunder. 2.8. Deferred Amount. The term "Deferred Amount" means the amount of Compensation that a Deferred Compensation Participant elects to defer in accordance with Section 4 hereof. 2.9. Deferred Compensation Account. The term "Deferred Compensation Account" means the account described in Section 6.1. 2.10. Deferred Compensation Participant. The term "Deferred Compensation Participant" means a Director who is not a current employee of the Company and who has currently or previously elected to defer all or part of his/her Compensation pursuant to the Prior Plan or in accordance with Section 4 of this Plan, and for whom a Deferred Compensation Account is currently maintained. 2.11. Deferred Stock Participant. The term "Deferred Stock Participant" means a Director who is not a current employee of the Company and who becomes a Participant in the Plan in accordance with Section 3 hereof. 2.12. Director. The term "Director" means each member of the Board of Directors. 2.13. Disability. The term "Disability" means the complete and permanent inability of an individual, by reason of illness or accident, to perform the individual's duties as a Director. The determination whether a Director has suffered a Disability shall be made by the Board of Directors based upon such evidence as it deems appropriate. 2.14. Dividend Allocation Date. The term "Dividend Allocation Date" means the first Monday that (a) follows a Dividend Payment Date and (b) is the third Monday of a month. 2.15. Dividend Payment Date. The term "Dividend Payment Date" means the date as of which the Company pays a cash dividend on Shares. 2.16. Dividend Record Date. The term "Dividend Record Date" means, with respect to any Dividend Payment Date, the date established by the Board of Directors as the record date for determining shareholders entitled to receive payment of the dividend on such Dividend Payment Date. 2.17. Individual Accounts. The term "Individual Accounts" or "Accounts" means the separate Deferred Compensation Account and Share Accounts, described in Section 6 hereof, which are established under the Plan for each Participant. When used in the singular, the term shall refer to one of these accounts, as the context requires. 2.18. Participant. The term "Participant" means a Director who is a Deferred Stock Participant, a Deferred Compensation Participant, or both, as the case may be. 2.19. Plan. The term "Plan" means the AHPC Directors' Deferral Plan, as set forth herein and as it may be amended from time to time. 2.20. Prior Plan. The term "Prior Plan" has the meaning set forth in Section 1 hereof. 2.21. Share. The term "Share" means a share of Common Stock, par value $.33-1/3 per share, of the Company. 2.22. Share Accounts. The term "Share Accounts" means a Participant's Vested Share Account and Unvested Share Account. 2.23. Share Equivalents. The term "Share Equivalents" means bookkeeping entries credited to a Participant's Share Accounts and denominated in Shares. 2.24. Unvested Share Account. The term "Unvested Share Account" means an account consisting of amounts transferred under Section 5.4 for which the vesting requirements of Section 5.5(ii) have not been satisfied, and which are denominated in Share Equivalents as described in Section 6.2. 2.25. Vested Share Account. The term "Vested Share Account" means an account consisting of amounts transferred under Section 5.4 for which the vesting requirements of Section 5.5(ii) have been satisfied together with amounts deferred hereunder, and which are denominated in Share Equivalents as described in Section 6.2, and including any amounts previously maintained in a Participant's Unvested Share Account which are transferred to such account following satisfaction of the vesting requirements described in Section 5.5(ii). 2.26. Year of Service. The term "Year of Service" means each full year and any partial year an individual served as a Director. For this purpose a "year" is the twelve-month period commencing with the first day of the individual's service as a Director of the Company both before and after the effective date of the Plan. SECTION 3. DEFERRED STOCK PARTICIPANT Each person who as of the effective date of this Plan is currently serving or who is hereafter elected or appointed to serve as a Director, as the case may be, who is not an employee of the Company, and who elects to become a Participant by making a deferral under Section 5.2, or for whom a transfer is made under Section 5.4, shall become a Deferred Stock Participant. A Deferred Stock Participant shall cease to participate in the Plan when the Participant ceases to be a Director. For purposes of the Plan, a Director shall be deemed to cease to be a Deferred Stock Participant on the first day of the month next following the month in which he/she last serves as a Director. SECTION 4. DEFERRED COMPENSATION PARTICIPANT Prior to the beginning of any calendar quarter in each calendar year, any Director who is not an employee of the Company may defer the receipt of Compensation to be earned by the Director during such calendar quarter and the ensuing calendar quarters by filing with the Company a written election that: (i) defers payment of a designated amount (of One Thousand Dollars ($1,000) or more) or a percentage of his/her Compensation for services attributable to such calendar quarters (the "Deferred Amount"); (ii) specifies the payment option selected by the Participant pursuant to Section 7.2 hereof for such Deferred Amount; and (iii) specifies the options selected by the Participant pursuant to Section 5 hereof for such Deferred Amount. The amount deferred may not exceed the Director's Compensation for the period of deferral. Notwithstanding the foregoing, any individual who is not an employee of the Company, and who is newly elected or appointed to serve as a Director may, not later than thirty (30) days after his/her election or appointment as a Director becomes effective, elect in accordance with the preceding provisions of this Section 4, to defer the receipt of Compensation earned during the portion of the current calendar quarter that follows his/her filing of the election with the Company. Any elections made pursuant to this Section 4 shall be irrevocable when made. Notwithstanding the foregoing, the Board of Directors in its sole discretion, may make a distribution to a Participant under either Section 7.2(i)(a) or 7.4. If a Participant fails to discontinue an election under Section 5 with respect to his/her Deferred Amount for a future period, the Participant's current election shall remain in effect, provided, however, that the Participant may thereafter make a new election with regard to a future period at any time in accordance with the first paragraph of this Section 4. SECTION 5. FORM OF DEFERRED COMPENSATION CREDITS 5.1. Deferred Compensation Account. Except with respect to the deferral of Compensation for a quarter in which a Deferred Compensation Participant elects to have all or a percentage of the Deferred Amount credited in Shares in accordance with Section 5.2 hereof, the Deferred Amount shall be denominated in U.S. dollars and credited to the Participant's Deferred Compensation Account pursuant to Section 6.1 hereof. 5.2. Shares. Prior to the beginning of any calendar quarter, a Deferred Compensation Participant may elect, by filing a written election with the Board of Directors, to have all or a percentage of the Deferred Amount for the following calendar quarter and/or ensuing calendar quarters credited in Share Equivalents and allocated to the Participant's Vested Share Account pursuant to Section 6.2 hereof. Any elections made pursuant to this Section 5.2 shall be irrevocable when made. If a Participant fails to discontinue an election under this Section 5 with respect to his/her Deferred Amount for a future period, his/her current election shall remain in effect, provided, however, that the Participant may thereafter make a new election with regard to a future period at any time. 5.3. Transfer of Deferred Compensation Account Balance to Share Account. Prior to the effective date of the Plan, a Deferred Compensation Participant may elect to have all or a portion of his/her final credited account balance in the Prior Plan ( i.e. , the balance as of April 30, 1997) converted to Share Equivalents and credited to the Participant's Vested Share Account. Such conversion shall take place as of May 1, 1997, based on the Average Closing Price as of May 1, 1997. 5.4. Transfer of Present Value of Accrued Benefits Under Retirement Plan to Share Account Prior to the effective date of the Plan, a Deferred Compensation Participant shall have allocated to his/her Unvested Share Account, or if a Participant has satisfied the vesting requirements set forth in Section 5.5(ii) hereof, to his/her Vested Share Account, the number of Share Equivalents (maintained in fractions and rounded to three (3) decimal places) having a market value (calculated as set forth below) equal to the actuarial present value as of May 1, 1997, of the amount that would have been due to such Participant under the AHPC Retirement Plan for Outside Directors at the time of his/her earliest retirement date assuming that the Participant has then satisfied the vesting requirements thereunder. Such actuarial present value calculation shall be performed by the Company in its discretion and shall be converted to Share Equivalents and credited to the Participant's Unvested or Vested Share Account, as the case may be. such conversion shall take place as of May 1, 1997, based on the Average Closing Price as of that date. 5.5. Vesting of Unvested Share Account. (i) All amounts transferred pursuant to Section 5.4 shall be maintained in a Vested Share Account to the extent vested at the time of transfer. All amounts which are not vested will be held in an Unvested Share Account until the Participant shall have satisfied the vesting requirements set forth in Section 5.5(ii), at which time such amounts in the Participant's Unvested Share Account shall be transferred from such Unvested Share Account and shall become a part of or be added to the Participant's Vested Share Account. (ii) A Participant shall have satisfied the vesting requirements upon completion of at least ten (10) Years of Service and attainment of age sixty-five (65), provided, however, that a Participant who ceases to be a Director prior to attainment of age sixty-five (65) with at least ten (10) Years of Service shall be deemed to have satisfied the vesting requirements upon the first to occur of (1) attainment of age sixty-five (65), (2) death, or (3) Disability. SECTION 6. INDIVIDUAL ACCOUNTS The Company shall maintain Individual Accounts for Participants, as follows: 6.1. Deferred Compensation Account. The Company shall maintain a Deferred Compensation Account in the name of each Deferred Compensation Participant with respect to any amounts deferred under the Plan which the Deferred Compensation Participant does not elect to have credited in Share Equivalents pursuant to Section 5.2 or 5.3 hereof. The opening balance of each Participant's Deferred Compensation Account on the effective date of this Plan shall be equal to the closing balance on the immediately preceding date of the corresponding account maintained on the Participant's behalf under the Prior Plan, if any, less any portion of such account converted to Share Equivalents and allocated to the Participant's Vested Share Account pursuant to Section 5.3 hereof. The Deferred Compensation Account shall be denominated in U.S. dollars, rounded to the nearest whole cent. A Deferred Amount allocated to a Deferred Compensation Account pursuant to Section 5.1 hereof shall be credited to the Deferred Compensation Account as of the Deferral Allocation Date. 6.2. Share Accounts. The Company shall maintain Share Accounts consisting of (i) a Vested Share Account and (ii) an Unvested Share Account. The Share Accounts shall be denominated in Share Equivalents, and shall be maintained in fractions rounded to three (3) decimal places. Share Equivalents allocated to a Deferred Stock Participant's Vested Share Account in accordance with the Participant's election under Section 5.2 hereof, shall be credited to the Participant's Vested Share Account as of the Deferral Allocation Date. Share Equivalents and, if necessary, fractional Share Equivalents, shall be credited to a Participant's Vested Share Account based on the Average Closing Price at the Deferral Allocation Date. 6.3. Accrual of Company Credit. The Treasurer of the Company shall determine the annual rate of Company Credit on or before December 31 of each calendar year. This rate shall be effective for the following calendar year. The Company Credit shall be compounded and credited to each Deferred Compensation Account as of the last day of each calendar quarter for each month (or part thereof) that the Participant serves as a Director during such calendar quarter. If a Participant elects the payment option under either Section 7.2(i)(b) or Section 7.2(i)(c) below, the Company Credit shall continue to be credited to the Participant's account until distributed. 6.4. Cash Dividends. Cash dividends paid on Shares shall be deemed to have been paid on the Share Equivalents allocated to each Participant's Share Accounts and shall be treated as if the allocated Share Equivalents were actual Shares issued and outstanding on the Dividend Record Date. An amount equal to the amount of such dividends shall be credited in Share Equivalents to each Share Account as of each Dividend Allocation Date based on the Average Closing Price at the Dividend Allocation Date. 6.5. Capital Adjustments. The number of Share Equivalents allocated to Share Accounts shall be adjusted by the Board of Directors, as it deems appropriate, to reflect stock dividends, stock splits, reclassifications, spinoffs, and other extraordinary distributions, as if those Share Equivalents were actual Shares. 6.6. Account Statements. Within a reasonable time following the end of each calendar year, the Company shall provide an annual statement to each Participant. The annual statement for each Participant shall report the number of Share Equivalents credited to each of the Participant's Share Accounts and shall report the dollar amount credited to the Participant's Deferred Compensation Account as of December 31 of that year. SECTION 7. PAYMENT PROVISIONS 7.l. Method of Payment All payments to a Participant (or to a Participant's Beneficiary or estate, as the case may be) with respect to the Participant's Deferred Compensation Account and Vested Share Account shall be paid in cash only, with Share Equivalents valued as set forth in Section 7.2 below. 7.2. Payment Options (i) At the time each Director elects to make a deferral or, for Participants who are Directors on May 1, 1997, prior to the effective date of the Plan, the Participant shall select a payment option with respect to the payment of the Participant's Individual Accounts from the following payment options: (a) a lump sum paid in the calendar quarter first day of the calendar quarter following the calendar quarter in which the Participant ceases to be a Director; (b) payments in substantially equal annual installments over a period of between two (2) to ten (10) years, as elected by the Participant at the time he/she makes his/her election under this paragraph (i)(b), commencing in January of the calendar year following the calendar year during which the Participant ceases to be a Director with Share Equivalents in the Participant's Vested Share Account treated as described in paragraph (iii) below; or (c) payments in annual installments over a period of between two (2) to ten (10) years as elected by the Participant at the time he/she makes his/her election under this paragraph (i)(c), commencing in January of the calendar year following the calendar year during which the Participant ceases to be a Director, with Share Equivalents in the Participant's Vested Share Account treated as described in paragraph (iv) below. (ii) If the payment option described in paragraph (i)(a) above has been elected, the amount of the lump sum with respect to the Participant's Deferred Compensation Account shall be equal to the amount credited to the Participant's Deferred Compensation Account as of the last business day of the calendar quarter preceding the date of payment, and the amount of the lump sum with respect to the Participant's Vested Share Account shall be equal to the Average Closing Price as of last business day of the calendar quarter preceding the date of payments multiplied by the number of Share Equivalents credited to the Participant's Vested Share Account as of such date. (iii) If the payment option described in paragraph (i)(b) above has been elected, the value of the Participant's Vested Share Account shall be added to the amount in such Participant's Deferred Compensation Account based on the Average Closing Price at the date of the first payment and the amount of each installment with respect to the Participant's Deferred Compensation Account (including the amount transferred from the Participant's Vested Share Account) shall be paid annually, in substantially equal installment amounts. The determination of the amount of substantially equal installment payments shall be a fixed annuity computation determined based on the amount of the Participant's Deferred Compensation Account (including the amount transferred from the Participant's Vested Share Account) at the time of the first payment, the annual rate of the Company Credit at that time and the number of installments selected, assuming compounding of the Company Credit on a quarterly basis. (iv) If the payment option described in paragraph (i)(c) above has been elected, the amount of each installment with respect to the Participant's Deferred Compensation Account and Vested Share Account shall be paid annually, in installment amounts. The amount to be distributed annually with respect to Share Equivalents shall be computed by dividing the number of Share Equivalents in the Participant's Vested Share Account by the number of installment payments selected, with the resulting number of Share Equivalents paid in cash, based on the Average Closing Price as of the December 31 preceding each date of payment. Any additional amounts in respect of Share Equivalents relating to dividend equivalents during the duration of installment payments shall be included with and paid as part of the last installment. (v) If the Participant fails to elect a payment option, the amount credited to the Participant's Deferred Compensation Account and Vested Share Account shall be distributed in a lump sum in accordance with the payment option described in paragraph (i)(a) and paragraph (ii) above. If, at the time a Participant ceases to be a Director, the amount credited to a Participant's Deferred Compensation Account and the value of Share Equivalents credited to a Participant's Share Accounts is less than $25,000 in the aggregate, the Board of Directors, in its sole discretion, may pay out the amount credited to such Account in a lump sum as if such Participant elected distribution under paragraph (i)(a) above. (vi) Notwithstanding the foregoing, any amounts in a Participant's Unvested Share Account at the time the Participant ceases to be a Director shall be (a) forfeited if the Participant has not completed at least ten (10) Years of Service, or (b) if the Participant has completed at least ten (10) Years of Service, shall be paid to the Participant, in the manner selected in paragraph (i)(a), (i)(b), or (i)(c) above, upon the first to occur of (1) attainment of age sixty-five (65),or (2) Disability, provided, however, that if the payment option described in paragraph (i)(a) above has been selected, the value of such Unvested Share Account shall be determined based on the Average Closing Price as of the December 31 preceding the date of payment , and thereafter shall be treated as if it were part of the Participant's Deferred Compensation Account. If the payment option described in paragraph (i)(b) above has been selected, payment shall be made in accordance with Section 7.2(iii). If the payment option in paragraph (i)(c) above has been selected, payment shall be made in accordance with Section 7.2(iv). Notwithstanding the foregoing, any benefits in the Unvested Share Account at the date of a Participant's death shall be paid to the Participant's Beneficiary or estate, as the case may be, in accordance with Section 7.3. 7.3. Payment Upon Death. Notwithstanding any other provision of the Plan to the contrary, within a reasonable period of time following the death of a Participant, the amount credited to the Participant's Deferred Compensation Account and all of the Share Equivalents credited to the Participant's Share Accounts shall be paid by the Company in a lump sum to the Participant's Beneficiary. For purposes of this Section 7.3, the amount credited to the Participant's Deferred Compensation Account, and the number and value of Share Equivalents credited to the Participant's Share Accounts, shall be determined as of the date of payment using the Average Closing Price. A Participant may designate a Beneficiary, in writing, in a form acceptable to the Board of Directors. A Participant may revoke a prior designation of a Beneficiary and may also designate a new Beneficiary without the consent of the previously designated Beneficiary, provided, however, that such revocation and new designation (if any) are in writing, in a form acceptable to the Board of Directors, and filed with the Board of Directors before the Participant's death. If the Participant does not designate a Beneficiary, or if no designated Beneficiary survives the Participant, any amount not distributed to the Participant during the Participant's life shall be paid to the Participant's estate in a lump sum in accordance with this Section 7.3. 7.4. Payment on Unforeseeable Emergency. The Board of Directors may, in its sole discretion, direct payment to a Participant of all or of any portion of the vested portion of a Participant's Accounts, notwithstanding an election of a payment option under Section 7.2 above, at any time that the Board of Directors determines that such Participant has an unforeseeable emergency, and then only to the extent reasonably necessary to meet the emergency. For purposes of this section, "unforeseeable emergency" means severe financial hardship to the Participant resulting from a sudden and unexpected illness or accident of the Participant or of a dependent of the Participant, loss of the Participant's property due to casualty, or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant. SECTION 8. OWNERSHIP OF SHARES A Participant shall have no rights as a shareholder of the Company with respect to any Shares represented by the Share Equivalents described hereunder. SECTION 9. PROHIBITION AGAINST TRANSFER The right of a Participant to receive payments under the Plan may not be transferred except by will or applicable laws of descent and distribution. A Participant may not assign, sell, pledge, or otherwise transfer amounts to which he/she is entitled hereunder prior to payment thereof to the Participant. SECTION 10. GENERAL PROVISIONS 10.1. Director's Rights Unsecured. The Plan is unfunded. The right of any Participant to receive payments of cash under the provisions of the Plan shall be an unsecured claim against the general assets of the Company. 10.2. Administration. Except as otherwise provided in the Plan, the Plan shall be administered by the Board of Directors, which shall have the authority to adopt rules and regulations for carrying out the Plan, and which shall interpret, construe, and implement the provisions of the Plan. This Plan is intended to comply with Section 16 of the Securities Exchange Act of 1934, as amended (the "Act") and the rules promulgated thereunder. Any election by a Participant which would be in violation of the Act or the rules thereunder causing short-swing liability shall be deemed ineffective under the Plan, and such election shall be deemed to be null and void. 10.3. Legal Opinions. The Board of Directors may consult with legal counsel, who may be counsel for the Company or other counsel, with respect to its obligations and duties under the Plan, or with respect to any action, proceeding, or any questions of law, and shall not be liable with respect to any good faith action taken, or omitted, by it pursuant to the advice of such counsel. 10.4. Liability. Any decision made or action taken by the Board of Directors, or any employee of the Company or any of its subsidiaries, arising out of or in connection with the construction, administration, interpretation, or effect of the Plan, shall be absolutely discretionary, and shall be conclusive and binding on all parties. Neither the Board of Directors nor any employee of the Company or any of its subsidiaries shall be liable for any act or action hereunder, whether of omission or commission, by any other member or employee or by any agent to whom duties in connection with the administration of the Plan have been delegated or, except in circumstances involving bad faith, for anything done or omitted to be done. 10.5. Withholding. The Company shall have the right to deduct from all payments hereunder any taxes required by law to be withheld from such payments. The recipients of such payments shall bear all taxes on amounts paid under the Plan to the extent that no taxes are withheld thereon, irrespective of whether withholding is required. 10.6. Legal Holidays. If any day on (or on or before) which action under the Plan must be taken falls on a Saturday, Sunday, or legal holiday, such action may be taken on (or on or before) the next succeeding day that is not a Saturday, Sunday, or legal holiday; provided, however, that this Section 10.6 shall not permit any action that must be taken in one calendar year to be taken in any subsequent calendar year. SECTION 11. AMENDMENT, SUSPENSION, AND TERMINATION The Board of Directors shall have the right at any time, and for any reason, to amend, suspend, or terminate the Plan, provided, however, that no amendment, suspension, or termination shall reduce the number of Share Equivalents or the cash balance in an Individual Account. SECTION 12. APPLICABLE LAW The Plan shall be governed by, and construed in accordance with, the laws of the State of Delaware, except to the extent that such laws are preempted by federal law. SECTION 13. EFFECTIVE DATE The effective date of this Plan is May 1, 1997. Nothing herein shall invalidate or adversely affect any previous election, designation, deferral, or accrual in accordance with the terms of the Prior Plan that were in effect prior to the effective date of this Plan. SECTION 14. CHANGE IN CONTROL Upon the occurrence of a Change in Control, all Accounts under the Plan that are not fully vested as of the date of such occurrence (and which have not previously been forfeited) will become fully vested. Furthermore, notwithstanding any prior election by a Participant to the contrary, at any time following a Change in Control a Participant may elect to accelerate any or all payments due under the Plan to a single sum payment to be made on a date at least twelve (12) months subsequent to such election; provided, however, that such an election may be made for an immediate single sum payment, in which six percent (6%) of the amount of the accelerated payment shall be permanently forfeited to the Company. For purposes of this provision, a Change in Control will be deemed to have occurred if: (i) any person or persons acting in concert (excluding Company benefit plans) becomes the beneficial owner of securities of the Company having at least 20% of the voting power of the Company's then outstanding securities (unless the event causing the 20% threshold to be crossed is an acquisition of voting common securities directly from the Company); or (ii) the consummation of any merger or other business combination of the Company, sale or lease of the Company's assets or combination of the foregoing transactions (the "Transactions") other than a Transaction immediately following which the shareholders of the Company who owned shares immediately prior to the Transaction (including any trustee or fiduciary of any Company employee benefit plan) own, by virtue of their prior ownership of the Company's shares, at least 65% of the voting power, directly or indirectly, of (a) the surviving corporation in any such merger or other business combination; (b) the purchaser or lessee of the Company's assets; or (c) both the surviving corporation and the purchaser or lessee in the event of any combination of Transactions; or (iii) within any 24 month period, the persons who were directors immediately before the beginning of such period (the "Incumbent Directors") shall cease (for any reason other than death) to constitute at least a majority of the Board or the board of directors of a successor to the Company. For this purpose, any director who was not a director at the beginning of such period shall be deemed to be an Incumbent Director if such director was elected to the Board by, or on the recommendation of or with the approval of, at least two-thirds of the directors who then qualified as Incumbent Directors (so long as such director was not nominated by a person who has expressed an intent to effect a Change in Control or engage in a proxy or other control contest). EX-12 7 ex-12.txt COMPUTATION OF RATIOS Exhibit 12 American Home Products Corporation Computation of Ratio of Earnings to Fixed Charges (3) (In Thousands, except ratio amounts)
Years Ended December 31, Six Month Ended ------------------------------------------------------------------- June 30, 2001 2000 1999 1998 1997 1996 ---------------- ----------- ----------- ---------- ---------- ---------- Earnings Income (loss) from continuing operations before federal and foreign taxes (2) $1,612,878 ($1,101,040) ($1,907,299) $3,089,936 $2,364,753 $2,398,866 Add: Fixed charges 210,792 324,887 403,694 371,986 513,860 601,927 Minority interests 12,211 26,784 30,301 620 2,421 13,677 Distributed equity income 0 0 0 771 0 0 Amortization of capitalized interest 1,240 1,917 1,803 1,487 1,057 5,621 Less: Equity income 36,680 55,991 2,122 473 9,777 8,448 Capitalized interest 44,737 43,303 15,375 9,497 12,898 0 ---------- ----------- ----------- ---------- ---------- ---------- Total earnings (loss) as defined $1,755,704 ($846,746) ($1,488,998) $3,454,830 $2,859,416 $3,011,643 ========== =========== =========== ========== ========== ========== Fixed Charges: Interest and amortization of debt expense $144,107 $238,840 $343,271 $322,970 $461,370 $571,414 Capitalized interest 44,737 43,303 15,375 9,497 12,898 0 Interest factor of rental expense (1) 21,948 42,744 45,048 39,519 39,592 30,513 ---------- ----------- ----------- ---------- ---------- ---------- Total fixed charges as defined $210,792 $324,887 $403,694 $371,986 $513,860 $601,927 ========== =========== =========== ========== ========== ========== Ratio of earnings to fixed charges (2) 8.3 - - 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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