-----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, VbgF9brZ2Gbf+7Yk3Vy87Qi3pwKpkz2lXEtNadGzbs4ViKbmIE4cQoW8pnH5Xb6j 60N4gngSQ1L+1sC5R/mfXA== 0000005187-97-000012.txt : 19971117 0000005187-97-000012.hdr.sgml : 19971117 ACCESSION NUMBER: 0000005187-97-000012 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971114 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN HOME PRODUCTS CORP CENTRAL INDEX KEY: 0000005187 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 132526821 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-01225 FILM NUMBER: 97718598 BUSINESS ADDRESS: STREET 1: 5 GIRALDA FARMS CITY: MADISON STATE: NJ ZIP: 07940 BUSINESS PHONE: 201-660-50 10-Q 1 ===================================================================== UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended September 30, 1997 Commission File Number 1-1225 AMERICAN HOME PRODUCTS CORPORATION (Exact name of registrant as specified in its charter) Delaware 13-2526821 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) Five Giralda Farms, Madison, N.J. 07940 (Address of principal executive 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 October 31, 1997: Number of Class Shares Outstanding Common Stock, $0.33-1/3 par value 649,656,383 ====================================================================== AMERICAN HOME PRODUCTS CORPORATION AND SUBSIDIARIES INDEX Page No. Part I - Financial Information 2 Item 1. Financial Statements: Consolidated Condensed Balance Sheets - September 30, 1997 and December 31, 1996 3 Consolidated Condensed Statements of Income - Three Months Ended and Nine Months Ended September 30, 1997 and 1996 4 Consolidated Condensed Statements of Retained Earnings and Additional Paid-in Capital - Nine Months Ended September 30, 1997 and 1996 5 Consolidated Condensed Statements of Cash Flows - Nine Months Ended September 30, 1997 and 1996 6 Notes to Consolidated Condensed Financial Statements 7-9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10-17 Part II - Other Information 18 Item 1. Legal Proceedings 18-20 Item 6. Exhibits and Reports on Form 8-K 20 Signature 21 Exhibit Index EX-1 - 1 - Part I - Financial Information AMERICAN HOME PRODUCTS CORPORATION AND SUBSIDIARIES The consolidated condensed financial statements included herein have been prepared by 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 generally accepted accounting principles 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 financial statements include all adjustments necessary to present fairly the financial position of the Company as of September 30, 1997 and December 31, 1996, the results of its operations for the three months and nine months ended September 30, 1997 and 1996, and its cash flows and the changes in retained earnings and additional paid-in capital for the nine months ended September 30, 1997 and 1996. It is suggested that these 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 1996 Annual Report on Form 10-K and Quarterly Reports on Form 10-Q for the quarters ended March 31 and June 30, 1997. - 2 - AMERICAN HOME PRODUCTS CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (In Thousands Except Per Share Amounts)
September 30, December 31, 1997 1996 ASSETS Cash and cash equivalents .................... $1,089,258 $1,322,297 Marketable securities ........................ 53,804 221,820 Accounts receivable less allowances .......... 2,697,693 2,541,714 Inventories: Finished goods .......................... 1,116,727 1,121,055 Work in progress ........................ 679,124 567,240 Materials and supplies................... 696,915 701,074 2,492,766 2,389,369 Other current assets including deferred taxes. 1,132,390 995,219 Total Current Assets 7,465,911 7,470,419 Property, plant and equipment................. 6,666,300 6,254,666 Less accumulated depreciation ........... 2,450,679 2,217,933 4,215,621 4,036,733 Goodwill and other intangibles, net of accumulated amortization ................ 8,611,623 8,517,610 Other assets including deferred taxes ........ 881,261 760,581 Total Assets $21,174,416 $20,785,343 LIABILITIES Loans payable ................................ $53,758 $76,574 Trade accounts payable ....................... 1,114,235 940,076 Accrued expenses ............................. 3,097,959 2,810,223 Accrued federal and foreign taxes ............ 499,554 510,762 Total Current Liabilities 4,765,506 4,337,635 Long-term debt ............................... 5,747,785 6,020,575 Other noncurrent liabilities ................. 2,159,881 2,486,375 Postretirement benefit obligations other than pensions ........................... 816,969 782,342 Minority interests ........................... 222,603 196,324 STOCKHOLDERS' EQUITY $2 convertible preferred stock, par value $2.50 per share ......................... 73 79 Common stock, par value $0.33-1/3 per share .. 216,401 213,328 Additional paid-in capital ................... 2,371,557 2,034,337 Retained earnings ............................ 5,145,082 4,756,270 Currency translation adjustments ............. (271,441) (41,922) Total Stockholders' Equity .............. 7,461,672 6,962,092 Total Liabilities and Stockholders' Equity.................................$21,174,416 $20,785,343
The accompanying notes are an integral part of these consolidated condensed balance sheets. - 3 - AMERICAN HOME PRODUCTS CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF INCOME (In Thousands Except Per Share Amounts)
Three Months Nine Months Ended September 30, Ended September 30, 1997 1996 1997 1996 Net Sales.............. $3,481,870 $3,470,922 $10,584,647 $10,607,557 Cost of goods sold .... 970,666 1,058,950 3,061,606 3,427,536 Selling, general and administrative expenses............. 1,300,736 1,267,663 3,967,288 3,914,852 Research and development expenses ............ 378,273 350,823 1,130,081 1,048,471 Interest expense, net.. 93,249 104,577 294,758 341,258 Other income, net ..... (13,160) (4,546) (62,991) (52,538) Special charges ....... 180,000 - 180,000 - Income before federal and foreign taxes ... 572,106 693,455 2,013,905 1,927,978 Provision for taxes ... 136,574 202,330 542,604 556,213 Net Income ............ $435,532 $491,125 $1,471,301 $1,371,765 Net Income per Share of Common Stock ..... $0.67 $0.77 $2.28 $2.16 Dividends per share of common stock ..... $0.41 $0.385 $1.23 $1.155 Average number of common shares outstanding during the period used in the computation of net income per share of common stock ..... 649,009 637,410 645,716 633,920
The accompanying notes are an integral part of these consolidated condensed statements. - 4 - AMERICAN HOME PRODUCTS CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF RETAINED EARNINGS AND ADDITIONAL PAID-IN CAPITAL (In Thousands)
Nine Months Ended September 30, RETAINED EARNINGS 1997 1996 Balance, beginning of period .....$4,756,270 $3,875,224 Add: Net income ................. 1,471,301 1,371,765 6,227,571 5,246,989 Less: Cash dividends declared .... 1,074,713* 731,383 Cost of treasury stock acquired (less amounts charged to capital) and other items .............. 7,776 3,580 1,082,489 734,963 Balance, end of period............$5,145,082 $4,512,026 ADDITIONAL PAID-IN CAPITAL Balance, beginning of period .... $2,034,337 $1,515,154 Add: Excess over par value of common stock issued .. 338,185 360,688 Less: Cost of treasury stock acquired (less amounts charged to retained earnings) ....... 965 1,025 Balance, end of period ...........$2,371,557 $1,874,817
* Reflects the 1997 fourth quarter common stock dividend of $0.43 per share ($279,157 in the aggregate) declared on September 25, 1997 and payable on December 1, 1997. The accompanying notes are an integral part of these consolidated condensed statements. - 5 - AMERICAN HOME PRODUCTS CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (In Thousands)
Nine Months Ended September 30, 1997 1996 Operating Activities Net income ............................... $1,471,301 $1,371,765 Adjustments to reconcile net income to net cash provided from operating activities: Special Charges ....................... 180,000 - Gains on sales of businesses and other assets .................... (123,156) (51,069) Depreciation and amortization ......... 554,301 510,316 Deferred income taxes ................. (291,470) (29,076) Changes in working capital, net........ (333,330) (107,264) Other, net ............................ (277,214) 27,792 Net cash provided from operating activities ............................ 1,180,432 1,722,464 Investing Activities Purchases of property, plant and equipment ............................. (579,067) (523,022) Purchases of businesses, net of cash acquired ......................... (479,694) - Proceeds from sales of businesses and other assets ...................... 279,459 200,424 Proceeds from sales of/(purchases of) marketable securities, net ............ 168,208 (18,273) Net cash used for investing activities ... (611,094) (340,871) Financing Activities Net repayments of debt ................... (295,637) (1,107,195) Dividends paid ........................... (795,556) (731,383) Exercise of stock options ................ 324,440 353,692 Purchases of treasury stock .............. (10,190) (9,887) Net cash used for financing activities ............................ (776,943) (1,494,773) Effects of exchange rates on cash balances ......................... (25,434) (1,629) Decrease in cash and cash equivalents .... (233,039) (114,809) Cash and cash equivalents, beginning of period ............................. 1,322,297 1,802,397 Cash and cash equivalents, end of period ............................. $1,089,258 $1,687,588 The accompanying notes are an integral part of these consolidated condensed statements. Supplemental Information Interest payments $366,181 $460,911 Income tax and related interest payments, net of refunds 845,813 304,405
- 6 - AMERICAN HOME PRODUCTS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS Note 1. Special Charges On September 15, 1997, the Company announced the voluntary market withdrawal of fenfluramine, manufactured and sold under the name PONDIMIN, and dexfenfluramine, marketed under the name REDUX. The Company took this action and withdrew the products on the basis of new, preliminary information regarding heart valve abnormalities in patients using these medications. The 1997 third quarter and first nine months results of operations include special charges aggregating $180.0 million ($117.0 million after-tax or $0.18 per share). The special charges reflect the one-time costs associated with the voluntary market withdrawal and include provisions for product returns, notification and administrative handling fees, the writedown of inventory and supplies, and other related costs. These costs do not include provisions for any subsequent charges which may result from legal actions related to these products. Note 2. Contingencies 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 quantifiable. The Company has been named as a defendant in numerous legal actions, many of which are purported class actions, relating to PONDIMIN and/or REDUX, which the Company estimates were used in the U.S. prior to their voluntary market withdrawal by approximately six million people (see Note 1). It is likely that additional legal actions, including purported class actions, will be filed. These actions typically allege, among other things, that the use of PONDIMIN and/or REDUX, independently or in combination with the prescription drug phentermine (which the Company does not manufacture, distribute or market), causes certain serious conditions, including valvular heart disease. The Company believes that it has meritorious defenses to these actions and that it has acted properly at all times in dealing with PONDIMIN and REDUX matters. 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. - 7 - AMERICAN HOME PRODUCTS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS Note 3. Solvay S.A. Animal Health Acquisition On February 28, 1997, the Company completed the acquisition of the worldwide animal health business of Solvay S.A. for approximately $460 million. The acquisition was financed partially through the issuance of commercial paper and was accounted for under the purchase method of accounting. The purchase price exceeded the net assets acquired by approximately $328 million which is being amortized over periods of 20 to 40 years. Note 4. Derivatives and Other Financial Instruments Cash and cash equivalents consist primarily of certificates of deposit, time deposits and other short-term, highly liquid securities with original maturities of three months or less and are stated at cost, which approximates fair value. Long-term debt is stated at face value which approximates fair value. The Company enters into interest rate swap and foreign currency agreements to manage specifically identifiable risks. The unleveraged interest rate swap agreements convert a portion of the commercial paper from a floating rate obligation to a fixed rate obligation. The short-term (approximately 30 days) foreign exchange forward contracts are part of the Company's management of foreign currency exposures. The Company does not speculate on interest or foreign currency exchange rates. Interest rate swap agreements are accounted for under the accrual method. Amounts to be paid to the counter-parties of the agreements are accrued during the period to which the payments relate and are reflected in interest expense. The related amounts payable to the counter-parties are included in accrued expenses. The fair value of the swap agreements is not recognized in the consolidated condensed financial statements since the agreements are accounted for as hedges. If the swap agreements are terminated prior to maturity, any gains or losses resulting from the termination are deferred and amortized as an adjustment to interest expense over the remaining life of the terminated swaps. Foreign currency agreements are accounted for under the fair value method. The fair value of the foreign currency agreements is carried on the balance sheet with changes in fair value recognized in the results of operations offsetting any gains and losses recognized on the underlying hedged transactions. - 8 - AMERICAN HOME PRODUCTS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS Note 5. Earnings per Share In February 1997, Statement of Financial Accounting Standards ("SFAS") No. 128 - "Earnings per Share" was issued and is effective for interim and annual reporting periods ending after December 15, 1997. SFAS No. 128 will require the presentation of Basic Earnings per Share and Diluted Earnings per Share in the Company's Consolidated Statements of Income. Net Income per Share of Common Stock presented in these financial statements is equivalent to Basic Earnings per Share. Pro forma Diluted Earnings per Share for the three months ended September 30, 1997 and 1996 were $0.65 and $0.75. Pro forma Diluted Earnings per Share for the nine months ended September 30, 1997 and 1996 were $2.23 and $2.13. Note 6. Other Recently Issued Accounting Standards In June 1997, SFAS No. 130 - "Reporting Comprehensive Income" and SFAS No. 131 - "Disclosures about Segments of an Enterprise and Related Information" were issued and are effective for periods beginning after December 15, 1997. SFAS No. 130 establishes standards for reporting comprehensive income and its components. SFAS No. 131 establishes standards for reporting financial and descriptive information regarding an enterprise's operating segments. These standards increase financial reporting disclosures only and will have no impact on the Company's financial position or results of operations. - 9 - Management's Discussion and Analysis of Financial Condition and Results of Operations Three Months and Nine Months Ended September 30, 1997 Results of Operations Management's discussion and analysis of results of operations for the 1997 third quarter and first nine months has been presented on an as-reported basis except for sales variation explanations which are presented on an as-reported and pro forma basis. The pro forma sales results reflect businesses acquired and divested in 1997 and 1996 assuming the transactions occurred as of January 1, 1996. This activity includes the acquisition of the worldwide animal health business of Solvay S.A. in 1997 and the divestitures of the American Home Foods business and the Symbiosis surgical products business in 1996. On an as-reported basis, worldwide net sales for the 1997 third quarter and first nine months were comparable to prior year levels. On a pro forma basis, worldwide net sales increased 6% for both the 1997 third quarter and first nine months. The increases in pro forma worldwide net sales in both periods were due primarily to higher domestic sales of pharmaceuticals. Results for the 1997 first nine months also reflect higher worldwide sales of agricultural products. Worldwide net sales were impacted by unfavorable foreign exchange effects of 3% for the 1997 third quarter and 2% for the first nine months. The following tables set forth worldwide net sales results by major product category and industry segment together with the percentage changes in "As- Reported" and "Pro Forma" worldwide net sales from comparable periods in the prior year:
Three Months As-Reported Pro Forma ($ in Millions) Ended September 30, % Increase % Increase Net Sales to Customers 1997 1996 (Decrease) (Decrease) Health Care Products: Pharmaceuticals $2,284.4 $2,026.1 13% 9% Consumer Health Care 558.0 564.6 (1)% (1)% Medical Devices 321.7 321.2 - - Total Health Care Products 3,164.1 2,911.9 9% 6% Agricultural Products 317.7 304.3 4% 4% Food Products - 254.8 (100)% - Consolidated Net Sales $3,481.8 $3,471.0 - 6%
- 10 - Management's Discussion and Analysis of Financial Condition and Results of Operations Three Months and Nine Months Ended September 30, 1997
Nine Months As-Reported Pro Forma ($ in Millions) Ended September 30, % Increase % Increase Net Sales to Customers 1997 1996 (Decrease) (Decrease) Health Care Products: Pharmaceuticals $6,317.3 $5,705.0 11% 8% Consumer Health Care 1,499.3 1,496.2 - - Medical Devices 972.2 995.0 (2)% (1)% Total Health Care Products 8,788.8 8,196.2 7% 6% Agricultural Products 1,795.8 1,707.3 5% 5% Food Products - 704.1 (100)% - Consolidated Net Sales $10,584.6 $10,607.6 - 6%
The following sales variation explanations are presented on an as-reported and pro forma basis: On an as-reported basis, worldwide pharmaceutical sales increased 13% for the 1997 third quarter and 11% for the first nine months. On a pro forma basis, after adjusting for the acquisition of the worldwide animal health business of Solvay S.A. in February 1997, worldwide pharmaceutical sales increased 9% for the 1997 third quarter and 8% for the first nine months due primarily to higher sales of PREMARIN products, EFFEXOR, CORDARONE, ZOTON, infant nutritionals, ZOSYN (marketed internationally as TAZOCIN), NAPRELAN (introduced in the 1996 second quarter), BENEFIX (introduced in the 1997 first quarter) and DURACT (introduced in the 1997 third quarter) offset, in part, by lower sales of other pharmaceuticals. Worldwide pharmaceutical results for the 1997 third quarter also reflect lower sales of antiobesity products and LODINE. On an as-reported basis, U.S. pharmaceutical sales increased 18% for the 1997 third quarter and 17% for the first nine months. On a pro forma basis, U.S. pharmaceutical sales increased 17% for the 1997 third quarter and 16% for the first nine months. The increase in pro forma U.S. pharmaceutical sales for the 1997 third quarter consisted of unit volume growth of 14% and price increases of 3%. The increase in pro forma U.S. pharmaceutical sales for the 1997 first nine months consisted of unit volume growth of 13% and price increases of 3%. On an as-reported basis, international pharmaceutical sales increased 5% for the 1997 third quarter and 3% for the first nine months. On a pro forma basis, international pharmaceutical sales decreased 1% for both the 1997 third quarter and first nine months. The decrease in pro forma international pharmaceutical sales for the 1997 third quarter consisted of unit volume growth of 5% and price increases of 2% which were offset by unfavorable foreign exchange of 8%. The decrease in pro forma international pharmaceutical sales for the - 11 - Management's Discussion and Analysis of Financial Condition and Results of Operations Three Months and Nine Months Ended September 30, 1997 1997 first nine months consisted of unit volume growth of 3% and price increases of 1% which were offset by unfavorable foreign exchange of 5%. On an as-reported and pro forma basis, worldwide consumer health care sales decreased 1% for the 1997 third quarter and were comparable with prior year results for the first nine months. Worldwide consumer health care results for the 1997 third quarter and first nine months reflect higher sales of ADVIL and CENTRUM products offset, in part, by the effect of the disposal of several non-core products in late 1996 and early 1997. Worldwide consumer health care results for the 1997 third quarter also reflect lower sales of cough/cold products. On an as-reported and pro forma basis, U.S. consumer health care sales decreased 5% for the 1997 third quarter and 3% for the first nine months. The decrease in U.S. consumer health care sales for the 1997 third quarter consisted of unit volume declines of 6% offset by price increases of 1%. The decrease in U.S. consumer health care sales for the 1997 first nine months consisted of unit volume declines of 5% offset by price increases of 2%. On an as-reported and pro forma basis, international consumer health care sales increased 8% for both the 1997 third quarter and first nine months. The increase in international consumer health care sales for the 1997 third quarter consisted of unit volume growth of 10% and price increases of 3% which were offset by unfavorable foreign exchange of 5%. The increase in international consumer health care sales for the 1997 first nine months consisted of unit volume growth of 8% and price increases of 3% which were offset by unfavorable foreign exchange of 3%. On an as-reported and pro forma basis, worldwide medical devices sales for the 1997 third quarter were comparable to prior year levels. On an as-reported basis, worldwide medical devices sales decreased 2% for the 1997 first nine months. On a pro forma basis, after adjusting for the divestiture of the Symbiosis surgical products business in March 1996, worldwide medical devices sales decreased 1% for the 1997 first nine months. Worldwide medical devices results for both periods reflect lower sales of wound closure products offset, in part, by higher sales of needles and syringes. Worldwide medical devices sales for the 1997 third quarter consisted of unit volume growth of 5% which was offset by price decreases of 2% and unfavorable foreign exchange of 3%. The decrease in pro forma worldwide medical devices sales for the 1997 first nine months consisted of unit volume growth of 3% which was offset by price decreases of 1% and unfavorable foreign exchange of 3%. On an as-reported and pro forma basis, worldwide agricultural products sales increased 4% for the 1997 third quarter and 5% for the first nine months due to higher sales of herbicides resulting primarily from increased soybean acreage and new product launches offset, in part, by lower sales of insecticides due primarily to poor weather conditions in several major European markets during the current growing season. On an as-reported and pro forma basis, U.S. agricultural products sales - 12 - Management's Discussion and Analysis of Financial Condition and Results of Operations Three Months and Nine Months Ended September 30, 1997 increased 8% for the 1997 third quarter and 5% for the first nine months. The increase in U.S. agricultural products sales for the 1997 third quarter consisted of unit volume growth of 6% and price increases of 2%. The increase in U.S. agricultural products sales for the 1997 first nine months consisted of unit volume growth of 3% and price increases of 2%. Due to the seasonality of the U.S. agricultural products business, which is concentrated primarily in the first six months of the year, U.S. agricultural products sales and results of operations for the 1997 third quarter and first nine months are not indicative of the results to be expected in subsequent fiscal quarters or for the full year. On an as-reported and pro forma basis, international agricultural products sales increased 3% for the 1997 third quarter and 5% for the first nine months. The increase in international agricultural products sales for the 1997 third quarter consisted of unit volume growth of 5% and price increases of 5% which were offset by unfavorable foreign exchange of 7%. The increase in international agricultural products sales for the 1997 first nine months consisted of unit volume growth of 7% and price increases of 4% which were offset by unfavorable foreign exchange of 6%. Cost of goods sold, as a percentage of net sales, decreased to 27.9% for the 1997 third quarter versus 30.5% for the 1996 third quarter, and decreased to 28.9% for the 1997 first nine months versus 32.3% for the 1996 first nine months due primarily to favorable pharmaceutical and agricultural products sales mix, an overall product mix improvement as higher sales of pharmaceuticals and agricultural products replaced the loss of lower margin food products sales, and to a lesser extent, cost savings. Selling, general and administrative expenses, as a percentage of net sales, increased to 37.4% for the 1997 third quarter versus 36.5% for the 1996 third quarter, and increased to 37.5% for the 1997 first nine months versus 36.9% for the 1996 first nine months. Higher marketing and selling expenses related to recent pharmaceutical and agricultural product introductions were offset by the elimination of marketing and selling expenses associated with the foods business. Higher general and administrative expenses were due, in part, to increased pension costs and additional goodwill amortization related to the Genetics Institute and Solvay S.A. animal health acquisitions. Research and development expenses increased 8% for both the 1997 third quarter and first nine months due primarily to higher pharmaceutical research and development expenditures and operating costs related to recent pharmaceutical research and development facility expansions. Interest expense, net decreased in the 1997 third quarter and first nine months due primarily to the reduction in long-term debt during 1996. Average long-term debt outstanding during the 1997 and 1996 third quarter was $5,850.1 million and $7,024.3 million, respectively. Average long-term debt outstanding during the 1997 and 1996 first nine months was $5,884.2 million and $7,251.6 million, respectively. - 13 - Management's Discussion and Analysis of Financial Condition and Results of Operations Three Months and Nine Months Ended September 30, 1997 Other income, net for the 1997 first nine months included the amount paid in settlement of a lawsuit brought by Johnson & Johnson and its wholly-owned subsidiary, Ortho Pharmaceutical Corporation. The settlement was offset by a previously established reserve for this litigation and a gain on the sale of the Company's investment in the common stock of certain publicly traded insurance companies. As discussed in Note 1 to the Consolidated Condensed Financial Statements, on September 15, 1997, the Company announced the voluntary market withdrawal of fenfluramine, manufactured and sold under the name PONDIMIN, and dexfenfluramine, marketed under the name REDUX. The Company took this action and withdrew the products on the basis of new, preliminary information regarding heart valve abnormalities in patients using these medications. The 1997 third quarter and first nine months results of operations include special charges aggregating $180.0 million ($117.0 million after-tax or $0.18 per share). The special charges reflect the one-time costs associated with the voluntary market withdrawal and include provisions for product returns, notification and administrative handling fees, the writedown of inventory and supplies, and other related costs. These costs do not include provisions for any subsequent charges which may result from legal actions related to these products. As discussed in Note 2 to the Consolidated Condensed Financial Statements and in Item 1 - Legal Proceedings of Part II - Other Information, the Company has been named as a defendant in numerous legal actions, many of which are purported class actions, relating to PONDIMIN and/or REDUX. The Company believes that it has meritorious defenses to these actions and that it has acted properly at all times in dealing with PONDIMIN and REDUX matters. In the opinion of the Company, although the outcome of any legal proceedings cannot be predicted with certainty, the ultimate liability of the Company in connection with these proceedings will not have a material adverse effect on the Company's financial position but could be material to the results of operations in any one accounting period. - 14 - Management's Discussion and Analysis of Financial Condition and Results of Operations Three Months and Nine Months Ended September 30, 1997 The following table sets forth income before taxes by industry segment:
Three Months Nine Months ($ in Millions) Ended September 30, Ended September 30, Income before Taxes 1997 1996 1997 1996 Health Care Products $698.7(1) $773.9 $1,979.5(1) $1,911.5 Agricultural Products 9.1 (7.6) 440.3 355.8 Food Products - 53.5 - 113.6 Corporate (135.7) (126.3) (405.9) (452.9) Consolidated Income before Taxes $572.1 $693.5 $2,013.9 $1,928.0
(1) 1997 includes special charges of $180.0 associated with the voluntary market withdrawal of PONDIMIN and REDUX. The effective tax rate decreased to 23.9% in the 1997 third quarter from 29.2% in the 1996 third quarter and decreased to 26.9% in the 1997 first nine months from 28.8% in the 1996 first nine months due primarily to the reinstatement of the U.S. research tax credit in the 1997 third quarter and the tax impact of the previously discussed special charges associated with the voluntary market withdrawal of PONDIMIN and REDUX. Net income and net income per share decreased 11% and 13% for the 1997 third quarter compared to the 1996 third quarter results and increased 7% and 6% for the 1997 first nine months compared to the 1996 first nine months results. Results for the 1997 third quarter and first nine months reflect the previously discussed special charges associated with the voluntary market withdrawal of PONDIMIN and REDUX. Excluding the special charges, net income and net income per share increased 13% and 10% for the 1997 third quarter compared to the 1996 third quarter results and increased 16% and 14% for the 1997 first nine months compared to the 1996 first nine months results. The increases in net income and net income per share for both the 1997 third quarter and first nine months excluding the special charges were greater than the results registered for net sales due primarily to improved pharmaceutical and agricultural products sales mix, higher sales of pharmaceuticals and agricultural products, cost savings and lower interest expense offset, in part, by the divestiture of the foods business and higher research and development expenses. Competition The Company is not dependent on any one patent-protected product or line of products for a substantial portion of its sales or results of operations. However, PREMARIN, the Company's conjugated estrogens product, which has not had patent protection for many years, does contribute significantly to sales and results of operations. PREMARIN is not currently subject to generic - 15 - Management's Discussion and Analysis of Financial Condition and Results of Operations Three Months and Nine Months Ended September 30, 1997 competition in the United States and, on May 5, 1997, the U.S. Food and Drug Administration (FDA) announced that it will not approve synthetic generic conjugated estrogens products at this time because these products have not been shown to contain the same active ingredient as PREMARIN. The FDA further stated that, until the full composition of PREMARIN is determined, a synthetic generic version cannot be approved, although a generic product derived from the same natural source could be approved earlier under certain circumstances. Although the Company believes that, as a result of this announcement, PREMARIN is not likely to face generic competition in the near term, it cannot predict the timing or outcome of continued efforts to obtain approval for a generic conjugated estrogens product. Liquidity, Financial Condition and Capital Resources Cash and cash equivalents decreased $233.0 million in the 1997 first nine months to $1,089.3 million. Cash flows from operating activities of $1,180.4 million, proceeds from sales of other assets and marketable securities of $447.7 million and proceeds from the exercise of stock options of $324.4 million were used principally for dividend payments of $795.6 million, capital expenditures of $579.1 million, the purchase of the worldwide animal health business of Solvay S.A. for $460.0 million, and long-term debt reduction of $295.6 million. Cash flows from operating activities for the 1997 first nine months were impacted by payments of $381.8 million related to certain previously accrued long-term tax liabilities which were required to be paid in connection with the filing of a tax claim and a $200.0 million contribution to the U.S. defined benefit pension plan. Due to seasonality of the U.S. agricultural products business, a significant portion of the annual U.S. agricultural products sales are recorded in the first six months of the year; however, a significant amount of the related accounts receivable are not collected until the third quarter. As a result, cash flows from operating activities for the 1997 first nine months are not indicative of the results to be expected for the full year. Capital expenditures included strategic investments in manufacturing and distribution facilities worldwide and the expansion of the Company's research and development facilities. On October 22, 1997, the Company entered into a definitive agreement with Bausch & Lomb Incorporated for the sale of the stock of Storz Instrument Company and certain other assets relating to the Storz business for $380.0 million in cash. This transaction, which is subject to certain conditions including the receipt of necessary governmental approvals and the closing of the acquisition by Bausch & Lomb of Chiron Vision Corporation, is not expected to have a material impact on the Company's results of operations. The Company is exploring strategic alternatives for its remaining medical devices business, including the possible sale of Sherwood-Davis & Geck and Quinton Instrument Company. - 16 - Management's Discussion and Analysis of Financial Condition and Results of Operations Three Months and Nine Months Ended September 30, 1997 Cautionary Statements for Forward Looking Information Management's discussion and analysis set forth above contains certain forward looking statements, including statements regarding the Company's financial position, results of operations and potential competition. These forward looking statements are based on current expectations. Certain factors which could cause the Company's actual results to differ materially from expected and historical results have been identified by the Company in Exhibit 99 to the Company's 1996 Annual Report on Form 10-K which exhibit is hereby incorporated by reference. - 17 - 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 those described in the Company's Annual Report on Form 10-K for the year ended December 31, 1996 and Quarterly Reports on Form 10-Q for the periods ended March 31, 1997 and June 30, 1997. In the action for patent infringement pending in U.S. District Court (E.D., Pa.), McNeilab Inc. has increased the amount of damages it is seeking from $60 million to approximately $77 million (plus $10 million in interest) against Scandipharm Inc., which would be entitled to seek indemnification from a subsidiary of the Company, Eurand Microencapsulation, S.A. This action is expected to proceed to trial in late 1997 or early 1998. In the brand name prescription drug litigation that has been coordinated and consolidated for pretrial purposes under the caption In re Brand Name Prescription Drug Antitrust Litigation (MDL 997 N.D. Ill.), the U.S. Court of Appeals for the Seventh Circuit has (i) dismissed challenges to the settlements of certain defendants, including the Company, of the class action case; (ii) reversed the District Court's decision and held that the Supreme Court's Illinois Brick ruling that indirect purchasers do not have standing under federal antitrust laws applies to this litigation; (iii) reversed the District Court's grant of summary judgment to the wholesaler defendants and to DuPont Merck; and (iv) reversed the District Court's ruling that the Higgins case brought by Alabama retailers should not be remanded to Alabama state court. In the similar litigation pending in state courts, the courts in the Maine, Michigan and Minnesota indirect consumer purchase cases have denied motions to certify the cases as class actions. On September 15, 1997, the Company's Wyeth-Ayerst Laboratories division, the manufacturer of PONDIMIN (fenfluramine hydrochloride) tablets C-IV and the distributor of REDUX (dexfenfluramine hydrochloride capsules) C-IV, announced a voluntary and immediate market withdrawal of these antiobesity medications. The Company took this action on the basis of new, preliminary information provided to the Company on September 12, 1997 by the U.S. Food and Drug Administration (FDA) regarding heart valve abnormalities in patients using these medications. The Company estimates that approximately six million people used these medications in the U.S. As of November 12, 1997, the Company has been served or is aware that it has been named as a defendant in 303 lawsuits as the manufacturer of PONDIMIN and/or the distributor of REDUX. These lawsuits have been filed on behalf of individuals who claim to have been injured as a result of their use of PONDIMIN and/or REDUX, - 18 - either individually or in combination with the prescription drug phentermine (which the Company does not manufacture, distribute or market). The lawsuits also often name as defendants other distributors and/or retailers of PONDIMIN and/or REDUX, the manufacturers, distributors and/or retailers of phentermine and physicians or other health care providers. Based on media reports and other sources, the Company anticipates that it will be named as a defendant in a significant number of additional PONDIMIN and/or REDUX lawsuits in the future. Of the 303 lawsuits naming the Company as a defendant, 141 are actions that seek certification of a class, some on a national and others on a statewide basis. Of these 141 lawsuits, 101 are pending in various federal district courts and 40 are pending in various state courts. A number of the actions brought in state courts have been removed to federal courts. In addition, plaintiffs in various federal court actions have filed motions before the Judicial Panel on Multidistrict Litigation to transfer and consolidate all federal litigation of a similar nature for pretrial proceedings. Individual plaintiffs and two associations have filed the remaining lawsuits: 96 individual lawsuits and the associations' lawsuits are pending in various federal district courts and 66 individual lawsuits have been brought in various state courts. Plaintiffs' allegations of liability are based on various theories of recovery, including, but not limited to, product liability, strict liability, negligence, various breaches of warranty, conspiracy, fraud, misrepresentation and deceit. These lawsuits typically allege that the short or long-term use of PONDIMIN and/or REDUX, independently or in combination (including the combination of PONDIMIN and phentermine popularly known as "fen/phen"), causes, among other things, primary pulmonary hypertension, valvular heart disease and/or neurological dysfunction. In addition, some lawsuits allege severe emotional distress caused by the knowledge that ingestion of these drugs, independently or in combination, could cause such injuries. Plaintiffs typically seek relief in the form of monetary damages (including general damages, medical care and monitoring expenses, loss of earnings and earnings capacity, compensatory damages and punitive damages), generally in unspecified amounts, on behalf of the individual or the class. In addition, some actions seeking class certification ask for certain types of purportedly equitable relief, including, but not limited to, declaratory judgments and the establishment of a research or medical surveillance program. On September 18, 1997, a securities fraud putative class action was commenced in U.S. District Court in which the plaintiff alleges that the Company (and certain officers and directors named as controlling persons under the Securities Exchange Act of 1934) violated the Securities Exchange Act of 1934 by failing to disclose material facts or making material misstatements of fact regarding alleged adverse events associated with REDUX and/or PONDIMIN. Oran v. American Home Products Corporation, et al. (D.N.J.). The plaintiff seeks to represent a class of individuals who purchased shares of the - 19 - Company's common stock on the open market between March 1, 1997 and September 16, 1997 and seeks compensatory damages in an unspecified amount. 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. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit No. Description (10.1)* Deferred Compensation Plan. (10.2)* Executive Retirement Plan. (11) Computation of Earnings Per Share. (27) Financial Data Schedule. *Denotes management contract or compensatory plan or arrangement to be filed as an exhibit hereto. (b) Reports on Form 8-K A report on Form 8-K regarding the Company's announcement of the voluntary market withdrawal of fenfluramine, manufactured and sold under the name PONDIMIN, and dexfenfluramine, marketed under the name REDUX, was filed on September 15, 1997. - 20 - 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 Vice President and Comptroller (Duly Authorized Signatory and Chief Accounting Officer) Date: November 14, 1997 - 21 - Exhibit Index Exhibit No. Description (10.1)* Deferred Compensation Plan. (10.2)* Executive Retirement Plan. (11) Computation of Earnings Per Share. (27) Financial Data Schedule. *Denotes management contract or compensatory plan or arrangement required to be filed as an exhibit hereto. EX-1 EX-10.1 2 AMERICAN HOME PRODUCTS CORPORATION DEFERRED COMPENSATION PLAN Effective as of July 31, 1997 PURPOSE The purpose of the Deferred Compensation Plan (the "Plan") is to encourage the retention of a key group of management employees by allowing them to defer various types of compensation. SECTION ONE - DEFINITIONS Whenever used in the Plan, the following terms shall have the following meanings: (a) " Administrator " - means the Committee or such entity or person to whom the Committee may delegate responsibility for administration of the Plan. (b) " Beneficiary " - means one or more persons or entities (including a trust or estate) designated by an Employee, at any time or from time to time, to receive any payment under the Plan at or after such Employee's death. Such designation shall be made on a form provided or approved by the Administrator. If at any time a deferred amount shall become payable at or after the death of an Employee, and there shall not be in existence any person or entity so designated, then "Beneficiary" means the estate of such Employee. (c) " Board of Directors " - means the Board of Directors of the Company. (d) A " Change of Control " - shall be deemed to have occurred if (i) any "person" (as that term is used in Sections 13 and 14(d)(2) of the Exchange Act) other than a Permitted Holder (as defined below) is or becomes the beneficial owner (as that term is used in Section 13(d) of the Exchange Act), directly or indirectly, of fifty percent (50%) or more of either the outstanding shares of Common Stock or the combined voting power of the Company's then outstanding voting securities entitled to vote generally, (ii) during any period of two (2) consecutive years, individuals who constitute the Board of Directors of the Company at the beginning of such period cease for any reason to constitute at least a majority thereof, unless the election - 1 - or the nomination for election by the Company's stockholders of each new director was approved by a vote of at least three-quarters (3/4) of the directors then still in office who were directors at the beginning of the period or (iii) the Company undergoes a liquidation or dissolution or a sale of all or substantially all of the assets of the Company. No merger, consolidation, or corporate reorganization in which the owners of the combined voting power of the Company's then outstanding voting securities entitled to vote generally prior to such combination, own fifty percent (50%) or more of the resulting entity's outstanding voting securities shall, by itself, be considered a Change of Control. As used herein, "Permitted Holder" means: (i) the Company, (ii) any corporation, partnership, trust, or other entity controlled by the Company and (iii) any employee benefit plan (or related trust) sponsored or maintained by the Company or any such controlled entity. (e) " Code " - means the Internal Revenue Code of 1986, as amended from time to time. (f) " Committee " - means the Compensation and Benefits Committee of the Board of Directors. (g) " Company " - means American Home Products Corporation, a Delaware Corporation. (h) " Deemed Rate of Interest " - means a rate of interest deemed payable on amounts deferred under the Plan equal to the average of the quarter end yields for a ten-year period ending September 30 of the prior year, of ten- year U.S. Treasury notes plus two percent (2%). The Deemed Rate of Interest shall be calculated, accrued, credited, and compounded quarterly by the Treasurer of the Company. The Deemed Rate of Interest may be increased or decreased from time to time by the Board as it may deem appropriate, provided that no such decrease shall be effective for deemed interest accruing prior to the latest of (i) the date of Board action implementing such decrease and (ii) the date such decrease is communicated to Participants. (i) " Eligible Employee " - means an employee of the Company employed in the United States who either: (i) is a principal officer of the Company as that term is defined at Paragraph 30 of the By-Laws of the Company, or (ii) earns an annual base salary of not less than one hundred seventy-five thousand dollars ($175,000) or such greater amount as may be determined from time to time by the Committee. Whether or not a person is an Eligible Employee will - 2 - be determined on a Plan Year by Plan Year basis, such that a person who qualifies as an Eligible Employee in a particular Plan Year shall not qualify as an Eligible Employee in a subsequent Plan Year in which he/she meets neither of criteria (i) or (ii) above. (j) " Exchange Act " - means the Securities Exchange Act of 1934, as amended. (k) " Effective Date " - means July 31, 1997. (l) " Participant " - means an Eligible Employee who elects to defer compensation under the terms of the Plan. (m) " 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. (n) " Plan Year " - means the calendar year, except that the first Plan Year which shall be the period beginning on the Effective Date and ending on December 31, 1997. (o) " Retirement Date " - means the date of an Employee's separation from service on or after his/her attainment of age fifty-five (55). (p) " SESP " - means the American Home Products Corporation Supplemental Savings Plan, as amended from time to time. (q) " Stock Plans " - means the 1996 Stock Incentive Plan of the Company and all similar prior and subsequent plans of the Company providing for the granting of stock options to officers and other key employees of the Company. SECTION TWO - DEFERRALS UNDER PRIOR PLANS An Eligible Employee who, prior to the Effective Date, elected to defer part or all of (i) the cash portion of his/her Management Incentive Plan ("MIP") compensation, (ii) his/her base salary under the Deferred Compensation Program ("Program") of the Company, (iii) the income on the proceeds (net of after-tax withholding and prescribed fees) of the cashless exercise of his/her stock options under the Stock Plans i.e. proceeds from the sale of the stock resulting from such exercise or (iv) the proceeds (net after tax withholding) of the exercise of stock appreciation rights, may elect to have such deferrals or proceeds considered to be credited under the Plan as of the Effective Date in accordance with such terms and conditions as may be established by the Committee. Thereafter, such deferrals shall continue in accordance with the deferral and distribution provisions of the Plan; provided that amounts - 3 - attributable to such deferrals shall remain subject to the same elections and restrictions as previously had been in effect with respect thereto, unless thereafter changed by the Eligible Employee in accordance with the terms of the Plan. SECTION THREE - PARTICIPATION (a) Participation on the Effective Date. An employee of the Company shall become a Participant as of the Effective Date if he/she is an Eligible Employee on the Effective Date and elects to include previously deferred amounts under the Plan as described in Section Two above or elects to defer on and after the Effective Date by filing a deferral election form with the Administrator in accordance with Section 5. (b) Participation after the Effective Date . Any Eligible Employee who has not become a Participant on the Effective Date in accordance with Section 3(a) above shall become a Participant as of the Effective Date of his/her first deferral under the Plan in accordance with Section 5 following the Effective Date. SECTION FOUR - DEFERRALS UNDER THE PLAN (a) Deferral of Cash Awards under the MIP. (1) A Participant may designate a percentage of the cash portion of his/her MIP compensation from the Company which is payable in a Plan Year (the "Deferred MIP Compensation") to be deferred and distributed in accordance with a written election made by the Participant in accordance with Section 5. (2) A Participant's Deferred MIP Compensation shall accrue deemed interest, compounded quarterly, at the Deemed Rate of Interest from the date such Deferred MIP Compensation otherwise would have been paid to the date of distribution. (3) The Company shall distribute to a Participant his/her total Deferred MIP Compensation (together with deemed interest accrued thereon) in accordance with the deferral period and distribution form designated by the Participant in accordance with Section 5. - 4 - (b) Deferral of Base Salary. (1) A Participant may designate a percentage of his/her total annual base salary for a Plan Year (the "Deferred Salary Compensation") to be deferred and distributed in accordance with a written election made by the Participant in accordance with Section 5. However, no such deferral shall be effective unless the Participant elects with respect to the same Plan Year to have no less than six percent (6%) of his/her total base salary deferred in accordance with the SESP, and such SESP deferral shall be subject to the terms of the SESP and not to this Plan. (2) A Participant's Deferred Salary Compensation shall accrue deemed interest, compounded quarterly, at the Deemed Rate of Interest from the date such Deferred Salary Compensation otherwise would have been paid to the date of distribution. (3) The Company shall distribute to the Participant his/her total Deferred Salary Compensation (together with deemed interest accrued thereon) in accordance with the deferral period and distribution form designated by the Participant in accordance with Section 5. (4) A Participant may, upon no less than thirty (30) days' advance written notice to the Vice President - Finance of the Company or any successor thereto as designated by the Committee, prospectively terminate his/her deferral of base salary, effective as of the date stated in such written notice. Such termination shall not affect the treatment hereunder of amounts deferred prior to the effective date of such written notice. (c) Deferral of Proceeds from a Cashless Exercise/Sale Transaction. (1) A Participant may designate an amount of the proceeds (net of withheld taxes and prescribed fees) of a cashless exercise/sale transaction of stock options granted under the Stock Plans to be held by the Company pursuant to the Plan ("the "Deferred Stock Option Proceeds") so that deemed interest accrued thereon in accordance with clause (2) immediately below would be deferred and distributed in accordance with a written election made by the Participant in accordance with Section 5. - 5 - (2) A Participant's Deferred Stock Option Proceeds shall accrue deemed interest, compounded quarterly, at the Deemed Rate of Interest from the date the amount of such Deferred Stock Option Proceeds otherwise would have been paid. (3) The Company shall distribute to a Participant his/her total Deferred Stock Option Proceeds (together with deemed interest accrued thereon) in accordance with the deferral period and distribution form designated by the Participant in accordance with Section 5. (4) For purposes of clarity, it shall be understood that the intent of this Section 4(c) is to provide for a deferral of the Participant's taxation only with respect to the deemed interest credited in accordance with clause (2) above and not on the Deferred Stock Option Proceeds. As a result, it is intended that the cashless exercise/sale transaction shall be taxable to the Participant as if no election had been made hereunder and, upon distribution from the Plan, only the deemed interest accrued on the Deferred Stock Option Proceeds, and not the Deferred Stock Option Proceeds themselves, shall be taxable to the Participant. (d) Deferral of Proceeds from Exercise of Stock Appreciation Rights ("SARs"). (1) A Participant may designate an amount of the proceeds of the exercise of SARs ("Deferred SAR Proceeds"), as specified on the deferral election form, to be deferred and distributed in accordance with a written election made by the Participant in accordance with Section 5. (2) A Participant's Deferred SAR Proceeds shall accrue deemed interest, compounded quarterly, at the Deemed Rate of Interest from the date such Deferred SAR Proceeds otherwise would have been paid to the Participant. (3) The Company shall distribute to the Participant his/her total Deferred SAR Proceeds (together with deemed interest accrued thereon) in accordance with the deferral period and distribution form designated by the Participant in accordance with Section 5. - 6 - SECTION FIVE - FORM OF DEFERRAL ELECTIONS (a) All deferrals made under Section 4 shall be evidenced by the Participant's properly executing a deferred compensation agreement form supplied by the Administrator in accordance with the rules set forth in this Section 5. (b) An election to consider amounts previously deferred to be credited under this Plan in accordance with Section 2 must be received by the Committee or its designee prior to the Effective Date. (c) An election to defer MIP compensation in accordance with Section 4(a) or base salary in accordance with Section 4(b) with respect to a particular Plan Year must be received by the Committee or its designee no later than the last day of the preceding Plan Year. Such election must designate the timing and form of distribution of such Deferred MIP Compensation and/or base salary and earnings thereon in accordance with the options described in Section 6(a) and (b), respectively. (d) An election to have the proceeds from a cashless exercise/sale transaction held by the Company in accordance with Section 4(c) must be received by the Committee within the time frame established by the Committee from time to time. Such election must designate the timing and form of distribution of such proceeds and earnings thereon in accordance with the options described in Section 6(c). (e) An election to defer proceeds from the exercise of SARs in accordance with Section 4(d) must be received by the Committee no later than the six months prior to the exercise date of the SAR. Such election must designate the timing and form of distribution of such deferred SAR proceeds and earnings thereon in accordance with the options described in Section 6(d). (f) Notwithstanding the above, an employee who becomes an Eligible Employee for the first time during a Plan Year shall be permitted, within the thirty (30) day period that begins on the day he/she becomes an Eligible Employee, to make an election to defer base salary accrued after the - 7 - effective date of such election for the remainder of the Plan Year and MIP Compensation payable with respect to the Plan Year, provided, in the case of MIP Compensation, that the amount, if any, of such compensation is not known prior to the effective date of such election. SECTION SIX - DISTRIBUTIONS (a) Deferred MIP Compensation. (1) Commencement of Payment of Deferral of Deferred MIP Compensation. Deferred MIP Compensation, (together with deemed interest accrued thereon) shall commence to be paid at the election of the Participant either (i) ten (10) years following the date the Deferred MIP Compensation otherwise would have been paid, or (ii) at the Participant's Retirement Date. (2) Form of Distribution of Deferred MIP Compensation. Deferred MIP Compensation (together with deemed interest accrued thereon) shall be distributed at the election of a Participant either: (i) in a lump sum payment payable within ninety (90) days following the time designated pursuant to Section 6(a)(1) above, or (ii) in installment payments of up to ten (10) substantially equal annual installments, with the first installment payable within ninety (90) days following the time designated pursuant to Section 6(a)(1) above, with the remaining installments payable within ninety (90) days following the anniversaries of such time. The amount of each installment shall be determined by dividing the amount credited to the Participant's account at the time the installment is to be made (including deemed interest) by the number of remaining installments (including the installment then due). (b) Deferred Salary Compensation. (1) Commencement of Payment of Deferred Salary Compensation. Deferred Salary Compensation (together with deemed interest accrued thereon) - 8 - shall commence to be paid at the election of the Participant either: (i) ten (10) years following the date the Deferred Salary Compensation otherwise would have been paid, or (ii) at the Participant's Retirement Date. (2) Form of Distribution of Deferred Salary Compensation. Deferred Salary Compensation (together with interest accrued thereon) shall be distributed at the election of the Participant either: (i) in a lump sum payable within ninety (90) days following the time designated pursuant to Section 6(b)(1) above, or (ii) in installment payments of up to ten (10) substantially equal annual installments, with the first installment payable within ninety (90) days following the time designated pursuant to Section 6(b)(1) above, with the remaining installments payable within ninety (90) days following the anniversaries of such time. The amount of each installment shall be determined by dividing the amount credited to the Participant's account at the time the installment is to be made (including deemed interest) by the number of remaining installments (including the installment then due). (c) Deferred Stock Option Proceeds. (1) Commencement of Payment of Deferred Stock Option Proceeds. Deferred Stock Option Proceeds (together with deemed interest accrued thereon) shall commence to be paid at the election of a Participant either (i) not less than three (3) years nor more than ten (10) years following the exercise of the stock options subject to such election or, (ii) at attainment of the Retirement Date of the Participant. (2) Form of Distribution of Deferred Stock Option Proceeds. Deferred Stock Option Proceeds (together with deemed interest accrued thereon) shall be distributed at the election of a Participant either: (i) in a lump sum payable within ninety (90) days following the time designated in Section 6(c)(1) above, or (ii) in installment payments of up to ten (10) substantially equal annual installments, with the first installment payable within ninety (90) days following the time designated in Section 6(c)(1) above, with the remaining installments payable within ninety (90) days following the anniversaries of such time. The amount of each installment shall be determined by dividing the amount of deferrals in the Participant's account at the time the installment is to be made (including deemed interest thereon) by the number of installments. (3) Early Payment of Deferred Stock Option Proceeds. A Participant may, upon written request to the Committee, receive payment of a portion or all of his/her Deferred Stock Option Proceeds (as elected by the Participant) prior - 9 - to the date selected pursuant to Section 6(c)(1) above. In that event of such early payment the deemed interest credited to the Participant for that Plan Year shall be one percent (1%) less than the rate otherwise applicable for the Plan Year, and shall be credited on Deferred Stock Option Proceeds distributable under this Section 6(c)(3) only through the date of distribution. A Participant shall not be allowed to elect to receive early payment under this Section 6(c)(3) of any deemed interest credited to his/her Deferred Stock Option Proceeds, but only of the Deferred Stock Option Proceeds themselves. (d) Deferred SAR Proceeds. (1) Commencement of Payment of Deferred SAR Proceeds. Deferred SAR Proceeds (together with deemed interest accrued thereon) shall commence to be paid at the election of a Participant either (i) ten (10) years following the exercise of the SAR subject to such election, or (ii) at the Participant's Retirement Date. (2) Form of Distribution of SAR Proceeds. Deferred SAR Proceeds (together with deemed interest accrued thereon) shall be distributed at the election of a Participant either: (i) in a lump sum payment payable within ninety (90) days following the time designated pursuant to Section 6(d)(1) above, or (ii) in installment payments of up to ten (10) substantially equal annual installments, with the first installment payable within ninety (90) days following the time period designated pursuant to Section 6(d)(1) above, with the remaining installments payable within ninety (90) days following the anniversaries of such time. The amount of each installment shall be determined by dividing the amount of deferrals in the Participant's account at the time the installment is to be made (including deemed interest thereon) by the number of installments. (e) Payment Upon Separation From Service. Notwithstanding the above, in the event a Participant shall separate from service with the Company (for reasons other than death) prior to the commencement of payment of his/her - 10 - Deferred MIP Compensation, Deferred Salary Compensation, Deferred Stock Option Proceeds and/or Deferred SAR Proceeds, the Participant's account shall be distributed to the Participant in a single lump sum, together with deemed interest accrued thereon through the date of distribution, within ninety (90) days following such separation, provided that the foregoing shall not apply in the case of a Participant who (i) separates from service on a Retirement Date and (ii) had elected to receive payment of any amounts deferred under the Plan in the form of installment payments, commencing at his/her Retirement Date (but only with respect to amounts for which such election had been made). (f) Payment Upon Death. Notwithstanding anything in the Plan to the contrary, in the event a Participant dies prior to the receipt of any or all of his/her Deferred MIP Compensation, Deferred Salary Compensation, Deferred Option Proceeds, and/or Deferred SAR Proceeds, such amount shall be distributed in a single lump sum to the Participant's Beneficiary(ies), together with deemed interest accrued thereon through the date of such distribution, within ninety (90) days following his/her death. SECTION SEVEN - MISCELLANEOUS (a) Funding of the Plan. The Plan is unfunded and the Company has no obligation to set aside, earmark, or place in trust any funds with which to pay its obligations under this Plan. The Company's obligation shall not be secured in any way and a Participant's rights shall in no way be preferred over the general creditors of the Company. (b) Change of Control. In the event of a Change of Control, all Deferred MIP Compensation, Deferred Salary Compensation, Deferred Stock Option Proceeds and/or Deferred SAR Proceeds shall be paid to the Participant in a lump sum, together with deemed interest accrued thereon, within ten (10) days following the Change of Control. (c) Employment. This Plan does not constitute an employment contract between the Company and a Participant. Nothing in this Plan shall be construed - 11 - to give a Participant the right to be retained in the service of the Company, nor interfere with the right of the Company to terminate or discipline a Participant at any time. (d) Construction. This Plan shall be construed and interpreted under the laws of the State of New Jersey. (e) Taxes. The Company may withhold from distributions made from the Plan any taxes required to be withheld under federal, state, or local law. (f) Non-Assignable. Benefits payable under this Plan may not be anticipated, assigned (either at law or equity), alienated, pledged, encumbered, or subjected to attachment, garnishment, levy, execution, or other legal process, and any attempt to effect such distribution shall be void. (g) Minors and Incompetents. If the Administrator determines that any person to whom a payment is due hereunder is a minor or incompetent by reason of physical or mental disability, the Administrator shall have the power to cause the payments then due to such person to be made to another for the benefit of the minor or incompetent, without responsibility of the Company or the Administrator to see to the application of such payment, unless claim prior to such payment is made therefor by a duly appointed legal representative. Payments made pursuant to such power shall operate as a complete discharge of the Company and the Administrator. SECTION EIGHT - EMERGENCY BENEFIT In the event that the Committee determines that the Employee has suffered an unforeseeable financial emergency, the Administrator shall pay to the Employee as soon as possible following such determination, an amount not in excess of the amount needed to satisfy the emergency. Such payment shall be distributed - 12 - first out of the Employee's Deferred Stock Option Proceeds and deemed interest accrued thereon, second, out of Deferred MIP Compensation and deemed interest accrued thereon, third, out of Deferred Salary Compensation and deemed interest accrued thereon, and fourth, out of Deferred SAR Proceeds and deemed interest accrued thereon. Deemed interest shall not be accrued for any Employee on an amount paid to the Employee after the date of such payment. For this purpose, an "unforeseeable financial emergency " means an unanticipated emergency that is caused by an event beyond the control of the Employee that would result in severe financial hardship if the emergency distribution were not permitted. In determining whether a Participant has suffered an unforeseeable financial emergency, the Administrator shall apply principals similar to those contained in Treasury Regulation Section 1.457-2(h)(4). SECTION NINE - ADMINISTRATION OF THE PLAN The Plan shall be administered by the Administrator which shall have full discretionary authority to interpret the Plan; to make all determinations as may be necessary or advisable; and to adopt, amend or rescind any rules, regulations, and procedures as it deems necessary or appropriate for the administration of the Plan. The determinations, actions, and decisions of the Administrator shall be binding and conclusive for all purposes and upon all persons. The Administrator may delegate part or all of its responsibilities under the Plan to such party or parties as it may deem necessary or appropriate. SECTION TEN - AMENDMENT AND TERMINATION The Board of Directors may from time to time amend or revise the terms of the Plan, or may discontinue the Plan at any time. However, such amendment, revision or discontinuance of the Plan may not adversely affect an Employee's benefit(s) accrued under the Plan prior to the date of such action. - 13 - SECTION ELEVEN - CLAIMS PROCEDURE If a Participant does not receive the timely payment of the benefits which he/she believes are due under the Plan, the Participant may make a claim for benefits in the manner hereinafter provided. All claims for benefits under the Plan shall be made in writing and shall be signed by the Participant. Claims shall be submitted to the Administrator. If the Participant does not furnish sufficient information with the claim for the Administrator to determine the validity of the claim, the Administrator shall indicate to the Participant any additional information which is necessary for the Administrator to determine the validity of the claim. Each claim hereunder shall be acted on and approved or disapproved by the Administrator within 90 days following the receipt by the Administrator of the information necessary to process the claim. In the event the Administrator denies a claim for benefits in whole or in part, the Administrator shall notify the Participant in writing of the denial of the claim and notify the Participant of his right to a review of the Administrator's decision by the Administrator. Such notice by the Administrator shall also set forth, in a manner calculated to be understood by the Participant, the specific reason for such denial, the specific provisions of the Plan on which the denial is based, a description of any additional material or information necessary to perfect the claim with an explanation of the Plan's appeals procedure as set forth in this Section Eleven. - 14 - If no action is taken by the Administrator on a Participant's claim within 90 days after receipt by the Administrator, such claim shall be deemed to be denied for purposes of the following appeals procedure. Any applicant whose claim for benefits is denied in whole or in part may appeal for a review of the decision by the Administrator. Such appeal must be made within three months after the applicant has received actual or constructive notice of the denial as provided above. An appeal must be submitted in writing within such period and must: (a) request a review by the Administrator of the claim for benefits under the Plan; (b) set forth all of the grounds upon which the Participant's request for review is based on any facts in support thereof; and (c) set forth any issues or comments which the Participant deems pertinent to the appeal. The Administrator shall act upon each appeal within 60 days after receipt thereof unless special circumstances require an extension of the time for processing, in which case a decision shall be rendered by the Administrator as soon as possible but not later than 120 days after the appeal is received by it. The Administrator may require the Participant to submit such additional facts, documents or other evidence as the Administrator in its discretion deems necessary or advisable in making its review. The Participant shall be given the opportunity to review pertinent documents or materials upon submission of a written request to the Administrator, provided the Administrator finds the requested documents or materials are pertinent to the appeal. - 15 - 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. - 16 - EX-10.2 3 AMERICAN HOME PRODUCTS CORPORATION EXECUTIVE RETIREMENT PLAN EFFECTIVE AS OF JANUARY 1, 1997 PURPOSE The purpose of the American Home Products Corporation Executive Retirement Plan (the "Plan") is to provide competitive executive retirement benefits for key executives and to enhance the ability of the Company to attract and retain key senior executives. SECTION ONE-DEFINITIONS Except where the context indicates otherwise, any masculine terminology used herein shall also include the feminine gender, and the definition of any term herein in the singular shall also include the plural. Whenever used herein, the following terms shall have the meaning set forth below: 1.1. "Actuarial Equivalence" means an amount of equivalent value determined by reference to a specified set of conversion or reduction factors. In determining either the amount of any reduction in benefit amount or the amount of a benefit payable under the Plan in an optional form, actuarial equivalence shall be determined by applying the conversion factors set forth in the AHPC Retirement Plan. 1.2 "Affiliate" means any corporation, partnership or other organization controlling, controlled by or under common control with the Company. 1.3. "AHPC Retirement Plan" means the American Home Products Corporation Retirement Plan - United States, as amended from time to time. 1.4. "Average Pension Earnings" has the same meaning as in the AHPC Supplemental Executive Retirement Plan, as amended from time to time. - 1 - 1.5. "Board of Directors" means the Board of Directors of the Company. 1.6. "Code" means the Internal Revenue Code of 1986, as amended from time to time. 1.7. "Company" means American Home Products Corporation, a Delaware corporation. 1.8. "Contingent Annuity" has the meaning set forth in the AHPC Retirement Plan. 1.9. "Contingent Annuitant" has the meaning set forth in the AHPC Retirement Plan. 1.10. "Continuous Service" has the meaning set forth in the AHPC Retirement Plan. 1.11. "Corporate Officer" means a principal officer of the Company as described in Paragraph 30 of the By-Laws of the Company (copy attached). 1.12. "Credited Service" means the number of years of service credited to an Employee under and as determined in accordance with the AHPC Retirement Plan. 1.13. "Early Plan Benefit" means the monthly benefit payable to a Participant under Section 4.2 of the Plan. 1.14. "Early Retirement Age" means attainment of both age fifty-five (55) or more and at least ten (10) years of Continuous Service. 1.15. "Early Retirement Date" means the first day of the calendar month coincident with or next following the date a Participant attains his/her Early Retirement Age, or any subsequent day elected by the Participant to retire - 2 - prior to his/her attainment of Normal Retirement Age. 1.16. "Effective Date" is January 1, 1997. 1.17. "Employee" has the meaning set forth in the AHPC Retirement Plan. 1.18. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, including any regulations promulgated thereunder. 1.19. "Final Average Annual Pension Earnings" means the average of a Participant's Annual Pension Earnings (as of January 1 of each year) for the three years during the ten-year period immediately preceding the date of his/her Severance from Service in which such Annual Pension Earnings were the highest. 1.20. "Minimum Eligible Compensation Level" means a Rate of Annual Earnings equal to or greater than two hundred and fifty thousand dollars ($250,000), which amount shall be subject to periodic review and adjustment by the Compensation and Benefits Committee of the Board. 1.21. "Normal Plan Benefit" means the Plan Benefit payable monthly to a Participant pursuant to Section 4.1 of the Plan. 1.22. "Normal Retirement Age" means age sixty (60). 1.23 "Normal Retirement Date" means the first day of the calendar month coincident with or next following the date a Participant attains his/her Normal Retirement Age and elects to retire. - 3 - 1.24. "Participant" means an Employee of the Company who has met the requirements to become a Participant in the Plan pursuant to Section Two. 1.25. "Plan" means this American Home Products Corporation Executive Retirement Plan, as amended from time to time. 1.26. "Plan Benefit" means the benefit payable monthly to a Participant under the terms of the Plan. 1.27. "Plan Year" means the calendar year. 1.28. "Postponed Plan Benefit" means the Plan Benefit payable monthly to a Participant under Section 4.4 of the Plan. 1.29. "Rate of Annual Earnings" means the annual base salary rate of a Participant as of January 1 of each Plan Year. 1.30. "Retirement Committee" has the meaning set forth in the AHPC Retirement Plan. 1.31. "Retirement Plans" means the AHPC Retirement Plan, the American Home Products Corporation Supplemental Executive Retirement Plan, the American Cyanamid and Subsidiaries Supplemental Employees Retirement Plan; the American Cyanamid and Subsidiaries ERISA Excess Plan and/or any other retirement plan or arrangement of the Company to the extent it provides retirement or pension benefits (but only to the extent that service under such plan is counted for purposes of the AHPC Retirement Plan) each as amended from time to time. 1.32. "Severance from Service" has the meaning set forth in the AHPC Retirement Plan. - 4 - 1.33. "Single Life Annuity" means an annuity providing payments for the lifetime of a Participant with no survivor benefits. 1.34. "Social Security Benefit" means the estimated annual amount of an Employee's old age retirement benefits that a Participant will receive under the United States Social Security system. 1.35. "Surviving Spouse" means the spouse of a deceased Participant to whom such Participant has been validly married for a continuous period of at least one (1) year immediately preceding such Participant's death. 1.36. "Vested Plan Benefit" means the Plan Benefit payable monthly to a Participant under Section 4.3 of the Plan. SECTION TWO-ELIGIBILITY 2.1. (a) Eligibility on Effective Date. An Employee of the Company or its Affiliate employed on the Effective Date shall become a Participant in the Plan on the Effective Date provided such Employee: (1) Is a Participant in the AHPC Retirement Plan, and (2) Either; (A) Has a Rate of Annual Earnings equal to or in excess of the then Minimum Eligible Compensation Level; or (B) Is a Corporate Officer. (b) Eligibility After Effective Date. Any other Employee shall become a Participant when and if he/she satisfies the requirements under Section 2.1(a)(1) and (2) above. - 5 - SECTION THREE-VESTING 3.1. Vesting. A Participant shall be vested upon the first to occur of the following: (a) Completion of five years of Continuous Service; or (b) Attaining age 60 regardless of the number of years of Continuous Service. 3.2. Termination Prior to Vesting. Any Participant who incurs a Severance from Service prior to becoming vested under Section 3.1 shall not be entitled to receive a Plan Benefit. SECTION FOUR-AMOUNT AND COMMENCEMENT OF BENEFITS 4.1. Normal Plan Benefits. (a) Eligibility. A Participant who retires at or after attaining his/her Normal Retirement Age, shall be eligible to receive monthly a Normal Plan Benefit under the Plan. (b) Amount of Normal Plan Benefit. The monthly Normal Plan Benefit of a Participant shall be one-twelfth of the amount, if any, by which the amount determined under subparagraph (1) below, exceeds (to prevent duplication of benefits) the amount determined under subparagraph (2) below, where - (1) An amount equal to: (A) two percent (2%) of the Participant's Final Average Annual Pension Earnings multiplied by the Participant's actual years of Credited Service up to Normal Retirement Age plus, subject to subparagraph (c) below, an additional three (3) - 6 - years of Credited Service (not to exceed thirty (30) years); minus (B) 1/60 of the Participant's Social Security Benefit multiplied by the Participant's years of Credited Service plus, subject to subparagraph (c) below, an additional three (3) years of Credited Service (not to exceed thirty (30) years). (2) The annual amount of retirement benefits, if any under the Retirement Plans, payable in the form of a Single Life Annuity to the Participant at Normal Retirement Age. (c) Additional Credited Years of Bridge Service. The three (3) additional years of Credited Service described in Section 4.1(b) shall be reduced by one year for each year of Service (or part thereof) that the Participant works beyond age sixty two (62) years, provided however, that a Participant who commences participation in the Plan at age sixty one (61) or later shall accrue a monthly Normal Plan Benefit in the amount provided in Section 4.1(b) for two (2) years before such reductions take effect. (d) Commencement and Duration. Monthly Normal Plan Benefit payments for Participants who retire and elect to receive payments shall begin as of the Participant's Normal Retirement Date. Such payments shall continue in accordance with the payment option elected by the Participant in Section 5. - 7 - 4.2. Early Plan Benefits. (a) Eligibility. A Participant who incurs a Severance from Service while a Participant on or after he has attained his/her Early Retirement Age but prior to his/her Normal Retirement Age shall be eligible to retire and receive an Early Plan Benefit under the Plan. (b) Amount of Early Plan Benefit. A Participant's Early Plan Benefit shall be computed in the same manner as a Normal Plan Benefit under Section 4.1(b) except that the amount determined under Section 4.1(b)(1) shall be reduced by three (3) percent for each year (or part thereof) by which his/her Early Plan Benefit commences prior to the attainment of his/her Normal Retirement Age hereunder and the amount so determined shall then have the offset provisions set forth in Section 4.1(b)(2) applied to determine the amount of the Participant's Early Retirement Benefit. (c) Commencement and Duration. A Participant who has incurred a Severance from Service after attaining his/her Early Retirement Age may elect to retire and commence payment as of his/her Early Retirement Date, and such payments shall continue in accordance with the payment option elected in Section 5. 4.3. Vested Plan Benefit. (a) Eligibility. A Participant who incurs a Severance from Service while a Participant after having attained five years of Continuous Service but prior to either his/her Early Retirement Age or his/her Normal Retirement Age, shall be eligible to retire and receive a Vested Plan Benefit under the Plan. (b) Amount of Vested Plan Benefit. A Participant's Vested Plan Benefit shall be computed in the same manner as a monthly Normal Plan Benefit under Section 4.1(b) except that the amount determined under Section 4.1(b)(1), shall be reduced - 8 - actuarially (by reference to the Actuarial Equivalence) for each year (or part thereof) by which his/her Vested Plan Benefit commences prior to the attainment of his/her Normal Retirement Age and the amount so determined shall then have the offset provisions set forth in Section 4.1(b)(2) applied to determine the amount of the Vested Plan Benefit. (c) Commencement and Duration. A Participant who has incurred a Severance from Service while a Participant after attaining a right to a Vested Plan Benefit in accordance with Section 4.3(a) above may elect to commence payment of his/her Vested Plan Benefit as of the time he/she attains age 55. Such payments shall continue in accordance with the payment option elected by the Participant pursuant to Section 5. 4.4. Postponed Plan Benefit. (a) Eligibility. A Participant who remains an Employee beyond his/her Normal Retirement Age shall be entitled to retire and receive a Postponed Plan Benefit under the Plan. (b) Amount. Except as otherwise provided in this paragraph (b), a Participant's Postponed Plan Benefit shall be an amount computed in the same manner as a monthly Normal Plan Benefit under Subsection 4.1(b), provided, however, that: (1) The Participant's Postponed Plan Benefit shall be determined by taking into account all years of actual Credited Service and Final Average Annual Pension Earnings attributable to employment with the Company both before and after his/her Normal Retirement Date (not to exceed, including the three additional years of Credited Service, thirty (30) years); and that - 9 - (2) The three (3) additional years of Credited Service described in paragraph (b)(1) above shall be reduced for each year (or part thereof) that the Participant works beyond age sixty two (62), provided, however, that a Participant who commences participation at age sixty one (61) or later must be eligible to receive a Normal Plan Benefit for two (2) years before such reductions take effect. (c) Commencement and Duration. Postponed Plan Benefit payments shall commence as of the first day of the calendar month coincident with or next following a Participant's Severance from Service. Such benefits shall continue in accordance with the payment option selected by the Participant in accordance with Section 5. - 10 - SECTION FIVE-FORM AND COMMENCEMENT OF BENEFITS 5.1. Form of Benefit. Plan Benefits payable to a Participant pursuant to Section Four shall be payable in any optional form as elected by the Participant. The Participant may elect any optional form of benefit payment available under the AHPC Retirement Plan. If a Plan Benefit is payable in a form other than a Single Life Annuity over the life of the Participant, such Plan Benefit shall be subject to adjustment by the same actuarial equivalent factors as are applied under the AHPC Retirement Plan with respect to the AHPC Retirement Plan benefit of the Participant to determine Actuarial Equivalence. Any election made by a Participant pursuant Section 4 shall be in writing in a form acceptable to the Retirement Committee and filed at least six (6) months prior to his/her retirement. SECTION SIX-SURVIVING SPOUSE BENEFIT 6.1. Surviving Spouse's Benefit. (a) Death of Participant After Attaining Early Retirement Age. Upon the death of a Participant while employed by the Company after having attained his/her Early Retirement Age his/her Surviving Spouse will be entitled to an immediate survivors benefit under this Plan equal to one- half of the Plan Benefit the Participant would be entitled to receive commencing on the date of his/her death, assuming the Participant had lived and retired on the day prior to his death with a 50% Contingent Annuity Option in effect. (b) Death of Participant Prior to Attaining Early Retirement Age. Upon the death of a Participant while employed by the Company prior to having reached Early Retirement Age but after becoming vested under Section 3 of the Plan, his/her Surviving Spouse shall be entitled to receive a survivors annuity starting on the first day of the month on or after the date the - 11 - Participant would have attained his/her Early Retirement Age. Such annuity shall be equal to one-half of the Vested Plan Benefit the Participant would be entitled to receive starting on the first day of the month on or after the later of (i) the Participant's death, or (ii) the date of the Participant would have attained age 55, assuming the Participant had elected a 50% Contingent Annuity. (c) Death of Participant After a Separation of Service but Before Commencement of Early Retirement or Vested Plan Benefits. If a Participant has a Separation from Service while vested and dies prior to attaining his/her Early Retirement Age or commencing a Vested Plan Benefit, the Participant's Surviving Spouse shall be entitled to a survivor's annuity commencing on the later of the Participant's death or the date the Participant would have attained age 55. The amount of such an annuity shall be equal to one-half of the Early Retirement Benefit or the Vested Plan Benefit the Participant was entitled to receive as of the date of his/her Separation from Service commencing as of the date described above assuming the Participant had elected a 50% Contingent Annuity option. SECTION SEVEN-AMENDMENT AND TERMINATION 7.1. Amendment or Termination. The Company reserves the right to amend, modify, or terminate the Plan at any time for any reason. Any such amendment, modification or termination shall be made pursuant to a resolution of the Board of Directors and shall be effective as of the date specified in the resolution. However, no such amendment, modification or termination of the Plan shall directly or indirectly deprive or adversely affect a Participant's Plan Benefit under the Plan as in effect on the date immediately preceding the date of such amendment, modification or termination. 7.2. Termination Benefit. In the event of a Plan termination, each Participant shall become fully vested in his/her accrued Plan Benefit as of the termination date. Such accrued Plan Benefit - 12 - shall be calculated as set forth in Section 4.1(b) above, and shall be based upon the Participant's Years of Service, Final Average Pension Earnings, and Retirement Plans benefit as of the termination date. For purposes of determining a Participant's accrued Plan Benefit pursuant to this paragraph, the Participant's Retirement Plans benefit shall be his/her accrued benefit from the Retirement Plans payable at age sixty (60). Payment of a Participant's accrued Plan Benefit shall not be contingent upon his/her continuation of employment with the Company following the Plan termination date, and such benefit shall be payable at the date for commencement of payment of a Plan Benefit pursuant to of Section Five. SECTION EIGHT-MISCELLANEOUS 8.1. No Effect on Employment Rights. Nothing contained herein will confer upon any Participant the right to be retained in the service of the Company, nor limit the right of the Company to discharge or otherwise deal with any Participant without regard to the existence of the Plan. 8.2. Funding. The Plan at all times shall be entirely unfunded, and no provision shall at any time be made with respect to segregating any assets of the Company for payment of any benefits hereunder. No Participant, Surviving Spouse or any other person shall have any interest in any particular assets of the Company by reason of a right to receive a benefit under the Plan, and any such Participant, Surviving Spouse or other person shall have the rights of a general unsecured creditor of the Company with respect to any rights under the Plan. Notwithstanding the foregoing, the Retirement Committee or the Board of Directors, in their discretion, may segregate the assets in a separate trust (treated for tax purposes as a Rabbi trust), for the payment of Plan Benefits and such segregation shall not be regarded as funding the Plan. - 13 - 8.3. Anti-assignment. To the maximum extent permitted by law, no benefit payable under the Plan shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, attachment, encumbrance, or charge prior to actual receipt thereof by the payee; and any attempt so to anticipate, alienate, sell, transfer, assign, pledge, attach, encumber, or charge prior to such receipt shall be void. 8.4. Administration. The Retirement Committee shall be responsible for the general operation and administration of the Plan and for carrying out the provisions thereof. All provisions set forth in the AHPC Retirement Plan with respect to the administrative powers and duties of the Retirement Committee, expenses of administration, and procedures for filing claims shall also be applicable with respect to the Plan. The Retirement Committee shall have the full discretionary authority to construe and interpret the Plan, including the right to remedy possible ambiguities, to adopt, amend, and rescind rules and regulations for the administration of the plan, and generally to conduct and administer the Plan and to make all determinations in connection with the Plan as may be necessary or advisable. All such actions of the Retirement Committee shall be conclusive and binding upon all Participants, Beneficiaries and Surviving Spouses. The Retirement Committee shall be entitled to rely conclusively upon all tables, valuations, certificates, opinions, and reports furnished by any actuary, accountant, controller, counsel, or other person employed or engaged by the Company with respect to the Plan. 8.5. State Law. The Plan is established under and will be construed according to the laws of the State of New York, to the extent that such laws are not preempted by ERISA and the regulations promulgated thereunder. 8.6. Incapacity of Recipient. In the event a Participant, or Surviving Spouse is declared incompetent and a conservator or other person legally charged with the care of his/her person or his/her estate is appointed, any benefits under the Plan to which - 14 - such Participant, or Surviving Spouse is entitled shall be paid to such conservator or other person legally charged with the care of his/her person or estate. SECTION NINE-CLAIMS PROCEDURE If a Participant does not receive the timely payment of the benefits which he/she believes are due under the Plan, the Participant may make a claim for benefits in the manner hereinafter provided. All claims for benefits under the Plan shall be made in writing and shall be signed by the Participant. Claims shall be submitted to the Administrator. If the Participant does not furnish sufficient information with the claim for the Administrator to determine the validity of the claim, the Administrator shall indicate to the Participant any additional information which is necessary for the Administrator to determine the validity of the claim. Each claim hereunder shall be acted on and approved or disapproved by the Administrator within 90 days following the receipt by the Administrator of the information necessary to process the claim. In the event the Administrator denies a claim for benefits in whole or in part, the Administrator shall notify the Participant in writing of the denial of the claim and notify the Participant of his right to a review of the Administrator's decision by the Administrator. Such notice by the Administrator shall also set forth, in a manner calculated to be understood by the Participant, the specific reason for such denial, the specific provisions of the Plan on which - 15 - the denial is based, a description of any additional material or information necessary to perfect the claim with an explanation of the Plan's appeals procedure as set forth in this Section Eleven. If no action is taken by the Administrator on a Participant's claim within 90 days after receipt by the Administrator, such claim shall be deemed to be denied for purposes of the following appeals procedure. Any applicant whose claim for benefits is denied in whole or in part may appeal for a review of the decision by the Administrator. Such appeal must be made within three months after the applicant has received actual or constructive notice of the denial as provided above. An appeal must be submitted in writing within such period and must: (a) request a review by the Administrator of the claim for benefits under the Plan; (b) set forth all of the grounds upon which the Participant's request for review is based on any facts in support thereof; and (c) set forth any issues or comments which the Participant deems pertinent to the appeal. The Administrator shall act upon each appeal within 60 days after receipt thereof unless special circumstances require an extension of the time for processing, in which case a decision shall be rendered by the Administrator as soon as possible but not later than 120 days after the appeal is received by it. The Administrator may require the Participant to submit such additional facts, documents or other evidence as the Administrator in its discretion deems necessary or advisable in making its review. The Participant shall be given the opportunity to review - 16 - 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. - 17 - EX-11 4 EXHIBIT 11 AMERICAN HOME PRODUCTS CORPORATION AND SUBSIDIARIES COMPUTATION OF EARNINGS PER SHARE (In Thousands Except Per Share Amounts)
Three Months Ended Nine Months Ended September 30, September 30, 1997 1997 1. Net Income .................. $435,532 $1,471,301 2. Reported earnings per share: a. Average number of common shares outstanding during the period .............. 649,009 645,716 b. Reported earnings per share (1/2a) ............. $0.67 $2.28 3. Primary earnings per share: a. Average number of common shares outstanding during the period ............... 649,009 645,716 b. Common shares deemed outstanding from the assumed exercise of stock options reduced by the number of common shares purchased with the proceeds (determined using the average market price during the period).................... 15,557 14,446 c. Deferred contingent common stock awards .............. 494 494 d. Shares for primary earnings per share calculation (3a+3b+3c) ................ 665,060 660,656 e. Primary earnings per share (1/3d)..................... $0.65 $2.23 4. Fully diluted earnings per share: a. Average number of common shares outstanding during the period................. 649,009 645,716 b. Common shares deemed outstanding from the assumed exercise of stock options reduced by the number of common shares purchased with the proceeds (determined using the higher of the average market price during the period or the market price at the end of the period) ......... 15,557 15,191 c. Deferred contingent common stock awards ............... 494 494 d. Shares for fully diluted earnings per share calculation (4a+4b+4c)...... 665,060 661,401 e. Fully diluted earnings per share (1/4d) ............... $0.65 $2.22 EX-27 5
5 EXHIBIT 27 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AMERICAN HOME PRODUCTS CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEET AS OF SEPTEMBER 30, 1997 AND CONSOLIDATED CONDENSED STATEMENT OF INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-1997 SEP-30-1997 1,089,258 53,804 2,697,693 0 2,492,766 7,465,911 6,666,300 2,450,679 21,174,416 4,765,506 5,747,785 216,401 0 73 7,245,198 21,174,416 10,584,647 10,584,647 3,061,606 3,061,606 1,130,081 0 294,758 2,013,905 542,604 1,471,301 0 0 0 1,471,301 2.23 2.22
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