-----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, JFNR8lwPwtqCdupL8nc4kyrhw2RgUq+l4yHq1Y5aSwlUlkS/YS4PbWw5fKMk0Ojt cerORZp4+W/dO3iWx3H/zg== 0000005187-98-000005.txt : 19980330 0000005187-98-000005.hdr.sgml : 19980330 ACCESSION NUMBER: 0000005187-98-000005 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 15 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980327 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-K SEC ACT: SEC FILE NUMBER: 002-44305 FILM NUMBER: 98575525 BUSINESS ADDRESS: STREET 1: 5 GIRALDA FARMS CITY: MADISON STATE: NJ ZIP: 07940 BUSINESS PHONE: 201-660-50 10-K 1 . UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended Commission file number December 31,1997 1-1225 AMERICAN HOME PRODUCTS CORPORATION (Exact name of registrant as specified in its charter) Delaware 13-2526821 (State or other jurisdiction of (I.R.S. Employer Identification incorporation or organization) Number) Five Giralda Farms, Madison, NJ 07940-0874 (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code (973) 660-5000 Securities registered pursuant to Section 12(b) of the Act: Name of Each Exchange On Title of Each Class Which Registered $2 Convertible Preferred Stock, $2.50 par value New York Stock Exchange Common Stock, $.33 - 1/3 par value New York Stock Exchange Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] State the aggregate market value of the voting stock held by nonaffiliates of the registrant. (The aggregate market value shall be computed by reference to the price at which the stock was sold, or the average bid and asked prices of such stock, as of a specified date within 60 days prior to the date of filing). Aggregate market value at March 2, 1998 $61,446,876,563 Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date (applicable only to corporate registrants). Outstanding at March 2, 1998 Common Stock, $.33 - 1/3 par value 654,924,364 Documents incorporated by reference: list hereunder the following documents if incorporated by reference and the part of the Form 10-K into which the document is incorporated: (1) any annual report to security holders; (2) any proxy or information statements; and (3) any prospectus filed pursuant to Rule 424(b) or (c) under the Securities Act of 1933 (the listed documents should be clearly described for identification purposes). (1) 1997 Annual Report to Shareholders - In Parts I, II and IV (2) Proxy Statement filed March 25,1998 - In Part III PART I ITEM 1. BUSINESS General American Home Products Corporation (the "Company"), a Delaware corporation organized in 1926, is currently engaged in the discovery, development, manufacture, distribution and sale of a diversified line of products in two primary business segments: health care products and agricultural products. Health care products include branded and generic ethical pharmaceuticals, biologicals, nutritionals, consumer health care products, and animal biologicals and pharmaceuticals. Agricultural products include crop protection and pest control products such as herbicides, insecticides, fungicides and plant growth regulators. The Company holds a majority interest in Immunex Corporation, a biopharmaceutical company whose stock is publicly traded. In February 1998, the Company sold the Sherwood-Davis & Geck medical devices business to a subsidiary of Tyco International Ltd. for approximately $1.77 billion. This transaction completed the Company's exit from the medical devices business. In December 1997, the Company sold the stock of Storz Instrument Company and affiliated companies, a global manufacturer and marketer of ophthalmic products, and certain assets relating to the Storz business for $380 million. In February 1997, the Company acquired the worldwide animal health business of Solvay S.A. for approximately $460 million. In December 1996, the Company acquired the remaining equity interest in the biopharmaceutical company Genetics Institute, Inc. ("G.I.") that it did not already own for approximately $1.3 billion. In November 1996, the Company sold a majority interest in the American Home Foods business for approximately $1.2 billion. The Company retained a 20% equity interest in International Home Foods, the successor to American Home Foods. In November 1997, the Company sold a portion of the 20% equity interest in International Home Foods. In late 1994, the Company acquired the outstanding common stock of American Cyanamid Company ("Cyanamid"). The aggregate purchase price to acquire all of Cyanamid including acquisition-related fees and expenses was approximately $9.6 billion. Additional information relating to the G.I., Solvay S.A. and Cyanamid acquisitions, the American Home Foods, Sherwood-Davis & Geck and Storz dispositions, and certain other acquisitions and divestitures is set forth in Notes 2 and 3 of the Notes to Consolidated Financial Statements in the Company's 1997 Annual Report to Shareholders and is incorporated herein by reference. I-1 Unless stated to the contrary, or unless the context otherwise requires, references to the Company in this report include American Home Products Corporation and its majority-owned subsidiaries. Industry Segments Financial information, by industry segment, for the three years ended December 31, 1997 is set forth in Note 11 of the Notes to Consolidated Financial Statements in the Company's 1997 Annual Report to Shareholders and is incorporated herein by reference. The Company is not dependent on any single or major group of customers for its sales. The Company currently manufactures, distributes and sells a diversified line of products in two primary industry segments. The product designations appearing in differentiated type herein are trademarks. HEALTH CARE PRODUCTS - Pharmaceuticals - This sector includes a wide variety of ethical pharmaceutical and biological products for human and veterinary use which are promoted and sold worldwide primarily to wholesalers, pharmacies, hospitals, managed care organizations and physicians. Some of these sales are made to large buying groups representing certain of these customers. Principal product categories for human use and their respective products are: women's health care including PREMARIN, PREMPRO, LO/OVRAL (marketed as MIN-OVRAL internationally), NORDETTE and TRIPHASIL (marketed as TRINORDIOL internationally); infant nutritionals (international markets only); cardiovascular including CORDARONE and ZIAC; mental health including ATIVAN and EFFEXOR; anti-inflammatory and gastroenterology including LODINE, ORUVAIL, ZOTON (international markets only) and NAPRELAN; anti- infectives including MINOCIN, SUPRAX and ZOSYN (marketed as TAZOCIN internationally); vaccines including HIBTITER; biopharmaceuticals including recombinant Factor VIII; and oncology therapies. In addition, the Company markets generic pharmaceutical products. Principal animal health product categories include vaccines, pharmaceuticals (including anthelmintics), endectocides and growth implants. The Company manufactures these products in the United States and Puerto Rico and in 22 foreign countries. Sales of women's health care products in the aggregate accounted for more than 10% of consolidated net sales in 1997, 1996 and 1995. Except for sales of women's health care products, no single pharmaceutical product or other category of products accounted for more than 10% of consolidated net sales in 1997, 1996 or 1995. The operating income before taxes from the women's health care products in the aggregate, and the PREMARIN family of products individually, accounted for more than 10% of consolidated operating income before taxes in 1997, 1996 and 1995. Consumer health care - Principle over-the-counter health care product categories and their respective products are: analgesics including ADVIL; cough/cold/allergy remedies including ROBITUSSIN and DIMETAPP; I-2 vitamins and mineral supplements including CENTRUM; hemorrhoidal; antacids; and asthma relief items. These products are generally sold to wholesalers and retailers, and are primarily promoted to consumers worldwide through advertising. These products are manufactured in the United States and Puerto Rico and in 17 foreign countries. No single consumer health care product or category of products accounted for more than 10% of consolidated net sales or operating income before taxes in 1997, 1996 or 1995. Medical Devices - In February 1998, the Company sold the Sherwood- Davis & Geck medical devices business to a subsidiary of Tyco International Ltd. This transaction completed the Company's exit from the medical devices business. Principal products in this sector included MONOJECT needles and syringes, ARGYLE tubes, catheters and chest drainage devices, DAVIS & GECK wound closure products, tympanic and predictive thermometers, ophthalmic surgical equipment and vision care products, exercise equipment, cardiopulmonary instrumentation and devices, enteral feeding systems and access devices, microsurgical equipment and other hospital products which were promoted and sold worldwide, principally to physicians, hospitals, other health care institutions and wholesalers. Buying groups also represented certain of these customers. In addition to the United States and Puerto Rico, these products were manufactured in 10 foreign countries. No single medical device product or category of products accounted for more than 10% of consolidated net sales or operating income before taxes in 1997, 1996 or 1995. AGRICULTURAL PRODUCTS - Principal agricultural product categories and their respective products are: herbicides including PURSUIT (marketed as PIVOT internationally), PROWL (marketed as STOMP internationally) and SCEPTER; insecticides including COUNTER; and fungicides which are promoted to consumers worldwide and generally sold directly to wholesalers and retailers. In addition to the United States and Puerto Rico, these products are manufactured in eight foreign countries. No single agricultural product or category of products accounted for more than 10% of consolidated net sales or operating income before taxes in 1997, 1996 or 1995. FOOD PRODUCTS - In November 1996, the Company sold a majority interest in the American Home Foods business. Products in this segment included prepared pastas and other entrees, regional specialty foods, condiments, snack products, spreadable fruit products and other food products which were promoted to consumers through advertising and generally sold directly to wholesalers and retailers. The Company retained a 20% equity interest in International Home Foods, the successor to American Home Foods. In November 1997, the Company sold a portion of the 20% equity interest in International Home Foods. I-3 No single food product or category of products accounted for more than 10% of consolidated net sales or operating income before taxes in 1996 or 1995. Sources and Availability of Raw Materials Generally, raw materials and packaging supplies are purchased in the open market from various outside vendors. The loss of any one source of supply would not have a material adverse effect on the Company's consolidated financial position or results of operations. Patents and Trademarks The Company owns, has applications pending for, and is licensed under many patents relating to a wide variety of products. The Company believes that its patents and licenses are important to its business, but no one patent or license (or group of related patents or licenses) currently is of material importance in relation to its business as a whole. In the pharmaceuticals business, most of the Company's major products are not protected by patents. The non-steroidal anti-inflammatory ("NSAID") LODINE ceased to be under patent protection in the United States in 1997. LODINE XL, a product extension of LODINE, will have patent protection until 2007. The anti-depressant EFFEXOR will have patent protection into 2007. TETRAMUNE, a combination vaccine, will have patent protection until 2007. SUPRAX, a third-generation cephalosporin antibiotic, remains under patent protection until 2002. VERELAN, a calcium channel blocker, will have patent protection until 2006. PREMPRO, a combination estrogen and progestin product, will have patent protection until 2006. Concentrated recombinant human antihemophilic factor (Factor VIII), a product that helps regulate activation of the body's coagulation pathway, will have patent protection until 2014. Sales in the consumer health care business are largely supported by the Company's trademarks and brand names. These trademarks and brand names are a significant part of the Company's business and have a perpetual life as long as they remain in use. See "Competition" below for a discussion of generic and store brands competition. In the Agricultural Products segment, the imidazolinone herbicide products SCEPTER and PURSUIT will have patent protection until at least 2006. Seasonality Sales and results of operations of the U.S. agricultural products business are seasonal and tend to be heavily concentrated in the first six months of each year. Sales of consumer health care products are affected by seasonal demand for cold/flu products and, as a result, second quarter results for consumer health care products tend to be lower than results in other quarters. I-4 Competition HEALTH CARE PRODUCTS - The Company operates in the highly competitive health care industry which includes the ethical pharmaceutical, animal health and consumer health care businesses. Within the ethical pharmaceutical and animal health businesses, the Company has many major multi-national competitors and numerous other smaller domestic and foreign competitors. Based on net sales, the Company believes it ranks within the top 10 major competitors within the ethical pharmaceutical business category and, with the acquisition of the Solvay S.A. animal health business in the first quarter of 1997, the Company believes it ranks within the top five major competitors within the animal health business category. The consumer health care business also has many competitors. Based on net sales, the Company believes it ranks within the top five major competitors within this business category. The Company's competitive position in the Health Care Products segment is affected by several factors including resources available to develop, enhance and promote products, customer acceptance, product quality, patent protection, development of alternative therapies by competitors, scientific and technological advances and governmental actions affecting pricing and generic substitutes. For prescription products, the growth of managed care organizations, such as health maintenance organizations ("HMOs") and pharmaceutical benefit management companies, has resulted in increased competitive pressures. The continued growth of generic substitutes is further promoted by legislation, regulation and various incentives enacted and promulgated in both the public and private sectors. PREMARIN, the Company's conjugated estrogens product, which has not had patent protection for many years, contributes significantly to sales and results of operations. PREMARIN currently is not subject to generic competition in the United States, and, on May 5, 1997, the U.S. Food and Drug Administration (FDA) announced that it would not approve synthetic 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. While the introduction of generic competition ordinarily is expected to significantly impact the market for a brand name product, the extent of such impact on PREMARIN and related products cannot be predicted with certainty due to a number of factors, including the nature of the product and the recently introduced combination estrogen and progestin products in the PREMARIN family. I-5 Health care costs will continue to be the subject of attention in both the public and private sectors in the U.S. Similarly, in international markets, health care spending is subject to increasing governmental review, much of which is focused on pharmaceutical prices. While the Company cannot predict the impact that any future health care initiatives may have on the Company's worldwide results of operations, the Company believes that the pharmaceutical industry will continue to play a very positive role in helping to contain global health care costs through the development of innovative products. The growth of generic and store brands continued to impact some of the Company's consumer health care branded product line categories in 1997 and is expected to continue during 1998. AGRICULTURAL PRODUCTS - The Company operates in the highly competitive agrochemical industry. The Agricultural Products segment has over 40 competitors worldwide and ranks in the top 10 based on net sales. Among these companies, the top 10 competitors are multi-national, representing over 70% of the sales in the agrochemical market. Competitive factors include product efficacy, distribution channels and resource availability for development of new products and improvement of existing ones. There can also be generic competition when products are no longer patent protected. GENERAL - In all business segments, advertising and promotional expenditures are significant costs to the Company and are necessary to effectively communicate information concerning the Company's products to health professionals, to the trade and to consumers. Research and Development Worldwide research and development activities are focused on developing and bringing to market new products to treat and/or prevent some of the most serious health care and agricultural problems. Research and development expenditures totaled $1,558,035,000 in 1997, $1,429,056,000 in 1996 and $1,354,963,000 in 1995 with approximately 80% of these expenditures in the ethical pharmaceutical area in 1997. The Company currently has 4 New Drug Applications and 28 Supplemental Drug Applications filed with the FDA for review, and 98 active Investigational New Drug Applications and two Biologics License Applications pending. During 1997, several major collaborative research and development arrangements were commenced or continued with other pharmaceutical and biotechnology companies. Additionally, the animal health business has 78 Veterinary Biologics License Applications awaiting approval by the United States Department of Agriculture ("USDA") and the Agricultural Products segment has 49 applications for new products and/or expanded use of existing products awaiting approval by the United States Environmental Protection Agency ("EPA"). The extent of subsequent contributions from these potential products, if any, cannot presently be predicted. I-6 During 1997, the Company received FDA approval for the mental health product EFFEXOR XR, the pain and anti-inflammatory products DURACT and SYNVISC, the cardiovascular blood thinner NORMIFLO, the oral contraceptive ALESSE, the progesterone gel CRINONE, BENEFIX coagulation Factor IX (Recombinant), the platelet factor product NEUMEGA, the animal health care product DICURAL, a new fluroquinolone antibiotic for the treatment of serious infections in dogs, the equine dewormer and boticide product QUEST, the canine heartworm preventive product PROHEART and the OTC product Children's ADVIL Grape Suspension. The EPA also approved the Company's LIGHTNING and RAPTOR herbicide products. Regulation The Company's various health care and agricultural products are subject to regulation by government agencies throughout the world. The primary emphasis of these requirements is to assure the safety and effectiveness of the Company's products. In the United States, the FDA, under the Federal Food, Drug and Cosmetic Act and the Public Health Service Act, regulates many of the Company's health care products, including human and animal pharmaceuticals, vaccines and consumer health care products. The U.S. Department of Agriculture ("USDA") regulates the Company's domestic animal vaccine products. The FDA's powers include the imposition of criminal and civil sanctions against companies, including seizures of regulated products and criminal sanctions against individuals. The FDA's enforcement powers also include its inspection of the numerous facilities operated by the Company. To facilitate compliance, the Company from time to time may institute voluntary compliance actions such as product recalls when it believes it is appropriate to do so. In addition, many states have similar regulatory requirements. Most of the Company's pharmaceutical products, and an increasing number of its consumer health care products, are regulated under the FDA's new drug approval processes, which mandate pre-market approval of all new drugs. Such processes require extensive time, testing and documentation for approval, resulting in significant costs for new product introductions. The Company's pharmaceutical business is also affected by the Controlled Substances Act, administered by the Drug Enforcement Administration, which regulates strictly all narcotic and habit-forming drug substances. In addition, in the foreign countries where the Company does business, it is subject to regulatory and legislative climates that, in many instances, are similar to or more restrictive than that described above. The Company devotes significant resources to dealing with the extensive federal, state and foreign regulatory requirements applicable to its products. Federal law also requires drug manufacturers to pay rebates to state Medicaid programs in order for their products to be eligible for federal matching funds under the Social Security Act. Additionally, a number of states are, or may be, pursuing similar initiatives for rebates and other strategies to contain the cost of pharmaceutical products. The federal Vaccines for Children entitlement program enables states to purchase vaccines at federal vaccine prices and limits federal vaccine price increases in certain respects. Federal and state rebate programs are expected to continue. I-7 The manufacture and sale of pesticides are regulated by the EPA. No new pesticide and no existing pesticide for a new use may be manufactured, processed or used in the United States without prior notice to or approval of the EPA. Outside the United States, agricultural chemicals are regulated by various agencies, often by standards which differ from those in the United States. Environmental Certain of the Company's operations are affected by a variety of federal, state and local environmental protection laws and regulations and the Company has, in a number of instances, been notified of its potential responsibility relating to the generation, storage, treatment and disposal of hazardous waste. In addition, the Company has been advised that it may be a responsible party in several sites on the National Priority List created by the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), commonly known as Superfund. (See Item 3. Legal Proceedings.) In connection with the spin-off in 1993 by Cyanamid of Cytec Industries Inc. ("Cytec"), Cyanamid's former chemicals business, Cytec assumed the environmental liabilities relating to the chemicals businesses, except for the former chemical business site at Bound Brook, New Jersey, and certain sites for which there is shared responsibility between Cyanamid and Cytec. This assumption is not binding on third parties, and if Cytec were unable to satisfy these liabilities, they would, in the absence of other circumstances, be enforceable against Cyanamid. The Company has no reason to believe that it has any practical exposure to any of the liabilities against which Cytec has agreed to assume and indemnify Cyanamid. It is the Company's policy to accrue environmental cleanup costs if it is probable that a liability has been incurred and an amount is reasonably estimable. Additional information on environmental matters is set forth in Notes 3, 5 and 10 of the Notes to Consolidated Financial Statements in the Company's 1997 Annual Report to Shareholders and is incorporated herein by reference. Employees At the end of 1997, the Company had 60,523 employees worldwide, with 31,233 employed in the United States including Puerto Rico. Approximately 29% of worldwide employees are represented by various collective bargaining groups. Relations with most organized labor groups remain relatively stable. Financial Information about the Company's Foreign and Domestic Operations Financial information about foreign and domestic operations for the three years ended December 31, 1997 is set forth in Note 11 of the Notes to Consolidated Financial Statements in the Company's 1997 Annual Report to Shareholders and is incorporated herein by reference. I-8 The Company's operations outside the United States are conducted primarily through subsidiaries. International sales in 1997 amounted to 42% of the Company's total worldwide sales. The Company's international businesses are subject to risks of currency fluctuations, governmental actions and other governmental proceedings which are inherent in conducting business outside of the United States. The Company does not regard these factors as deterrents to maintaining or expanding its non-U.S. operations. Additional information about foreign operations, specifically the Asian-Pacific region, is set forth in Liquidity, Financial Condition and Capital Resources in Management's Discussion and Analysis of Financial Condition and Results of Operations in the Company's 1997 Annual Report to Shareholders and is incorporated herein by reference. ITEM 2. PROPERTIES The Company's corporate headquarters and the headquarters of its domestic consumer health care business are located in Madison, New Jersey. The Company's domestic and international ethical pharmaceutical operations and its international consumer health care business are headquartered in three executive/administrative buildings in Radnor and St. Davids, Pennsylvania. The Company's animal health business is headquartered in Overland Park, Kansas. The Company's principal medical devices business maintained its headquarters in St. Louis, Missouri. The Agricultural Products segment maintains its headquarters in Parsippany, New Jersey. The Company's foreign subsidiaries and affiliates, which generally own their properties, have manufacturing facilities in 24 countries outside the United States. The following are the principal manufacturing plants (M) and research laboratories (R) of the Company as of December 31, 1997: INDUSTRY SEGMENT Health Care Products: Alpirsbach, Germany (M) Andover, Massachusetts (M, R) Askeaton, Ireland (M, R) *Ballymoney, N. Ireland (M) Baulkham Hills, Australia (M) Buenos Aires, Argentina (M) Cabuyao, Philippines (M) Cambridge, Massachusetts (R) Carolina, Puerto Rico (M) Catania, Italy (M, R) Charles City, Iowa (M) Chazy, New York (R) Cherry Hill, New Jersey (M, R) *Commerce, Texas (M) *Deland, Florida (M) Fort Dodge, Iowa (M, R) Georgia, Vermont (M) I-9 Gosport, Great Britain (M) Guayama, Puerto Rico (M) Havant, Great Britain (M, R) Hsin-Chu Hsien, Taiwan (M) Maracay, Venezuela (M) Marietta, Pennsylvania (M, R) Munster, Germany (M) Newbridge, Ireland (M) *Norfolk, Nebraska (M) Pearl River, New York (M, R) Princeton, New Jersey (R) Radnor, Pennsylvania (R) Richmond, Virginia (M, R) Rouses Point, New York (M, R) Sanford, North Carolina (M) Smithfield, Australia (M) St. Laurent, Canada (M, R) Suzhou, China (M) *Tijuana, Mexico (M, R) West Chester, Pennsylvania (M) Agricultural Products: Genay, France (M) Gravelines, France (M) Hannibal, Missouri (M) Paulina, Brazil (M) Princeton, New Jersey (R) Resende, Brazil (M) Schwabenheim, Germany (R) *These facilities were divested on February 27, 1998 as part of the Company's sale of the Sherwood-Davis & Geck medical devices business. All of the above properties are owned except certain facilities in Cambridge, Massachusetts, Cherry Hill, New Jersey, Guayama, Puerto Rico, Suzhou, China and Tijuana, Mexico which are under lease. The Company also owns or leases a number of other smaller properties worldwide which are used for manufacturing, research, warehousing and office space. ITEM 3. LEGAL PROCEEDINGS The Company and its subsidiaries are parties to numerous lawsuits and claims arising out of the conduct of its business, including product liability and other tort claims. As of March 19, 1998, the Company has been served with more than 3,200 lawsuits in federal and state courts on behalf of approximately 48,000 plaintiffs alleging injuries as a result of use of the NORPLANT I-10 SYSTEM, the Company's implantable contraceptive containing levonorgestrel. Although approximately 70 of the cases have been filed as class actions, class certification has been denied in the federal actions as well as in every state in which the question has been considered. On December 6, 1994, the Judicial Panel on Multi- District Litigation ("MDL") ordered that all NORPLANT SYSTEM lawsuits filed in federal courts be consolidated for pretrial proceedings in the U.S. District Court (E.D. Tex.) in Beaumont. The MDL proceedings now account for over 37,000 of the NORPLANT SYSTEM plaintiffs. Following the denial of class certification, the MDL court scheduled three "bellwether" trials, each involving the claims of five Texas plaintiffs. Rather than proceeding with the first of these trials as scheduled on February 24, 1997, the court entered summary judgment in favor of the Company on all of plaintiffs' claims. That decision is now on appeal to the U.S. Court of Appeals for the Fifth Circuit. No NORPLANT SYSTEM case involving the Company has yet been tried to a verdict. All of the cases involving the Company that have approached trial have either been dismissed by the courts or withdrawn by the plaintiffs, except for one trial in Hidalgo County, Texas which resulted in a mistrial in January 1998 due to conflicts among plaintiffs' attorneys. The Company will continue to contest the NORPLANT SYSTEM litigation vigorously. On September 15, 1997, the Company's Wyeth-Ayerst Laboratories Division, the manufacturer of PONDIMIN (fenfluramine hydrochloride) tablets C-IV and the distributor of REDUX (dexfenfluramine hydrochloride capsules) C-IV, announced a voluntary and immediate withdrawal of these antiobesity medications. The Company took this action on the basis of new, preliminary information provided to the Company on September 12, 1997 by the 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 March 19, 1998, the Company has been served or is aware that it has been named as a defendant in 797 lawsuits as the manufacturer of PONDIMIN and/or the distributor of REDUX. These lawsuits have been filed on behalf of individuals who claim to have been injured as a result of their use of PONDIMIN and/or REDUX, either individually or in combination with the prescription drug phentermine (which the Company does not manufacture, distribute or market). The lawsuits also often name as defendants other distributors and/or retailers of PONDIMIN and/or REDUX, the manufacturers, distributors and/or retailers of phentermine and physicians or other health care providers. The Company anticipates that it will be named as a defendant in additional PONDIMIN and/or REDUX lawsuits in the future. Of the 797 lawsuits naming the Company as a defendant, 180 are actions that seek certification of a class, some on a national and others on a statewide basis. Of these 180 lawsuits, 133 are pending in various federal district courts and 47 are pending in various state courts. A number of the actions brought in state courts have been removed to federal courts. Individual plaintiffs have filed the remaining lawsuits: 334 individual lawsuits are pending in various federal district courts and 283 individual lawsuits are pending in various state courts. On December 10, 1997, the federal Judicial Panel on Multidistrict Litigation transferred all pending federal lawsuits alleging injuries from the use of REDUX and/or PONDIMIN to the U.S. I-11 District Court for the Eastern District of Pennsylvania (MDL 1203), where they will be coordinated for all pretrial purposes before U.S. District Judge Louis C. Bechtle. The state cases are pending in 30 different states, with the bulk of the cases in California, Massachusetts, New Jersey, New York, Oklahoma, Pennsylvania and Texas. Plaintiffs' allegations of liability are based on various theories of recovery, including, but not limited to, product liability, strict liability, negligence, various breaches of warranty, conspiracy, fraud, misrepresentation and deceit. These lawsuits typically allege that the short or long-term use of PONDIMIN and/or REDUX, independently or in combination (including the combination of PONDIMIN and phentermine popularly known as "fen/phen"), causes, among other things, primary pulmonary hypertension, valvular heart disease and/or neurological dysfunctions. In addition, some lawsuits allege severe emotional distress caused by the knowledge that ingestion of these drugs, independently or in combination, could cause such injuries. Plaintiffs typically seek relief in the form of monetary damages (including general damages, medical care and monitoring expenses, loss of earnings and earnings capacity, compensatory damages and punitive damages), generally in unspecified amounts, on behalf of the individual or the class. In addition, some actions seeking class certification ask for certain types of purportedly equitable relief, including, but not limited to, declaratory judgments and the establishment of a research or medical surveillance program. The Company is also named as a defendant in two shareholder lawsuits arising out of the REDUX and PONDIMIN withdrawal. Oran, et al. v. Stafford, et al.(No. 97-CV-4513 (NHP), U.S.D.C., D.N.J.) (filed Sept. 18, 1997) is a securities fraud putative class action in which plaintiffs allege, on behalf of a class of individuals who purchased shares of the Company's common stock on the open market during the period from March 1, 1997 through September 16, 1997, that the Company (and nine officers and directors named as controlling persons under Section 20(a) of the Securities Exchange Act of 1934) engaged in a plan to defraud the market and purchasers of the Company's common stock in violation of Section 10(b) of the Exchange Act and SEC Rule 10b-5 by failing to disclose material facts or making material misstatements of fact regarding alleged adverse events associated with REDUX and PONDIMIN, in particular the alleged association between those two products and valvular heart disease. Plaintiffs' amended complaint also includes claims for negligent misrepresentation and common law fraud and deceit. Plaintiffs seek compensatory and punitive damages for themselves and for the class. Grill v. Stafford, et al.(No. MRS-L-164-98, N.J. Sup. Ct., Morris Cty.) (filed Jan. 14, 1998) is a shareholder derivative action filed against the Company, the directors (other than Mr. Essner), a former director and officer of the Company, and certain officers which seeks to recover any losses or damages sustained by the Company, as well as profits from the sale of stock by certain present and former officers and directors, as a result of alleged intentional, reckless or negligent breaches of fiduciary duty by the defendants. The complaint contains allegations of material misstatements and omissions regarding alleged adverse events associated with REDUX and PONDIMIN similar to those described above and alleges that the defendants' actions have exposed the Company to liability for personal injury lawsuits and securities claims. I-12 The Company believes that it has meritorious defenses to these actions and that it has acted properly at all times in dealing with PONDIMIN and REDUX matters. The Company intends to defend all of the REDUX and PONDIMIN related litigation vigorously. In an action for patent infringement pending in U.S. District Court (No.92-7403, E.D. Pa.), McNeilab Inc. is seeking approximately $77 million (plus $10 million in interest) in compensatory damages against Scandipharm Inc., which would be entitled to seek indemnification from a subsidiary of the Company, Eurand Microencapsulation, S.A. In this action McNeilab is alleging that pancreatic tablets used to treat cystic fibrosis, which Eurand exclusively supplies to Scandipharm, infringe U.S. patents licensed to McNeilab. Treble damages are also sought for alleged willful infringement. On July 7, 1997, the plaintiffs were awarded $44 million in compensatory damages and $1 million in punitive damages in an action which was commenced in U.S. District Court in August 1993 (University of Colorado et al. v. American Cyanamid, Docket No. 93-K-1657, D.Col.). The plaintiffs had accused American Cyanamid of misappropriating the invention of, and patenting as its own, the formula for the current MATERNA Multi-Vitamins. The complaint also contained allegations of conversion, fraud, misappropriation, wrongful naming of inventor and copyright and patent infringement. The patent whose ownership and inventorship is in dispute was granted to American Cyanamid in 1984. The Court had previously granted American Cyanamid's summary judgment motions dismissing all counts for relief except for unjust enrichment and fraud, which were the issues tried before the court in a three-week bench trial in May 1996. Although the plaintiffs had earlier been granted summary judgment of their copyright infringement claim, the court had declined to award plaintiffs damages on that claim. Plaintiffs' post-trial motions seeking to increase the damages to approximately $111 million allegedly representing American Cyanamid's gross profit for 1982-1985 from the sale of the reformulated MATERNA product and to recover approximately $800,000 of attorneys fees has been denied. The Company has appealed the district court decision to the U.S. Court of Appeals for the Federal Circuit. On October 14, 1993, Rite Aid Corporation, Revco D.S. Inc. and other retail drug chains and retail pharmacies filed an action in U.S. District Court (M.D. Pa.) against the Company, other pharmaceutical manufacturers and a pharmacy benefit management company alleging that the Company and other defendants provided discriminatory price and promotional allowances to managed care organizations and others in violation of the Robinson-Patman Act. The complaint further alleges collusive conduct among the defendants related to the alleged discriminatory pricing in violation of the Sherman Antitrust Act as well as certain other violations of common law principles of unfair competition. Subsequently, numerous other cases, many of which were purported class actions brought on behalf of retail pharmacies and retail drug and grocery chains, were filed in various federal courts against the Company as well as other pharmaceutical manufacturers and wholesalers. These cases make one or more similar allegations of violations of federal or state antitrust or unfair competition laws. In addition, a I-13 mail order pharmacy plaintiff alleges that it was forced out of business and certain plaintiffs also allege that the defendants' patents covering brand name prescription drugs give the defendants power to enter into exclusionary arrangements with certain managed care customers and seek compulsory patent licenses. The various class actions were consolidated as a single class action (the "Consolidated Class Action") which alleges violations of Section 1 of the Sherman Act. All of the federal actions have been coordinated and consolidated for pretrial purposes under the caption In re Brand Name Prescription Drugs Antitrust Litigation (MDL 997 N.D. Ill.). These federal actions seek treble damages in unspecified amounts and injunctive and other relief. The court in the federal actions approved an amended settlement among certain defendants, including the Company, and the Consolidated Class Action plaintiffs. The settlement provides, among other things, for certain payments to be made by the settling defendants, over a period of three years, to the Consolidated Class Action plaintiffs. The Company's settlement payments (including payments to be made on behalf of American Cyanamid) will total $42.5 million. Certain provisions of the amended settlement, which became effective on January 28, 1998 and will be in effect for three years, prohibit the settling manufacturers from refusing to grant discounts to retailers solely because of their status as retailers and require that retailers be given the opportunity to demonstrate their ability to move market share and to negotiate and earn discounts similar to any discounts offered to managed care organizations. The settlement also provides that it shall not be deemed or construed to be an admission or evidence of any violation of any statute or law or of any liability or wrongdoing by the Company or of the truth of any of the claims or allegations alleged in the Consolidated Class Action. In 1997, the Court of Appeals for the Seventh Circuit reversed a district court ruling that plaintiffs in the multidistrict proceeding could seek damages for purchases that were only indirectly made from manufacturers. However, many indirect purchasers are likely to remain in the cases because the district court allowed the addition of wholesalers as defendants. The individual federal actions, including those brought by Rite Aid Corporation, Revco D.S. Inc. and other retail drug and grocery chains, remain pending against the Company. In 1997, similar complaints were filed by the American Drug Stores and Eckerd's Drug Stores chains and they have been consolidated in the multidistrict litigation. In 1997, the class action plaintiffs also filed a complaint against the defendants that settled the Consolidated Class Action, including the Company. The class action plaintiffs allege that the settling defendants conspired to not implement the affirmative obligations in the settlement agreements which were before the Seventh Circuit Court of Appeals and not yet final at that time. The complaint seeks class action status and requests preliminary and permanent injunctions. It does not request money damages. The request for a preliminary injunction was denied. In addition to the federal actions, similar litigation on behalf of consumers or retail pharmacies has been brought in various state courts, including purported class actions in Alabama, Arizona, California, Colorado, District of Columbia, Florida, Kansas, Maine, Michigan, Minnesota, Mississippi, New York, North Carolina, Tennessee, Washington and Wisconsin. These actions are all in various pre-trial stages. Final approval has been granted for a settlement of a I-14 purported class action with similar allegations under state antitrust, unfair competition and unitary pricing laws in Wisconsin state court on behalf of retail pharmacies located in that state. The Company's share of that settlement is approximately $440,000. Final approval was received for a settlement of a similar state law case by retailers in Minnesota. The Company's share of the Minnesota settlement with retailers was approximately $99,000. The actions in Colorado, Washington and New York have been dismissed on pre-trial motions. An appeal of the New York action is pending. The Federal Trade Commission is investigating allegations of concerted action in the pricing of pharmaceutical products and the Company has provided information in response to a subpoena. In an action commenced in state court in Texas in January 1997 by Foxmeyer Health Corporation against McKesson Corp., the Company's Wyeth-Ayerst Laboratories Division and eleven other manufacturers, which was removed to U.S. District Court for the Northern District of Texas and referred to U.S. Bankruptcy Court in Dallas, Texas (Adv. No. 397-3052, U.S.B.C., N.D. Tex.), Foxmeyer is seeking in excess of $400 million in compensatory damages alleged to have risen from an alleged conspiracy to drive Foxmeyer's subsidiary into bankruptcy, ostensibly so that McKesson could then purchase the drug distribution operations of the subsidiary at a discounted price. A purported class action commenced in 1997 in state court in Tennessee, Fox v. American Cyanamid Company (No. 19,996, Ch.Ct.Tenn.), alleges violations of state antitrust and consumer protection laws by Cyanamid concerning pricing practices relating to marketing programs for crop protection products. The complaint purports to be on behalf of indirect purchasers of Cyanamid's crop protection products in the states of Tennessee, Alabama, California, Florida, Kansas, Maine, Michigan, Minnesota, Mississippi, New Mexico, North Carolina, North Dakota, South Dakota, West Virginia, Wisconsin and the District of Columbia. A purported class action in federal court in Alabama, Lowell v. American Cyanamid Company (No.97-581-BH-M, U.S.D.C., S.D. Ala.) alleges violations of federal antitrust laws involving pricing practices relating to marketing programs for crop protection products. This action was dismissed but the plaintiffs have filed a notice of appeal. As discussed in Item I, the Company is a party to, or otherwise involved in, legal proceedings under CERCLA and similar state laws directed at the cleanup of various sites including 61 Superfund sites, including the Cyanamid-owned Bound Brook, N.J. site. The Company's potential liability varies greatly from site to site. For some sites, the potential liability is de minimis and, for others, the final costs of cleanup have not yet been determined. As assessments and cleanups proceed, these liabilities are reviewed periodically and are adjusted as additional information becomes available. Environmental liabilities are inherently unpredictable. The liabilities can change substantially due to such factors as additional information on the nature or extent of contamination, methods of remediation required, and other actions by governmental agencies or private parties. The 61 Superfund sites exclude sites for which Cytec assumed full liability and agreed to indemnify Cyanamid but include certain sites for which there is shared responsibility between Cyanamid and Cytec. The Company has no reason to believe that it has any practical exposure to I-15 any of the liabilities against which Cytec has agreed to assume and indemnify Cyanamid. In the opinion of the Company, although the outcome of any litigation cannot be predicted with certainty, the ultimate liability of the Company in connection with pending litigation and other matters described above will not have a material adverse effect on the Company's consolidated financial position but could be material to the results of operations in any one accounting period. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. I-16 EXECUTIVE OFFICERS OF THE REGISTRANT AS OF MARCH 27, 1998 Each officer is elected to hold office until a successor is chosen or until earlier removal or resignation. None of the executive officers is related to another: Elected to Name Age Offices and Positions Office John R. Stafford 60 Chairman of the Board, President December 1986 and Chief Executive Officer, Chairman of Executive, Finance, Operations and Nominating Committees Business Experience: 1991 to date, Chairman of the Board, President and Chief Executive Officer (President to May 1990 and from February 1994) Robert G. Blount 59 Senior Executive Vice President, October 1995 Director, Member of Executive, Finance and Operations Committees Business Experience: To October 1995, Executive Vice President October 1995 to date, Senior Executive Vice President Robert Essner 50 Executive Vice President September 1997 Director, Member of Finance and Operations Committees Business Experience: To March 1997, President, Wyeth- Ayerst Laboratories, U.S. Pharmaceutical Business March 1997 to September 1997, President, Wyeth-Ayerst Global Pharmaceuticals September 1997 to date, Executive Vice President Joseph J. Carr 55 Senior Vice President May 1993 Member of Finance and Operations Committees Business Experience: To May 1993, Group Vice President May 1993 to date, Senior Vice President I-17 Elected to Name Age Offices and Positions Office Louis L. Hoynes, Jr. 62 Senior Vice President and November 1990 General Counsel Member of Finance and Operations Committees Business Experience: 1991 to date, Senior Vice President and General Counsel Robert I. Levy, M.D. 60 Senior Vice President-Science March 1998 and Technology Member of Finance and Operations Committees Business Experience: To March 1998, President, Wyeth-Ayerst Research March 1998 to date, Senior Vice President - Science and Technology William J. Murray 52 Senior Vice President October 1995 Member of Finance and Operations Committees Business Experience: To January 1995, Group Vice President, American Cyanamid Company January 1995 to October 1995, Vice President October 1995 to date, Senior Vice President David M. Olivier 54 Senior Vice President January 1996 Member of Finance and Operations Committees Business Experience: To January 1996, President, Wyeth-Ayerst International, Inc. January 1996 to date, Senior Vice President I-18 Elected to Name Age Offices and Positions Office John R. Considine 47 Vice President - Finance February 1992 Member of Finance and Operations Committees Business Experience: 1992 to date, Vice President - Finance William A. Hawkins 44 Vice President - Medical Device April 1997 and Specialty Pharmaceutical Divisions Member of Finance and Operations Committees Business Experience: To January 1995, President & Chief Executive Officer, IVAC Corporation, Eli Lilly and Company January 1995 to October 1995, President & Chief Executive Officer, Guidant Corporation, Devices for Vascular Intervention October 1995 to April 1997, President, Ethicon Endo-Surgery, Inc., Johnson & Johnson May 1997 to March 1998, President, Sherwood-Davis & Geck April 1997 to date, Vice President - Medical Device and Specialty Pharmaceutical Divisions Paul J. Jones 52 Vice President and Comptroller May 1995 Member of Finance Committee Business Experience: To April 1995, Senior Vice President - Finance and Administration, Wyeth-Ayerst Laboratories Division May 1995 to date, Vice President and Comptroller I-19 Elected to Name Age Offices and Positions Office Rene R. Lewin 51 Vice President - Human Resources May 1994 Member of Finance Committee Business Experience: To May 1994, Executive Director Human Resources - Worldwide Pharmaceutical Division, Eli Lilly and Company May 1994 to date, Vice President - Human Resources Thomas M. Nee 58 Vice President - Taxes May 1986 Member of Finance Committee Business Experience: 1991 to date, Vice President - Taxes I-20 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The New York Stock Exchange is the principal market on which the Company's common stock is traded. Tables showing the high and low sales price for the stock, as reported in the consolidated transaction reporting system, and the dividends paid per common share for each quarterly period during the past two years, as presented in Market Prices of Common Stock and Dividends on page 38 of the Company's 1997 Annual Report to Shareholders, are incorporated herein by reference. There were 63,774 holders of record of the Company's common stock as of March 2, 1998. On March 5, 1998, the Company's Board of Directors approved a two-for- one split of the Company's common stock to be effected in the form of a 100% stock dividend. The stock split is subject to stockholder approval of an increase in the number of authorized shares of common stock from 1,200,000,000 to 2,400,000,000 at the Company's annual meeting to be held on April 23, 1998. ITEM 6. SELECTED FINANCIAL DATA The data with respect to the last five fiscal years, appearing in the Ten-Year Selected Financial Data presented on pages 20 and 21 of the Company's 1997 Annual Report to Shareholders, are incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's Discussion and Analysis of Financial Condition and Results of Operations, appearing on pages 39 through 44 of the Company's 1997 Annual Report to Shareholders, is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Consolidated Financial Statements and Notes to Consolidated Financial Statements on pages 22 through 36 of the Company's 1997 Annual Report to Shareholders, the Report of Independent Public Accountants on page 37, and Quarterly Financial Data on page 38, are incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. II-1 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (a) Information relating to the Company's directors is incorporated herein by reference to pages 2 through 5 of a definitive proxy statement filed with the Securities and Exchange Commission on March 25, 1998 ("the 1998 Proxy Statement"). (b) Information relating to the Company's executive officers as of March 27, 1998 is furnished in Part I hereof under a separate unnumbered caption ("Executive Officers of the Registrant as of March 27, 1998"). (c) Information relating to certain filing obligations of directors and executive officers of the Company under the federal securities laws set forth on page 6 of the 1998 Proxy Statement under the caption "Section 16(a) Beneficial Ownership Reporting Compliance" is incorporated by reference herein. ITEM 11. EXECUTIVE COMPENSATION Information relating to executive compensation is incorporated herein by reference to pages 9 through 14 and pages 16 and 17 of the 1998 Proxy Statement. Information with respect to compensation of directors is incorporated herein by reference to pages 5 and 6 of the 1998 Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information relating to security ownership is incorporated herein by reference to pages 7 through 9 of the 1998 Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None. III-1 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)1. Financial Statements The following Consolidated Financial Statements, Notes to Consolidated Financial Statements and Report of Independent Public Accountants, included on pages 22 through 37 of the Company's 1997 Annual Report to Shareholders, are incorporated herein by reference. Pages Consolidated Balance Sheets as of December 31, 1997 and 1996 22 Consolidated Statements of Income for the years ended December 31, 1997, 1996 and 1995 23 Consolidated Statements of Retained Earnings and Additional Paid-in Capital for the years ended December 31, 1997, 1996 and 1995 24 Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995 25 Notes to Consolidated Financial Statements 26-36 Report of Independent Public Accountants 37 (a)2. Financial Statement Schedules The following consolidated financial information is included in Part IV of this report: Pages Report of Independent Public Accountants on Supplemental Schedule IV-8 Schedule II - Valuation and Qualifying Accounts for the years ended December 31, 1997, 1996 and 1995 IV-9 Schedules other than those listed above are omitted because they are not applicable. IV-1 ITEM 14. (Continued) (a)3. Exhibits Exhibit No. Description (2.1) Agreement and Plan of Merger, dated August 17, 1994, as amended, among the Company, AC Acquisition Corp. and American Cyanamid Company, filed as Exhibit (I) to the Report on Schedule 13D for Immunex Corporation filed by the Company, dated December 1, 1994 for the event which occurred on November 21, 1994 is hereby incorporated herein by reference. (3.1) The Company's Restated Certificate of Incorporation is incorporated herein by reference to Exhibit 3.1 of the Company's Form 10/A dated April 30, 1996. (3.2) The Company's By-Laws, as amended to date. (4.1) Indenture, dated as of April 10, 1992, between the Company and The Chase Manhattan Bank (successor to Chemical Bank), as Trustee, is incorporated by reference to Company's Exhibit 2 of the Company's Form 8-A dated August 25, 1992 (File Number 1-1225). (4.2) Supplemental Indenture, dated October 13, 1992, between the Company and The Chase Manhattan Bank (successor to Chemical Bank), as Trustee, is incorporated by reference to Company's Form 10-Q for the quarter ended September 30, 1992 (File Number 1-1225). (10.1) A Credit Agreement, dated as of September 9, 1994, among the Company, American Home Food Products, Inc., Sherwood Medical Company, A.H. Robins Company, Incorporated, the several banks and other financial institutions from time to time parties thereto and The Chase Manhattan Bank (successor to Chemical Bank), as agent for the lenders thereunder, filed as Exhibit 11(b)(2) to Amendment No. 7 to the Schedule 14D-1 is hereby incorporated herein by reference. (10.2) B Credit Agreement, dated as of September 9, 1994, among the Company, American Home Food Products, Inc., Sherwood Medical Company, A.H. Robins Company, Incorporated, the several banks and other financial institutions from time to time parties thereto and The Chase Manhattan Bank (successor to Chemical Bank), as agent for the lenders thereunder, filed as Exhibit 11(b)(3) to Amendment No. 7 to the Schedule 14D-1 is hereby incorporated herein by reference. IV-2 ITEM 14. (Continued) (a)3. Exhibits Exhibit No. Description (10.3) First Amendment to A Credit Agreement, dated as of August 4, 1995, among the Company, American Home Food Products, Inc., Sherwood Medical Company, A.H. Robins Company, Incorporated, the several banks and other financial institutions from time to time parties thereto and The Chase Manhattan Bank (as successor to Chemical Bank), as agent for the lenders thereunder is incorporated by reference to Exhibit 10.3 of the Company's Form 10-K for the year ended December 31, 1995. (10.4) First Amendment to B Credit Agreement, dated as of August 4, 1995, among the Company, American Home Food Products, Inc., Sherwood Medical Company, A.H. Robins Company, Incorporated, the several banks and other financial institutions from time to time parties thereto and The Chase Manhattan Bank (successor to Chemical Bank), as agent for the lenders thereunder is incorporated by reference to Exhibit 10.4 of the Company's Form 10-K for the year ended December 31, 1995. (10.5) Second Amendment to A Credit Agreement, dated as of August 2, 1996, among the Company, American Home Food Products, Inc., Sherwood Medical Company, A.H. Robins Company, Incorporated, the several banks and other financial institutions from time to time parties thereto and The Chase Manhattan Bank, as agent for the lenders thereunder is incorporated by reference to Exhibit 10.5 of the Company's Form 10-K for the year ended December 31, 1996. (10.6) Second Amendment to B Credit Agreement, dated as of August 2, 1996, among the Company, American Home Food Products, Inc., Sherwood Medical Company, A.H. Robins Company, Incorporated, the several banks and other financial institutions from time to time parties thereto and The Chase Manhattan Bank, as agent for the lenders thereunder is incorporated by reference to Exhibit 10.6 of the Company's Form 10-K for the year ended December 31, 1996. (10.7) Third Amendment to A Credit Agreement, dated as of July 31, 1997, among the Company, Sherwood Medical Company, A.H. Robins Company, Incorporated, AC Acquisition Holding Company, the several banks and other financial institutions from time to time parties thereto and The Chase Manhattan Bank, as agent for the lenders thereunder. (10.8) Third Amendment to B Credit Agreement, dated as of July 31, 1997, among the Company, Sherwood Medical Company, A.H. Robins Company, Incorporated, AC Acquisition Holding Company, the several banks and other financial institutions from time to time parties thereto and The Chase Manhattan Bank, as agent for the lenders thereunder. IV-3 ITEM 14. (Continued) (a)3. Exhibits Exhibit No. Description (10.9)* 1978 Stock Option Plan, as amended to date, is incorporated herein by reference to Exhibit 10.2 of the Company's Form 10-K for the year ended December 31, 1990 (File Number 1-1225). (10.10)* 1980 Stock Option Plan, as amended is incorporated by reference to Exhibit 10.3 of the Company's Form 10-K for the year ended December 31, 1991 (File Number 1-1225). (10.11)* Amendment to the 1980 Stock Option Plan is incorporated by reference to Exhibit 10.7 of the Company's Form 10-K for the year ended December 31, 1995. (10.12)* 1985 Stock Option Plan, as amended is, incorporated by reference to Exhibit 10.4 of the Company's Form 10-K for the year ended December 31, 1991 (File Number 1-1225). (10.13)* Amendment to the 1985 Stock Option Plan is incorporated by reference to Exhibit 10.9 of the Company's Form 10-K for the year ended December 31, 1995. (10.14)* Amendment to the 1985 Stock Option Plan is incorporated by reference to Exhibit 10.12 of the Company's Form 10-K for the year ended December 31, 1996. (10.15)* Management Incentive Plan, as amended to date. (10.16)* Supplemental Executive Retirement Plan is incorporated herein by reference to Exhibit (10.6) of the Company's Form 10-K for the year ended December 31, 1990 (File Number 1-1225). (10.17)* American Cyanamid Company's Supplemental Executive Retirement Plan is incorporated by reference to Exhibit 10K of American Cyanamid Company's Form 10-K for the year ended December 31, 1988 (File 1- 3426). (10.18)* American Cyanamid Company's Supplemental Employees Retirement Plan Trust Agreement, dated September 19, 1989, between American Cyanamid Company and Morgan Guaranty Trust Company of New York is incorporated by reference to Exhibit 10K of American Cyanamid Company's Form 10-K for the year ended December 31, 1989 (File 1- 3426). *Denotes management contract or compensatory plan or arrangement required to be filed as an exhibit hereto. IV-4 ITEM 14. (Continued) (a)3. Exhibits Exhibit No. Description (10.19)* American Cyanamid Company's ERISA Excess Retirement Plan is incorporated by reference to Exhibit 10N of American Cyanamid Company's Form 10-K for the year ended December 31, 1988 (File 1- 3426). (10.20)* American Cyanamid Company's Excess Retirement Plan Trust Agreement, dated September 19, 1989, between American Cyanamid Company and Morgan Guaranty Trust Company of New York is incorporated by reference to Exhibit 10M of American Cyanamid Company's Form 10-K for the year ended December 31, 1989 (File 1- 3426). (10.21)* 1990 Stock Incentive Plan is incorporated herein by reference to Exhibit 28 of the Company's Form S-8 Registration Statement File No. 33-41434 under the Securities and Exchange Act of 1933, filed June 28, 1991 (File Number 1-1225). (10.22)* Amendment to the 1990 Stock Incentive Plan is incorporated by reference to Exhibit 10.13 of the Company's Form 10-K for the year ended December 31, 1995. (10.23)* Amendment to the 1990 Stock Incentive Plan is incorporated by reference to Exhibit 10.21 of the Company's Form 10-K for the year ended December 31, 1996. (10.24)* 1993 Stock Incentive Plan is incorporated herein by reference to Exhibit I of the Company's definitive Proxy Statement filed March 17, 1994. (10.25)* Amendment to the 1993 Stock Incentive Plan is incorporated by reference to Exhibit 10.15 of the Company's Form 10-K for the year ended December 31, 1995. (10.26)* Amendment to the 1993 Stock Incentive Plan is incorporated by reference to Exhibit 10.24 of the Company's Form 10-K for the year ended December 31, 1996. (10.27)* 1996 Stock Incentive Plan, as amended to date. (10.28)* Form of Stock Option Agreement is incorporated by reference to Exhibit 10.27 of the Company's Form 10-K for the year ended December 31, 1996. *Denotes management contract or compensatory plan or arrangement required to be filed as an exhibit hereto. IV-5 ITEM 14. (Continued) (a)3. Exhibits Exhibit No. Description (10.29)* Form of Special Stock Option Agreement (phased vesting) is incorporated by reference to Exhibit 10.27 of the Company's Form 10- K for the year ended December 31, 1995. (10.30)* Form of the Company's Special Stock Option Agreement (three-year vesting) is incorporated by reference to Exhibit 10.28 of the Company's Form 10-K for the year ended December 31, 1995. (10.31)* Amendment to Special Stock Option Agreement is incorporated by reference to Exhibit 10.30 of the Company's Form 10-K for the year ended December 31, 1996. (10.32)* Form of the Company's Special Stock Option Agreement (transferable options). (10.33)* Form of the Company's Restricted Stock Performance Award Agreement under the 1990 Stock Incentive Plan, 1993 Stock Incentive Plan and 1996 Stock Incentive Plan for a three year period is incorporated by reference to Exhibit 10.31 of the Company's Form 10-K for the year ended December 31, 1996. (10.34)* Form of the Company's Restricted Stock Performance Award Agreement under the 1990 Stock Incentive Plan, 1993 Stock Incentive Plan and 1996 Stock Incentive Plan for a two year period is incorporated by reference to Exhibit 10.32 of the Company's Form 10-K for the year ended December 31, 1996. (10.35)* 1994 Restricted Stock Plan for Non-Employee Directors is incorporated herein by reference to Exhibit II of the Company's definitive Proxy Statement filed March 17, 1994. (10.36)* Savings Plan, as amended, is incorporated herein by reference to Exhibit 99 of the Company's Form S-8 Registration Statement File No. 33-50149 under the Securities and Exchange Act of 1933, filed September 1, 1993 (File Number 1-1225). (10.37)* Retirement Plan for Outside Directors, as amended on January 27, 1994 is herein incorporated by reference to Exhibit 10.12 of the Company's Form 10-K for the year ended December 31, 1993. (10.38)* Directors' Deferral Plan is incorporated by reference to Exhibit 10.37 of the Company's Form 10-K for the year ended December 31, 1996. *Denotes management contract or compensatory plan or arrangement required to be filed as an exhibit hereto. IV-6 ITEM 14. (Continued) (a)3. Exhibits Exhibit No. Description (10.39)* Restricted Stock Trust Agreement under the 1993 Stock Incentive Plan is incorporated by reference to Exhibit 10.23 of the Company's Form 10-K for the year ended December 31, 1995. (10.40)* Deferred Compensation Plan is incorporated by reference to Exhibit 10.1 of the Company's Form 10-Q for the quarter ended September 30, 1997. (10.41)* Executive Retirement Plan is incorporated by reference to Exhibit 10.2 of the Company's Form 10-Q for the quarter ended September 30, 1997. (10.42)* Supplemental Employee Savings Plan, as amended to date. (10.43)* Form of Severance Agreement entered into between the Company and the executive officers specified therein. (12) Computation of Ratio of Earnings to Fixed Charges. (13) 1997 Annual Report to Shareholders. Such report, except for those portions thereof which are expressly incorporated by reference herein, is furnished solely for the information of the Commission and is not to be deemed "filed" as part of this filing. (21) Subsidiaries of the Company. (23) Consent of Independent Public Accountants relating to their report dated January 27, 1998, consenting to the incorporation thereof in Registration Statements on Form S-3 (File Nos. 33-45324 and 33- 57339) and on Form S-8 (File Nos. 2-96127, 33-24068, 33-41434, 33- 53733, 33-55449, 33-45970, 33-14458, 33-50149, 33-55456 and 333- 15509) by reference to the Form 10-K of the Company filed for the year ended December 31, 1997. (27) Financial Data Schedule. (99) Cautionary Statements regarding "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995. (b) Reports on Form 8-K None *Denotes management contract or compensatory plan or arrangement required to be filed as an exhibit hereto. IV-7 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To American Home Products Corporation: We have audited in accordance with generally accepted auditing standards, the consolidated financial statements included in American Home Products Corporation's Annual Report to Shareholders incorporated by reference in this Form 10-K, and have issued our report thereon dated January 27, 1998. Our audit was made for the purpose of forming an opinion on those statements taken as a whole. The schedule listed in the accompanying index is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. The schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP New York, N.Y. January 27, 1998 IV-8 American Home Products Corporation and Subsidiaries Schedule II - Valuation and Qualifying Accounts For the Years Ended December 31, 1997, 1996 and 1995 (Dollars in thousands)
Column A Column B Column C Column D Column E Balance Balance at at Beginning Additions Deductions End of of Period (A) Period Description Year ended 12/31/97: Allowance for doubtful accounts $179,980 $9,974 $21,529 $168,425 Allowance for cash discounts 24,141 226,284 221,695 28,730 Allowance for deferred tax assets 294,840 19,486 14,902 299,424 $498,961 $255,744 $258,126 $496,579 Year ended 12/31/96: Allowance for doubtful accounts $108,164 $88,273 $16,457 $179,980 Allowance for cash discounts 27,445 235,802 239,106 24,141 Allowance for deferred tax assets 206,644 117,569 29,373 294,840 $342,253 $441,644 $284,936 $498,961 Year ended 12/31/95: Allowance for doubtful accounts $77,985 $32,186 $2,007 $108,164 Allowance for cash discounts 21,483 240,871 234,909 27,445 Allowance for deferred tax assets 250,976 45,604 89,936 206,644 $350,444 $318,661 $326,852 $342,253
(A) Represents amounts used for the purposes for which the accounts were created and reversal of amounts no longer required. IV-9 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized. AMERICAN HOME PRODUCTS CORPORATION (Registrant) March 27, 1998 By/S/Robert G. Blount Robert G. Blount Senior Executive Vice President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signatures Title Date Principal Executive Officer: /S/John R. Stafford Chairman, President and March 27 ,1998 John R. Stafford Chief Executive Officer Principal Financial Officer: /S/Robert G. Blount Senior Executive Vice March 27, 1998 Robert G. Blount President and Director Principal Accounting Officer: /S/Paul J. Jones Vice President and March 27, 1998 Paul J. Jones Comptroller Directors: /S/Clifford L. Alexander, Jr. Director March 27, 1998 Clifford L. Alexander, Jr. /S/Frank A. Bennack, Jr. Director March 27, 1998 Frank A. Bennack, Jr. /S/Robin Chandler Duke Director March 27, 1998 Robin Chandler Duke IV-10 Signatures Title Date /S/Robert Essner Director March 27, 1998 Robert Essner /S/John D. Feerick Director March 27, 1998 John D. Feerick /S/John P. Mascotte Director March 27, 1998 John P. Mascotte /S/Mary Lake Polan, M.D., Ph.D. Director March 27, 1998 Mary Lake Polan, M.D., Ph.D. /S/Ivan G. Seidenberg Director March 27, 1998 Ivan G. Seidenberg /S/John R. Torell III Director March 27, 1998 John R. Torell III /S/William Wrigley Director March 27, 1998 William Wrigley IV-11 INDEX TO EXHIBITS Exhibit No. Description (3.2) The Company's By-Laws, as amended to date. (10.7) Third Amendment to A Credit Agreement, dated as of July 31, 1997, among the Company, Sherwood Medical Company, A.H. Robins Company, Incorporated, AC Acquisition Holding Company, the several banks and other financial institutions from time to time parties thereto and The Chase Manhattan Bank, as agent for the lenders thereunder. (10.8) Third Amendment to B Credit Agreement, dated as of July 31, 1997, among the Company, Sherwood Medical Company, A.H. Robins Company, Incorporated, AC Acquisition Holding Company, the several banks and other financial institutions from time to time parties thereto and The Chase Manhattan Bank, as agent for the lenders thereunder. (10.15)* Management Incentive Plan, as amended to date. (10.27)* 1996 Stock Incentive Plan, as amended to date. (10.32)* Form of Company's Special Stock Option Agreement (transferable options). (10.42)* Supplemental Employee Savings Plan, as amended to date. (10.43)* Form of Severance Agreement entered into between the Company and the executive officers specified therein. (12) Computation of Ratio of Earnings to Fixed Charges. (13) 1997 Annual Report to Shareholders. Such report, except for those portions thereof which are expressly incorporated by reference herein, is furnished solely for the information of the Commission and is not to be deemed "filed" as part of this filing. (21) Subsidiaries of the Company. (23) Consent of Independent Public Accountants relating to their report dated January 27, 1998, consenting to the incorporation thereof in Registration Statements on Form S-3 (File Nos. 33-45324 and 33-57339) and on Form S-8 (File Nos. 2-96127, 33-24068, 33-41434, 33-53733, 33-55449, 33-45970, 33-14458, 33-50149, 33-55456 and 333-15509) by reference to the Form 10-K of the Company filed for the year ended December 31, 1997. (27) Financial Data Schedule. (99) Cautionary Statements regarding "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995. *Denotes management contract or compensatory plan or arrangement required to be filed as an exhibit hereto. EX-3.2 2 ****************************************************************************** BY-LAWS OF AMERICAN HOME PRODUCTS CORPORATION AS AMENDED THROUGH MARCH 5, 1998 ****************************************************************************** CONTENTS STOCKHOLDERS MEETINGS 1. Annual Meeting 1 2. Special Meetings 1 3. Notice 1 4. Place 2 5. Quorum 2 6. Voting; Proxies 2 BOARD OF DIRECTORS 7. Powers; Number; Election; Term; Vacancies 3 8. Regular Meetings 5 9. Special Meetings 5 10. Quorum; Voting 5 11. Compensation 5 12. Residual Powers of Board 6 EXECUTIVE COMMITTEE 13. Appointment 6 14. Duties and Powers 6 15. Meetings 7 16. Quorum; Voting 7 17. Minutes 7 FINANCE COMMITTEE 18. Appointment 7 19. Duties and Powers 8 20. Meetings 8 21. Quorum; Voting 8 22. Minutes 8 AUDIT COMMITTEE 23. Appointment 8 24. Duties and Powers 9 25. Meetings 9 26. Quorum; Voting 9 27. Minutes 9 OTHER COMMITTEES 28. Appointment 10 29. Organization and Operation 10 OFFICERS 30. Principal Officers 10 31. Other Officers 11 32. Salaries 11 33. Term of Office; Removal 11 34. Vacancies 11 35. Chairman 11 36. Vice Chairman 12 37. President 12 38. Executive Vice Presidents 12 39. Senior Vice Presidents 13 40. Vice Presidents 13 41. Principal Financial Officer 13 42. Secretary 14 43. Treasurer 14 44. Comptroller 15 45. Delegation of Officer's Duties by Board 15 46. Delegation of Officer's Duties by Officer 15 47. Indemnification of Directors, Officers and Employees 15 AUTHORITY TO ACT AND SIGN 48. Instrument Execution 18 49. Bank Accounts 18 50. Voting of Stock in Other Corporations 19 51. Sale and Transfer of Securities 19 STOCK 52. Certificates 19 53. Transfer 20 54. Transfer Agent and Registrar 20 55. Record Date 20 56. Registered Stockholders 21 57. Lost Certificates 21 MISCELLANEOUS 58. Notices 21 59. Fiscal Year 22 60. Offices 22 61. Seal 22 62. Amendments 22 BY-LAWS of AMERICAN HOME PRODUCTS CORPORATION * * * * * * * * * * * * * * * * * * * * * STOCKHOLDERS MEETINGS 1. Annual Meeting. An annual meeting of stockholders for election of directors and transaction of other business properly before the meeting shall be held on the fourth Wednesday of April in each year, or on such other date and at such time as the Board of Directors may designate. 2. Special Meetings. Except as provided in paragraph VII (g) (v) of Article FOURTH of the Certificate of Incorporation respecting rights of holders of Preferred Stock to call meetings of such holders in certain dividend default situations, special meetings of stockholders, unless otherwise provided by law, may be called by the Chairman or Vice Chairman of the Board of Directors or the President or by the Secretary on the written request of a majority of all the directors, such request to state the purpose of the proposed meeting, which meeting shall thereupon be called by the Secretary. Business at special meetings shall be confined to the matters stated in the notice. 3. Notice. Written notice of each meeting of stockholders shall be mailed, not less than ten days prior to the meeting, to each stockholder entitled to vote at such address as appears on the stock books of the corporation. The notice shall specify the time and place of the meeting and, as to special meetings, the matter or matters to be acted upon at such meeting. 4. Place. Meetings of stockholders shall be held at the office of the corporation in Wilmington, Delaware, or at such other place, within or without the State of Delaware, as the Board of Directors may designate. 5. Quorum. Except as provided in paragraph VII (g) (v) of Article FOURTH of the Certificate of Incorporation respecting meetings of stockholders during certain dividend default situations, at which meetings holders of Preferred Stock have special voting rights, the holders of a majority of the outstanding stock having voting power, present in person or by proxy, shall constitute a quorum at all meetings of stockholders for the transaction of business unless otherwise provided by law. Except as provided in such paragraph VII (g) (v) of Article FOURTH of the Certificate of Incorporation, if a quorum shall not be present at any meeting of stockholders, the stockholders entitled to vote, present in person or by proxy, may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present; and at such adjourned meeting at which a quorum shall be present any business may be transacted which might have been transacted at the meeting originally called. 6. Voting; Proxies. At each meeting of stockholders every stockholder entitled to vote may vote in person or by proxy appointed by an instrument in writing subscribed by such stockholder or his duly appointed attorney-in-fact or in any other manner prescribed by the General Corporation Law of the State of Delaware. Except as provided in paragraphs VII (g) (i) and VII (g) (v) of Article FOURTH of the Certificate of Incorporation respecting holders of Preferred Stock voting in certain situations, each holder of Common Stock shall have one vote and each holder of Preferred Stock shall have eighteen (18) votes on each matter submitted to a vote at a meeting of stockholders for each share of, respectively, Common and Preferred Stock having voting power, registered in his name on the stock books of the corporation. The vote for directors and, upon the demand of any stockholder, the vote upon any other matter before the meeting, shall be by ballot. Elections shall be decided by a plurality of the votes cast and other matters shall be decided by a majority of the votes cast on such matters. BOARD OF DIRECTORS 7. Powers; Number; Election; Term; Vacancies. The property and business of the corporation shall be managed by its Board of Directors, which shall be not less than eight nor more than fifteen in number as determined from time to time by the Board, except as provided in paragraph VII (g) (ii) of Article FOURTH of the Certificate of Incorporation respecting additional directors in certain dividend default situations. Directors shall be elected at the annual meeting of stockholders and each director shall continue in office until his successor shall be elected or until his earlier removal or resignation. Except as provided in paragraph VII (g) (ii) of Article FOURTH of the Certificate of Incorporation respecting additional directors in certain dividend default situations, nominations for the election of directors may be made by the Board of Directors or a committee appointed by the Board of Directors or by any stockholder entitled to vote in the election of directors generally. However, any stockholder entitled to vote in the election of directors generally may nominate one or more persons for election as directors only if written notice of such stockholder's intent to make such nomination or nominations has been given, either by personal delivery or by United States Mail, postage prepaid, to the Secretary of the corporation not later than (i) with respect to an election to be held at an annual meeting of stockholders, ninety days prior to the anniversary date of the immediately preceding annual meeting, and (ii) with respect to an election to be held at a special meeting of stockholders for the election of directors, the close of business on the tenth day following the date on which notice of such meeting is first given to stockholders. Each such notice shall set forth: (a) the name and address of the stockholder who intends to make the nomination and of the person or persons to be nominated; (b) a representation that the stockholder is a holder of record of stock of the corporation entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice; (c) a description of all arrangements or understandings between the stockholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the stockholder; (d) such other information regarding each nominee proposed by such stockholder as would be required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission; and (e) the consent of each nominee to serve as a director of the corporation if so elected. The presiding officer of the meeting may refuse to acknowledge the nomination of any person not made in compliance with the foregoing procedure. Except as provided in Paragraph VII (g) (v) of Article FOURTH of the Certificate of Incorporation respecting the additional directors in certain dividend default situations, vacancies in the membership of the Board, whether or not caused by an increase in the number of directors, will be filled solely by the affirmative vote of a majority of the remaining directors then in office, even though less than a quorum of the Board of Directors. Any director elected in accordance with the preceding sentence shall hold office only until the next succeeding annual meeting of stockholders. 8. Regular Meetings. Regular meetings of the Board may be held without notice at such time and place as the Board shall from time to time determine. 9. Special Meetings. Special Meetings of the Board may be called by direction of the Chairman, the Vice Chairman, the President or two directors on two days notice to each director specifying the time and place of meeting. 10. Quorum; Voting. At all meetings of the Board a majority of all the directors then in office, or if the number of directors is then an even number, one-half such number shall constitute a quorum for the transaction of business and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the Board unless otherwise provided by law, the Certificate of Incorporation or these by-laws. 11. Compensation. Directors shall be paid such fees for their services as directors and for attending meetings of the Board and committees appointed thereby as shall be determined from time to time by the Board. The Board may also provide for compensation to a director for expenses he may incur in attending such meetings. Nothing herein shall be construed to preclude any director from serving the corporation in any other capacity and receiving compensation therefor. 12. Residual Powers of Board. In addition to the powers conferred by these by- laws upon the Board, the Board may exercise all such powers of the corporation and do all such lawful acts and things as are not by law, the Certificate of Incorporation or these by-laws directed or required to be exercised or done by the stockholders. Nothing contained in these by-laws shall restrict the Board or any committee thereof from taking any action in any manner permitted by law, including unanimous written consent and conference communication by means of telephone or similar communications equipment by which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to this by-law shall constitute presence in person at such meeting. EXECUTIVE COMMITTEE 13. Appointment. The Board may by vote of a majority of all the directors appoint three or more members to constitute an Executive Committee which shall serve at the pleasure of the Board. Vacancies in the membership of the Executive Committee shall be filled by the Board by vote of a majority of all the directors. 14. Duties and Powers. During the intervals between meetings of the Board, the Executive Committee shall perform all the duties and exercise all the powers of the Board in the management of the property and business of the corporation except such duties and powers as are by law, the Certificate of Incorporation or these by-laws directed or required to be performed or exercised specifically by the Board as such or by any proportion thereof. The Chairman of the Executive Committee shall assist the Chairman of the Board, shall perform such of the duties and exercise such of the powers of the Chairman as the latter may delegate to him and shall, in the absence or disability of the President, perform the duties and exercise the powers of the President. He shall perform such other duties and exercise such other powers as the Board or the Chairman shall from time to time prescribe. 15. Meetings. The Executive Committee may meet at stated times without notice, or on two days notice to all by one of its members. 16. Quorum; Voting. A majority of the Executive Committee shall constitute a quorum for the transaction of business and the act of a majority of those present at any meeting at which there is a quorum shall be the act of the Committee. 17. Minutes. The Executive Committee shall keep regular minutes of its proceedings and report its actions to the Board when it so requests. FINANCE COMMITTEE 18. Appointment. The Board may appoint three or more directors, officers or employees of the corporation or its subsidiaries to constitute a Finance Committee which shall serve at the pleasure of the Board. Vacancies in the membership of the Finance Committee shall be filled by the Board. 19. Duties and Powers. The Finance Committee shall supervise the financial affairs, budgets and procedures of the corporation and its subsidiaries and shall fix the salaries of officers and employees of the corporation and its subsidiaries, except such thereof as may be fixed by the Board or any other committee appointed by it for such purpose. 20. Meetings. The Finance Committee may meet at stated times without notice, or on notice to all by the Chairman or Vice-Chairman of the Board, the President, an Executive Vice President or a Senior Vice President. 21. Quorum; Voting. A majority of the Finance Committee shall constitute a quorum for the transaction of business and the act of a majority of those present at any meeting at which there is a quorum shall be the act of the Committee. 22. Minutes. The Finance Committee shall keep regular minutes of its proceedings and make copies thereof available to the Board at its meetings. AUDIT COMMITTEE 23. Appointment. The Board shall appoint three or more directors of the Corporation, none of whom is presently employed by the Corporation or any of its subsidiaries, to constitute an Audit Committee, which shall serve at the pleasure of the Board. Vacancies in the membership of the Audit Committee shall be filled by the Board. 24. Duties and Powers. The Audit Committee shall recommend a firm of independent public accountants to be engaged as the principal auditor for each year's annual audit on behalf of the Corporation subject to the approval of the Board of Directors and ratification by the stockholders. The Audit Committee shall discuss with the auditors the scope and results of the audit and shall report to the Board of Directors thereon. The Audit Committee shall undertake such other financial reviews as the Board deems appropriate. 25. Meetings. The Audit Committee may meet at stated times without notice, or on notice to all by the Chairman or Vice Chairman of the Board, the President, an Executive Vice President or a Senior Vice President, or by one of the members of the Audit Committee. 26. Quorum; Voting. A majority of the Audit Committee shall constitute a quorum for the transaction of business and the act of a majority of those present at any meeting at which there is a quorum shall be the act of the Committee. 27. Minutes. The Audit Committee shall keep regular minutes of its proceedings and make copies thereof available to the Board at its meetings. OTHER COMMITTEES 28. Appointment. The Board may from time to time appoint further standing or special committees of directors, officers or employees of the corporation or its subsidiaries to serve at the pleasure of the Board and confer upon such committees such powers and duties as the Board may deem expedient within the limits permitted by law. 29. Organization and Operation. Unless otherwise provided in the resolutions appointing any such committee and determining its powers and duties, the committee may establish procedures for calling and conducting meetings, provided that no less than a majority of its members shall constitute a quorum for the transaction of business and the act of no less than a majority of those present at a meeting at which there is a quorum shall be the act of the committee, and the committee shall keep regular minutes of its proceedings and report its actions to the Board when it so requests. OFFICERS 30. Principal Officers. The principal officers shall be chosen annually by the Board and shall be a Chairman of the Board of Directors, a President, one or more Vice Presidents, a Secretary, a Treasurer and a Comptroller and, in the discretion of the Board, a Vice Chairman of the Board of Directors, one or more Executive Vice Presidents and one or more Senior Vice Presidents. The Chairman or Vice Chairman and President may be the same person; the Secretary and Treasurer may be the same person and Executive Vice President, Senior Vice President or Vice President may hold at the same time the office of Secretary, Treasurer or Comptroller. The Chairman and Vice Chairman, if any, and the President shall be chosen from the members of the Board; the other principal officers need not be directors. 31. Other Officers. The Board may choose such other officers and agents as it shall deem necessary, who shall hold their offices for such terms and shall perform such duties and exercise such powers as are delegated to them pursuant to these by-laws or as the Board shall from time to time prescribe. 32. Salaries. The salaries of all principal officers shall be fixed by the Board. 33. Term of Office; Removal. Each officer shall hold office until his successor is chosen or until his earlier removal or resignation. The Board may remove any officer or agent provided that removal of a principal officer be by vote of a majority of all the directors. 34. Vacancies. Vacancies in any office may be filled by the Board. 35. Chairman. The Chairman of the Board of Directors shall preside at all meetings of stockholders and of the Board. He shall be ex-officio a member of all standing committees appointed by the Board, shall be the chief executive officer of the corporation, shall have all powers and perform all duties incident to such chief executive office and, subject to the direction of the Board, shall have general and active supervision of the property and business of the corporation. He shall be the officer through whom the Board delegates authority to corporate management and he shall be the medium of communication to the Board of information as to the affairs of the corporation and of all matters presented for the Board's consideration. He shall be responsible to see that all orders and resolutions of the Board are carried into effect by the proper officers. 36. Vice Chairman. The Vice Chairman of the Board of Directors shall assist the Chairman of the Board, shall perform such of the duties and exercise such of the powers of the Chairman as the latter may delegate to him and shall, in the absence or disability of the Chairman, perform the duties and exercise the powers of the Chairman. He shall perform such other duties and exercise such other powers as the Board or the Chairman shall from time to time prescribe. 37. President. The President shall assist the Chairman and Vice Chairman of the Board, shall perform such of the duties and exercise such of the powers of the Chairman as the latter may delegate to him and shall, in the absence or disability of the Vice Chairman, perform the duties and exercise the powers of the Vice Chairman. He shall perform such other duties and exercise such other powers as the Board, the Chairman or the Vice Chairman shall from time to time prescribe. 38. Executive Vice Presidents. Each Executive Vice President shall serve in a general executive capacity, more particularly as general assistant to the President. In the absence or disability of the President, and in the event the Chairman of the Executive Committee is absent or disabled, an Executive Vice President shall, in the order of seniority in that office, perform the duties and exercise the powers of the President. Executive Vice Presidents shall perform such other duties and exercise such other powers as the Board, the Chairman, the Vice Chairman or the President shall from time to time prescribe. 39. Senior Vice Presidents. Each Senior Vice President shall serve in a general executive capacity, more particularly as general assistant to the President or to one or more Executive Vice Presidents. In the absence or disability of the President, and in the event the Chairman of the Executive Committee and all Executive Vice Presidents are absent or disabled, a Senior Vice President shall, in the order of seniority in that office, perform the duties and exercise the powers of the President. Senior Vice Presidents shall perform such other duties and exercise such other powers as the Board, the Chairman, the Vice Chairman or the President shall from time to time prescribe. 40. Vice Presidents. In the absence or disability of the Executive Vice Presidents and Senior Vice Presidents, a Vice President shall, in the order of seniority in that office, perform the duties and exercise the powers of the Executive Vice Presidents and Senior Vice Presidents. Vice Presidents shall perform such other duties and exercise such other powers as the Board, the Chairman, the Vice Chairman or the President shall from time to time prescribe. 41. Principal Financial Officer. The Board may designate an Executive Vice President, a Senior Vice President, a Vice President or the Treasurer as the Principal Financial Officer of the corporation. 42. Secretary. The Secretary shall attend all meetings of stockholders and of the Board and shall record the minutes of all proceedings of such meetings in books to be kept for that purpose, and shall perform like duties for the standing committees appointed by the Board unless the Board directs otherwise. He shall have custody of the seal of the corporation and shall affix it or cause it to be affixed to all instruments requiring it. He shall give or cause to be given the notice required of all meetings of stockholders and of the Board. He shall perform such other duties and exercise such other powers as the Board, the Chairman, the Vice Chairman or the President shall from time to time prescribe. 43. Treasurer. The Treasurer shall have general charge of and responsibility for the corporate funds and securities. He shall deposit or cause to be deposited in the name of the corporation all moneys and other valuable effects of the corporation in such depositories as may be designated in accordance with these by-laws. He shall disburse the funds of the corporation as directed by the Board or by any other principal officer, taking proper vouchers for such disbursements. He shall advise upon all terms of credit granted by the corporation. He shall render to the Board, when the Board so requests, an accounting of all his transactions as Treasurer and of the financial condition of the corporation. He shall perform such other duties and exercise such other powers as the Board, the Chairman, the Vice Chairman or the President shall from time to time prescribe. 44. Comptroller. The Comptroller shall have general supervision of the accounting practices of the corporation and its subsidiaries and the preparation of statements and other reports respecting financial aspects of the corporation's or its subsidiaries' operations. He shall establish, through appropriate channels, recording and reporting procedures and standards pertaining to such matters. He shall be responsible for collection of all corporation accounts. He shall perform such other duties and exercise such other powers as the Board, the Chairman, the Vice Chairman or the President shall from time to time prescribe. 45. Delegation of Officer's Duties by Board. In the absence or disability of any principal officer, or for any other reason that the Board may deem sufficient, the Board may by vote of a majority of all the directors delegate any or all of the powers or duties of such officer to any other officer. 46. Delegation of Officer's Duties by Officer. Any principal officer may delegate portions of his powers and duties to any assistant officer chosen by the Board and acting under the principal officer's supervision. INDEMNIFICATION OF DIRECTORS, OFFICERS AND EMPLOYEES 47. Each person (and heirs and legal representatives of such person) who serves or has served as a director, officer or employee of the corporation or of any other corporation or entity when requested by this corporation, and of which this corporation is or was a stockholder, a creditor or otherwise interested, shall be indemnified by this corporation against all liability and reasonable expense, including but not limited to counsel fees and disbursements and amounts of judgments, fines or penalties, incurred by or imposed upon him in connection with any claim, action, suit or proceeding, actual or threatened, whether civil, criminal, administrative or investigative, and appeals in which he may become involved as a party or otherwise by reason of acts or omissions in his capacity as and while a director, officer or employee of this corporation or such other corporation or entity, provided that such person is wholly successful with respect thereto and unless the Board in its absolute discretion shall determine that such person did not meet the standard of conduct required herein. The term "wholly successful" shall mean termination of any claim, action, suit or proceeding against such person without any finding of liability or guilt against him and without any settlement by payment, promise or undertaking by or for such person or the expiration of a reasonable period of time after the making of any claim or threat without action, suit or proceeding having been brought and without any settlement by payment, promise, or undertaking by or for such person. The standard of conduct required shall be that such person acted in good faith for a purpose which he reasonably believed to be in or not opposed to the best interests of the corporation, and, in addition, in any criminal action or proceeding, had no reasonable cause to believe that his conduct was unlawful. Should indemnification be requested hereunder in respect to any claim, action, suit or other proceeding where the person seeking indemnification has not been wholly successful, such indemnification may be made only upon the prior determination by a resolution of a majority of those members of the Board who are not involved in the claim, action, suit or other proceeding, that such person met the standards of conduct required herein, or, in the discretion of the Board, upon the prior determination by non-employee legal counsel, in written opinion, that such person has met such standards, and where a settlement is involved, that the amount thereof is reasonable. Indemnification under this by-law shall not include any amount payable by such person to the corporation or entity in satisfaction of any judgment or settlement, or any amount payable on account of profits realized by him in the purchase or sale of securities of the corporation, and shall be reduced by the amount of any other indemnification or reimbursement of such liability and expense to such person. The termination of any claim, action, suit or other proceeding, by judgment, order, settlement (whether with or without court approval) or conviction or upon a plea of guilty or of nolo contendere, or its equivalent, shall not of itself create a presumption that such person did not meet the standard of conduct required herein. Expenses incurred which are subject to indemnification hereunder may be advanced by the corporation prior to final disposition of the claim, action, suit or other proceeding upon receipt of an undertaking acceptable to the corporation by or on behalf of the recipient to repay such amount unless it shall ultimately be determined that he is entitled to indemnification. The right of indemnification herein provided shall be in addition to other rights to which those to be indemnified may otherwise be entitled by agreement, vote of stockholders, operation of law or otherwise, and shall be available whether or not the claim asserted against such person is based upon matters which antedate the adoption of this by-law. If any word, clause or provision of this by-law or any indemnification made hereunder shall for any reason be determined to be invalid, the provisions hereof shall not otherwise be affected thereby but shall remain in full force and effect. AUTHORITY TO ACT AND SIGN 48. Instrument Execution. Unless otherwise provided by law or by the Board, all instruments to be executed on behalf of the corporation, whether or not requiring the seal of the corporation, may be executed by the Chairman, the Vice Chairman, the President, any Executive Vice President, any Senior Vice President or any Vice President and attested by the Secretary or an Assistant Secretary. 49. Bank Accounts. Unless otherwise provided by the Board, any two of the following officers: the Chairman, the Vice Chairman, the President, any Executive Vice President, any Senior Vice President, any Vice President and the Treasurer, may from time to time (1) open and maintain in the name of the corporation, and terminate, general and special bank accounts for the funds of the corporation with such banks, trust companies or other depositories as they may designate and (2) designate, and revoke the designation of, the officers or employees of the corporation who may sign, manually or by facsimile, checks, drafts or orders on such bank accounts. Any such action, designation or revocation shall be by written instrument, signed by the officers taking the action or making or revoking the designation and filed with the bank, trust company or other depository. 50. Voting of Stock in Other Corporations. Unless otherwise directed by the Board, Chairman, the Vice Chairman, the President, any Executive Vice President, any Senior Vice President, the Treasurer or the Secretary may, on behalf of the corporation, attend, act and vote at any meeting of stockholders of any corporation in which this corporation may hold stock and at any such meeting shall possess and may exercise all rights of this corporation incident to ownership of such stock or may give a proxy or proxies in the name of this corporation to any other person or persons who may vote such stock and exercise any and all other rights in regard to it as are here accorded to the officers mentioned. 51. Sale and Transfer of Securities. Unless otherwise directed by the Board, any two of the following officers: the Chairman, the Vice Chairman, the President, any Executive Vice President, any Senior Vice President and the Treasurer may, on behalf of the corporation, transfer, convert, endorse, sell, assign, set over and deliver, or take action appropriate to the encumbrance by the corporation of any bonds, shares of stock, warrants or other securities owned by or standing in the name of the corporation, and may execute and deliver in the name of the corporation all written instruments necessary or proper to implement the authority herein contained. STOCK 52. Stock Certificates; Uncertificated Shares. The shares of the corporation shall be represented by certificates, provided that the Board of Directors of the corporation may provide by resolution or resolutions that some or all of any or all classes or series of its stock shall be uncertificated shares. Any such resolution shall not apply to shares represented by a certificate until such certificate is surrendered to the corporation. Notwithstanding the adoption of such a resolution by the Board of Directors, every holder of stock represented by certificates and upon request every holder of uncertificated shares shall be entitled to have a certificate signed by, or in the name of the corporation by the Chairman or Vice- Chairman of the Board of Directors, or the President or Vice-President, and by the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary of such corporation representing the number of shares registered in certificate form. Any or all of the signatures on the certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if he or she were such officer, transfer agent or registrar at the date of issue. 53. Transfer. Transfer of stock shall be made on the books of the corporation only upon surrender of the certificate therefor, endorsed by the person named in the certificate or accompanied by proper written evidence of succession, assignment or authority to transfer such stock or upon receipt of proper transfer instructions from the owner of uncertificated shares. 54. Transfer Agent and Registrar. The Board may appoint one or more Transfer Agents to record transfers of shares of stock and to keep the stock certificate books, transfer books and stock ledgers of the corporation. The Board may also appoint one or more Registrars to register certificates of stock. The Board may require all certificates of stock to bear the signatures of either or both a Transfer Agent and a Registrar. Where any such certificate is manually signed by the Registrar, the signature of any Transfer Agent may be facsimile engraved or printed. 55. Record Date. The Board may fix in advance a date, not less than ten nor more than sixty days preceding the date of any meeting of stockholders or the date for the payment of any dividend or the date for the allotment of rights or the date when any change, conversion or exchange of stock shall go into effect or the date in connection with obtaining consent of stockholders or any class thereof for any purpose, as a record date for the determination of stockholders entitled to notice of and to vote at any such meeting or to receive payment of any such dividend or to receive any allotment of rights or to exercise the rights or to give such consent, as the case may be, notwithstanding any transfer of any stock on the books of the corporation after any such record date fixed as aforesaid. The Board may direct that the stock books of the corporation be closed against transfers during such period. 56. Registered Stockholders. The corporation shall be entitled to treat the holder of record of any share of stock as the holder in fact thereof and accordingly shall not be bound to recognize any equitable or other claim to or interest in such share on the part of any other person, whether or not it shall have express or other notice thereof, except as provided by law. 57. Lost Certificates. The Board may direct a new certificate of stock to be issued in place of any certificate theretofore issued and claimed to have been lost, stolen or destroyed, provided that any person claiming a certificate to be lost, stolen or destroyed shall make an affidavit of ownership and of the facts of such loss, theft or destruction and, if the Board so requires, shall advertise the same, and provided further that the Board may require the owner of the certificate claimed to be lost, stolen or destroyed, or his legal representative, to deliver to the corporation for itself, its officers Transfer Agents and Registrars, a bond of indemnity in such amount or unlimited in amount, upon such terms and secured by such surety as the Board may require. MISCELLANEOUS 58. Notices. Whenever under the provisions of these by-laws notice is required to be given to any person other than in his capacity as stockholder, it may be given by hand delivery, by telegram or by mail. Whenever under the provisions of these by-laws notice is required to be given to any stockholder, it may be given by mail, by depositing the same in the post office or a letter box, in a post-paid, sealed envelope, addressed to such stockholder at such address as appears on the stock books of the corporation, and such notice shall be deemed to be given at the time when the same shall be thus mailed. Any person entitled to notice under any provision of these by-laws may waive such notice. 59. Fiscal Year. The fiscal year of the corporation shall begin the first day of January in each year. 60. Offices. The corporation may have an office in New York, New York, and at such other places as the business of the corporation may require. 61. Seal. The corporate seal shall have inscribed thereon the name of the corporation and the words "Corporate Seal, Delaware." 62. Amendments. These by-laws may be altered or repealed and new by-laws may be adopted at any meeting of stockholders by the vote of the holders of a majority of the outstanding stock having voting power, provided the notice of such meeting includes the proposed alterations or repeal or the proposed new by-laws, or a summary thereof, or the Board by vote of a majority of all the directors. EX-10.7 3 THIRD AMENDMENT TO A CREDIT AGREEMENT Third Amendment (this "Amendment"), dated as of July 31, 1997 among Sherwood Medical Company, A.H. Robins Company, Incorporated and AC Acquisition Holding Company (each, a "Subsidiary Borrower"), American Home Products Corporation (the "Company", and together with the Subsidiary Borrowers, the "Borrowers"), the lending institutions party to the A Credit Agreement referred to below (the "Banks") and The Chase Manhattan Bank, as Agent (in such capacity, the "Agent"). All capitalized terms used herein and not otherwise defined shall have the respective meanings provided such terms in the A Credit Agreement referred to below. W I T N E S S E T H : WHEREAS, the Borrowers, the Banks and the Agent are parties to a Credit Agreement, dated as of September 9, 1994, (as heretofore amended, the "A Credit Agreement"); WHEREAS, the parties hereto wish to amend the A Credit Agreement as herein provided; NOW THEREFORE, it is agreed: 1. The amount "$2,500,000,000" shall replace (i) the amount "$3,000,000,000" in the first recital of the A Credit Agreement and (ii) the amount of "$2,800,000,000" in each of Section 2.1(a) and 2.2(a) of the A Credit Agreement. 2. Section 1.1 of the A Credit Agreement is hereby amended by deleting the definition of "Applicable Margin" in its entirety and inserting in lieu thereof the following new definition: "Applicable Margin": a percentage equal to, (x) for Alternate Base Rate Loans, 0%, (y) for C/D Rate Loans, .2725% and (z) for Eurodollar Rate Loans, .1475%. 3. Section 1.1 of the A Credit Agreement is hereby amended by deleting the definition of "Facility Fee Percentage" in its entirety and inserting in lieu thereof the following definition: ""Facility Fee Percentage": a percentage equal to .0400%." 4. Section 1.1 of the A Credit Agreement is hereby amended by deleting clause (a) of the definition of "Termination Date" in its entirety and inserting in lieu thereof "(a) July 30, 1998 (as such date may be extended in accordance with the provisions of subsection 2.19)and ". 5. In order to induce the Agent and the Banks to enter into this Amendment, the Borrowers hereby represent and warrant that (x) no Default or Event of Default exists on the Third Amendment Effective Date (as defined herein) both before and after giving effect to this Amendment and (y) all of the representations and warranties contained in the Credit Documents shall be true and correct in all material respects on the Third Amendment Effective Date both before and after giving effect to this Amendment with the same effect as though such representations and warranties had been made on and as of the Third Amendment Effective Date (it being understood that any representation or warranty made as of a specific date shall be true and correct in all material respects as of such specific date). 6. This Amendment is limited as specified and shall not constitute a modification, acceptance or waiver of any other provision of the A Credit Agreement or any other Credit Document. 7. This Amendment may be executed in any number of counterparts and by the different parties hereto on separate counterparts, each of which counterparts when executed and delivered shall be an original, but all of which shall together constitute one and the same instrument. A complete set of counterparts shall be lodged with the Company and the Agent. 8. This Amendment and the rights and obligations of the parties hereunder shall be construed in accordance with and governed by the law of the State of New York. 9. Notwithstanding anything to the contrary contained in the A Credit Agreement or this Amendment, for purposes of this Amendment "Banks" shall mean each of the lending institutions who shall have delivered (including by way of telecopier) by July 30, 1997 (or such later date as the Agent and the Company shall agree) a signed copy hereof to the Agent as provided in Section 8.2 of the A Credit Agreement that has been accepted by the Company. 10. As of the Third Amendment Effective Date, (v) Schedule I to the A Credit Agreement shall be revised to read as set forth on Annex I hereto, (w) Schedule II to the A Credit Agreement shall be revised by the Agent to give effect to such revised Schedule I, (x) the Banks shall constitute all the Lenders and no other entity that had been a Lender will continue to be a Lender, (y) either (A) all amounts owing to Lenders prior to July 30, 1997 who are not Banks (the "Former Lenders") shall be paid to such Former Lenders or (B) such Former Lenders shall assign their Commitments to one or more Banks and (z) no such Former Lender will continue to be a Lender. 11. This Amendment shall become effective as of the date hereof (the "Third Amendment Effective Date") on the date upon which (x) each of the Borrowers, the Agent and Banks (as defined in paragraph 9 hereto) with Commitments as set forth on Annex I hereto aggregating $2,500,000,000 shall have signed a copy hereof (whether the same or different copies) and shall have delivered (including by way of telecopier) the same to the Agent as provided in Section 8.2 of the A Credit Agreement and (y) the Third Amendment to the B Credit Agreement, dated as of the date hereof, has become effective. 12. From and after the Third Amendment Effective Date, all references in the A Credit Agreement and each of the other A Credit Documents to the A Credit Agreement shall be deemed to be references to the A Credit Agreement after giving effect to this Amendment. IN WITNESS WHEREOF, each of the parties hereto has caused a counterpart of this Amendment to be duly executed and delivered as of the date first above written. AMERICAN HOME PRODUCTS CORPORATION By:_________________________________ Title: Vice President - Finance SHERWOOD MEDICAL COMPANY By: Title: Vice President A. H. ROBINS COMPANY, INCORPORATED By:_________________________________ Title: Vice President and Treasurer AC ACQUISITION HOLDING COMPANY By:_________________________________ Title: Vice President and Treasurer BANCA COMMERCIALE ITALIANA NEW YORK BRANCH By:_________________________________ Title: Charles Daugherty,Vice President By:_________________________________ Title: K. Purelis, Vice President BANCA DI ROMA By:_________________________________ Title: Virgina Mahler Cosenza Assistant Vice President By:_________________________________ Title: Vice President BANCA MONTE DEI PASCHI DI SIENA, S.p.A. By:_________________________________ Title: S.V.P. and General Manager By:_________________________________ Title: Brian R. Landy Vice President BANCA NAZIONALE DEL LAVORO S.p.A. NEW YORK BRANCH By:_________________________________ Title: Giuliano Violetta First Vice President By:_________________________________ Title: Giulio Giovine Vice President BANCA POPOLARE DI MILANO By:_________________________________ Title: Anthony Franco Executive Vice President & GM By:_________________________________ Title: Fulvio Montanari First Vice President BANK OF AMERICA NT & SA By:_________________________________ Title: Vice President BANK OF IRELAND By:_________________________________ Title: BANK OF MONTREAL By:_________________________________ Title: Sharron P. Walsh Director THE BANK OF NEW YORK By:_________________________________ Title: Vice President THE BANK OF NOVA SCOTIA By:_________________________________ Title: Vice President THE BANK OF TOKYO-MITSUBISHI TRUST COMPANY, as Co-Agent By:_____________________________ Title: Vice President BANKERS TRUST COMPANY By:_________________________________ Title: Vice President BANQUE NATIONALE DE PARIS NEW YORK BRANCH By:____________________________________ Title: Richard L. Sted Senior Vice President By:_________________________________ Title: Richard Pace Vice President, Corporate Banking Division CARIPLO - CASSA DI RISPARMIO DELLE PROVINCIE LOMBARDE SPA By:_____________________________ Title: F. Vice President By:_____________________________ Title: F. Vice President THE CHASE MANHATTAN BANK, as Administrative Agent By:_________________________________ Title: Managing Director CITIBANK, N.A., as Co-Agent By:_________________________________ Title: Mary W. Corkran Vice President COMMERZBANK AKTIENGESELLSCHAFT New York and/or Grand Cayman Branches, as Co-Agent By:__________________________________ Title: By:__________________________________ Title: A. Oliver Welsch-Lehmann Assistant Treasurer COOPERATIEVE CENTRALE RAIFFEISEN- BOERENLEENBANK, B.A., "RABOBANK NEDERLAND" By:_________________________________ Title: Ellen A. Polansky Vice President By:_________________________________ Title: W. Pieter C. Kodde Vice President CORESTATES BANK, N.A., as co-Agent By:_____________________________ Title: Vice President CRESTAR BANK By:__________________________________ Title: Senior Vice President THE DAI-ICHI KANGYO BANK LTD., as co-Agent By:__________________________________ Title: Vice President THE FIRST NATIONAL BANK OF CHICAGO, as co-Agent By:_____________________________ Title: Corporate Banking Officer FLEET NATIONAL BANK By:_____________________________ Title: Assistant Vice President THE FUJI BANK, LIMITED, as co-Agent By:_________________________________ Title: Senior Vice President ISTITUTO BANCARIO SAN PAOLO DI TORINA S.p.A. - NEW YORK LIMITED BRANCH, as co-Agent By:___________________________________ Title: Vice President By:_________________________________ Title: Vice President MELLON BANK, N.A. By:_____________________________ Title: Vice President MARINE MIDLAND BANK By:_________________________________ Title: William M. Holland Vice President THE MITSUBISHI TRUST AND BANKING CORPORATION By:_________________________________ Title: Deputy General Manager MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as co-Agent By:_________________________________ Title: Charles H. King Vice President NATIONAL WESTMINSTER BANK PLC By:_________________________________ Title: Vice President NATIONSBANK, N.A., as co-Agent By:_________________________________ Title: Senior Vice President THE NORINCHUKIN BANK, NEW YORK BRANCH By:_________________________________ Title: Takeshi Akimoto General Manager THE NORTHERN TRUST COMPANY By:_________________________________ Title: Vice President PNC BANK, NATIONAL ASSOCIATION By:_________________________________ Title: Vice President ROYAL BANK OF CANADA By:_________________________________ Title: Manager ROYAL BANK OF CANADA GRAND CAYMAN BRANCH By:_________________________________ Title: Senior Manager THE SAKURA BANK, LIMITED By:_________________________________ Title: Yasumasa Kikuchi Senior Vice President THE SANWA BANK LTD, NEW YORK BRANCH By:_________________________________ Title: Joseph E. Leo Vice President & Area Manager STANDARD CHARTERED BANK By:_________________________________ Title: Brian S. Taylor Vice President THE SUMITOMO TRUST & BANKING CO., LTD, NEW YORK BRANCH By:_________________________________ Title: Suraj Bhatia Senior Vice President THE SUMITIMO TRUST & BANKING CO. By:_________________________________ Title: SUNTRUST BANK, INC. By:_________________________________ Title: Group Vice President SWISS BANK CORPORATION, NEW YORK BRANCH as co-Agent By:_________________________________ Title: William S. Lutkins Associate Director, Credit Risk Management By:_________________________________ Title: Dorothy L. McKinley Associate Director, Banking Finance Support, N.A. THE TOKAI BANK, LIMITED NEW YORK BRANCH By:_________________________________ Title: Deputy General Manager TORONTO DOMINION (NEW YORK), INC. By:_________________________________ Title: Debbie A. Greene Vice President THE TOYO TRUST & BANKING CO., LTD. NEW YORK BRANCH By:_________________________________ Title: Vice President WACHOVIA BANK OF GEORGIA, N.A., as co-Agent By:_________________________________ Title: Vice President EX-10.8 4 THIRD AMENDMENT TO B CREDIT AGREEMENT Third Amendment (this "Amendment"), dated as of July 31, 1997 among Sherwood Medical Company, A.H. Robins Company, Incorporated and AC Acquisition Holding Company (each, a "Subsidiary Borrower"), American Home Products Corporation (the "Company", and together with the Subsidiary Borrowers, the "Borrowers"), the lending institutions party to the B Credit Agreement referred to below (the "Banks") and The Chase Manhattan Bank, as Agent (in such capacity, the "Agent"). All capitalized terms used herein and not otherwise defined shall have the respective meanings provided such terms in the B Credit Agreement referred to below. W I T N E S S E T H : WHEREAS, the Borrowers, the Banks and the Agent are parties to a Credit Agreement, dated as of September 9, 1994 (as heretofore amended, the "B Credit Agreement"); WHEREAS, the parties hereto wish to amend the B Credit Agreement as herein provided; NOW THEREFORE, it is agreed: 1. The first recital of the B Credit Agreement is hereby amended by deleting the amount "3,000,000,000" in its entirety and inserting in lieu thereof the amount of "2,500,000,000". 2. Section 1.1 of the B Credit Agreement is hereby amended by deleting the definition of "Applicable Margin" in its entirety and inserting in lieu thereof the following new definition: "Applicable Margin": for any day, the rate per annum set forth below opposite the Rating Period then in effect, it being understood that the Applicable Margin for (x) Alternate Base Rate Loans shall be the percentage set forth under the column "Alternate Base Rate Margin", (y) C/D Rate Loans shall be the percentage set forth under the column "C/D Rate Margin" and (z) Eurodollar Rate Loans shall be the percentage set forth under the column "Eurodollar Rate Margin": Alternative Eurodollar Rating Base Rate C/D Rate- Rate Period Margin Margin Margin Category A Period 0% .2300% .1050% Category B Period 0% .2500% .1250% Category C Period 0% .2525% .1275% Category D Period 0% .2850% .1600% Category E Period 0% .3500% .2250% 3. Section 1.1 of the B Credit Agreement is hereby amended by deleting the definition of "Facility Fee Percentage" in its entirety and inserting in lieu thereof the following definition: ""Facility Fee Percentage": a percentage equal to at any time (i) during a Category A Period, .0450%, (ii) during a Category B Period, .0500%, (iii) during a Category C Period, .0600%, (iv) during a Category D Period, .0900% and (v) during a Category E Period, .1250%." 4. Section 1.1 of the B Credit Agreement is hereby amended by deleting clause (a) of the definition of "Termination Date" in its entirety and inserting in lieu thereof "(a) July 31, 2002 and ". 5. In order to induce the Agent and the Banks to enter into this Amendment, the Borrowers hereby represent and warrant that (x) no Default or Event of Default exists on the Third Amendment Effective Date (as defined herein) both before and after giving effect to this Amendment and (y) all of the representations and warranties contained in the Credit Documents shall be true and correct in all material respects on the Third Amendment Effective Date both before and after giving effect to this Amendment with the same effect as though such representations and warranties had been made on and as of the Third Amendment Effective Date (it being understood that any representation or warranty made as of a specific date shall be true and correct in all material respects as of such specific date). 6. This Amendment is limited as specified and shall not constitute a modification, acceptance or waiver of any other provision of the B Credit Agreement or any other Credit Document. 7. This Amendment may be executed in any number of counterparts and by the different parties hereto on separate counterparts, each of which counterparts when executed and delivered shall be an original, but all of which shall together constitute one and the same instrument. A complete set of counterparts shall be lodged with the Company and the Agent. 8. This Amendment and the rights and obligations of the parties hereunder shall be construed in accordance with and governed by the law of the State of New York. 9. Notwithstanding anything to the contrary contained in the B Credit Agreement or this Amendment, for purposes of this Amendment "Banks" shall mean each of the lending institutions who shall have delivered (including by way of telecopier) by July 30, 1997 (or such later date as the Agent and the Company shall agree) a signed copy hereof to the Agent as provided in Section 8.2 of the B Credit Agreement that has been accepted by the Company. 10. As of the Third Amendment Effective Date, (v) Schedule I to the B Credit Agreement shall be revised to read as set forth on Annex I hereto, (w) Schedule II to the B Credit Agreement shall be revised by the Agent to give effect to such revised Schedule I and (x) the Banks shall constitute all the Lenders and no other entity that had been a Lender will continue to be a Lender, (y) either (A) all amounts owing to Lenders prior to July 30, 1997 who are not Banks (the "Former Lenders") shall be paid to such Former Lenders or (B) such Former Lenders shall assign their Commitments to one or more Banks and (z) no such Former Lender will continue to be a Lender. 11. This Amendment shall become effective as of the date hereof (the "Third Amendment Effective Date") on the date upon which (x) each of the Borrowers, the Agent and the Banks (as defined in paragraph 9) with Commitments as set forth on Annex I hereto aggregating $2,500,000,000 shall have signed a copy hereof (whether the same or different copies) and shall have delivered (including by way of telecopier) the same to the Agent as provided in Section 8.2 of the B Credit Agreement and (y) the Third Amendment to the A Credit Agreement, dated as of the date hereof, has become effective. 12. From and after the Third Amendment Effective Date, all references in the B Credit Agreement and each of the other Credit Documents to the B Credit Agreement shall be deemed to be references to the B Credit Agreement after giving effect to this Amendment. IN WITNESS WHEREOF, each of the parties hereto has caused a counterpart of this Amendment to be duly executed and delivered as of the date first above written. AMERICAN HOME PRODUCTS CORPORATION By:_________________________________ Title: Vice President - Finance SHERWOOD MEDICAL COMPANY By: Title: Vice President A. H. ROBINS COMPANY, INCORPORATED By:_________________________________ Title: Vice President and Treasurer AC ACQUISITION HOLDING COMPANY By:_________________________________ Title: Vice President and Treasurer BANCA COMMERCIALE ITALIANA NEW YORK BRANCH By:_________________________________ Title: Charles Daugherty,Vice President By:_________________________________ Title: K. Purelis, Vice President BANCA DI ROMA By:_________________________________ Title: Virgina Mahler Cosenza Assistant Vice President By:_________________________________ Title: Vice President BANCA MONTE DEI PASCHI DI SIENA, S.p.A. By:_________________________________ Title: S.V.P. and General Manager By:_________________________________ Title: Brian R. Landy Vice President BANCA NAZIONALE DEL LAVORO S.p.A. NEW YORK BRANCH By:_________________________________ Title: Giuliano Violetta First Vice President By:_________________________________ Title: Giulio Giovine Vice President BANCA POPOLARE DI MILANO By:_________________________________ Title: Anthony Franco Executive Vice President & GM By:_________________________________ Title: Fulvio Montanari First Vice President BANK OF AMERICA NT & SA By:_________________________________ Title: Vice President BANK OF IRELAND By:_________________________________ Title: BANK OF MONTREAL By:_________________________________ Title: Sharron P. Walsh Director THE BANK OF NEW YORK By:_________________________________ Title: Vice President THE BANK OF NOVA SCOTIA By:_________________________________ Title: Vice President THE BANK OF TOKYO-MITSUBISHI TRUST COMPANY, as Co-Agent By:_____________________________ Title: Vice President BANKERS TRUST COMPANY By:_________________________________ Title: Vice President BANQUE NATIONALE DE PARIS NEW YORK BRANCH By:____________________________________ Title: Richard L. Sted Senior Vice President By:_________________________________ Title: Richard Pace Vice President, Corporate Banking Division CARIPLO - CASSA DI RISPARMIO DELLE PROVINCIE LOMBARDE SPA By:_____________________________ Title: F. Vice President By:_____________________________ Title: F. Vice President THE CHASE MANHATTAN BANK, as Administrative Agent By:_________________________________ Title: Managing Director CITIBANK, N.A., as Co-Agent By:_________________________________ Title: Mary W. Corkran Vice President COMMERZBANK AKTIENGESELLSCHAFT New York and/or Grand Cayman Branches, as Co-Agent By:__________________________________ Title: By:__________________________________ Title: A. Oliver Welsch-Lehmann Assistant Treasurer COOPERATIEVE CENTRALE RAIFFEISEN- BOERENLEENBANK, B.A., "RABOBANK NEDERLAND" By:_________________________________ Title: Ellen A. Polansky Vice President By:_________________________________ Title: W. Pieter C. Kodde Vice President CORESTATES BANK, N.A., as co-Agent By:_____________________________ Title: Vice President CRESTAR BANK By:__________________________________ Title: Senior Vice President THE DAI-ICHI KANGYO BANK LTD., as co-Agent By:__________________________________ Title: Vice President THE FIRST NATIONAL BANK OF CHICAGO, as co-Agent By:_____________________________ Title: Corporate Banking Officer FLEET NATIONAL BANK By:_____________________________ Title: Assistant Vice President THE FUJI BANK, LIMITED, as co-Agent By:_________________________________ Title: Senior Vice President ISTITUTO BANCARIO SAN PAOLO DI TORINA S.p.A. - NEW YORK LIMITED BRANCH, as co-Agent By:___________________________________ Title: Vice President By:_________________________________ Title: Vice President MELLON BANK, N.A. By:_____________________________ Title: Vice President MARINE MIDLAND BANK By:_________________________________ Title: William M. Holland Vice President THE MITSUBISHI TRUST AND BANKING CORPORATION By:_________________________________ Title: Deputy General Manager MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as co-Agent By:_________________________________ Title: Charles H. King Vice President NATIONAL WESTMINSTER BANK PLC By:_________________________________ Title: Vice President NATIONSBANK, N.A., as co-Agent By:_________________________________ Title: Senior Vice President THE NORINCHUKIN BANK, NEW YORK BRANCH By:_________________________________ Title: Takeshi Akimoto General Manager THE NORTHERN TRUST COMPANY By:_________________________________ Title: Vice President PNC BANK, NATIONAL ASSOCIATION By:_________________________________ Title: Vice President ROYAL BANK OF CANADA By:_________________________________ Title: Manager ROYAL BANK OF CANADA GRAND CAYMAN BRANCH By:_________________________________ Title: Senior Manager THE SAKURA BANK, LIMITED By:_________________________________ Title: Yasumasa Kikuchi Senior Vice President THE SANWA BANK LTD, NEW YORK BRANCH By:_________________________________ Title: Joseph E. Leo Vice President & Area Manager STANDARD CHARTERED BANK By:_________________________________ Title: Brian S. Taylor Vice President THE SUMITOMO TRUST & BANKING CO., LTD, NEW YORK BRANCH By:_________________________________ Title: Suraj Bhatia Senior Vice President THE SUMITIMO TRUST & BANKING CO. By:_________________________________ Title: SUNTRUST BANK, INC. By:_________________________________ Title: Group Vice President SWISS BANK CORPORATION, NEW YORK BRANCH as co-Agent By:_________________________________ Title: William S. Lutkins Associate Director, Credit Risk Management By:_________________________________ Title: Dorothy L. McKinley Associate Director, Banking Finance Support, N.A. THE TOKAI BANK, LIMITED NEW YORK BRANCH By:_________________________________ Title: Deputy General Manager TORONTO DOMINION (NEW YORK), INC. By:_________________________________ Title: Debbie A. Greene Vice President THE TOYO TRUST & BANKING CO., LTD. NEW YORK BRANCH By:_________________________________ Title: Vice President WACHOVIA BANK OF GEORGIA, N.A., as co-Agent By:_________________________________ Title: Vice President EX-10.15 5 American Home Products Corporation MANAGEMENT INCENTIVE PLAN (As amended by the Board of Directors on February 6, 1997 and as approved by stockholders on April 28, 1997.) I. Purpose The Management Incentive Plan (the "Plan") is maintained by the Corporation primarily for the purpose of providing immediate and deferred incentive compensation for a select group of management and highly compensated employees and is designed to provide for awards to selected key salaried employees in executive, administrative, technical, professional or other important capacities, who individually, or as members of a group, contribute in a substantial degree to the success of the Company, thus affording to them a means of participating in that success and an incentive to contribute further to that success. II. Definitions The following words and phrases as used herein shall have the meanings set forth below: (1) "Company" shall mean American Home Products Corporation (the Corporation), and any corporation, domestic or foreign, 50% or more of whose share voting power is held, directly or indirectly, by the Company. (2) "Employee" shall mean any key salaried employee of the Company whether or not an Officer or Director, including individuals whose employment has terminated during the applicable year by reason of death or retirement. (3) "Committee" shall mean the Compensation and Benefits Committee consisting of three or more Corporation Directors who are not Employees. (4) "Average Net Capital" shall mean the average of the beginning and ending balances, shown in the Corporation's Consolidated Balance Sheet, of the Stockholders' Equity and funded debt. (5) "Net Income" shall mean the "net income for year," after taxes, shown in the Corporation's Consolidated Statement of Income, adjusted, however, by adding any amount by which such net income after taxes has been reduced by provision for awards under the Plan. (6) "Incentive Earnings" shall mean the excess of Net Income for any year over the greater of (a) an amount equal to 12% of Average Net Capital or b) an amount equal to $.375 multiplied by the average number of shares of the Corporation's Common Stock outstanding at the close of business on each day of the year assuming full conversion of the Corporation's Preferred Stock. The amount of Incentive Earnings shall be reported to the Committee by the Corporation's Treasurer as promptly after the close of the year as is practical; provided, however, that such Incentive Earning's and awards based thereon shall be adjusted downward, if necessary, to reflect the net income for the year certified by the Corporation's independent public accountants as adjusted as provided in II (5) above. In the event of stock split, stock dividend or other relevant change in the Corporation's capitalization, the Committee shall, subject to the approval of the Board of Directors, appropriately adjust such $.375 per share of the Corporation's Common Stock. (7) "Award Fund" shall mean the amount, not in excess of 12% of Incentive Earnings, which is recommended by the Committee and approved by the Board of Directors as the maximum amount to be used for awards under the Plan for the applicable year. Any unawarded portion of the Award Fund shall not be available for awards for subsequent years. III. Administration The Plan shall be administered by the Committee which may make such determinations, make such awards and take such other action in connection with the Plan as it deems necessary, taking into consideration the recommendations of management. Such determinations, awards and action shall be binding and conclusive for all purposes and upon all persons unless and except to the extent that the Board of Directors of the Company shall have previously directed that all or specified types of action by the Committee shall be subject to approval by the Board of Directors. IV. Eligibility The individuals eligible to receive awards under the Plan shall be such Employees as the Committee shall determine each year. V. Awards The Committee shall determine the awards to be made for any year subject to the following: (1) the award amounts payable with respect to any year to an Employee who for such year is the Chief Executive Officer of the Corporation or one of the Corporation's four other highest compensated officers (as determined in accordance with Section 162(m) of the Internal Revenue Code of 1986, as amended) shall not exceed 3% of the Award Fund, and, (2) the portion of the Award Fund remaining after the awards to the Employees in (1) above shall be available for awards to other Employees in such amounts as the Committee determines. In no event, however, shall the amount of an award payable to any Employee exceed the Employee's total compensation for the year, excluding only any award under the Plan. Awards may be in whole or in part (a) current and payable in cash ("Cash Award"), or (b) deferred and conditional and payable (i) in cash ("Contingent Cash Award") or (ii) in shares of the Corporation's Common Stock ("Contingent Stock Award"). The aggregate number of shares of the Corporation's Common Stock which may be issued under the Plan shall be 24,000,000 (plus the number of shares credited in respect of dividends as hereinafter provided) and all such shares shall be from Treasury Stock or from authorized and unissued shares as the Board of Directors shall from time to time determine. In the event of stock split, stock dividend or other relevant change in the Corporation's capitalization, the Committee shall, subject to the approval of the Board of Directors, appropriately adjust such maximum number of shares. Insofar as the Committee has not predetermined the manner of payment of awards, whether in terms of individuals or classifications on the basis of age, salary, amount of award or other criteria, the Committee may permit eligible Employees to indicate a preference, which shall not be binding on the Committee, within limits established by the Committee, that all or any portion of an award be a Cash Award, a Contingent Cash Award or a Contingent Stock Award. VI. Payment of Awards (1) Cash Awards The amount of each Cash Award shall be paid in cash as soon as practicable after the close of the calendar year for which the award is made. (2) Contingent Cash Awards The Company shall credit the amount of each Contingent Cash Award to the Employee's Contingent Award Account and shall, subject to the conditions of paragraph VI(4), pay the same out in equal installments on the five succeeding anniversaries of the date of the award. (3) Contingent Stock Awards (a) The amount of each Contingent Stock Award shall be used to determine the largest full number of shares of the Corporation's Common Stock which such amount would purchase at the average closing market price of such Common Stock on the Consolidated Transaction Reporting System for the last five business days, on which at least one sale of such Common Stock took place on such System, of the calendar year for which the award is made. The Company shall credit the Employee's Contingent Award Account as of the date of the award with the number of shares so determined. At no time after such credit and prior to the delivery of the shares so credited shall any of such shares be earmarked for his or her account, nor shall he or she have any of the rights of a stockholder with respect to such shares. Any excess of the Contingent Stock Award remaining after such computation of shares of stock shall be carried forward and treated as an addition to any future award to the Employee; provided, however, that any such excess remaining after termination of the Employee's employment shall be paid to him or her in cash at the time of the first delivery from his or her Contingent Award Account. As of December 31 of each year, the Corporation shall determine the amount of the dividends which would have been paid during such calendar year with respect to the number of shares credited in each Contingent Award Account at the record date for each such dividend payment had the shares so credited then been issued and outstanding. The Employee's Contingent Award Account shall be credited with the largest full number of shares of the Corporation's Common Stock purchasable with the above determined amount at the average closing market price of such Common Stock on the Consolidated Transaction Reporting System, for the last five business days, on which at least one sale of such Common Stock took place on such System, of the calendar year (such share credits in respect of dividends shall not be deemed awards under the Plan). The cash equivalent of any excess thereafter remaining shall be carried forward and treated as an addition to the next succeeding year's dividends on the shares credited to the Employee's Contingent Award Account; provided, however, that the cash equivalent of any such excess remaining after final delivery from the Employee's Contingent Award Account shall be paid to him or her in cash. In the event of stock split, stock dividend or other relevant change in the Corporation's capitalization, the Committee shall, subject to the approval of the Board of Directors, appropriately adjust the shares of stock theretofore credited to the Contingent Award Accounts. (b) The Company shall, subject to the conditions of paragraph VI(4), deliver to the Employee the shares of stock credited to his or her Contingent Award Account in approximately equal installments as soon as practicable after the first day of January of each of the five years following any termination of his or her employment, unless the Committee shall otherwise determine. (c) Notwithstanding any other provisions hereof, the Committee may in its absolute discretion provide, with respect to any Contingent Stock Award made to any participant or participants under the Plan, that in the event of any delivery of shares of Common Stock by the Company pursuant to such Contingent Stock Award, the number of such shares which the recipient thereof shall be entitled to receive and which shall be delivered by the Company shall be (i) the number of such shares which would have been delivered in the absence of this paragraph VI(3)(c), minus (ii) the number of whole shares of Common Stock necessary to satisfy the minimum federal, state and/or local income tax withholding obligations which are imposed on the Company by applicable law in respect of the delivery of such award (and which may be satisfied by the reduction effected hereby in the number of deliverable shares), it being understood that the value of the shares referred to in clause (ii) above shall be determined, for the purposes of satisfying such withholding obligations, on the basis of the average of the high and low per share prices for the Common Stock as reported on the Consolidated Transaction Reporting System on the date of authorization of delivery by the Committee, or on such other reasonable basis for determining fair market value as the Committee may from time to time adopt. Notwithstanding any term or provision of this paragraph VI(3)(c), in determining the total number of shares authorized for issuance under the Plan pursuant to paragraph V hereof and in calculating the limit set forth in paragraph V hereof on the number of shares which may be awarded to any individual Employee under the Plan, the reduction in the number of shares effected by this paragraph VI(3)(c) shall not be taken into account. (4) Conditions of Payment of Contingent Awards (a) In the event that the Employee is discharged for, or after any other termination of employment is found while employed by the Company to have engaged in, deliberate gross misconduct, as determined by the Company, no further payment or delivery shall thereafter be made in respect of his or her Contingent Cash or Stock Awards and all his or her rights with respect to his or her Contingent Cash or Stock Awards and all his or her rights with respect to his or her Contingent Award Account shall thereupon be forfeited. (b) In the event of termination of the Employee's employment prior to his or her retirement for reasons other than death or discharge for deliberate gross misconduct, as determined by the Company, any unpaid installments of his or her Contingent Cash Awards and any undelivered shares of stock from his or her Contingent Award Account shall, subject to the conditions set forth in paragraph (d) below, be paid or delivered to him or her at the dates and in the installments originally determined. (c) In the event of the Employee's death, any unpaid installments of his or her Contingent Cash Awards shall be paid and any undelivered shares of stock from his or her Contingent Award Account shall be paid or delivered at the dates and in the installments originally determined, unless the Committee shall otherwise determine, to or as directed by his or her legal representative, or legatee or such other person designated by an appropriate court as the person entitled to receive the same, provided that the Employee was employed by the Company at the time of his or her death or up to the date of his or her death had complied with the conditions set forth in paragraph (d) below. (d) No payment of a Contingent Cash Award or delivery from a Contingent Award Account shall be made to any Employee after termination of employment unless he or she shall have to the date fixed for such payment or delivery (i) refrained from becoming or serving as an officer, director or employee of any individual, partnership or corporation, or the owner of a business, or a member of a partnership which conducts a business in competition with the Company or renders a service (including, without limitations, advertising agencies and business consultants) to competitors with any portion of the business of the Company, (ii) made himself or herself available, if so requested by the Company, at reasonable times and upon a reasonable basis to consult with, supply information to, and otherwise cooperate with, the Company and (iii) refrained from engaging in deliberate action which, as determined by the Committee, causes substantial harm to the interests of the Company. If these conditions are not fulfilled, no further payment or delivery shall thereafter be made with respect to the Employee's Contingent Cash or Stock Awards and all his or her rights with respect to his or her Contingent Award Account shall thereupon be forfeited. VII. Limitations No Employee, whether or not deemed eligible or offered an opportunity to indicate a preference under the Plan, or other person shall have any claim or right (legal, equitable or other) to be granted an award under the Plan, and no Director, Officer, Employee of the Company or any other person shall have the authority to enter into any agreement with any person for the making or payment of an award or to make any representation or warranty with respect thereto. No Employee to whom a Contingent Award has been made shall have any rights to his or her Contingent Award Account other than to receive the Contingent Award at the time and in the form determined by the Committee, subject to the fulfillment of the conditions prescribed herein, which right may not be assigned, transferred or pledged during his or her lifetime. Neither the action of the Corporation in establishing the Plan nor any action taken by it or by the Committee under the provisions hereof, nor any provision of the Plan, shall be construed as giving to any Employee the right to be retained in the employ of the Company. VIII. Amendment, Suspension or Termination of the Plan in Whole or in Part The Board of Directors may discontinue the Plan at any time and may from time to time amend the terms of the Plan; provided, however, that no such discontinuance or amendment shall adversely affect any right or obligation with respect to any award theretofore made, and no such amendment shall, without the approval of stockholders, operate so as to increase the annual amount of the Award Fund or increase the aggregate number of shares of the Corporation's Common Stock that may be issued under the Plan. IX. Construction The Plan shall be governed by and construed in accordance with the laws of the State of New York. EX-10.27 6 American Home Products Corporation 1996 STOCK INCENTIVE PLAN (As approved by stockholders on April 23, 1996 and as amended by the Board of Directors through March 5, 1998) Section 1. Purpose. The purpose of the 1996 Stock Incentive Plan (the "Plan") is to provide favorable opportunities for officers and other key employees of American Home Products Corporation (the "Company") and its subsidiaries to acquire shares of Common Stock of the Company or to benefit from the appreciation thereof. Such opportunities should provide an increased incentive for these employees to contribute to the future success and prosperity of the Company, thus enhancing the value of the stock for the benefit of the stockholders, and increase the ability of the Company to attract and retain individuals of exceptional skill upon whom, in large measure, its sustained progress, growth and profitability depend. Pursuant to the Plan, options to purchase the Company's Common Stock ("Options") and Stock Appreciation Rights may be granted and Restricted Stock may be awarded by the Company. Options granted under the Plan may be either incentive stock options, as defined in Section 422(b) of the Internal Revenue Code of 1986, as amended (the "Code"), or options which do not meet the requirements of said Section 422(b) of the Code, herein referred to as non- qualified stock options. It is intended, except as otherwise provided herein, that incentive stock options may be granted under the Plan and that such incentive stock options shall conform to the requirements of Section 422 and 424 of the Code and to the provisions of this Plan and shall otherwise be as determined by the Committee and, to the extent provided in the last sentence of Section 2 hereof, approved by the Board of Directors. The terms "subsidiaries" and "subsidiary corporation" shall have the meanings given to them by Section 424 of the Code. All section references to the Code in this Plan are intended to include any amendments or substitutions therefor subsequent to the adoption of the Plan. Section 2. Administration. The Plan shall be administered by a Compensation and Benefits Committee (the "Committee") consisting of two or more members of the Board of Directors of the Company, each of whom shall be (i) a "disinterested person" within the meaning of Rule 16b-3 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and (ii) an "outside director" within the meaning of Section 162(m) of the Code. The Committee shall have full authority to grant Options and Stock Appreciation Rights, and make Restricted Stock awards, to interpret the Plan and to make such rules and regulations and establish such procedures as it deems appropriate for the administration of the Plan, taking into consideration the recommendations of management. Notwithstanding the foregoing and anything else in the Plan to the contrary, the Committee may from time to time delegate the Finance Committee of the Company (the "Finance Committee") the authority to grant, and the Finance Committee shall thereafter have the authority to grant on behalf of the Committee, in accordance with rules and procedures adopted from time to time by the Committee, Options under the Plan with respect to not more than 1,200,000 shares of the Company's Common Stock in any calendar year to new key employees of the Company and its subsidiaries upon their employment or promotion, provided that such employees are not then subject to Section 16 of the Securities Exchange Act of 1934, as amended, and the effective date of the grant of each such Option shall be deemed for all purposes to be the date the Finance Committee approves such grant. The decisions of the Committee shall be binding and conclusive for all purposes and upon all persons unless and except to the extent that the Board of Directors of the Company shall have previously directed that all or specified types of decisions of the Committee shall be subject to approval by the Board of Directors. Section 3. Number of Shares. The total number of shares which may be sold or awarded under the Plan and with respect to which Stock Appreciation Rights may be exercised shall not exceed 15,000,000 shares of the Company's Common Stock. Such number shall be, without further action, adjusted to 30,000,000 in accordance with Section 8 hereof upon the consummation of a two-for-one stock split (in the form of a dividend) anticipated to occur in 1996. The total number of shares which may be sold or awarded under the Plan to any optionee (hereinafter defined), including shares for which Stock Appreciation Rights may be exercised, shall not exceed 10% of such number, as and if adjusted, over the life of the Plan. The shares may be authorized and unissued or issued and reacquired shares, as the Board of Directors from time to time may determine. Shares with respect to which Options or Stock Appreciation Rights are not exercised prior to termination of the Option and shares that are part of a Restricted Stock award which are forfeited before the restrictions lapse shall be available for Options and Stock Appreciation Rights thereafter granted and for Restricted Stock thereafter awarded under the Plan, to the fullest extent permitted by Rule 16b-3 under the Exchange Act (if applicable at the time). Section 4. Participation. The Committee may, from time to time, select and grant Options and Stock Appreciation Rights to officers (whether or not directors) and other key employees of the Company and its subsidiaries ("optionees") and award Restricted Stock to officers (whether or not directors) and other key employees of the Company and its subsidiaries and shall determine the number of shares subject to each Option or award. Section 5. Terms and Conditions of Options. The terms and conditions of each Option and each Stock Appreciation Right shall be set forth in an agreement or agreements between the Company and the optionee. Such terms and conditions shall include the following as well as such other provisions, not inconsistent with the Plan, as may be deemed advisable by the Committee: (a) Number of Shares. The number of shares subject to the Option. (b) Option Price. The option price per share (the "Option Price"), which shall not be less than 100% of the fair market value of the Company's Common Stock on the date the Option is granted. Fair market value shall be deemed to be the mean between the highest and lowest sale prices of the Common Stock on the Consolidated Transaction Reporting System on the date the Option is granted. (c) Date of Grant. Subject to previous directions of the Board of Directors pursuant to the last sentence of Section 2, the date of grant of an Option shall be the date when the Committee meets and awards such Option. (d) Payment. The Option Price multiplied by the number of shares to be purchased by exercise of the Option shall be paid upon the exercise thereof. Unless the terms of an Option provide to the contrary, upon exercise, the aggregate Option Price shall be payable by delivering to the Company (i) cash equal to such aggregate Option Price, (ii) shares of the Company's Common Stock owned by the grantee having a fair market value (determined in accordance with Section 5(b)) at least equal to such aggregate Option Price, (iii) a combination of any of the above methods which total to such aggregate Option Price, or (iv) any other form of consideration which has been approved by the Committee, including under any approved cashless exercise mechanism; and payment of such aggregate Option Price by any such means shall be made and received by the Company prior to the delivery of the shares as to which the Option was exercised. The right to deliver in full or partial payment of such Option Price any consideration other than cash shall be limited to such frequency as the Committee shall determine in its absolute discretion. A holder of an Option shall have none of the rights of a stockholder until the shares are issued to him or her; provided that if an optionee exercises an Option and the appropriate purchase price is received by the Company in accordance with this Section 5(d) prior to any dividend record date, such optionee shall be entitled to receive the dividends which would be paid on the shares subject to such exercise if such shares were outstanding on such record date. (e) Term of Options. Each Option granted pursuant to the Plan shall be for the term specified in the applicable option agreement (the "Option Agreement") subject to earlier termination in all cases as provided in paragraph (g) of this Section. (f) Exercise of Option. Options granted under the Plan may be exercised during the period and in accordance with the conditions set forth in the Plan and the applicable Option Agreement; provided, however, that (i) no option granted under the Plan may be exercisable earlier than the later of (A) one year from the date of grant or (B) the date on which the optionee completes two years of continuous employment with the Company or one or more of its subsidiaries and (ii) in the event of an optionee's death, Retirement (as defined below) or Disability (as defined below), any options held by such optionee shall become exercisable on his or her Retirement date, the date his or her employment terminates on account of Disability or the date of his or her death provided he or she has been in the continuous employment of the Company or one or more of its subsidiaries for at least two years at such time. No Option may be exercised after it is terminated as provided in paragraph (g) of this Section, and no Option may be exercised unless the optionee, except as provided in paragraph (g) of this Section, is then employed by the Company or any of its subsidiaries and shall have been continuously employed by the Company or one or more of such subsidiaries since the date of the grant of his or her Option. Non-qualified stock options and incentive stock options may be exercised regardless of whether or not other Options granted to the optionee pursuant to the Plan are outstanding or whether or not other stock options granted to the optionee pursuant to any other plan are outstanding. (g) Termination of Options. An Option, to the extent not validly exercised, shall terminate upon the occurrence of the first of the following events: (i) On the date specified in the Option Agreement; (ii) Three years after the date of termination of the optionee's employment by the Company or its subsidiaries due to "Retirement" (defined as termination of full time employment on or after the earliest retirement age under any qualified retirement plan of the Company or its subsidiaries which covers the optionee, or age 55 with 5 continuous years of such employment if there is no such plan) or "Disability" (defined as disability for purposes of at least one qualified retirement plan or long term disability plan maintained by the Company or its subsidiaries in which the optionee participates), during which three year period the optionee may exercise the Option to the extent he or she was entitled to exercise it at the time of such termination or such shorter period as may be provided in the Option Agreement; (iii) Three years after the date of the optionee's death during which three year period the Option may be exercised by the optionee's legal representative or legatee or such other person designated by an appropriate court as the person entitled to exercise such Option to the extent the optionee was entitled to exercise it at the time of his or her death; (iv) Three months after termination by the Company or one of its subsidiaries of the optionee's employment for any reason other than death, Retirement, Disability or deliberate gross misconduct, determined in the sole discretion of the Committee, during which three month period the Option may be exercised by the optionee to the extent the optionee was entitled to exercise it at the time of such termination; (v) Concurrently with the time of termination by the Company or one of its subsidiaries of the optionee's employment for deliberate gross misconduct, determined in the sole discretion of the Committee (for purposes only of this subparagraph (v) an Option shall be deemed to be exercised when the optionee has received the stock certificate representing the shares for which the Option was exercised); or (vi) Concurrently with the time of termination by the employee of his or her employment with the Company or one of its subsidiaries for reasons other than Retirement, Disability or death. Notwithstanding the above, no Option shall be exercisable after termination of employment unless the optionee shall have, during the entire time period in which his or her Options are exercisable, (a) refrained from becoming or serving as an officer, director, partner or employee of any individual proprietorship, partnership or corporation, or the owner of a business, or a member of a partnership which conducts a business in competition with the Company or renders a service (including without limitation, advertising agencies and business consultants) to competitors with any portion of the business of the Company, (b) made himself or herself available, if so requested by the Company, at reasonable times and upon a reasonable basis to consult with, supply information to, and otherwise cooperate with, the Company and (c) refrained from engaging in deliberate action which, as determined by the Committee, causes substantial harm to the interests of the Company. If these conditions are not fulfilled, the optionee shall forfeit all rights to any unexercised Option as of the date of the breach of the condition. Notwithstanding the provisions of subparagraphs (ii) and (iii) of this Section 5(g), an Option granted under the Plan to an optionee who dies or terminates employment due to Retirement or Disability before this Plan is approved by the stockholders of the Company, to the extent not validly exercised, shall terminate three years after the date the Plan is approved by the stockholders of the Company. (h)Non-transferability of Options and Stock Appreciation Rights. Options and Stock Appreciation Rights shall not be transferable by the optionee other than by will or the laws of descent and distribution, and Options and Stock Appreciation Rights shall during his or her lifetime be exercisable only by the optionee; provided, however, that the Committee may, in its sole discretion, allow for transfer of Options (other than incentive stock options, unless such transferability would not adversely affect incentive stock option tax treatment) to other persons or entities, subject to such conditions or limitations as it may establish to ensure that transactions with respect to Options intended to be exempt from Section 16(b) of the Exchange Act pursuant to Rule 16b-3 under the Exchange Act do not fail to maintain such exemption as a result of the Committee causing Options to be transferrable, or for other purposes; provided further, however, that for any Option that is transferred, other than by the laws of descent and distribution, any related Stock Appreciation Right shall be extinguished. (i)Applicable Laws or Regulations. The Company's obligation to sell and deliver stock under the Option is subject to such compliance as the Company deems necessary or advisable with federal and state laws, rules and regulations. (j)Limitations on Incentive Stock Options. To the extent that the aggregate fair market value of the Company's Common Stock, determined at the time of grant in accordance with the provisions of Section 5(b), with respect to which incentive stock options granted under this or any other Plan of the Company are exercisable for the first time by an optionee during any calendar year exceeds $100,000, or such other amount as may be permitted under the Code, such excess shall be considered non-qualified stock options. Notwithstanding anything in the Plan to the contrary, any incentive stock option granted to any individual who, at the time of grant, is the owner, directly or indirectly, of stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or any subsidiary thereof, shall (i) have a term not exceeding five years from the date of grant and (ii) shall have an option price per share of not less than 110% of the fair market value of the Company's Common Stock on the date the incentive stock option is granted (determined in accordance with the last sentence of Section 5(b)). Section 6. Stock Appreciation Rights. (a)The Committee may, in its sole discretion, from time to time grant Stock Appreciation Rights to certain optionees in connection with any Option granted under this Plan and in connection with Options granted under the 1990 and 1993 Stock Incentive Plans and under the 1985 Stock Option Plan. Stock Appreciation Rights may be granted either at the time of the grant of an Option under the Plan or at any time thereafter during the term of the Option, provided such Stock Appreciation Rights may also be granted with respect to outstanding Options under the 1990 and 1993 Stock Incentive Plans and the 1985 Stock Option Plan. Stock Appreciation Rights may be granted with respect to all or part of the stock under a particular Option. (b)Stock Appreciation Rights shall entitle the holder of the related Option, upon exercise, in whole or in part, of the Stock Appreciation Rights, to receive payment in the amount and form determined pursuant to subparagraph (iii) of paragraph (c) of this Section 6. Stock Appreciation Rights may be exercised only to the extent that the related Option has not been exercised. The exercise of Stock Appreciation Rights shall result in a pro rata surrender of the related Option to the extent that the Stock Appreciation Rights have been exercised. (c)Stock Appreciation Rights shall be subject to such terms and conditions which are not inconsistent with the Plan as shall from time to time be approved by the Committee and reflected in the applicable Option Agreement (or in a separate document, which shall be considered for purposes of the Plan to be incorporated into and part of the applicable Option Agreement), and to the following terms and conditions. (i) Stock Appreciation Rights shall be exercisable at such time or times and to the extent, but only to the extent, that the Option to which they relate shall be exercisable. (ii) [Reserved] (iii) Upon exercise of Stock Appreciation Rights, the holder thereof shall be entitled to elect to receive therefor payment in the form of shares of the Company's Common Stock (rounded down to the next whole number so no fractional shares are issued), cash or any combination thereof in an amount equal in value to the difference between the Option Price per share and the fair market value per share of Common Stock on the date of exercise multiplied by the number of shares in respect of which the Stock Appreciation Rights shall have been exercised, subject to any limitation on such amount which the Committee may in its discretion impose. The fair market value of Common Stock shall be deemed to be the mean between the highest and lowest sale prices of the Common Stock on the Consolidated Transaction Reporting System on the date the Stock Appreciation Right is exercised or if no transaction on the Consolidated Transaction Reporting System occurred on such date, then on the last preceding day on which a transaction did take place. (iv) Any exercise of Stock Appreciation Rights by an officer or director subject to Section 16(b) of the Exchange Act, as well as any election by such officer or director as to the form of payment of Stock Appreciation Rights (Common Stock, cash or any combination thereof), shall be made during the ten-day period beginning on the third business day following the release for publication of any quarterly or annual statement of sales and earnings by the Company and ending on the twelfth business day following the date of such release ("window period"). In the event that such a director or officer exercises a Stock Appreciation Right for cash or stock pursuant to this Section 6 during a "window period", the day on which such right is effectively exercised shall be that day, if any, during such "window period" which is designated by the Committee in its discretion for all such exercises by such individuals during such period. If no such day is designated, the day of effective exercise shall be determined in accordance with normal administrative practices of the Plan. (d)To the extent that Stock Appreciation Rights shall be exercised, the Option in connection with which such Stock Appreciation Rights shall have been granted shall be deemed to have been exercised for the purpose of the maximum limitations set forth in the Plan under which such Options shall have been granted. Any shares of Common Stock which are not purchased due to the surrender in whole or in part of an Option pursuant to this Section 6 shall not be available for granting further Options under the Plan. Section 6A. Deferral. (a)Notwithstanding anything herein to the contrary, an optionee may elect, at the discretion of, and in accordance with rules which may be established by, the Committee, to defer delivery of the proceeds of exercise of an unexercised Option or the corresponding Stock Appreciation Right, provided such election is irrevocable and is made (i) at least six months prior to the date that such Option or the corresponding Stock Appreciation Right otherwise would expire and (ii) at least one month prior to the date such Option or the corresponding Stock Appreciation Right is exercised (or such shorter period as may be determined by the Committee). Upon such exercise, the amount deferred shall be equal in value to the difference between the Option Price per share and the fair market value per share of the Common Stock on the date of exercise (determined in accordance with Section 5(b)), multiplied by the number of shares covered by such exercise and in respect of which the optionee shall have made the deferral election, and shall be credited to an account in the name of the optionee on the books and records of the Company (a "Deferred Compensation Account") at the date of exercise. A separate Deferred Compensation Account shall be maintained with respect to each Option or corresponding Stock Appreciation Right subject to an effective deferral election. (b)Interest shall be credited on amounts in the Deferred Compensation Account from the date of exercise of the Option or the corresponding Stock Appreciation Right to the date of payment, at the rate of interest determined by the Committee and communicated to the optionees. The value of an optionee's Deferred Compensation Account shall be payable in a lump sum cash payment or in annual installments over a period not to exceed 10 years or as otherwise determined by the Committee. At the time an optionee makes such deferral election, the optionee shall elect the form of payment and date for lump sum payment or commencement of annual payments of the Deferred Compensation Account, with such date at least one year subsequent to the date of exercise of the Option or corresponding Stock Appreciation Right, but not later than the date of the optionee's termination of employment with Company. Notwithstanding any election by an optionee, in the event of Disability or death of the optionee, the optionee's Deferred Compensation Account shall be paid within 90 days in the form of a single lump sum. (c)Notwithstanding the deferred payment date elected by the optionee, the Committee may, in its discretion, allow for early payment of an optionee's Deferred Compensation Account in the event of an "unforeseeable emergency." For this purpose, an unforeseeable emergency shall be defined as an unanticipated emergency that is caused by an event beyond the control of the optionee and that would result in severe financial hardship to the optionee if early withdrawal were not permitted. Any withdrawal on account of an unforeseeable emergency must be limited to the amount necessary to meet the emergency. The above provisions regarding a withdrawal upon an unforeseeable emergency shall be interpreted in accordance with published revenue procedures, regulations, releases or interpretations. In addition, Deferred Compensation Accounts may be distributed on an accelerated basis in the discretion of the Committee. (d)Optionees have the status of general unsecured creditors of the Company with respect to their Deferred Compensation Accounts, and such accounts constitute a mere promise by the Company to make payments with respect thereto. (e)An optionee's right to benefit payments under the Plan with respect to the Deferred Compensation Accounts may not be anticipated, alienated, sold, transferred, assigned, pledged, encumbered, attached or garnished by creditors of the optionee or the optionee's beneficiary and any attempt to do so shall be void. Section 7. Restricted Stock Performance Awards. The Committee may, in its sole discretion, from time to time, make awards of shares of the Company's Common Stock or awards of units representing shares of the Company's Common Stock, up to 2,000,000 shares in the aggregate (such number to be adjusted without further action to 4,000,000 in accordance with Section 8 hereof upon the consummation of the stock split referred to in Section 3), to such officers and other key employees of the Company and its subsidiaries in such quantity, and on such terms, conditions and restrictions (whether based on performance standards, periods of service or otherwise) as the Committee shall establish ("Restricted Stock"). The terms, conditions and restrictions of any Restricted Stock award made under this Plan shall be set forth in an agreement or agreements between the Company and the recipient of the award. (a)Issuance of Restricted Stock. The Committee shall determine the manner in which Restricted Stock shall be held during the period it is subject to restrictions. (b)Stockholder Rights. Beginning on the date of grant of the Restricted Stock award and subject to the execution of the award agreement by the recipient of the award and subject to the terms, conditions and restrictions of the award agreement, the Committee shall determine to what extent the recipient of the award has the rights of a stockholder of the Company including, but not limited to, whether or not the employee receiving the award has the right to vote the shares or to receive dividends or dividend equivalents. (c)Restriction on Transferability. None of the shares or units of a Restricted Stock award may be assigned or transferred, pledged or sold prior to their delivery to a recipient or, in the case of a recipient's death, to the recipient's legal representative or legatee or such other person designated by an appropriate court; provided, however, that the Committee may, in its sole discretion, allow for transfer of shares or units of a Restricted Stock Award to other persons or entities. (d)Delivery of Shares. Upon the satisfaction of the terms, conditions and restrictions contained in the Restricted Stock award agreement or the release from the terms, conditions and restrictions of a Restricted Stock award agreement, as determined by the Committee, the Company shall deliver, as soon as practicable, to the recipient of the award (or permitted transferee), or in the case of his or her death to his or her legal representative or legatee or such other person designated by an appropriate court, a stock certificate for the appropriate number of shares of the Company's Common Stock, free of all such restrictions, except for any restrictions that may be imposed by law. (e)Forfeiture of Restricted Stock. Subject to Section 7(f), all of the restricted shares or units with respect to a Restricted Stock award shall be forfeited and all rights of the recipient with respect to such restricted shares or units shall terminate unless the recipient continues to be employed by the Company or its subsidiaries until the expiration of the forfeiture period and the satisfaction of any other conditions set forth in the award agreement. (f)Waiver of Forfeiture Period. Notwithstanding any other provisions of the Plan, the Committee may, in its sole discretion, waive the forfeiture period and any other conditions set forth in any award agreement under certain circumstances (including the death, Disability or Retirement of the recipient of the award or a material change in circumstances arising after the date of an award) and subject to such terms and conditions (including forfeiture of a proportionate number of the restricted shares) as the Committee shall deem appropriate. Section 8. Adjustment in Event of Change in Stock. Subject to Section 9, in the event of stock split, stock dividend, cash dividend (other than a regular cash dividend), combination of shares, merger, or other relevant change in the Company's capitalization, the Committee shall, subject to the approval of the Board of Directors, appropriately adjust the number and kind of shares available for issuance under the Plan, the number, kind and Option Price of shares subject to outstanding Options and Stock Appreciation Rights and the number and kind of shares subject to outstanding Restricted Stock awards; provided, however, that to the extent permitted in the case of incentive stock options by Sections 422 and 424 of the Code, in the event that the outstanding shares of Common Stock of the Company are increased or decreased or changed into or exchanged for a different number or kind of shares or other securities of the Company or of another corporation, through reorganization, merger, consolidation, liquidation, recapitalization, reclassification, stock split-up, combination of shares or dividend, appropriate adjustment in the number and kind of shares as to which Options may be granted and as to which Options or portions thereof then unexercised shall be exercisable, and in the Option Price thereof, shall be made to the end that the proportionate number of shares or other securities as to which Options may be granted and the optionee's proportionate interests under outstanding Options shall be maintained as before the occurrence of such event; provided, that any such adjustment in shares subject to outstanding Options (including any adjustments in the Option Price) shall be made in such manner as not to constitute a modification as defined by subsection (h)(3) of Section 424 of the Code; and provided, further, that, in the event of an adjustment in the number or kind of shares under a Restricted Stock award pursuant to this Section 8, any new shares or units issued to a recipient of a Restricted Stock award shall be subject to the same terms, conditions and restrictions as the underlying Restricted Stock award for which the adjustment was made. Section 9. Effect of a Change of Control. (a) For purposes of this Section 9, "Change in Control" shall, unless the Board of Directors of the Company otherwise directs by resolution adopted prior thereto or, in the case of a particular award, the applicable award agreement states otherwise, be deemed to occur 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 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 consecutive years, individuals who constitute the Board of Directors of the Company at the beginning of such period cease for any reason to constitute at least a majority thereof, unless the election or the nomination for election by the Company's stockholders of each new director was approved by a vote of at least three-quarters 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 said combination, own 50% or more of the resulting entity's outstanding voting securities shall, by itself, be considered a Change in 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. (b) Except to the extent reflected in a particular award agreement, in the event of a Change of Control: (i) notwithstanding any vesting schedule, or any other limitation on exercise or vesting, with respect to an award of Options, Stock Appreciation Rights or Restricted Stock, such Options or Stock Appreciation Rights shall become immediately exercisable with respect to 100 percent of the shares subject thereto, and the restrictions shall expire immediately with respect to 100 percent of such Restricted Stock award; and (ii) the Committee may, in its discretion and upon at least 10 days advance notice to the affected persons, cancel any outstanding Options, Stock Appreciation Rights or Restricted Stock awards and pay to the holders thereof, in cash, the value of such awards based upon the highest price per share of Company Common Stock received or to be received by other stockholders of the Company in connection with the Change of Control. Section 10. Amendment and Discontinuance. The Board of Directors of the Company may from time to time amend or revise the terms of the Plan, or may discontinue the Plan at any time as permitted by law, provided, however, that such amendment shall not (except as provided in Section 8), without further approval of the stockholders, (i) increase the aggregate number of shares with respect to which awards may be made under the Plan; (ii) change the manner of determining the Option Price (other than determining the fair market value of the Common Stock to conform with applicable provisions of the Code or regulations and interpretations thereunder); (iii) extend the term of the Plan or the maximum period during which any Option may be exercised or (iv) make any other change which, in the absence of stockholder approval, would cause awards granted under the Plan which are then outstanding, or which may be granted in the future, to fail to meet the exemptions provided by Rule 16b-3 under the Exchange Act and Section 162(m) of the Code. No amendments, revision or discontinuance of the Plan shall, without the consent of an optionee or a recipient of a Restricted Stock award, in any manner adversely affect his or her rights under any Option theretofore granted under the Plan. Section 11. Effective Date and Duration. The Plan was adopted by the Board of Directors of the Company on January 25, 1996, subject to approval by the stockholders of the Company at a meeting to be held in April 1996. Neither the Plan nor any Option or Stock Appreciation Right or Restricted Stock award shall become binding until the Plan is approved by a vote of the stockholders in a manner which complies with Rule 16b-3 promulgated pursuant to the Exchange Act and Sections 162(m) and 422(b)(1) of the Code. No Option may be granted and no stock may be awarded under the Plan before January 25, 1996 nor after January 24, 2006. Section 12. Tax Withholding. Notwithstanding any other provision of the Plan, the Company or its subsidiaries, as appropriate, shall have the right to deduct from all awards under the Plan cash and/or stock, valued at fair market value on the date of payment in accordance with Section 5(b), in an amount necessary to satisfy all federal, state or local taxes as required by law to be withheld with respect to such awards. In the case of awards paid in the Company's Common Stock, the optionee or permitted transferee may be required to pay to the Company or a subsidiary thereof, as appropriate, the amount of any such taxes which the Company or subsidiary is required to withhold, if any, with respect to such stock. Subject in particular cases to the disapproval of the Committee, the Company may accept shares of the Company's Common Stock of equivalent fair market value in payment of such withholding tax obligations if the optionee elects to make payment in such manner. Section 13. Construction and Conditions. The Plan and Options, Restricted Stock awards, and Stock Appreciation Rights granted thereunder shall be governed by and construed in accordance with the laws of the State of Delaware and in accordance with such federal law as may be applicable. Neither the existence of the Plan nor the grant of any Options or Stock Appreciation Rights or awards of Restricted Stock pursuant to the Plan shall create in any optionee the right to continue to be employed by the Company or its subsidiaries. Employment shall be "at will" and shall be terminable "at will" by the Company or employee with or without cause. Any oral statements or promises to the contrary are not binding upon the Company or the employee. EX-10.32 7 AMERICAN HOME PRODUCTS CORPORATION STOCK OPTION AGREEMENT (Transferable Option) UNDER: 1996 STOCK INCENTIVE PLAN DATED: OPTION PRICE: INCENTIVE STOCK OPTION SHARES: [Name/Address] NON-QUALIFIED STOCK OPTION SHARES: 1. Under the terms and conditions of this Agreement and of the American Home Products Corporation (the "Company") 1996 Stock Incentive Plan (the "Plan"), a copy of which is attached hereto and incorporated herein by reference, the Company hereby grants to the Optionee an option or options (together, the "Option") to purchase the number of shares of the Company's common stock as specified above ("Option Shares") at the option price also above specified. Capitalized terms not otherwise defined herein have the meanings assigned to them in the Plan. 2. This Option may be exercised, in whole or in part from time to time in any whole number of Option Shares, upon and after the earlier of (i) with respect to one-third of the Option Shares (rounded down), the date that is one year from the date of grant of this Option, with respect to an additional one-third of the Option Shares (rounded down), the date that is two years from the date of grant of this Option and, with respect to the remaining one-third of the Option Shares, the date that is three years from the date of grant of this Option, or (ii) the date of the death, Disability or Retirement (each as defined in the Plan) of Optionee, subject to the provisions of Section 5 of the Plan which generally requires that at the time of exercise or the date of termination of Optionee's employment with the Company and its subsidiaries, the Optionee is or was employed by the Company or one or more of its subsidiaries and had been continuously employed by the Company or one or more of its subsidiaries for at least two years and since the date of grant. Once this Option becomes exercisable, it shall remain exercisable until its expiration as described in paragraph 3 below. To the extent Option Shares have been purchased pursuant to the exercise of this Option, such shares shall no longer be available for purchase hereunder. The date upon and after which this Option may be exercised will be accelerated upon a Change in Control (as defined in the Plan) of the Company and upon such occurrence may be cashed out at the discretion of the Compensation and Benefits Committee on the terms described in Section 9 of the Plan. 3. This Option shall expire upon the date that is ten years from the date of grant or earlier as provided in Section 5 of the Plan which provides, among other things, that Options shall expire upon the first to occur of the following: (i) the date that is three years from the date of Optionee's death, Disability or Retirement, (ii) the date that is three months from the date of the termination of Optionee's employment with the Company and its subsidiaries by the Company or any of its subsidiaries for any reason other than death, Disability, Retirement or deliberate gross misconduct (as determined by the Compensation and Benefits Committee), or (iii) immediately upon the date of (A) the termination of Optionee's employment with the Company and its subsidiaries by the Company or any of its subsidiaries because of Optionee's deliberate gross misconduct (as determined by the Compensation and Benefits Committee), (B) Optionee's voluntary termination of employment with the Company and its subsidiaries, or (C) Optionee's violation of (x) the noncompetition, or cooperation provisions of Section 5(g) of the Plan or (y) the undertaking not to deliberately cause substantial harm to the Company as set forth in Section 5(g) of the Plan. 4. To the extent any Incentive Stock Option granted hereby becomes exercisable for the first time in the aggregate amount of more than $100,000 (fair market value at time of grant) during any calendar year (including for this purpose any other Incentive Stock Options previously granted to the Optionee by the Company), such excess will be treated as a non-qualified stock option under U.S. federal tax provisions, if applicable. In addition, any such incentive stock option exercised by Optionee after three months after separation from service to the Company (or after one year after total and permanent disability) will be treated as a non- qualified stock option under applicable U.S. federal tax provisions. 5. This Option may be exercised by sending the Treasurer of the Company an option exercise notice indicating the number of Option Shares for which the Option is to be exercised at that time and the form in which the certificates are to be registered for Option Shares purchased in the name of the Optionee (or a Transferee (as defined in paragraph 7, below), or in Optionee's name and that of another person(s) as joint tenants with the right of survivorship). This notice shall be accompanied by payment of the Option Price for the Option Shares being purchased in the form of (i) personal or bank check in U.S. Dollars payable to American Home Products Corporation and drawn on or payable at a United States bank and/or (ii) shares of the Company's common stock issued in the Optionee's (or permitted Transferee's) name and duly assigned to the Company or (iii) by any other form of consideration which has been approved by the Compensation and Benefits Committee, as and to the extent provided and permitted by Section 5(d) of the Plan. Notwithstanding anything to the contrary herein, the Company or its subsidiaries, as appropriate, shall have the right to deduct from the number of Option Shares to be delivered upon exercise such number of Option Shares as may be necessary to satisfy all federal, state or local taxes or other deductions legally required to be withheld or in the alternative may require the Optionee to deliver to the Company or a subsidiary an amount of cash or number of shares of common stock of the Company to satisfy such withholding. 6. This Agreement and this Option as well as the Company's obligation to sell and deliver Option Shares covered by this Option is subject to all federal, state and other laws, rules and regulations of the United States and/or of the country wherein the Optionee resides or is employed. Compliance with any recording, protocolization or registration requirements and payment of any fees or taxes applicable to this Agreement or the transactions it contemplates are the exclusive responsibility of the Optionee. 7. This Option is not transferable or assignable other than by will or by the laws of descent and distribution and may be exercised during the Optionee's lifetime only by Optionee except that the Optionee may irrevocably transfer all or a portion of the non-qualified stock options represented hereby to (i) the spouse (current or former), children, stepchildren, grandchildren or step- grandchildren of the Optionee ("Immediate Family Members"), (ii) a trust or trusts for the exclusive benefit of such Immediate Family Members, or (iii) a general or limited partnership or other entity in which such Immediate Family Members are the only partners or beneficial owners, provided that (x) there may be no consideration for any such transfer, (y) the Optionee submits to the Company an Option Transfer Form duly completed and executed by the Optionee and Transferee in the form attached as Exhibit A hereto, and (z) subsequent transfers shall be prohibited except by will or the laws of descent and distribution. Following transfer, any such Option shall continue to be subject to the same terms and conditions as were applicable immediately prior to transfer, provided that for purposes of the Plan the term "Optionee" shall be deemed to include a permitted transferee hereunder (the "Transferee"), provided, however, that (i) the events of death, Disability, Retirement or other termination of employment (and any other provision regarding employment) described in paragraphs 2 and 3 of this Agreement and Sections 5(f) and 5(g) of the Plan shall continue to be applied with respect to the Optionee, and following any such events, the transferred Option shall be exercisable by the Transferee only to the extent, and for the periods specified in the Plan, (ii) the cashless exercise program referred to in Section 5(d) of the Plan shall not apply to Transferee unless specifically permitted by the Committee, and (iii) Section 6A of the Plan shall not apply to Transferee. If such Option is transferred to a Transferee, upon exercise of such Option, if any taxes are withheld from the proceeds remitted (in cash or stock) to Transferee or if the Transferee separately satisfies any withholding tax obligation, the amount of the withholding tax shall be deemed to be a loan from Transferee to Optionee. 8. After the Optionee's death the Option may be exercised only by the Optionee's legal representative or legatee or such other person designated by an appropriate court as the person entitled to make such exercise or, subject to paragraph 7 above, by other Transferees. The Option may be exercised after the Optionee's death by any permitted distributee or Transferee only to the extent that he or she was entitled to exercise it at the time of Optionee's death. 9. In the event that this Agreement also contains a grant of a Stock Appreciation Right (an "SAR") in connection with the Option, the terms of the SAR shall be governed by the provisions of Section 6 of the Plan, provided, however, that any permitted transfer of an Option, in accordance with paragraph 7 hereof, shall result in the automatic termination of any SARs in tandem with such Option. 10. Subject to the express provisions of the Plan, this Agreement and the Plan are to be interpreted and administered by the Compensation and Benefits Committee, whose determination will be final. 11. This Agreement shall be governed by the laws of the State of Delaware and in accordance with such federal law as may be applicable. AMERICAN HOME PRODUCT CORPORATION /s/ John R. Stafford Chairman of the Board Accepted and agreed to: - -------------------------------- Optionee's Signature - -------------------------------- Optionee's Social Security Number EXHIBIT A OPTION TRANSFER FORM Reference is made to the Stock Option Agreement dated _____________________ (the "Agreement") under which American Home Products Corporation (the "Company") granted to the undersigned transferor ("Optionee") non-qualified stock options covering ________ shares of the Company's Common Stock under the 1996 Stock Incentive Plan (the "Plan"). Capitalized terms used herein without definition are used as defined in the Agreement and the Plan. The Optionee hereby transfers non-qualified stock options covering ________ shares of the Company's Common Stock (the "Options") granted under the Plan pursuant to the Agreement to the following transferee (the "Transferee"): - ------------------------ -------------------------------- Name of person or entity Social security or tax ID number - ----------------------------- Type of entity (if applicable) - ------------------------ -------------------------------- Relationship to Optionee Address The Optionee and, by its execution of this form, the Transferee, hereby represent and warrant to the Company that the Transferee is a permitted transferee in accordance with paragraph 7 of the Agreement and under Section 5(h) of the Plan. It is understood and agreed by Optionee and Transferee that (i) the Committee shall be entitled, in its sole discretion, to determine whether such transfer is in accordance with such requirements, and (ii) the Company and the Committee shall be under no obligation to notify the Transferee of the termination date of any Option transferred hereunder. The Transferee hereby agrees, subject to paragraph 7 of the Agreement, to be bound by all of the terms, conditions and limitations set forth in the Agreement and the Plan binding upon the Optionee under the Agreement, and specifically understands that (i) the events of death, Disability, Retirement or other termination of employment (and any other provisions regarding employment) described in paragraphs 2 and 3 of the Agreement and Sections 5(f) and 5(g) of the Plan shall continue to be applied with respect to the Optionee, and following any such events, the transferred Options shall be exercisable by the Transferee only to the extent, and for the periods specified in the Plan, and (ii) the Options may not, without the consent of the Committee, be transferred by the Transferee except by will or pursuant to the laws of descent and distribution. The Transferee understands and acknowledges that any shares of Common Stock purchased by the Transferee pursuant to the Options may not be registered under the Securities Act of 1933, as amended, and that such shares may contain a restrictive legend in substantially the form as set forth below (in addition to any legend required under applicable state securities laws): THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO THE SECURITIES UNDER SUCH ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED OR UNLESS SOLD PURSUANT TO RULE 144 OF SUCH ACT. In order to enforce the foregoing, the Company may impose stop- transfer instructions with respect to such securities until such time as the Company is reasonably satisfied that such restrictions are no longer applicable to the sale of such securities. The Optionee further represents and warrants to the Company and the Transferee that (i) Optionee has delivered to the Transferee a copy of the Agreement, (ii) Optionee has consulted with qualified income and estate tax advisors in determining to transfer the Options to the Transferee or waives any such requirement to do so and (iii) Optionee has considered and understands each of the following: 1. The transfer to the Transferee is irrevocable. 2. Optionee will not control the exercise of the Options once they have been transferred. 3. Optionee is assuming all of the risks and possible consequences associated with the transfer of the Options, and acknowledges that the Company and its representatives are not responsible or liable for any tax, penalty, judgment or outcome resulting from the transfer of the Options. OPTIONEE: TRANSFEREE: - -------------------------------- -------------------------------- EX-10.42 8 AMERICAN HOME PRODUCTS CORPORATION AND SUBSIDIARIES SUPPLEMENTAL EMPLOYEE SAVINGS PLAN (as amended to July 1, 1997) I. PURPOSE The purpose of the Supplemental Employee Savings Plan ("the Plan") is to provide a savings plan of deferred compensation for selected managers or highly compensated employees in situations where part of such employees' compensation falls outside of the IRS qualified savings plan. The Plan shall be implemented by agreements entered into between the selected employees and their respective employers which shall be either American Home Products Corporation ("AHP") or a U.S. subsidiary thereof. The Plan shall be unfunded for tax purposes and for purposes of the Employee Retirement Income Security Act of 1974, as amended ("ERISA") and shall be administered and interpreted in such manner as not to be subject to the participation and vesting, the funding and the fiduciary responsibility provisions of Title I of ERISA. Participants in the Plan have the status of general unsecured creditors of their employers and the Plan constitutes a mere promise by the employer to make benefit payments in the future. The Plan shall be administered by the Savings Plan Committee (the "Committee") which also administers the AHPC Savings Plan. The Committee shall have sole discretion to determine which selected employees will be permitted to participate in the Plan. II. ADMINISTRATION The Committee shall administer the Plan and shall have full authority to determine all questions arising in connection with the Plan, including its interpretation. The Committee's decisions shall be conclusive and binding on all persons. The Committee may adopt rules and procedures to implement the Plan. III. PARTICIPATION The Committee shall have discretion to determine which employees of AHP and its subsidiaries may participate in the Plan. The Committee shall also have discretion to determine when participation begins and terminates. At the discretion of the Committee, a selected employee may begin or terminate participation at any time by appropriate notice to the Committee. A letter designating selection shall be issued to such employee by such employee's employer. Such letter shall indicate the applicable salary for which the employee may participate. When the agreement set forth at the end of the Plan is executed by both the employee and the appropriate officer of the employer, it shall become effective and the employee shall thereupon become a participant in the Plan. An employee who accepts an offer to participate in the Plan agrees to have from 1% to 6% of his or her applicable salary, as determined by the Committee, reduced from salary otherwise payable in accordance with the terms and conditions set forth in Article IV. IV. PLAN FORMULA (1). In General Employee Salary Deferral Contributions, (1% to 6% of applicable salary) and Matching Contributions (50% of the Salary Deferral Contributions as defined in the Savings Plan, hereinafter referred to as "Salary Deferral Contributions" and "Matching Contributions" respectively) may be made to the Plan and the Plan may receive contributions of such amounts. Salary Deferral Contributions shall be withheld from the respective employee's salary and accounted for separately. Matching Contributions shall be accounted for separately. (2). Investments Salary Deferral Contributions and Matching Contributions shall be adjusted for investment experience in the same manner, as directed by the employee, that would have resulted if these contributions were able to be invested as Salary Deferral Contributions in the investment funds described in Section 6 of the Savings Plan which are set forth in Appendix A, as attached hereto, and incorporated herein by reference. (3). Valuation, Distributions and Vesting Etc. The distribution of Salary Deferral Contributions and Matching Contributions shall be in a lump sum in cash and the amount of the distribution shall be determined in accordance with the investment performance under the applicable provisions of the Savings Plan as if such amounts had actually been invested in the same investment funds as set forth in Appendix A, as attached hereto, and incorporated herein by reference. Distributions shall be made in accordance with the provisions set forth in Section 7 of the Savings Plan, except that the Committee may waive one or more of the requirements set forth therein. No payments will be made under the Plan until the employee terminates employment by death or otherwise, or is permanently disabled. Vesting shall be determined in accordance with the same provisions set forth in the Savings Plan. Whatever beneficiary designations were made pursuant to the Saving Plan shall also apply to the Plan in the event of the Participant's death. Beneficiary designations shall be made pursuant to the Plan and in accordance with the agreement between the employer and the employee. Notwithstanding the provisions of this paragraph IV(3), distributions will only be made on six (6) months prior notice and in any event distributions will be made no sooner than the date on which the distribution from the Savings Plan is made. Employee's foreign salary shall be converted into U.S. dollars under guidelines adopted by the Committee. V. FOREIGN LAW This Plan shall be construed so that foreign law does not apply. If foreign law should apply to a particular participant, participation in the Plan shall terminate for such participant and such participant shall be appropriately reimbursed for any Salary Deferral Contributions and Matching Contributions made to the date of such termination. VI. AMENDMENT AND TERMINATION The Plan may be terminated or amended at any time by the Committee provided that benefits vested prior to such termination or amendment shall remain unaffected. VII. GOVERNING LAW AND CONSTRUCTION The Plan shall be governed in accordance with the laws of the State of New York except to the extent superseded by ERISA. The provisions of the Savings Plan are hereby incorporated by reference to the extent that they are referred to herein and to the extent that they do not conflict with the express provisions of the Plan set forth above. The Plan shall be deemed to have been adopted contemporaneously with the Savings Plan so that elections of savings percentages made under the Savings Plan may be made effective at such election date under the Plan. If any provision of the Plan is unenforceable due to operation of law or is contrary to foreign law, such provision shall be severable and not affect other portions of the Plan. APPENDIX A - As Amended to July 1, 1997 INVESTMENT FUNDS AVAILABLE UNDER THE SUPPLEMENTAL EMPLOYEE SAVINGS PLAN The following funds shall be available for investment under the Supplemental Employee Savings Plan: 1. the Interest Income Fund; 2. the Fidelity Balanced Fund; 3. the Spartan U.S. Equity Index Fund; 4. the Fidelity Magellan Fund; 5. the Fidelity International Growth & Income Fund; 6. the Fidelity Low-Price Stock Fund; 7. the Mas Value Portfolio; and 8. the AHPC Common Stock Fund EX-10.43 9 SEVERANCE AGREEMENT This Severance Agreement (this "Agreement") is made as of ______________, 1998 by and between AMERICAN HOME PRODUCTS CORPORATION, a Delaware corporation (the "Company"), and [SEE ANNEX A] ("Executive"). RECITALS WHEREAS the Board of Directors of the Company (the "Board") has approved a severance agreement to provide Executive with certain benefits upon the termination of his employment; NOW THEREFORE, the parties hereto agree as follows: 1. TERM OF AGREEMENT. This Agreement shall commence on the date hereof and shall continue in effect through December 31, 2000; provided, however, the term of this Agreement shall automatically be extended for one additional year beyond 2000 and successive one year periods thereafter, unless, not later than September 30, 1998 (for the additional year ending on December 31, 2001) or September 30 of each year thereafter (for each subsequent extension), the Company shall have given notice that it does not wish to extend this Agreement for an additional year, in which event this Agreement shall continue to be effective until the end of its then remaining term; provided, further, that, notwithstanding any such notice by the Company not to extend, if a Change in Control shall have occurred during the original or any extended term of this Agreement, this Agreement shall continue in effect for a period of thirty-six (36) months beyond such Change in Control. Notwithstanding the foregoing, this Agreement shall terminate if Executive ceases to be an employee of the Corporation and its subsidiaries for any reason prior to a Change in Control which, for these purposes, shall include cessation of such employment as a result of the sale or other disposition of the division, subsidiary or other business unit by which the Executive is employed. 2. CHANGE IN CONTROL. No benefits shall be payable hereunder unless there shall have been a Change in Control of the Company, as set forth below. For purposes of this Agreement, a Change in Control shall be deemed to have occurred if: (A) any person or persons acting in concert (excluding Company benefit plans) becomes the beneficial owner of securities of the Company having at least 20% of the voting power of the Company's then outstanding securities (unless the event causing the 20% threshold to be crossed is an acquisition of voting common securities directly from the Company); or (B) the consummation of any merger or other business combination of the Company, sale or lease of the Company's assets or combination of the foregoing transactions (the "Transactions") other than a Transaction immediately following which the shareholders of the Company who owned shares immediately prior to the Transaction (including any trustee or fiduciary of any Company employee benefit plan) own, by virtue of their prior ownership of the Company's shares, at least 65% of the voting power, directly or indirectly, of (a) the surviving corporation in any such merger or other business combination; (b) the purchaser or lessee of the Company's assets; or (c) both the surviving corporation and the purchaser or lessee in the event of any combination of Transactions; or (C) within any 24 month period, the persons who were directors immediately before the beginning of such period (the "Incumbent Directors") shall cease (for any reason other than death) to constitute at least a majority of the Board or the board of directors of a successor to the Company. For this purpose, any director who was not a director at the beginning of such period shall be deemed to be an Incumbent Director if such director was elected to the Board by, or on the recommendation of or with the approval of, at least two-thirds of the directors who then qualified as Incumbent Directors (so long as such director was not nominated by a person who has expressed an intent to effect a Change in Control or engage in a proxy or other control contest). 3. TERMINATION FOLLOWING CHANGE IN CONTROL. If any of the events described in Section 2 hereof constituting a Change in Control shall have occurred, Executive shall be entitled to the benefits provided in Section 4(iv) hereof upon the subsequent termination of Executive's employment with the Company and its subsidiaries during the term of this Agreement unless such termination is (A) a result of Executive's death or Retirement (except as provided in Section 3(i) below), or (B) by Executive without Good Reason, or (C) by the Company or any of its subsidiaries for Disability or for Cause. (i) DISABILITY; RETIREMENT. For purposes of this Agreement, "Disability" shall mean permanent and total disability as such term is defined under Section 22(e)(3) of the Internal Revenue Code of 1986, as amended (the "Code"), without regard to whether Executive is subject to the Code. Any question as to the existence of Executive's Disability upon which Executive and the Company cannot agree shall be determined by a qualified independent physician selected by Executive (or, if Executive is unable to make such selection, such selection shall be made by any adult member of Executive's immediate family or Executive's legal representative), and approved by the Company, said approval not to be unreasonably withheld. The determination of such physician made in writing to the Company and to Executive shall be final and conclusive for all purposes of this Agreement. For purposes of this Agreement, "Retirement" shall mean Executive's voluntary termination of employment with the Company under any of the Company's retirement plans; provided, however, that notwithstanding the foregoing, no Retirement shall adversely affect, interfere with or otherwise impair in any way Executive's right to receive the payments and benefits to which he is entitled on account of a termination without Cause or with Good Reason. (ii) CAUSE. For purposes of this Agreement, "Cause" shall mean (A) the conviction of, or plea of guilty or nolo contendere to, a felony or (B) the willful engaging by an Executive in gross misconduct which is materially and demonstrably injurious to the Company. Notwithstanding the foregoing, Executive shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to Executive a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters (3/4) of the Incumbent Directors of the Board at a meeting of the Board called and held for such purpose (after reasonable notice to Executive and an opportunity for Executive, together with Executive's counsel, to be heard before the Board), finding that, in the good faith opinion of the Board, Executive was guilty of conduct set forth above in this Section 3(ii) and specifying the particulars thereof in detail. (iii) GOOD REASON. Executive shall be entitled to terminate employment with Good Reason. For the purpose of this Agreement, "Good Reason" shall mean the occurrence, without Executive's express written consent, of any of the following circumstances unless, in the case of paragraphs 3(iii) (A), (E), (F), or (G), such circumstances are fully corrected prior to the date specified as the Date of Termination (as defined in Section 3(v)) in the Notice of Termination (as defined in Section 3(iv)) given in respect thereof: (A) the assignment to Executive of any duties inconsistent with Executive's status as an executive of the Company or its subsidiaries, Executive's removal from his or her position (as it existed immediately prior to the Change in Control), or a substantial diminution in the nature or status of Executive's responsibilities from those in effect immediately prior to the Change in Control; (B) a reduction by the Company or any of its subsidiaries in Executive's annual base salary as in effect on the date hereof or as the same may be increased from time to time; (C) a failure in any year after the Change in Control to grant stock options whose value at the time of grant on a Black-Scholes basis is no less than the greatest Black-Scholes value at the time of grant of stock options granted by the Company to Executive at any one time in any of the three years prior to the Change in Control (in calculating this value, (i) an initial employment grant shall be excluded unless it is the only grant made during such period, (ii) the one-time 1995 special stock option grant made May 25, 1995 to certain designated executives shall not be included, and (iii) any shares of restricted stock granted in lieu of shares subject to an option shall be converted to option shares in accordance with the formula used to determine the number of restricted shares to be granted and shall be treated as having been granted as shares subject to an option) (the "Stock Option Value"); provided, however, that the Black-Scholes value of any grant on a per option share basis shall be equal to the per option share value of a grant, if any, made on the same date as such grant and reported in the Company's proxy statement filed prior to a Change in Control and all determinations of the Black-Scholes value of other grants shall be made by Towers Perrin (or, if unavailable or unwilling to serve, any other nationally recognized compensation consulting firm chosen by the Company and reasonably acceptable to the Executive), using the same methodology and such assumptions consistent with those used for purposes of the Company's latest proxy statement filed prior to the Change in Control; (D) the relocation of Executive's place of business to a location more than 100 miles from the location where Executive was based and performed services immediately prior to the Change in Control; provided, however, that any relocation of greater than 25 miles, but less than or equal to 100 miles, will still constitute Good Reason unless Executive is provided with relocation benefits in the aggregate no less favorable than the 1993 Relocation Policy with respect to the relocation of the corporate offices to Madison, New Jersey from New York City; (E) the failure by the Company to pay to Executive any portion of any installment of deferred compensation under any deferred compensation program of the Company in which Executive participated within seven (7) days of the date such compensation is due; (F) the failure by the Company or any of its subsidiaries to continue in effect any incentive compensation plan in which Executive participated prior to the Change in Control, unless an equitable alternative compensation arrangement (embodied in an ongoing substitute or alternative plan) has been provided for Executive, or the failure by the Company or any of its subsidiaries to continue Executive's participation in any such incentive plan on a basis, both in terms of the amount of benefits provided and the level of Executive's participation relative to other participants, that is no less than existed at any time during the three years prior to the Change in Control; (G) except as required by law, the failure by the Company or any of its subsidiaries to continue to provide Executive with benefits, in the aggregate, at least as favorable as those enjoyed by Executive under the employee benefit and welfare plans of the Company and its subsidiaries, including, without limitation, the pension, life insurance, medical, dental, health and accident, retiree medical, disability, deferred compensation and savings plans, in which Executive was participating at the time of the Change in Control, the taking of any action by the Company or any of its subsidiaries which would directly or indirectly materially reduce the fringe benefits enjoyed by Executive at the time of the Change in Control, or the failure by the Company or any of its subsidiaries to provide Executive with the number of paid vacation days to which Executive was entitled at the time of the Change in Control; (H) the failure of the Company to obtain a satisfactory agreement from any successor to assume and agree to perform this Agreement, as contemplated in Section 6 hereof; or (I) any purported termination of Executive's employment by the Company or its subsidiaries which is not effected pursuant to a Notice of Termination satisfying the requirements of Section 3(iv) below (and, if applicable, the requirements of Section 3(ii) above); for purposes of this Agreement, no such purported termination shall be effective. In addition, Executive shall be entitled to terminate employment for any reason or no reason after the first anniversary of the Change in Control but within 90 days following such anniversary which shall be deemed to constitute Good Reason hereunder as if included as a subparagraph (J) above (a "Voluntary Termination"). In the event of any dispute about the date of the Change in Control or the anniversary thereof, the good faith determination by Executive of such date(s) for purposes of this provision shall be binding and conclusive on the Company. Executive's continued employment shall not constitute consent to, or a waiver of rights with respect to, any circumstances constituting Good Reason hereunder. (iv) NOTICE OF TERMINATION. Any purported termination of Executive's employment by the Company and its subsidiaries or by Executive shall be communicated by written Notice of Termination to the other party hereto in accordance with Section 7 hereof. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail (other than with respect to a Good Reason termination pursuant to Section 3(iii)(I) or a Voluntary Termination) the facts and circumstances claimed to provide a basis for termination of Executive's employment under the provision so indicated. (v) DATE OF TERMINATION. "Date of Termination" shall mean (A) if Executive's employment is terminated for Disability, thirty (30) days after Notice of Termination is given (provided that Executive shall not have returned to the full-time performance of Executive's duties during such thirty (30) day period), and (B) if Executive's employment is terminated pursuant to Section 3(ii) or (iii) above or for any reason (other than Disability), the date specified in the Notice of Termination (which, in the case of a termination pursuant to Section 3(ii) above shall not be less than thirty (30) days, and in the case of a termination pursuant to Section 3(iii) above shall not be less than thirty (30) nor more than sixty (60) days, respectively, from the date such Notice of Termination is given); provided, that, if within thirty (30) days after any Notice of Termination is given the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the grounds for termination, the Date of Termination shall be the date on which the dispute is finally determined, either by mutual written agreement of the parties, by a binding arbitration award or by a final judgment, order or decree of a court of competent jurisdiction (which is not appealable or the time for appeal therefrom having expired and no appeal having been perfected); provided further that the Date of Termination shall be extended by a notice of dispute only if such notice is given in good faith and the party giving such notice pursues the resolution of such dispute with reasonable diligence. Notwithstanding the pendency of any such dispute, the Company and its subsidiaries will continue to pay Executive's full compensation in effect when the notice giving rise to the dispute was given (including, but not limited to, base salary and bonus) and continue Executive as a participant in all incentive compensation, benefit and insurance plans in which Executive was participating when the notice giving rise to the dispute was given, until the dispute is finally resolved in accordance with this Section 3(v). Amounts paid under this Section 3(v) are in addition to all other amounts due under this Agreement and shall not be offset against or reduce any other amounts due under this Agreement. 4. COMPENSATION UPON TERMINATION OR DURING DISABILITY. Following a Change in Control of the Company, as defined by Section 2, upon termination of Executive's employment or during a period of Disability, which, in either event, occurs during the term of this Agreement, Executive shall be entitled to the following benefits: (i) During any period that Executive fails to perform Executive's full-time duties with the Company and its subsidiaries as a result of the Disability, Executive shall continue to receive an amount equal to Executive's base salary and bonus at the rate in effect at the commencement of any such period through the Date of Termination for Disability. Thereafter, Executive's benefits shall be determined in accordance with the employee benefit programs of the Company and its subsidiaries then in effect. (ii) If Executive's employment shall be terminated by the Company or any of its subsidiaries for Cause or by Executive without Good Reason (excluding death, Disability or Retirement) the Company (or one of its subsidiaries, if applicable) shall pay through the Date of Termination Executive's full base salary at the rate in effect at the time Notice of Termination is given and shall pay any amounts otherwise payable to Executive on or immediately prior to the Date of Termination pursuant to any other compensation plans, programs or employment agreements then in effect, and the Company shall have no further obligations to Executive under this Agreement. (iii) If Executive's employment shall be terminated by reason of Executive's death or Retirement, Executive's benefits shall be determined in accordance with the retirement and other benefit programs of the Company and its subsidiaries then in effect, except as otherwise provided in Section 3(i). (iv) If Executive's employment by the Company and its subsidiaries shall be terminated (other than for death or Disability) by (a) the Company and its subsidiaries other than for Cause or (b) Executive with Good Reason, then Executive shall be entitled to the benefits provided below: (A) The Company (or one of its subsidiaries, if applicable) shall pay Executive's full base salary, at the rate in effect at the time of the Change in Control and increased to reflect any subsequent increases in such base salary (the "Base Salary"), and a pro-rated Bonus calculated through the Date of Termination, no later than the thirtieth day following the Date of Termination, plus all other amounts to which Executive is entitled under any compensation plan of the Company applicable to Executive, at the time such payments are due. For purposes of this Agreement, the "Bonus" shall mean the highest amount of cash and the value (determined as of the time of the awards in the same manner as was used for the awards) of deferred stock awarded as an annual incentive under the Management Incentive Plan (or any other plan, policy or arrangement) to Executive in respect of any of the three years immediately prior to the year in which the Notice of Termination is given. (B) The Company shall pay Executive, on a date that is no later than the thirtieth day following the Date of Termination, as severance pay to Executive a severance payment equal to three (3) times the sum of (i) Executive's Base Salary, (ii) the Bonus, and (iii) the Stock Option Value (or, if greater, the highest value at the time of grant on a Black-Scholes basis, determined as provided for herein, of any option grant made to Executive after the Change in Control). (C) The Company shall also pay to Executive, no less frequently than monthly, all legal fees and expenses reasonably incurred by Executive in connection with this Agreement (including all such fees and expenses, if any, incurred in contesting or disputing the nature of any such termination for purposes of this Agreement or in seeking to obtain or enforce any right or benefit provided by this Agreement); and (D) (i) Upon the date of Termination, Executive (or Executive's spouse or applicable beneficiary in the event of Executive's death) will be eligible to receive a benefit, when such benefits otherwise become payable, from the Company's general funds to be calculated using the benefit calculation provisions of the AHPC Retirement Plan - U.S. (the "DB Plan") and, to the extent Executive participates therein, the AHPC Supplemental Executive Retirement Plan (the "SERP") and the AHPC Executive Retirement Plan (the "ERP") as if the provisions thereunder contained the assumptions set forth herein, and offset by any benefits actually payable under the DB Plan, the SERP, and the ERP not taking into account the assumptions set forth herein. Any elections made under the DB Plan, the SERP and the ERP for purposes of determining the form of payment will also apply for purposes of this benefit. The assumptions to be used in calculating Executive's benefit are: (x) Executive has continued in the employ of the Company for an additional three years (the "Severance Period") after the Date of Termination, and (y) Executive has earned annually from the Date of Termination to the date of Executive's assumed continued employment pursuant to clause (x) above the same compensation Executive earned in the twelve months preceding the Date of Termination or in the twelve months preceding the Change in Control, if greater. In addition, any pension payable to Executive at age 55 (or upon the Date of Termination, if Executive is then age 55 or over) shall not be reduced because it is payable prior to age 65 or 60, as the case may be. (ii) The length of the Severance Period will be added to Executive's actual age for determining whether or when Executive has attained or will attain age 55 for the purposes of Executive's eligibility to commence receiving payments of benefits pursuant to Section 4(iv)(D)(i) above. (E) Executive shall become eligible for all benefits, in addition to those described in Section 4(iv)(D) above, made available immediately prior to the Date of Termination (or, if greater, immediately prior to the date of the Change in Control) to retirees of the Corporation, including, without limitation, retiree medical coverage and life insurance benefits, if at the time of termination Executive has already attained age 45, as if Executive had at the Date of Termination satisfied the service and age conditions for coverage under the applicable provisions of the Company's employee benefit plans. If the Company is unable to provide Executive coverage under such plans, it shall provide Executive with separate comparable coverage, but in no event less than the retiree coverage in place immediately prior to the Change in Control; provided, however, that the retiree medical coverage provided by the Corporation shall be secondary to any other medical coverage the Executive may then have. (F) The Company will continue Executive's participation and coverage for the Severance Period from the Date of Termination under all the Company's life, medical, dental plans and other welfare benefit plans (but excluding the Company's disability plans) ("Insurance Benefits"), and all perquisites and fringe benefit plans and programs (other than the Company's pension and 401(k) plans) (the perquisites and fringe benefits together being the "Fringe Benefits") in which Executive is participating immediately prior to such employment termination, under the same coverages and on the same terms as in effect immediately prior to termination; provided, however, that if his continued participation is not possible under the general terms and provisions of such plans and programs, the Company shall arrange to provide him with substantially similar benefits; provided, further, that if any other Company plan, arrangement or agreement provides for continuation of Insurance Benefits and Fringe Benefits then the Executive shall receive such coverage under such other plan, arrangement or agreement, and if the period of such coverage is shorter than the Severance Period, then the Executive shall receive pursuant to this section, such coverage for the remainder of the Severance Period. (G) Upon the Date of Termination, to the extent that, under the terms of any plan, any Company "restricted" stock awards or options shall terminate or be forfeited upon or following Executive's termination of employment without, in the case of options, the opportunity to exercise after Notice of Termination and to sell the underlying shares immediately after exercise without legal impediment, then the Executive (or any permitted transferee) shall receive, within 10 days after the forfeiture or termination of such award or option, an amount in respect of such terminated or forfeited stock awards or options, equal to the sum of (i) the Cashout Value (as defined below) of all the shares covered by the restricted stock awards so forfeited (with units converted to shares based on the target awards), and (ii) the excess of (a) the Cashout Value of all the shares subject to options which were so forfeited over (b) the aggregate exercise price of the shares subject to such forfeited options. For purposes of this Section 4(iv)(G), the "Cashout Value" of a share shall mean the greater of (x) the average of the closing prices paid for the Company's common stock (or any other securities to which the restricted shares or options relate) on any national exchange on which such shares are traded on each of the five trading days prior to and including the date of Executive's termination of employment (or, if no such shares are traded any of such days, the most recent date preceding Executive's termination of employment on which such shares were traded), and (y) the closing price paid for the Company's common stock (or any other securities to which the restricted shares or options relate) on any such exchange on the date of Executive's termination of employment (or, if no such shares are traded on such day, the most recent date preceding Executive's termination of employment on which such shares were traded). At all times that there are options outstanding, the Company shall keep in place an effective registration statement (on form S-8 or otherwise) and shall take any other further action necessary to permit the sale, without restriction, by Executive (or any permittee transferee) of shares received upon the exercise of options. (H) The Company shall also provide to Executive outplacement services or executive recruiting services provided by a professional outplacement provider or executive recruiter at a cost to the Company of not more than 10% of the Executive's base salary (not to exceed $25,000). 5. EXCISE TAXES. (i) In the event that any payment or benefit received or to be received by Executive pursuant to the terms of this Agreement (the "Contract Payments") or in connection with Executive's termination of employment or contingent upon a Change in Control of the Company pursuant to any plan or arrangement or other agreement with the Company (or any affiliate) ("Other Payments" and, together with the Contract Payments, the "Payments") would be subject to the excise tax (the "Excise Tax") imposed by Section 4999 of the Code, as determined as provided below, the Company shall pay to Executive, at the time specified in Section 5(ii) below, an additional amount (the "Gross-Up Payment") such that the net amount retained by Executive, after deduction of the Excise Tax on Contract Payments and Other Payments and any federal, state and local income or other tax and Excise Tax upon the payment provided for by this Section 5(i), and any interest, penalties or additions to tax payable by Executive with respect thereto, shall be equal to the total present value of the Contract Payments and Other Payments at the time such Payments are to be made. For purposes of determining whether any of the Payments will be subject to the Excise Tax and the amounts of such Excise Tax, (1) the total amount of the Payments shall be treated as "parachute payments" within the meaning of Section 280G(b)(2) of the Code, and all "excess parachute payments" within the meaning of Section 280G(b)(1) of the Code shall be treated as subject to the Excise Tax, except to the extent that, in the opinion of independent tax counsel selected by the Company's independent auditors and reasonably acceptable to Executive ("Tax Counsel"), a Payment (in whole or in part) does not constitute a "parachute payment" within the meaning of Section 280G(b)(2) of the Code, or such "excess parachute payments" (in whole or in part) are not subject to the Excise Tax, (2) the amount of the Payments that shall be treated as subject to the Excise Tax shall be equal to the lesser of (A) the total amount of the Payments or (B) the amount of "excess parachute payments" within the meaning of Section 280G(b)(1) of the Code (after applying clause (1) hereof), and (3) the value of any noncash benefits or any deferred payment or benefit shall be determined by Tax Counsel in accordance with the principles of Sections 280G(d)(3) and (4) of the Code. For purposes of determining the amount of the Gross-Up Payment, Executive shall be deemed to pay federal income tax at the highest marginal rates of federal income taxation applicable to individuals in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest effective rates of taxation applicable to individuals as are in effect in the state and locality of Executive's residence in the calendar year in which the Gross- Up Payment is to be made, net of the maximum reduction in federal income taxes that can be obtained from deduction of such state and local taxes, taking into account any limitations applicable to individuals subject to federal income tax at the highest marginal rates. (ii) The Gross-Up Payments provided for in Section 5(i) hereof shall be made upon the earlier of (i) the payment to Executive of any Contract Payment or Other Payment or (ii) the imposition upon Executive or payment by Executive of any Excise Tax. (iii) The Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of a Gross-Up Payment. Such notification shall be given as soon as practicable but no later than 10 business days after the Executive is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the 30 day period following the date on which the Executive gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall: 1) give the Company any information reasonably requested by the Company relating to such claim; 2) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company and reasonably satisfactory to the Executive; 3) cooperate with the Company in good faith in order to effectively contest such claim; and 4) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including, but not limited to, additional interest and penalties and related legal, consulting or other similar fees) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or other tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. (iv) The Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs the Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Executive on an interest-free basis, and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or other tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and provided, further, that if the Executive is required to extend the statute of limitations to enable the Company to contest such claim, the Executive may limit this extension solely to such contested amount. The Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. In addition, no position may be taken nor any final resolution be agreed to by the Company without the Executive's consent if such position or resolution could reasonably be expected to adversely affect the Executive (including any other tax position of the Executive unrelated to the matters covered hereby). (v) As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Company or the Tax Counsel hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies and the Executive thereafter is required to pay to the Internal Revenue Service an additional amount in respect of any Excise Tax, the Company or the Tax Counsel shall determine the amount of the Underpayment that has occurred and any such Underpayment shall promptly be paid by the Company to or for the benefit of the Executive. (vi) If, after the receipt by Executive of the Gross-Up Payment or an amount advanced by the Company in connection with the contest of an Excise Tax claim, the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Company in connection with an Excise Tax claim, a determination is made that Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest the denial of such refund prior to the expiration of 30 days after such determination, such advance shall be forgiven and shall not be required to be repaid. 6. SUCCESSORS; BINDING AGREEMENT. (i) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company is required to perform it. Failure of the Company to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle Executive to compensation from the Company in the same amount and on the same terms as Executive would be entitled hereunder if Executive had terminated Executive's employment with Good Reason following a Change in Control, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. (ii) This Agreement shall inure to the benefit of and be enforceable by Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If Executive should die while any amount would still be payable to Executive hereunder if Executive had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to Executive's devisee, legatee or other designee or, if there is no such designee, to Executive's estate. 7. NOTICE. For the purpose of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid (or its international equivalent), addressed to Five Giralda Farms, Madison, New Jersey 07940 with respect to the Company and on the signature page with respect to Executive, provided that all notices to the Company shall be directed to the attention of the Senior Vice President-General Counsel of the Company, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt. 8. MISCELLANEOUS. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by Executive and such officer as may be specifically designated by the Board. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any conditions or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. The validity, interpretation, construction and performance of this Agreement shall be governed by the internal laws of the State of New York, without regard to its conflict of law provisions. All references to sections of the Code shall be deemed also to refer to any successor provisions to such sections. Any payments provided for hereunder shall be paid net of any applicable withholding required under federal, state, local or other applicable law. The obligations of the Company under Sections 4 and 5 shall survive the expiration of the term of this Agreement. 9. VALIDITY. The invalidity or unenforceability of any provision of this Agreement shall not effect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 10. COUNTERPARTS. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 11. ARBITRATION; INDEMNIFICATION. Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction; provided, however, that Executive shall be entitled to seek specific performance of Executive's right to be paid until the Date of Termination during the pendency of any dispute or controversy arising under or in connection with this Agreement. Following any termination of employment of the Executive (other than a termination by the Company for Cause), the Company shall indemnify and hold harmless Executive to the fullest extent permitted under the Company's by-laws (as in effect prior to the Change in Control) and applicable law for any claims, costs and expenses arising out of or in connection with Executive's employment with the Company and shall maintain directors' and officers' liability insurance coverage for the benefit of the Executive which provides him with coverage, if any, no less favorable than that in effect prior to the Change in Control. 12. NONDISCLOSURE OF CONFIDENTIAL INFORMATION. Executive shall not, without the prior written consent of the Company, use, divulge, disclose or make accessible to any other person, firm, partnership, corporation or other entity any Confidential Information pertaining to the business of the Company or any of its affiliates, except (i) while employed by the Company, in the business of and for the benefit of the Company, or (ii) when required to do so by a court of competent jurisdiction, by any governmental agency having supervisory authority over the business of the Company, or by any administrative body or legislative body (including a committee thereof) with jurisdiction to order Executive to divulge, disclose or make accessible such information. For purposes of this Section 12, "Confidential Information" shall mean any trade secret or other non- public information concerning the financial data, strategic business plans, product development (or other proprietary product data), customer lists, marketing plans and other non-public, proprietary and confidential information of the Company or its affiliates, that, in any case, is not otherwise available to the public (other than by Executive's breach of the terms hereof) or known to persons in the industry generally. 13. ENTIRE AGREEMENT. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. This Agreement constitutes the entire understanding between the parties with respect to Executive's severance pay in the event of a termination of Executive's employment with the Company, superseding all negotiations, prior discussions and preliminary agreements, written or oral, concerning said severance pay; provided, however, that any payments or benefits provided in respect of severance, or indemnification for loss of employment, pursuant to any severance, employment or similar agreement between the Company or any of its subsidiaries and Executive, or as required by applicable law outside the United States, shall reduce any payments or benefits provided pursuant to this Agreement, except that the payments or benefits provided pursuant to this Agreement shall not be reduced below zero. Notwithstanding any provision of this Agreement: (i) Executive shall not be required to mitigate the amount of any payment provided by this Agreement by seeking other employment or otherwise, nor shall the amount of any payment or benefit provided by this Agreement be reduced by any compensation earned by Executive as the result of employment by another employer or by retirement benefits received after the Date of Termination or otherwise, and (ii) except as otherwise provided in this Agreement, the obligations of the Company to make payments to Executive and to make the arrangements, provided for herein are absolute and unconditional and may not be reduced by any circumstances, including without limitation any set- off, counterclaim, recoupment, defense or other right which the Company may have against the Executive or any third party at any time. 14. FURTHER ACTION. The Company shall take any further action necessary or desirable to implement the provisions of this Agreement or perform its obligations hereunder (including, without limitation, amending the SERP, the ERP, any stock option or stock bonus plan, or any other applicable plan, program or arrangement or obtaining any necessary consents or approvals in connection therewith). AMERICAN HOME PRODUCTS CORPORATION By: Name: Rene Lewin Title: Vice President, Human Resources By: Executive Date: Home Address: ANNEX A List of Executive Officers Robert Essner Joseph J. Carr Louis L. Hoynes, Jr. Robert I. Levy William J. Murray David M. Olivier John R. Considine William A. Hawkins Paul J. Jones Rene R. Lewin Thomas M. Nee EX-12 10 EXHIBIT 12 American Home Products Corporation Computation of Ratio of Earnings To Fixed Charges (Thousands of dollars, except ratio amounts)
Years Ended December 31, Earnings: 1997 1996 1995 1994* 1993 Earnings from continuing operations before taxes on income $2,814,707 $2,755,460 $2,438,698 $2,029,760 $1,992,665 Add: Fixed charges 518,661 605,011 705,047 155,187 91,500 Minority interest in earnings of consolidated subsidiary 12,582 32,496 5,642 5,303 4,027 Equity loss 0 0 0 1,691 0 Amoritization of capitalized interest 1,057 5,621 768 497 0 Less: Minority interest in loss of consolidated subsidiary 11,861 14,412 4,925 17,873 9,129 Equity income 10,840 10,431 8,129 0 0 Capitalized interest 12,898 0 7,681 9,792 14,898 Dividends on preferred stock of majority- owned subsidiary 0 0 0 0 3,436 Total earnings as defined $3,311,408 $3,373,745 $3,129,420 $2,164,773 $2,060,729 Fixed Charges: Interest and amortization of debt expense $461,370 $571,414 $665,021 $116,661 $47,871 Capitalized interest 12,898 0 7,681 9,792 14,898 Interest factor of rental expense (a) 44,393 33,597 32,345 28,734 25,295 Dividends on preferred stock of majority- owned subsidiary 0 0 0 0 3,436 Total fixed charges as defined $518,661 $605,011 $705,047 $155,187 $91,500 Ratio of earnings to fixed charges 6.4 5.6 4.4 13.9 22.5 * - The 1994 results include one month of results of American Cyanamid Company which was acquired by American Home Products Corporation effective December 1, 1994. Assuming the acquisition took place January 1, 1994, the pro forma ratio of earnings to fixed charges would be 2.9 for the year ended December 31, 1994. (a)- A 1/3 factor was utilized to compute the portion of rental expenses deemed representative of the interest factor.
EX-13 11 American Home Products Corporation 1997 Annual Report [Logo] AHP INNOVATION American Home Products is focused on finding breakthrough medical therapies in areas of critical need and on developing innovative crop protection products. AHP is expressing its dedication through a continuing commitment to basic and developmental research. American Home Products Corporation American Home Products continues to enhance its role as a world leader in the discovery, development, manufacturing and marketing of health care and agricultural products that improve the quality of life for people all around the globe. The Company is intensively focused on innovation as the critical factor in the achievement of our mission. AHP's investment in scientific discovery and development, which exceeded $1.5 billion in 1997, enables the Company to bring a continuous flow of important new products to the worldwide market. The productivity of our R&D efforts is reflected in an expanding pipeline of promising new products. AHP's health care product franchise is one of the strongest in the industry and includes broad lines of widely recognized ethical pharmaceuticals, vaccines, nutritionals and over-the-counter (OTC) medications. In the United States, AHP's prescription medications are dispensed more frequently than those of any other pharmaceutical company. Our OTC medications and vitamin and mineral supplements represent one of the largest consumer health care franchises in the world, led by highly recognized, premier brands. AHP's agricultural products give us a leadership position in expanding global markets for herbicides and insecticides. Our animal health care business has become one of the world's leading providers of veterinary pharmaceuticals and biologicals. 2 Chairman's Report to Shareholders 6 AHP at a Glance 8 Special Report: Innovation 16 Pharmaceutical Products Pipeline 18 Principal Products -- United States 19 Financial Section 45 Corporate Data 46 Principal Officers IBC Board of Directors Financial Highlights
Years Ended December 31, 1997 1996 - -------------------------------------------------------------------------------- (In thousands except per share amounts) Net sales.......................................... $14,196,026 $14,088,326 Net income......................................... 2,043,123 1,883,403 Basic earnings per share........................... 3.16 2.96 Diluted earnings per share......................... 3.11 2.92 Dividends per common share......................... 1.66 1.565 Total assets....................................... 20,825,111 20,785,343 Stockholders' equity............................... 8,175,252 6,962,092
[Graphs Omitted] 1 Chairman's Report to Shareholders [Photo Omitted] John R. Stafford Chairman, President and Chief Executive Officer Overall, 1997 was a good year for American Home Products Corporation. We achieved record sales and earnings, and, for the 46th consecutive year, we increased the annual dividend to shareholders. Our product portfolio was strengthened and expanded through the introduction of a number of innovative health care and agricultural products, and we sharpened our focus through the selected divestiture of non-core businesses. In particular, we completed the sale of Storz Instrument Company in December 1997 for $380 million, and we sold our Sherwood-Davis & Geck medical devices business for $1.77 billion in February 1998. In early March 1998, we announced the Board of Directors' approval of a two-for-one split of the Company's common stock, subject to shareholder approval of an increase in the number of authorized shares of common stock from 1.2 billion to 2.4 billion at our Annual Meeting to be held on April 23, 1998. In September, we voluntarily recalled two drugs that were prescribed for the treatment of obesity: Pondimin (fenfluramine HCl) and Redux (dexfenfluramine HCl). The decision to recall these drugs was the prudent course of action in light of new, preliminary information from the U.S. Food and Drug Administration (FDA) suggesting the potential of heart valve abnormalities in some patients who had used one or the other of these drugs and in other patients who had used an off-label combination of fenfluramine and phentermine (the latter drug was not manufactured or marketed by the Company). The recall has received a great deal of attention from the media regarding lawsuits filed in federal and state courts alleging, among other things, valvular heart disease caused by the use of fenfluramine HCl, dexfenfluramine HCl or fenfluramine HCl in combination with phentermine. Closely related to the litigation process are the scientific investigations and studies initiated by the Company, which are ongoing and which should provide some answers to the questions that have been raised about the products. A number of clinical studies are under way, and some initial scientific data will become available during the first half of 1998. You can be assured that the Company will vigorously defend itself in the litigation, and we remain confident that we have always acted reasonably and responsibly in this matter. Review of 1997 In 1997, net sales totaled $14.2 billion. After adjusting for businesses acquired or divested in 1997 and 1996, net sales increased 5 percent. Net income and basic earnings per share for 1997 were $2.0 billion and $3.16 compared with $1.9 billion and $2.96 for 1996. These results included the following special items that are more fully discussed in the financial section of this report: in 1996, a gain on the sale of the American Home Foods business and special charges related to the purchase of the remaining equity interest in Genetics Institute, Inc.; and, in 1997, special charges for 2 the one-time costs associated with the voluntary market withdrawal of our antiobesity products. Excluding these special items, net income for 1997 increased 15 percent, and basic earnings per share increased 13 percent compared with the prior year. Innovation: the Key to Future Growth The global pharmaceutical market is more complicated than ever, and we face strong competitors in every market we serve. However, AHP has been meeting this challenge through the Company's focus on innovation. The power of innovation is such that it speeds exciting new products to market, molds a company into a formidable competitor, motivates talented employees to perform at consistently high levels and creates a culture defined by and dedicated to best-of-class success. One tangible measure of the power of our innovation: in 1997, we received market clearance for eight new pharmaceutical products in the United States as well as registration approvals for many products internationally. To further our position in the worldwide pharmaceutical arena, American Home Products must grow globally. With the industry cost of bringing a new drug to market now exceeding $500 million, it is essential to leverage our research investment by maximizing the market potential for every new product. This requires coordinated product development and marketing strategies, strong finances and an efficient structure to muster our considerable resources to meet competitive challenges around the world. No better example of meeting competitive challenges exists than Premarin and the Premarin family of products, which, this year, broke the $1 billion sales mark in the United States. The future for Premarin -- the most prescribed medication in the United States -- remains highly promising. Research continues to reveal new ways in which conjugated estrogens can contribute to the well-being and longevity of postmenopausal women. Additionally, in May 1997, the FDA ruled that all generic versions of Premarin must be shown to contain the same active ingredients as Premarin. This decision recognizes that, at this time, there can be no synthetic generic substitution for Premarin, a product made from a naturally derived blend of hormones. Research and Development Our Company's future growth depends upon identifying, developing and marketing innovative new products for use around the world. In the 11 years I have been privileged to serve as AHP's Chairman, our investment in research and development has grown steadily, and, in 1997, it exceeded $1.5 billion. Of this amount, more than $1.2 billion was devoted to pharmaceuticals and biotechnology. ==================================== - ----------------------------- United States 58% - ----------------------------- 22% - ----------------------------- Canada and Latin America 11% - ----------------------------- Asia and Australia 9% - ----------------------------- ==================================== Net Sales by Geographic Segment (on a pro forma basis)
R&D spending alone will not guarantee success unless it is productive. At AHP, both increased investment and R&D productivity are operative as we are bringing to market an exceptional array of pharmaceutical products. At year-end 1997, more than 50 compounds, each with the opportunity to generate substantial returns, were moving through various stages of the research, development and approval process. In the United States, the percentage of total pharmaceutical sales from AHP products on the market less than five years grew to 33 percent in 1997 and will climb further in 1998. Included among the promising new products awaiting near-term registration and marketing are: Enbrel: This breakthrough treatment for advanced rheumatoid arthritis was developed by Immunex Corporation, a leading biotechnology company in which AHP is the majority shareholder. Pneumococcal Conjugate Vaccine: This vaccine, in Phase III development, is designed to protect young people against invasive pneumococcal diseases such as meningitis, bacteremia and pneumococcal otitis media. Rapamune: Now in Phase III trials, this agent has demonstrated the ability to prevent or significantly reduce organ rejection in kidney transplant patients. Sonata: A New Drug Application (NDA) for this non-benzodiazepine sedative, developed for use in the treatment of insomnia, was filed with the FDA in December 1997 and was accepted in February 1998. These products and others are reviewed in greater detail in a special section within this report entitled "Innovation." 3 Our internal R&D efforts are being supplemented by important new strategic alliances established in 1997. These include a collaborative research agreement with ArQule, Inc. to help optimize chemical leads for discovery research; a licensing agreement with 3-Dimensional Pharmaceuticals, Inc. for development of oral thrombin inhibitors; and a licensing collaboration agreement with CoCensys, Inc. for the development of a novel compound for the anxiolytic market. Ethical Pharmaceuticals Worldwide pharmaceutical sales increased again during 1997, keyed by a strong year in the U.S. marketplace. Sales were driven by higher demand for the Premarin family of products, Effexor and Cordarone. Adding to these positive results were new product introductions in the United States, including: Alesse: Introduced in March 1997, this low-dose oral contraceptive represents a new option for the many women who choose the pill as their form of contraception. It represents the lowest dose combination of levonorgestrel and ethinyl estradiol marketed in the United States. BENEFIX: This biotechnology product received FDA market clearance in February 1997 as the only recombinant treatment for Hemophilia B. Duract: Receiving FDA market clearance in July 1997, Duract is a potent non-narcotic analgesic for the management of short-term pain, providing relief in a broad range of pain states. It has achieved rapid success in the marketplace, with more than 1 million prescriptions written in the first six months. Effexor XR: A once-a-day dosing alternative for our highly successful antidepressant Effexor, this simple dosing form, approved in October 1997, promotes patient compliance. Registration for the use of Effexor XR as a treatment for generalized anxiety disorder was submitted to the FDA in January 1998. Neumega: After receiving market clearance in November 1997, this platelet growth factor was launched nationally in January 1998. Consumer Health Care Our worldwide consumer health care business again was led by increased sales of Advil and Centrum. Overall sales gains were offset, in part, by divestiture of several non-core products. Brand recognition and market penetration remain the cornerstones of our over-the-counter medicine business, and Whitehall-Robins Healthcare remained a leader in three leading OTC categories: analgesics; vitamin and mineral supplements; and respiratory products, paced by Advil, Centrum, Robitussin and Dimetapp. ==================================== ----------------------------- 61% Pharmaceuticals ----------------------------- 15% Consumer Health Care ----------------------------- 15% Agricultural Products ----------------------------- 9% Medical Devices ----------------------------- ==================================== Net Sales by Segment (on a pro forma basis)
Agricultural Products Cyanamid Agricultural Products is the third-largest crop protection product marketer in the United States and one of the largest in the world. In 1997, Cyanamid achieved record sales, driven by an especially strong performance in Latin America. In addition, Cyanamid continued its leadership position in the U.S., Canadian and Latin American soybean herbicide markets. Cyanamid launched Raptor, a broad-spectrum soybean herbicide that will expand our market into areas where crop rotation restrictions formerly were present. An innovator in developing herbicide-tolerant crops, Cyanamid Agricultural Products extended its leadership in this segment with the launch of Lightning, a simple, one-pass, residual weed control product for corn, and with the launch of Odyssey, in Canada, for canola. Animal Health Care Our Fort Dodge Animal Health business posted strong 1997 results, in part due to the acquisition of the worldwide animal health business of Solvay S.A. This acquisition provided an opportunity for greater penetration of international markets, particularly Western Europe and the Far East, as well as a competitive entry into the swine and poultry biological markets. Similar to our pharmaceutical business, Fort Dodge continued a tradition of innovation with the launch of Cydectin Pour-On, a new generation product to combat cattle parasites, which was approved for use in the United States in early 1998. Launched in 1997 was Quest, the first totally 4 new equine dewormer and boticide in more than a decade. Both products' moxidectin formulations offer numerous advantages over traditional deworming agents. Additionally, Dicural will be launched in the United States for canine urinary tract infections and in Europe for poultry applications. Industry Developments As I told you in my Chairman's Report to Shareholders in our 1994 Annual Report, I believe that, over time, the health care products industry will continue to consolidate with fewer, larger -- which, in some cases, means stronger -- companies dominating the global marketplace. Our acquisition of American Cyanamid in 1994 was part of that trend. We will continue to examine appropriate opportunities if and when they arise, with our overall objective being the enhancement of value for our shareholders. The Board of Directors, Management and Employees Robert Essner, formerly President of Wyeth-Ayerst Laboratories, was elected to the Board of Directors and was promoted to Executive Vice President of AHP. Robert I. Levy, M.D., formerly President of Wyeth-Ayerst Research, was elected Senior Vice President, Science and Technology of AHP. L. Patrick Gage, Ph.D., formerly President of Genetics Institute, was named President, Wyeth-Ayerst Research. Among other key management actions, Bernard Poussot was named President, Wyeth-Ayerst Global Pharmaceuticals; Joseph M. Mahady was named President, Wyeth-Ayerst Global Pharmaceuticals-North America; Kenneth J. Martin was named President, Whitehall-Robins Healthcare; and Howard L. Minigh, Ph.D., was named President, Global Agricultural Products. William A. Hawkins was elected Vice President, Medical Device and Specialty Pharmaceutical Divisions, and Bruce Fadem was elected Vice President and Chief Information Officer of AHP upon the retirement of Edward A. Schefer. Marily H. Rhudy was elected Vice President, Public Affairs. Additionally, Tuan Ha-Ngoc was elected Vice President, Strategic Development of AHP. David A. Low, President, Sherwood-Davis & Geck, retired in May 1997 after 31 years of dedicated service. 1997 was a year in which we made impressive strides in research and development and global marketing as we continued our growth as a world-class pharmaceutical company focused on the development of superior products that improve the quality of life for people around the world. It is important to recognize that our accomplishments manifest the intelligence, creativity and extraordinary commitment of AHP employees around the world. The Board of Directors joins me in thanking them for their efforts and commends them for the results they have achieved. /s/ John R. Stafford John R. Stafford Chairman, President and Chief Executive Officer March 5, 1998 5 American Home Products Corporation AHP at a Glance As a result of our corporate commitment to innovation, the productivity of our growing investment in research and development, and our marketing strength, American Home Products today has one of the strongest product and brand portfolios of any company in our industry. Around the world, American Home Products is recognized and trusted for quality and cost-effective pharmaceutical, OTC, agricultural and animal health care products. Ethical Pharmaceuticals, Vaccines and Nutritionals ================================================================================ Women's Health Care Wyeth-Ayerst's research, products and educational initiatives benefit millions of women. A leader in oral contraception and the world's largest provider of hormone replacement therapy, Wyeth-Ayerst's products include Lo/Ovral, Triphasil and Premarin, the most prescribed medication in the United States. During 1997, Wyeth-Ayerst introduced Alesse, a low-dose, levonorgestrel-containing oral contraceptive formulation, in the United States. [Graphic Omitted] ================================================================================ Cardiovascular Therapies Wyeth-Ayerst is focused on improving cardiovascular health through research initiatives and product innovation aimed at advancing the treatment of cardiovascular diseases, including arrhythmia and hypertension. The Company's anti-hypertensives include products such as Verelan and Ziac. Our anti-arrhythmic franchise, which includes Cordarone and Cordarone I.V., leads the U.S. market, reflecting recognition of Cordarone's important role in the management of life-threatening ventricular arrhythmias. [Graphic Omitted] ================================================================================ Mental Health Products Wyeth-Ayerst offers various important anti-anxiety products as well as the fast-growing antidepressant, Effexor. Effexor XR, a new, once-daily formulation, was introduced in 1997 and has demonstrated the same unique efficacy profile of Effexor with more convenient dosing. [Graphic Omitted] ================================================================================ Vaccines Wyeth-Lederle Vaccines and Pediatrics is a major supplier of vaccines that prevent childhood and adult diseases, including: whooping cough, diphtheria, poliomyelitis, meningitis, pneumonia and influenza. Important products include: HibTITER, a major contributor to the reduction of diseases in children caused by the Haemophilus influenzae type b organism; Orimune, the only oral polio vaccine sold in the United States; and Acel-Imune for infants, a vaccine launched in early 1997 that provides advanced protection against whooping cough, diphtheria and tetanus. [Graphic Omitted] ================================================================================ Oncology / Hematology Anti-cancer agents from AHP are used by oncologists throughout the world. In the United States, Novantrone and Leukine, marketed by Immunex Corporation, are important products widely used in cancer treatment. AHP's oncology and hematology franchises were strengthened in 1997 by the introduction of two new products -- Neumega, the first approved platelet growth factor, and BeneFix, the only recombinant clotting factor treatment for Hemophilia B. [Graphic Omitted] 6 ================================================================================ Pain and Inflammation Wyeth-Ayerst's solid position in the pain and inflammation category was strengthened in 1997 with the introduction of Duract and Synvisc. Duract -- a potent non-narcotic analgesic for the short-term management of pain -- achieved quick success in the United States. Synvisc, licensed from BioMatrix, is a new treatment designed to alleviate pain associated with osteoarthritis of the knee by restoring and supplementing the natural elastic properties of synovial joint fluid. [Graphic Omitted] ================================================================================ Anti-Infectives Wyeth-Ayerst offers important antibiotic products that are used to treat infectious diseases globally. Our anti-infective franchise includes Minocin, Pipracil, Suprax and Zosyn. Zosyn continued to gain increased usage for the treatment of nosocomial (hospital-acquired) pneumonia throughout the world. [Graphic Omitted] ================================================================================ Nutritionals The Wyeth-Ayerst nutritional franchise is among the leaders in the international marketplace. Our line-up of first-age, second-age, third-age and other formulas designed for special needs includes S-26/SMA, Promil, Progress and Nursoy and is scientifically designed to meet the nutritional and therapeutic needs of infants and children. [Graphic Omitted] ================================================================================ Consumer Health Care Leading brands such as Advil, Centrum, Dimetapp and Robitussin give Whitehall-Robins Healthcare one of the largest global over-the-counter product franchises, highly ranked in worldwide sales of analgesics, vitamin and mineral supplements, and respiratory products. [Graphic Omitted] ================================================================================ Agricultural Products Cyanamid's growth as a leader in the global agricultural products market is based upon innovative herbicide, insecticide, fungicide and biotechnology products that meet increasingly stringent safety and environmental demands. In 1997, significant milestones were achieved in registrations of key new products, both in the United States and in international markets. Significant registrations included: Lightning, Mach 2, Odyssey, Raptor and Utopia as well as Section 18s for Acrobat and Pirate. [Graphic Omitted] ================================================================================ Animal Health Care By completing the acquisition of the global animal health business of Solvay S.A. in early 1997, Fort Dodge Animal Health has become the world's third largest provider of animal health care products. Recognized as a leader in pharmaceuticals and biologicals for companion animals and livestock, the Company continued to expand its line of moxidectin-based anti-parasitic products in 1997 and early 1998, introducing Quest Gel dewormer and boticide for horses and Cydectin Pour-On for cattle in the United States. [Graphic Omitted] 7 INNOVATION AHP's continuing commitment to basic and developmental research Organ transplant rejection. Rheumatoid arthritis. Rotavirus. Hemophilia. Infectious diseases. Cancer. American Home Products is focused on a number of the most difficult health care challenges facing the world. Focused ... and succeeding, as evidenced by our new product introductions in 1997 and our growing pipeline of promising new products. Today, American Home Products is on the leading edge in pharmaceutical research, biotechnology and genetic engineering. One measure of our commitment to research and development is this: After growing steadily during the 1980s and early 1990s, AHP's investment in R&D surpassed $1.5 billion in 1997, with 80 cents of every research dollar dedicated to pharmaceuticals, vaccines and biotechnology products. In terms of results, over the past three years AHP received 17 major product approvals in the United States and more internationally. In terms of the true innovators -- our people -- American Home Products today employs more than 3,600 researchers and scientists. In the pages that follow, we introduce some of AHP's people and highlight some of the unmet needs that have driven the most innovative thinking in the history of our Company. We also describe some recently introduced new products as well as some late-stage pipeline products, many of which were reviewed at our September 1997 meeting with R&D analysts from major brokerage firms. [Graphic Omitted] Scientist Pamela McMahon, shown here examining an Analytical SDS-PAGE gel of cell extracts, is among the many dedicated scientists and researchers worldwide who contribute to AHP's research and development efforts. 8 Rapamune(R) Because the current rate of organ transplant rejection is unacceptably high - --------------------------------------------------------------------------- Although a dramatic heart-lung or liver procedure may still make headlines, organ transplantation has become routine in cases such as kidney damage caused by diabetes and other diseases. But while the recipient of the transplant receives a life-saving gift, the donated organ is seen as a foreign invader, like a bacteria or virus infection, and the body's immune system will attack it. This results in rejection of the organ and is the major barrier to successful transplantation. Rejection can be overcome only by immunosuppressant drugs that reduce the body's normal immune response. However, there are only a handful of these powerful drugs available today, and they all have limitations: Patients still have organ rejection; patients usually must take many different drugs; and these drugs can cause side effects of their own, including kidney damage, nerve damage and high blood pressure. Rapamune (sirolimus rapamycin), an innovative new immunosuppressant from Wyeth-Ayerst Research, promises to reduce the rate of organ rejection and lower the common side effect problems associated with existing agents. Moreover, Rapamune may permit a reduction in dosage of some of these other drugs or their elimination altogether. This is an immense advance for transplant patients who require lifelong immunosuppressive therapy. below Suren Sehgal, Ph.D., (left) Distinguished Research Fellow at Wyeth-Ayerst Research (WAR), discovered the Rapamune molecule. Joseph S.Camardo, M.D., Assistant Vice President - Clinical Research at WAR, is Chairman of the Rapamune Task Force, responsible for all aspects of the development and successful registration of Rapamune. [2 Graphics Omitted] above Barry Kahan, M.D., Ph.D., is Professor of Surgery and Director of the Division of Immunology and Organ Transplantation at the University of Texas Health Science Center in Houston. Dr. Kahan was the first physician in the United States to use Rapamune in patients and has participated as an investigator in Phases I, II and III. Currently, he has more than 200 patients involved in clinical trials of Rapamune. 9 Pneumococcal Conjugate Vaccine Because more than 1 million annual childhood deaths cry out for an answer - ------------------------------------------------------------------------- Streptococcus pneumoniae is a major cause of morbidity and mortality worldwide. While pneumococcus infects people of all ages, in children it is the most frequent cause of otitis media, pneumonia and bacteremia, as well as the principal cause of childhood bacterial meningitis. Those most susceptible to pneumococcal diseases are children less than two years old. The impact is staggering in developing countries, where pneumococcus causes more than 1 million pneumonia deaths a year in children under the age of five. Additionally, in developing countries, it causes another 140,000 deaths from a range of related infections. Licensed pneumococcal polysaccharide vaccines are available but are poorly immunogenic in this age group. Further, strains that are resistant to routinely used antibiotics have emerged. Wyeth-Lederle Vaccines and Pediatrics has developed a new protein-polysaccharide conjugate vaccine that is immunogenic during infancy and is capable of providing long-term immunity. This vaccine has been shown to be well-tolerated and immunogenic in multiple studies in infants in the United States, Finland and South Africa. Two large-scale Phase III trials evaluating the protective efficacy of the pneumococcal conjugate vaccine against pneumococcal pneumonia, bacteremia and meningitis are under way. A Phase III trial evaluating the efficacy of the pneumococcal conjugate vaccine against pneumococcal otitis media also is ongoing in Finland. below Alan Kimura, M.D., Ph.D., is Associate Director - Clinical Research at Wyeth-Lederle Vaccines and Pediatrics (WLVP) and is responsible for the clinical development of the pneumococcal conjugate vaccine. Dr. Kimura is shown here with the seed fermenter for the pneumococcal bacteria at WLVP's Pearl River, New York, Vaccine Technology Development Center. [2 Graphics Omitted] above Pediatricians Henry Shinefield, M.D., (left) and Steven Black, M.D., are principal investigators in clinical trials of the pneumococcal conjugate vaccine being conducted at Northern California Kaiser Permanente Hospital in Oakland, California. 10 Effexor(R) XR Because distinguishing anxiety from depression often is difficult ----------------------------------------------------------------- Generalized Anxiety Disorder (GAD) is a serious illness characterized by distressing and/or disabling chronic, excessive anxiety and worry. Clinically distinct from depression, GAD also is associated with functional impairment, high utilization of medical services and a greater incidence of illicit drug use. During any 12-month period, some 3 percent of the U.S. population experiences GAD. Wyeth-Ayerst's Effexor (venlafaxine HCl), which inhibits both serotonin and norepinephrine reuptake, has proved to be an effective antidepressant without side effects such as fatigue. In 1997, Effexor XR, a new extended release formulation, was approved for marketing in the United States, the United Kingdom and six other countries for depression. Effexor XR permits once-daily dosing instead of dosing two or three times a day. In January 1998, Wyeth-Ayerst submitted a supplemental New Drug Application (NDA) to allow Effexor XR to be marketed for GAD. If approved, it will be the first drug for the treatment of both depressive disorders and GAD. It also will be the first new drug approved for GAD in more than a decade. Since the symptoms of both depression and anxiety commonly occur in the same patient, physicians often find it difficult to determine which is the primary disorder -- making Effexor XR a valuable drug that is effective both in generalized anxiety disorder and depression. [Graphic Omitted] Venlafaxine, the active component in Effexor and Effexor XR, is a structurally novel antidepressant that inhibits the brain's reuptake of serotonin and norepinephrine. Neumega(R) Because a cancer patient needs optimal doses of chemotherapy ------------------------------------------------------------ Chemotherapy -- taken orally or injected -- is used to treat about half of all cancer patients. In some cases, it's the patient's only hope for survival. But chemotherapy often produces severe side effects, including myelosuppression, in which bone marrow fails to produce sufficient levels of essential blood components: red blood cells, white blood cells and platelets. Of the 600,000 to 800,000 cancer patients undergoing chemotherapy each year in the United States, about one-quarter develop severe depletion of platelets due to their chemotherapy. If platelet levels are abnormally low, patients are at risk of bleeding, and their cancer treatments often are curtailed or delayed to give platelets a chance for replenishment. Alternatives to address low platelet levels, including transfusions, pose separate risks. Now there's new hope for cancer patients -- Neumega (Oprelvekin), the first platelet growth factor to enter the market worldwide. Neumega, discovered and developed by Genetics Institute, is the recombinant form of human interleukin-11, a naturally occurring platelet growth factor. Neumega boosts platelet levels, giving cancer patients the opportunity to receive chemotherapy as planned. After a rapid clinical development program, Neumega was licensed in the United States in November 1997 -- approximately 60 months after entering clinical development -- and was launched in January 1998. [Photo Omitted] Michael Gordon, M.D., is Associate Professor of Medicine and Director of the Clinical Hematology and Cytokine Program at the Indiana University School of Medicine. Dr. Gordon, a medical oncologist, was a key investigator in the clinical development program for Neumega. 11 RotaShield(R)/Rotamune(TM) Because rotavirus infects almost every child in the world --------------------------------------------------------- Every year, 130 million infants and children contract rotavirus diarrhea, and 875,000 of them die from it. Rotavirus is the single largest cause of life-threatening diarrhea in children under age two. Highly contagious, rotavirus infects almost all children by the age of four. While rotavirus often is perceived as a condition limited to developing countries, there are 3 million infectious rotavirus cases a year in the United States. Symptoms of rotavirus include diarrhea, vomiting, fever and dehydration. Dehydration can be reversed through oral hydration therapy but if serious enough, hospitalization and intravenous fluids are necessary. Because access to medical care is not always readily available, a promising answer lies in an oral vaccine -- the first ever against rotavirus -- developed through a Cooperative Research and Development Agreement between Wyeth-Ayerst and the National Institute of Allergy and Infectious Diseases. Now under review by the FDA, when licensed, it will be marketed as RotaShield in the United States. Internationally, registration is under way to market this vaccine under the name Rotamune. The vaccine is to be given in three doses in the first year of life. A strong endorsement for the product was received in February 1998 when a Centers for Disease Control and Prevention advisory committee voted to recommend routine use of RotaShield, when licensed in the United States, to prevent rotavirus gastroenteritis in infants. In the largest and most successful trial to date of a rotavirus vaccine, conducted in Venezuela, Rotamune reduced severe diarrheal illness by 88 percent. Further, studies in the United States indicate that the vaccine can prevent nearly half of all rotavirus infections, 80 percent of severe episodes and virtually 100 percent of all cases of dehydrating rotavirus illness. [Graphic Omitted] In December of 1997, an FDA advisory committee concluded that Wyeth-Ayerst's oral rotavirus vaccine is safe and effective against rotavirus gastroenteritis. Protonix(TM) Because even the most advanced medications require effective delivery --------------------------------------------------------------------- The caustic effect of stomach acid on the lining of the gastrointestinal tract can produce heartburn, gastric distress and, ultimately, ulceration. A primary goal in the treatment of these conditions is to reduce stomach acid, thereby removing the main erosive agent. The most effective approach for suppressing acid is the direct inhibition of its production by the gastric "proton pump" through the use of proton pump inhibitors (PPI). As a result, PPIs are the largest segment of the anti-ulcerant class, recording nearly $3 billion in U.S. sales in 1997, an increase of 45 percent over 1996. Protonix (pantoprazole), being developed for marketing in the United States by Wyeth-Ayerst under license from Byk Gulden, will be the first PPI available both in an oral and an intravenous form. The intravenous formulation of Protonix represents a significant medical advance because some patients cannot be treated with currently available PPIs due to the severity of their disease or their inability to take oral medications. Dosing guidance supporting the switching of patients between the intravenous and oral formulations should ensure that Protonix will be a valuable therapeutic tool for the medical community. NDA submissions from Wyeth-Ayerst for Protonix, in both intravenous and oral dosage forms, are anticipated in mid-1998. Now marketed in 48 countries outside the United States by Byk Gulden and its partners, pantoprazole is a unique PPI with an exceptionally clean drug interaction profile. [Graphic Omitted] The pantoprazole molecule, which is the active component in Protonix, binds irreversibly to the gastric proton pump for long-lasting suppression of gastric acid production. 12 Enbrel(TM) Because rheumatoid arthritis is a painful and disabling illness - --------------------------------------------------------------- You're 35 years old, and you've been diagnosed with rheumatoid arthritis (RA). You may be unable to work within 10 years, and, for certain, you are faced with painful, swollen joints and, perhaps, a crippling future. A disease of the immune system that occurs more frequently in women than men, rheumatoid arthritis affects millions of people around the world, including 2.5 million people in the United States, one-fifth of whom suffer from advanced symptoms. There is no known cure for rheumatoid arthritis, and current drugs do not address the underlying cause of the disease. Equally discouraging, after a few years, many patients no longer respond to or tolerate the side effects of current therapies. Enbrel (TNR-001) may change the outlook for RA patients. Enbrel is a biological immune modulator that regulates inflammation by blocking the interaction of the proinflammatory cytokine TNF with cells that respond to its signal. Enbrel has completed a Phase III study to evaluate its ability to alleviate the signs and symptoms of advanced RA. In this study, the advanced RA patients treated with Enbrel experienced a 71 percent reduction in painful joint counts. Other research under way includes a study in children with juvenile RA and a study in adults with RA to determine if Enbrel can modify the course of this disease. Enbrel was discovered by Immunex Corporation in which American Home Products owns a majority interest. Immunex and Wyeth-Ayerst have a long-term agreement to co-develop the product globally under which Wyeth-Ayerst has exclusive marketing rights outside of North America. In addition, under a new agreement, Wyeth-Ayerst will promote Enbrel in North America in collaboration with Immunex. below Teri G. Hall, Ph.D., (right) Wyeth-Ayerst's Project Team Leader for Enbrel, and Immunex's Leslie Garrison, M.D., Medical Director - Clinical Development, are part of the Joint Project Team coordinating Wyeth-Ayerst's and Immunex's global co-development of Enbrel. [2 Graphics Omitted] above Rheumatologist Larry W. Moreland, M.D., is a principal investigator in clinical trials of Enbrel, being conducted at the University of Alabama at Birmingham. 13 BENEFIX(R) Because Hemophilia B patients are at risk ----------------------------------------- Hemophilia B is an inherited disorder that almost exclusively affects males. Its cause is a deficiency or defect in Factor IX, one of a number of proteins involved in blood clotting. Although comparatively rare, its consequences are severe. Patients with clotting factor deficiencies bleed easily, without any provoking trauma. Even those with mild hemophilia can bleed after surgery, dental procedures or trauma. Until now, Factor IX replacement products all have been made from human blood using plasma pooled from many donors. This process introduces the risk of transmitting pathogenic viruses despite treatments to Factor IX products to reduce the probability of viral transmission. Included among the viruses that can be transmitted through human blood are HIV, hepatitis and parvovirus. In 1997, the FDA licensed a breakthrough alternative -- BeneFix, (rFactor IX), which now also has been approved in Canada and Europe with commercial launches targeted for mid-1998. A biotechnology product developed by Genetics Institute, BeneFix is a plasma- and albumin-free product that is genetically engineered and, for the first time, offers people with Hemophilia B a treatment that is inherently free from the risk of blood-borne pathogens. For Hemophilia B patients, BeneFix is more than an effective therapy -- it represents peace of mind. [Graphic Omitted] The N-Terminus of the Factor IX molecule is illustrated in this three-dimensional enhancement. Sonata(TM) Because a good night's sleep should be followed by a good morning ----------------------------------------------------------------- A 1997 National Sleep Foundation Gallup Survey, "Sleepiness in America," has found that people are far more sleep deprived than previously believed. One-third of all adults scored at levels of sleepiness known to be hazardous, with 6 percent scoring at severe levels of sleepiness. Nearly four in 10 of those reporting daytime sleepiness indicate that it interfered with routine activities. In addition, 12 percent acknowledge that daytime sleepiness diminished their driving abilities. Despite these statistics, Americans generally dismiss the problem, even though sleep disorders can be treated. However, currently available hypnotics must be taken within a significant period of time before the next morning in order to minimize the hangover effect. In cases of long-term use, either dependence on the drug or tolerance to its therapeutic effect may develop. Wyeth-Ayerst has developed Sonata (zaleplon), an innovative hypnotic that offers an opportunity to overcome these problems. Sonata permits insomnia sufferers to fall asleep rapidly and awaken refreshed, free from any rebound insomnia or residual drug sedation the next morning. An NDA and a Marketing Authorization Application for this product have been submitted in the United States and Europe, respectively. [Graphic Omitted] Thomas Roth, Ph.D., Director of Sleep Disorders Medicine at the Henry Ford Hospital in Detroit, was a principal investigator in clinical trials for Sonata. 14 Cydectin(R) Because raising cattle is tough enough without parasite problems ---------------------------------------------------------------- Bovine parasitism is the source of some of the most severe economic losses encountered by cattle producers in the United States. Cattle are infected by internal and external parasites that range from brown stomach worm (the most common) to lungworm, mites and lice. For the past two decades, animal health scientists have researched compounds that would combine safety and convenience while eliminating the problems of injectable formulations, which include side effects and injection site blemishes that can reduce meat's marketability. Cydectin Pour-On (moxidectin) is a new, potent endectocide from Fort Dodge Animal Health that sets a new standard for both performance and beef quality. Approved for use in the United States in early 1998, Cydectin is the only cattle parasite control product containing the active ingredient moxidectin, which delivers persistent anti-parasitic activity. Cydectin Pour-On is specially formulated to allow moxidectin to be absorbed through the skin and distributed to areas of the animal's body affected by internal or external parasites. After administration, moxidectin is stored in fat deposits, where it is slowly released into the blood stream. This characteristic is responsible for its long-lasting protection. Cydectin Pour-On can be used in all breeds of beef cattle, and its effectiveness is not affected by rainfall. As for convenience, a temporary purple dye provides ready recognition of treated cattle, and a large volume application gun makes it easy to apply. [Graphic Omitted] A second-generation molecule from the milbemycin chemical family, Cydectin delivers a unique combination of benefits unavailable in older avermectin products. Raptor(R) Because safe weed control is essential for food crops ----------------------------------------------------- Around the world, weeds like velvetleaf, nightshade and foxtail are known to be the most unwelcome visitors to farmers' fields. Soybeans and other leguminous crops, including peas, dry beans, alfalfa and lentils, are especially vulnerable to their infestation. This is significant because these are the essential feedstuffs upon which much of the world's livestock is dependent. Weed control products are available, but safety to crops, the environment and people is a concern. One effective answer is the family of products known as imidazolinones. First introduced by Cyanamid in 1984, they are known for their efficacy on a wide variety of weed species, are valued by farmers, and are safe to mankind and the environment. Raptor (imazamox) is a new Cyanamid broad-spectrum herbicide that is today's most potent and unique imidazolinone. Raptor provides contact and residual control of all major weeds, and its unique properties allow it to be used where other imidazolinones may not fit the cropping rotation. Raptor controls weeds during the growing season but degrades in the soil before the next season, offering growers outstanding followcrop flexibility. That means a U.S. farmer can plant cotton after soybeans, a French farmer can plant vegetables or canola after field peas and a Brazilian farmer can follow dry beans with potatoes -- all knowing that Raptor will provide the best weed control but will not affect the next season's crop. A global product, Raptor registrations are planned for more than 50 countries. [Graphic Omitted] Raptor is Cyanamid's new broad-spectrum herbicide for worldwide use on soybeans and other leguminous crops. Its unique soil properties allow greater followcrop flexibility. 15 American Home Products Corporation Pharmaceutical Products Pipeline AHP's pharmaceutical product pipeline produced eight new products in 1997: Alesse, BENEFIX, Crinone, Duract, Effexor XR, Neumega, Normiflo and Synvisc. Development now is proceeding for more than 50 new pharmaceutical compounds. A number of the most promising products in post-Phase I trials are described below. The majority of these products have worldwide market potential.
X U.S. O International A Approved NDA NDA filed PLA PLA filed III Phase 3 II Phase 2 + U.S. and International - ------------------------------------------------------------------------------------------------------------------------------------ Product Name Description/Indication A NDA/PLA III II - ------------------------------------------------------------------------------------------------------------------------------------ Crinone(R) Assisted reproduction therapy regimes; dysfunctional uterine bleeding and secondary amenorrhea O - ------------------------------------------------------------------------------------------------------------------------------------ Duract(R) Analgesia for short-term management of acute pain X O - ------------------------------------------------------------------------------------------------------------------------------------ Lyrelle(R)Patch Treatment of vasomotor symptoms related to menopause; 3.5 days O - ------------------------------------------------------------------------------------------------------------------------------------ Neumega(R) Chemotherapy-induced thrombocytopenia X O Interleukin-11 Crohn's disease X - ------------------------------------------------------------------------------------------------------------------------------------ Novantrone(R) Metastatic breast cancer O (Immunex) Non-Hodgkin's lymphoma (U.S. Phase I /II) O X - ------------------------------------------------------------------------------------------------------------------------------------ Effexor(R) XR Generalized anxiety disorder; once-a-day X O - ------------------------------------------------------------------------------------------------------------------------------------ Gestodene/EE Lowest-dose estrogen/progestin OC to be available 0 - ------------------------------------------------------------------------------------------------------------------------------------ Leukine(R) Treatment of neutropenia resulting from chemotherapy X (Immunex) Prevention of infections in patients with advanced HIV; fungal infections X Melanoma; flu vaccine adjuvant X - ------------------------------------------------------------------------------------------------------------------------------------ RotaShield(R)/ROTAMUNE(TM) Vaccine for prevention of rotaviral gastroenteritis in infants + - ------------------------------------------------------------------------------------------------------------------------------------ Sonata(TM) Non-benzodiazepine sedative/hypnotic for the treatment of + general insomnia - ------------------------------------------------------------------------------------------------------------------------------------ Suprax(R) Sinusitis claim X - ------------------------------------------------------------------------------------------------------------------------------------ TETRACEL(TM) Prophylaxis against diphtheria, tetanus, pertussis and Haemophilus X influenzae type b meningitis (acellular pertussis component) in toddlers - ------------------------------------------------------------------------------------------------------------------------------------ Enbrel(TM) Rheumatoid arthritis; joint venture with Immunex + (Immunex) Juvenile rheumatoid arthritis; joint venture with Immunex X - ------------------------------------------------------------------------------------------------------------------------------------ ERT Patch Treatment of vasomotor symptoms related to menopause; 7 days + - ------------------------------------------------------------------------------------------------------------------------------------
16
U.S. International A Approved NDA NDA filed PLA PLA filed III Phase 3 II Phase 2 U.S. and International - ------------------------------------------------------------------------------------------------------------------------------------ Product Name Description/Indication A NDA/PLA III II - ------------------------------------------------------------------------------------------------------------------------------------ HRT Patch Treatment of vasomotor symptoms related to menopause; 3.5 days + - ------------------------------------------------------------------------------------------------------------------------------------ Protonix(TM) Oral Erosive esophagitis, H. pylori eradication X Protonix(TM) I.V. Zollinger-Ellison Syndrome; erosive esophagitis X - ------------------------------------------------------------------------------------------------------------------------------------ Pneumococcal Conjugate Prophylaxis against pneumococcal diseases; e.g., otitis media, + Vaccine pneumonia, meningitis - ------------------------------------------------------------------------------------------------------------------------------------ Prempro(TM)/Premelle(R) Secondary prevention of coronary disease + - ------------------------------------------------------------------------------------------------------------------------------------ Rapamune(R) Immunosuppressive therapy for prophylaxis of renal transplant rejection + Immunosuppressive therapy for prophylaxis of liver, bone marrow + and cardiac transplant rejection - ------------------------------------------------------------------------------------------------------------------------------------ ReFacto(R) Hemophilia A; recombinant blood-clotting factor + - ------------------------------------------------------------------------------------------------------------------------------------ rhBMP-2* Bone repair and regeneration O X - ------------------------------------------------------------------------------------------------------------------------------------ Trimegestone/ Treatment of vasomotor symptoms and prevention of osteoporosis O 17 (beta)-estradiol with endometrial protection - ------------------------------------------------------------------------------------------------------------------------------------ Trimegestone/Premarin(R) Treatment of vasomotor symptoms and prevention of osteoporosis X with endometrial protection - ------------------------------------------------------------------------------------------------------------------------------------ Meningococcal Conjugate Prophylaxis against meningococcal group C meningitis + Vaccine - ------------------------------------------------------------------------------------------------------------------------------------ Fiblast(R) Stroke (Phase II/III); joint venture with Scios + Peripheral vascular disease (Phase I / II); joint venture with Scios + - ------------------------------------------------------------------------------------------------------------------------------------ CMA-676 Acute myelogenous leukemia; joint venture with Celltech plc + - ------------------------------------------------------------------------------------------------------------------------------------ Minalrestat (ARI-509) Adjunct to insulin/oral hypoglycemic agents for prevention/treatment of + diabetic complications - ------------------------------------------------------------------------------------------------------------------------------------ rhIL-12 Novel immunomodulator (Phase I / II) + - ------------------------------------------------------------------------------------------------------------------------------------ RSV Subunit Vaccine Prevention of respiratory syncytial virus-mediated lower respiratory + disease for at-risk children and the elderly - ------------------------------------------------------------------------------------------------------------------------------------ VPA-985 Hyponatremia + - ------------------------------------------------------------------------------------------------------------------------------------ Mobist(TM) Peripheral blood progenitor cell transplantation + (Immunex) Anti-tumor agent X - ------------------------------------------------------------------------------------------------------------------------------------ Nuvance(TM) (Immunex) Asthma X - ------------------------------------------------------------------------------------------------------------------------------------ Trimegestone/EE Oral contraceptive; newest progestin + - ------------------------------------------------------------------------------------------------------------------------------------
* Under evaluation by the U.S. Food and Drug Administration as a combination device; currently in pilot studies in the United States 17 American Home Products Corporation Principal Products -- United States Ethical Pharmaceuticals and Vaccines ===================== Women's Health Alesse Crinone Lo/Ovral Nordette Ovral Ovrette Premarin Premphase Prempro Triphasil - --------------------- Cardiovascular Cordarone Cordarone I.V. Inderal LA ISMO Isordil Normiflo Quinidex Sectral Tenex Verelan Ziac - --------------------- Mental Health Ativan Effexor Effexor XR Serax Pain and Inflammation Duract Lodine XL Naprelan Oruvail Synvisc - --------------------- Anti-Infectives Bicillin Minocin Myambutol Pipracil Suprax Zosyn - --------------------- Vaccines Acel-Imune FluShield HibTITER Orimune Pnu-Imune 23 Tetramune Tri-Immunol - --------------------- Oncology Therapies Leukine Neumega Novantrone Reglan Thioplex - --------------------- Other Products BeneFix Diamox Micro-K Phenergan Animal Health Care ===================== Veterinary Pharmaceuticals and Biologicals Cydectin Dicural Duramune Fel-O-Vax Fluvac Ketaset LymeVax ProHeart PYRAMID Quest Suvaxyn Synanthic Synovex ToDAY ToMORROW Triangle Consumer Health Care ===================== Analgesics and Cough/Cold/Allergy Advil Advil Cold & Sinus Anacin Children's Advil Dimetapp Dristan Junior Strength Advil Robitussin Vitamin and Mineral Supplements Caltrate Centrum Centrum Silver - --------------------- Other Products Anbesol Axid AR Chap Stick Denorex FiberCon Preparation H Primatene Agricultural Products ===================== Herbicides Arsenal Assert Cadre Lightning Prowl Pursuit Raptor Scepter Squadron Steel - --------------------- Insecticides Amdro Counter Thimet The above principal products are identified as trademarks used by American Home Products Corporation and its subsidiaries. 18 Financial Section Contents Ten-Year Selected Financial Data........................................... 20 Consolidated Balance Sheets................................................ 22 Consolidated Statements of Income.......................................... 23 Consolidated Statements of Retained Earnings and Additional Paid-in Capital.................................... 24 Consolidated Statements of Cash Flows...................................... 25 Notes to Consolidated Financial Statements................................. 26 Report of Independent Public Accountants................................... 37 Management Report on Financial Statements.................................. 37 Quarterly Financial Data................................................... 38 Market Prices of Common Stock and Dividends.............................................................. 38 Management's Discussion and Analysis of Financial Condition and Results of Operations.............................................................. 39 19 American Home Products Corporation and Subsidiaries Ten-Year Selected Financial Data (Dollar amounts in thousands except per share amounts)
Years Ended December 31, 1997 1996 1995 ===================================================================================================================== Summary of Sales and Earnings Net sales........................................................ $ 14,196,026 $ 14,088,326 $ 13,376,089 Net income(1).................................................... 2,043,123 1,883,403 1,680,418 Basic earnings per share(1)...................................... 3.16 2.96 2.71 Diluted earnings per share....................................... 3.11 2.92 2.69 Dividends per common share....................................... 1.66 1.565 1.51 ===================================================================================================================== Year-End Financial Position Current assets................................................... $ 7,361,326 $ 7,470,419 $ 7,986,137 Current liabilities.............................................. 4,327,018 4,337,635 4,556,248 Ratio of current assets to current liabilities................... 1.70 1.72 1.75 Total assets..................................................... 20,825,111 20,785,343 21,362,923 Long-term debt................................................... 5,031,861 6,020,575 7,808,757 Average stockholders' equity..................................... 7,568,672 6,252,545 4,898,550 ===================================================================================================================== Shareholders - Outstanding Shares Number of common shareholders.................................... 64,313 67,545 68,763 Average number of common shares outstanding used for basic earnings per share calculation (in thousands)... 646,882 635,426 619,670 Average number of common shares outstanding used for diluted earnings per share calculation (in thousands).......... 656,488 643,895 625,451 ===================================================================================================================== Employment Data Number of employees at year-end.................................. 60,523 59,747 64,712 Wages and salaries............................................... $ 2,726,877 $ 2,729,662 $ 2,757,664 Benefits (including social security taxes)....................... 692,648 688,766 703,756 - ---------------------------------------------------------------------------------------------------------------------
(1) See Management's Discussion and Analysis of Financial Condition and Results of Operations for amounts related to special charges, gains on sales of businesses and restructuring charges for the years ended December 31, 1997, 1996 and 1995. (2) The 1994 information reflects the acquisition of American Cyanamid Company for the one month ended December 31, 1994. 20 1994(2) 1993 1992 1991 1990 1989 1988 ========================================================================================================================= $ 8,966,214 $ 8,304,851 $ 7,873,687 $ 7,079,443 $ 6,775,182 $ 6,747,016 $ 6,401,454 1,528,254 1,469,300 1,460,842 1,375,273 1,230,597 1,102,158 995,461 2.49 2.37 2.33 2.18 1.96 1.77 1.61 2.48 2.35 2.31 2.16 1.94 1.75 1.60 1.47 1.43 1.33 1.1875 1.075 0.975 0.90 ========================================================================================================================= $ 7,821,246 $ 4,807,684 $ 4,552,077 $ 4,119,057 $ 3,826,075 $ 3,532,786 $ 3,256,494 4,618,086 1,584,411 1,492,717 1,270,135 1,693,852 1,108,895 1,067,599 1.69 3.03 3.05 3.24 2.26 3.19 3.05 21,674,812 7,687,353 7,141,405 5,938,797 5,637,107 5,681,487 5,492,424 9,973,240 859,278 601,934 104,710 111,430 1,895,796 100,057 4,065,295 3,719,539 3,431,568 2,987,885 2,322,623 1,651,050 1,077,462 ========================================================================================================================= 71,223 72,664 73,064 71,209 69,907 70,904 70,021 614,826 621,336 628,402 631,452 628,132 623,288 618,792 617,050 626,495 633,620 636,695 633,348 628,463 623,930 ========================================================================================================================= 74,759 51,399 50,653 47,938 48,700 50,816 51,464 $ 1,820,450 $ 1,654,984 $ 1,575,615 $ 1,388,397 $ 1,398,721 $ 1,391,233 $ 1,284,208 441,768 396,045 367,899 300,810 312,750 256,458 245,834 - -------------------------------------------------------------------------------------------------------------------------
21 American Home Products Corporation and Subsidiaries Consolidated Balance Sheets (In thousands except share amounts)
December 31, 1997 1996 =================================================================================================================== Assets Cash and cash equivalents ................................................... $ 1,051,372 $ 1,322,297 Marketable securities ........................................................ 48,363 221,820 Accounts receivable less allowances (1997 - $197,155 and 1996 - $204,121)..... 2,843,099 2,541,714 Inventories................................................................... 2,412,406 2,389,369 Other current assets including deferred taxes ................................ 1,006,086 995,219 ---------------------------------- Total Current Assets ....................................................... 7,361,326 7,470,419 Property, plant and equipment: Land........................................................................ 152,942 184,200 Buildings................................................................... 2,865,501 2,675,838 Machinery and equipment .................................................... 3,703,606 3,394,628 ---------------------------------- ............................................................................ 6,722,049 6,254,666 Less accumulated depreciation ................................................ 2,425,143 2,217,933 ---------------------------------- ............................................................................ 4,296,906 4,036,733 Goodwill and other intangibles, net of accumulated amortization (1997 - $1,863,773 and 1996 - $1,597,049)................................... 8,338,695 8,517,610 Other assets including deferred taxes......................................... 828,184 760,581 ---------------------------------- Total Assets ............................................................... $ 20,825,111 $ 20,785,343 ================================== =================================================================================================================== Liabilities Loans payable................................................................. $ 89,041 $ 76,574 Trade accounts payable ....................................................... 794,291 940,076 Accrued expenses ............................................................. 3,019,805 2,810,223 Accrued federal and foreign taxes ............................................ 423,881 510,762 ---------------------------------- Total Current Liabilities .................................................. 4,327,018 4,337,635 Long-term debt................................................................ 5,031,861 6,020,575 Other noncurrent liabilities.................................................. 2,248,282 2,486,375 Postretirement benefit obligations other than pensions........................ 833,916 782,342 Minority interests ........................................................... 208,782 196,324 =================================================================================================================== Stockholders' Equity $2 convertible preferred stock, par value $2.50 per share; 5,000,000 shares authorized........................................................... 72 79 Common stock, par value $.331/3 per share; 1,200,000,000 shares authorized (outstanding shares: 1997 - 650,377,000 and 1996 - 639,983,000) ............ 216,792 213,328 Additional paid-in capital ................................................... 2,530,696 2,034,337 Retained earnings............................................................. 5,710,892 4,756,270 Currency translation adjustments.............................................. (283,200) (41,922) ---------------------------------- Total Stockholders' Equity.................................................. 8,175,252 6,962,092 ---------------------------------- Total Liabilities and Stockholders' Equity ................................. $ 20,825,111 $ 20,785,343 ================================== - -------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated balance sheets. 22 American Home Products Corporation and Subsidiaries Consolidated Statements of Income (In thousands except per share amounts)
Years Ended December 31, 1997 1996 1995 ========================================================================================================= Net Sales ......................................... $ 14,196,026 $ 14,088,326 $ 13,376,089 --------------------------------------------------- Cost of goods sold................................. 4,101,309 4,449,783 4,534,320 Selling, general and administrative expenses....... 5,292,585 5,232,830 4,974,253 Research and development expenses ................. 1,558,035 1,429,056 1,354,963 Interest expense, net ............................. 370,696 433,034 514,920 Other income, net.................................. (121,306) (96,159) (98,184) Gains on sales of businesses....................... -- (813,532) (959,845) Special charges.................................... 180,000 697,854 436,724 Restructuring charge............................... -- -- 180,240 --------------------------------------------------- 11,381,319 11,332,866 10,937,391 --------------------------------------------------- Income before federal and foreign taxes............ 2,814,707 2,755,460 2,438,698 Provision for taxes: Federal......................................... 309,981 437,682 401,573 Foreign......................................... 461,603 434,375 356,707 --------------------------------------------------- 771,584 872,057 758,280 --------------------------------------------------- Net Income ........................................ $ 2,043,123 $ 1,883,403 $ 1,680,418 =================================================== Basic Earnings per Share........................... $ 3.16 $ 2.96 $ 2.71 =================================================== Diluted Earnings per Share......................... $ 3.11 $ 2.92 $ 2.69 =================================================== - ---------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated statements. 23 American Home Products Corporation and Subsidiaries Consolidated Statements of Retained Earnings and Additional Paid-in Capital (In thousands except per share amounts)
Years Ended December 31, 1997 1996 1995 ================================================================================================================================ Retained Earnings Balance, beginning of year................................................. $4,756,270 $3,875,224 $3,120,659 Add: Net income............................................................ 2,043,123 1,883,403 1,680,418 --------------------------------------------------- 6,799,393 5,758,627 4,801,077 --------------------------------------------------- Less: Cash dividends declared: Preferred stock (per share: 1997 - 1995, $2.00)......................... 60 65 71 Common stock (per share: 1997 - 1995, $1.66, $1.565, $1.51)............. 1,073,140 993,487 934,725 --------------------------------------------------- 1,073,200 993,552 934,796 Cost of treasury stock acquired (less amounts charged to capital) and other items........................................................ 12,746 10,139 6,544 --------------------------------------------------- 1,085,946 1,003,691 941,340 --------------------------------------------------- Change in unrealized gain/(loss) on marketable securities ................. (2,555) 1,334 15,487 --------------------------------------------------- Balance, end of year....................................................... $5,710,892 $4,756,270 $3,875,224 =================================================== ================================================================================================================================ Additional Paid-in Capital Balance, beginning of year ................................................ $2,034,337 $1,515,154 $1,020,658 Add: Excess over par value of common stock issued.......................... 497,438 520,355 495,323 Less: Cost of treasury stock acquired, less amounts charged to retained earnings............................................ 1,079 1,172 827 --------------------------------------------------- Balance, end of year....................................................... $2,530,696 $2,034,337 $1,515,154 =================================================== - --------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated statements. 24 American Home Products Corporation and Subsidiaries Consolidated Statements of Cash Flows (In thousands)
Years Ended December 31, 1997 1996 1995 ================================================================================================================================ Operating Activities Net income ............................................................... $ 2,043,123 $ 1,883,403 $ 1,680,418 Adjustments to reconcile net income to net cash provided from operating activities: Gains on sales of businesses............................................ -- (813,532) (959,845) Special and restructuring charges....................................... 180,000 697,854 616,964 Gains on sales of other assets.......................................... (375,925) (98,809) (23,703) Depreciation............................................................ 394,287 367,834 367,394 Amortization............................................................ 307,738 290,232 311,827 Deferred income taxes................................................... (220,214) 101,592 (145,070) Changes in working capital, net of businesses acquired or sold: Accounts receivable ................................................. (329,537) 18,675 (268,445) Inventories.......................................................... (50,927) (213,037) (111,147) Other current assets................................................. 28,143 65,901 (102,073) Trade accounts payable and accrued expenses ......................... (171,666) (354,132) (85,331) Accrued federal and foreign taxes.................................... (80,873) 154,271 (110,720) Other items, net........................................................ (28,695) 298,003 342,795 --------------------------------------------------- Net cash provided from operating activities............................... $ 1,695,454 $ 2,398,255 $ 1,513,064 =================================================== ================================================================================================================================ Investing Activities Purchases of property, plant and equipment................................ $ (830,351) $ (652,226) $ (637,501) Purchases of businesses, net of cash acquired............................. (479,694) -- (130,000) Purchase of remaining equity interest in Genetics Institute, Inc. and another subsidiary................................................. -- (1,326,351) -- Proceeds from sales of businesses and other assets........................ 874,850 1,483,709 2,046,047 Proceeds from sales of/(purchases of) marketable securities, net......... 172,236 (7,924) 45,842 --------------------------------------------------- Net cash provided from/(used for) investing activities................... $ (262,959) $ (502,792) $ 1,324,388 =================================================== ================================================================================================================================ Financing Activities Net repayments of debt.................................................... $ (976,926) $ (1,783,825) $ (2,205,550) Dividends paid............................................................ (1,073,200) (993,552) (934,796) Purchases of treasury stock............................................... (11,335) (11,382) (7,402) Exercise of stock options................................................. 369,561 412,197 469,763 Other items, net.......................................................... -- -- (58,502) ---------------------------------------------------- Net cash used for financing activities ................................... (1,691,900) (2,376,562) (2,736,487) ---------------------------------------------------- Effects of exchange rates on cash balances................................ (11,520) 999 5,228 --------------------------------------------------- Increase/(decrease) in cash and cash equivalents ......................... (270,925) (480,100) 106,193 Cash and cash equivalents, beginning of year.............................. 1,322,297 1,802,397 1,696,204 --------------------------------------------------- Cash and cash equivalents, end of year.................................... $ 1,051,372 $ 1,322,297 $ 1,802,397 =================================================== - --------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated statements. 25 Notes to Consolidated Financial Statements Summary of Significant Accounting Policies 1. Principles of Consolidation: The accompanying consolidated financial statements include the accounts of American Home Products Corporation and its majority-owned subsidiaries (the Company). The financial statements have been prepared in accordance with generally accepted accounting principles and necessarily include amounts based on judgments and estimates made by management. Description of Business: The Company is a U.S.-based multinational corporation engaged in the discovery, development, manufacture, distribution and sale of a diversified line of products in two primary business segments: health care and agricultural products. Health care products include branded and generic ethical pharmaceuticals, biologicals, nutritionals, consumer health care products, medical devices, and animal biologicals and pharmaceuticals. Agricultural products include crop protection and pest control products such as herbicides, insecticides, fungicides and plant growth regulators. The Company sells its diversified line of products to wholesalers, pharmacies, hospitals, physicians, retailers and other health care institutions located in various markets in more than 150 countries throughout the world. The Company is not dependent on any single or major group of customers for its sales. The Company is not dependent on any one patent-protected product or line of products for a substantial portion of its sales or results of operations. However, Premarin, the Company's conjugated estrogens product, which has not had patent protection for many years, does contribute significantly to sales and results of operations. See "Competition" in Management's Discussion and Analysis of Financial Condition and Results of Operations on page 43 for further details. Cash and Cash Equivalents, for purposes of reporting cash flows, consist primarily of certificates of deposit, time deposits and other short-term, highly liquid securities with original maturities of three months or less and are stated at cost, which approximates fair value. The carrying values of cash and cash equivalents approximate fair value due to the short-term, highly liquid nature of the cash equivalents. Marketable Securities consist of U.S. government or agency issues and corporate bonds and are stated at fair value, which approximates cost. The fair values are estimated based on quoted market prices. Inventories are valued at the lower of cost or market. Inventories valued under the last-in, first-out (LIFO) method amounted to $764,409,000 at December 31, 1997 and $806,661,000 at December 31, 1996. Current value exceeded LIFO value by $73,411,000 and $63,639,000 at December 31, 1997 and 1996, respectively. The remaining inventories are valued under the first-in, first-out (FIFO) or the average cost method. Inventories at December 31 consisted of:
(In thousands) 1997 1996 - ----------------------------------------------------------------------------- Finished goods ............................. $ 1,042,065 $1,121,055 Work in progress ........................... 657,033 567,240 Materials and supplies ..................... 713,308 701,074 ------------------------------- $ 2,412,406 $2,389,369 ===============================
Property, Plant and Equipment is carried at cost. Depreciation is provided over the estimated useful lives of the related assets, principally on the straight-line method. Goodwill, the excess of cost over the fair value of net assets acquired, is being amortized on the straight-line method over various periods not exceeding 40 years. The Company continually reviews goodwill to evaluate whether changes have occurred that would suggest goodwill may be impaired based on the estimated undiscounted cash flows of the entity acquired over the remaining amortization period. If this review indicates that the remaining estimated useful life of goodwill requires revision or that the goodwill is not recoverable, the carrying amount of the goodwill is reduced by the estimated shortfall of cash flows on a discounted basis. Interest Rate Swap and Foreign Currency Agreements: The Company enters into interest rate swap and short-term foreign currency agreements to manage specifically identifiable risks. The interest rate swap agreements lock in the underlying U.S. treasury security rate and 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. The fair value of interest rate swap and foreign currency agreements is based on market prices. The fair value represents the estimated amount the Company would receive/pay to terminate the agreements taking into consideration current interest or currency exchange rates. Amounts to be paid to the counterparties of the interest rate swap agreements are accrued during the period to which the payments relate and are reflected in interest expense. The fair value of the interest rate swap agreements is not recognized in the consolidated financial statements since the agreements are accounted for as hedges. 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. Currency Translation: The majority of the Company's international operations are translated into U.S. dollars using current exchange rates with translation adjustments accumulated 26 in stockholders' equity. Translation adjustments related to international operations in highly inflationary economies are included in net income. Earnings per Share: Effective for the year ended December 31, 1997, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 128 - "Earnings per Share." The adoption of SFAS No. 128 requires the presentation of Basic Earnings per Share and Diluted Earnings per Share. Basic Earnings per Share is based on the average number of common shares outstanding during the year. Diluted Earnings per Share is based on the average number of common shares outstanding during the year plus the common share equivalents related to outstanding stock options and deferred contingent common stock awards. The computations of Basic Earnings per Share and Diluted Earnings per Share were as follows:
(In thousands except per share amounts) 1997 1996 1995 - -------------------------------------------------------------------------------- Net income less preferred dividends .......... $2,043,063 $1,883,338 $1,680,347 Denominator: Average number of common shares ................ 646,882 635,426 619,670 ------------------------------------------ Basic earnings per share .................... $ 3.16 $ 2.96 $ 2.71 ========================================== Denominator: Average number of common shares ................ 646,882 635,426 619,670 Common share equivalents of outstanding stock options and deferred contingent common stock awards ................. 9,606 8,469 5,781 ------------------------------------------ Total shares ................... 656,488 643,895 625,451 ------------------------------------------ Diluted earnings per share .................... $ 3.11 $ 2.92 $ 2.69 ==========================================
Recently Issued Accounting Standards: In February 1998, SFAS No. 132 - "Employers' Disclosures about Pensions and Other Postretirement Benefits" was issued and is effective for periods beginning after December 15, 1997. 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. 132 revises employers' disclosures about pension and other postretirement benefit plans. 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 and will have no impact on the Com-pany's financial position or results of operations. Acquisitions and Divestitures 2. During 1997, 1996 and 1995, the Company acquired and divested various businesses and other assets as follows: In December 1997, the Company signed a definitive agreement with a subsidiary of Tyco International Ltd. for the sale of the Sherwood-Davis & Geck medical devices business. Under the transaction, which is subject to certain customary closing conditions, including the receipt of necessary governmental approvals, the Company will receive $1.77 billion in cash at closing. The completion of the transaction is expected to take place during the first quarter of 1998 and, excluding the gain on sale, will not have a material impact on the Company's future results of operations. This transaction will complete the Company's exit from the medical devices business. In December 1997, the Company sold the stock of Storz Instrument Company and affiliated companies, a global manufacturer and marketer of ophthalmic products, and certain assets relating to the Storz business for $380,000,000, resulting in a pre-tax gain of $71,861,000 ($46,710,000 after-tax). In February 1997, the Company completed the acquisition of the worldwide animal health business of Solvay S.A. for approximately $460,000,000. The acquisition was accounted for under the purchase method of accounting. The purchase price exceeded the net assets acquired by $368,303,000 and is being amortized over periods of 10 to 25 years. In December 1996, the Company acquired the remaining equity interest in Genetics Institute, Inc. (G.I.) by exercising its option to purchase the outstanding capital stock from public shareholders at $85 per share. The total consideration paid for the remaining equity interest in G.I. was $1.279 billion. The acquisition was accounted for under the purchase method of accounting effective December 31, 1996 (see Note 3). In November 1996, the Company sold a majority interest (80%) in the American Home Foods business for approximately $1.2 billion, resulting in a pre-tax gain of $813,532,000. Net income and basic earnings per share for 1996 included an after-tax gain of $706,279,000 or $1.11 per share related to this transaction. In March 1996, the Company sold Symbiosis Corp. for $148,672,000, resulting in a pre-tax gain of $22,677,000 ($14,740,000 after-tax). Symbiosis Corp. develops and manufactures disposable laparoscopic and endoscopic surgical products. In January 1995, the Company sold its South American oral health care business for approximately $1.0 billion, resulting in a pre-tax gain of $959,845,000. Net income and basic earnings per share for 1995 included an after-tax gain of $623,870,000 or $1.01 per share related to this transaction. 27 During 1995, the Company sold certain businesses and other assets acquired in the American Cyanamid Company (ACY) acquisition for total pre-tax proceeds aggregating $956,004,000. This activity included the sales of a preferred stock investment in Cytec Industries Inc. for $395,101,000, the medicated feed additives business for $344,500,000 and Acufex Microsurgical Inc., a manufacturer of arthroscopic instruments and scopes, for $141,000,000. Gains on the sales of these items reduced ACY acquisition-related goodwill. The Company had other acquisitions and divestitures during 1997, 1996 and 1995, the effects of which, individually and in the aggregate, were not material to the Company's consolidated financial position or results of operations. The operations of all acquisitions and divestitures during these years, individually and in the aggregate, were not material to the Company's consolidated financial position or results of operations. Restructuring and Special Charges 3. On September 15, 1997, the Company announced the voluntary market withdrawal of fenfluramine HCl, manufactured and sold under the name Pondimin, and dexfenfluramine HCl, marketed under the name Redux. The Company took this action and withdrew the products on the basis of new, preliminary information regarding heart valve abnormalities in patients using these medications. The 1997 results of operations included special charges aggregating $180,000,000 ($117,000,000 after-tax or $0.18 per share - basic) to record the one-time costs associated with the voluntary market withdrawal. The special charges included provisions for product returns, notification and administrative handling fees, the writedown of inventory and supplies, and other related costs. These costs did not include provisions for any subsequent charges which may result from legal actions related to these products (see Note 10). In December 1996, the Company completed a study and evaluation of the purchase price allocation related to the acquisition of the remaining equity interest in G.I. (see Note 2). The purchase price exceeded the net assets acquired by $1.057 billion, resulting in the recognition of goodwill related to the commercial operations of $359,513,000 and a special charge of $470,000,000 for the portion of the G.I. goodwill attributable to acquired in-process research and development. G.I. also recorded a special charge of $227,854,000 for the liquidation of its outstanding stock options as of December 31, 1996. The goodwill recognized in this acquisition was based on the estimated future cash flows of existing, approved products of G.I. attributed to the remaining equity interest acquired. The total special charges related to the acquisition of the remaining equity interest in G.I. were $697,854,000 or $1.10 per share - basic. Special charges aggregating $436,724,000 ($308,317,000 after-tax or $0.50 per share - basic) were recorded in 1995. The special charges included provisions for environmental liabilities related to ACY due to changes in estimates of $228,224,000 and provisions for other special charges of $208,500,000, including the shutdown and discontinuance of the U.S. infant nutritional business and other contingent liability adjustments. In 1995, the Company recorded a restructuring charge of $180,240,000 ($117,156,000 after-tax or $0.19 per share - basic) to recognize the costs of implementing the integration plan for the ACY acquisition related to American Home Products Corporation operations. The integration plan eliminated excess production capacity and facilities, reduced overhead and realigned the Company's resources to achieve its strategic objectives. The restructuring charge excluded costs associated with ACY personnel and facilities as these costs were included in the overall evaluation of net assets acquired from ACY. In 1994, the Company recorded a restructuring charge of $173,697,000 ($112,903,000 after-tax or $0.18 per share - basic) to recognize the costs of consolidating the manufacturing, distribution and quality control functions for the U.S. pharmaceutical and consumer health care businesses. Since the implementation of the 1995 and 1994 restructuring programs, the combined restructuring accruals have decreased by approximately $238,680,000 due to cash expenditures primarily for severance and related personnel benefits, production and administrative facility closure costs, and noncash charges to reduce the carrying value of certain assets related to manufacturing operations. Since 1994, total workforce reductions related to restructuring programs, integration plans and the discontinuance of the U.S. infant nutritional business have resulted in the elimination of approximately 10,100 positions worldwide. Debt and Financing Arrangements 4. The Company's debt at December 31 consisted of:
(In thousands) 1997 1996 - -------------------------------------------------------------------------------- Commercial paper ............................. $2,340,357 $2,997,771 Notes payable: 6.875% notes due 1997 ...................... -- 250,000 7.70% notes due 2000 ....................... 1,000,000 1,000,000 6.50% notes due 2002 ....................... 250,000 250,000 7.90% notes due 2005 ....................... 1,000,000 1,000,000 7.25% debentures due 2023 .................. 250,000 250,000 Pollution control and industrial revenue bonds: 3.85% - 7.00% due 1998-2020 ............... 123,900 136,990 Other debt: 1.18% - 13.30% due 1998-2009 ............... 156,645 212,388 --------------------------- 5,120,902 6,097,149 Less current portion ......................... 89,041 76,574 --------------------------- $5,031,861 $6,020,575 ===========================
28 At December 31, 1997 and 1996, the fair value of the Company's long-term debt, excluding the interest rate swap agreements discussed below, was $5,255,737,000 and $6,204,292,000, respectively. The fair value of the Company's long-term debt is estimated based on market prices. In connection with the ACY acquisition, the Company and certain of its subsidiaries issued commercial paper, of which approximately $2.3 billion and $3.0 billion was outstanding at December 31, 1997 and 1996, respectively. The weighted average interest rate on the commercial paper outstanding at December 31, 1997 and 1996 was 5.76% and 5.47%, respectively. The commercial paper has original maturities not exceeding 270 days and a weighted average remaining maturity of 35 days as of December 31, 1997. The commercial paper is supported by two credit agreements among the Company and certain of its subsidiaries and a syndicate of lenders. The credit facilities, as amended, aggregate $5.0 billion consisting of a $2.5 billion, five-year credit facility and a $2.5 billion, 364-day credit facility which may be renewed annually with the consent of the majority lenders for an additional 364-day period. Under the terms of the 364-day credit facility, if this facility is utilized, the borrowing is extendible for another 364-day period at the option of the Company. The interest rate on borrowings under the credit facilities is based on various rate options available to the Company. The proceeds of the credit facilities may be used to support commercial paper and the Company's general corporate and working capital purposes. The credit facilities contain a financial covenant and various other customary covenants, representations, warranties, conditions and default provisions. As of December 31, 1997, there were no borrowings outstanding under the credit facilities. Commercial paper outstanding at December 31, 1997 is classified as long-term debt since the Company intends, and has the ability, to refinance these obligations through the issuance of additional commercial paper, through the use of its credit facilities or through the issuance of long-term debt. In 1994, the Company entered into $4.75 billion notional amount of simple, unleveraged interest rate swap agreements as a means of (1) locking in the underlying U.S. treasury security rates to be paid in connection with long-term debt issued during 1995 and long-term debt expected to be issued and (2) converting a portion of the commercial paper issued in connection with the acquisition of ACY from a floating rate obligation to a fixed rate obligation. The swap agreements are contracts under which the Company pays a fixed rate of interest and receives a floating rate of interest over the term of the swap agreements without the exchange of the underlying notional amounts. During 1997, the weighted average interest rates paid and received on these agreements were 7.82% and 5.57%, respectively. The swap agreements have maturities ranging from 1998 to 2005. In 1995, the Company terminated $2.0 billion of interest rate swap agreements in connection with a $2.0 billion issuance of five- and 10-year notes as discussed below. In 1996 and 1997, interest rate swap agreements aggregating $450,000,000 matured and were not replaced. At December 31, 1997 and 1996, the fair value of the remaining $2.3 billion and $2.5 billion of interest rate swap agreements was a payable of $98,463,000 and $113,808,000, respectively. In 1995, the Company issued, under a $3.5 billion shelf registration statement, $1.0 billion of 7.70% notes due February 2000 and $1.0 billion of 7.90% notes due February 2005. Net proceeds from these issuances were used to repay commercial paper. The non-callable notes, which have semiannual interest payments due on February 15 and August 15, are unsecured and unsubordinated. The 6.875% notes which matured on April 15, 1997 were classified as long-term as of December 31, 1996 since the Company had both the intent and ability to refinance these notes on a long-term basis. The 6.50% non-callable notes have semiannual interest payments due on April 15 and October 15. The 7.25% non-callable debentures have semiannual interest payments due on March 1 and September 1. The non-callable notes and debentures are unsecured and unsubordinated. The aggregate maturities of debt during the next five years as of December 31, 1997 are as follows:
(In thousands) - ------------------------------------------------------------- 1998 .......................................... $ 89,041 1999 .......................................... 25,762 2000 .......................................... 1,023,308 2001 .......................................... 16,081 2002 .......................................... 253,354 Thereafter .................................... 1,372,999 ----------- 2,780,545 Commercial paper .............................. 2,340,357 ----------- Total debt .................................... $ 5,120,902 ===========
Interest payments in connection with the Company's debt obligations for the years ended December 31, 1997, 1996 and 1995 amounted to $471,120,000, $562,733,000 and $655,111,000, respectively. Interest expense, net in the Consolidated Statements of Income includes interest income of $90,674,000, $138,380,000 and $150,101,000 for the years ended December 31, 1997, 1996 and 1995, respectively. The Company enters into short-term foreign exchange forward contracts as part of its management of foreign currency exposures. The Company does not engage in speculation on foreign currency. At December 31, 1997 and 1996, the Company had notional amounts of $977,459,000 and $724,187,000, respectively, of foreign exchange forward contracts outstanding. At December 31, 1997 and 1996, the fair value of the foreign exchange forward contracts was a net 29 receivable of $14,368,000 and $2,845,000, respectively. As foreign exchange rates change from period to period, the fluctuations in the fair value of the foreign exchange forward contracts are offset by fluctuations in the fair value of the underlying hedged transactions. The Company believes that the risk of loss associated with the interest rate or foreign currency agreements, from either non-performance by the counterparties or due to fluctuations in interest or foreign exchange rates, is not material to its financial position or results of operations. Other Noncurrent Liabilities 5. Other noncurrent liabilities include reserves for contingencies relating to income taxes, environmental matters, product liability and other litigation, as well as restructuring, pension, Management Incentive Plan and other employee benefit liabilities. The Company has responsibility for environmental, safety and cleanup obligations under various local, state and federal laws, including the Comprehensive Environmental Response, Compensation and Liability Act, commonly known as Superfund. As of December 31, 1997, the Company was a party to, or otherwise involved in, legal proceedings directed at the cleanup of 61 Superfund sites. It is the Company's policy to accrue environmental cleanup costs if it is probable that a liability has been incurred and an amount is reasonably estimable. In many cases, future environmental-related expenditures cannot be quantified with a reasonable degree of accuracy. Environmental expenditures that relate to an existing condition caused by past operations that do not contribute to current or future results of operations are expensed. As investigations and cleanups proceed, environmental-related liabilities are reviewed and adjusted as additional information becomes available. The aggregate environmental-related accruals were $424,330,000 and $447,050,000 at December 31, 1997 and 1996, respectively. As discussed in Note 3, during 1995, a provision of $228,224,000 was recorded for environmental liabilities related to ACY due to changes in estimates. Environmental-related accruals have been recorded without giving effect to any possible future insurance proceeds or the timing of the payments. See Note 10 for a discussion of contingencies. The Company's Management Incentive Plan provides for cash and deferred contingent common stock awards to key employees. The maximum number of shares of common stock issuable under the plan is 24,000,000, of which 18,206,570 have been awarded through December 31, 1997. Deferred contingent common stock awards plus accrued dividends totaling 899,197 shares were outstanding at December 31, 1997. Awards for 1997, 1996 and 1995 were $67,045,000, $60,306,000 and $52,909,000, which included deferred contingent common stock of $14,834,000 (198,416 shares), $12,283,000 (205,581 shares) and $10,197,000 (212,542 shares), respectively. Employee Benefit Plans 6. Pension Plans: The Company sponsors various retirement plans for most full-time employees. Total pension expense for 1997, 1996 and 1995 was $146,403,000, $120,621,000 and $132,639,000, respectively. The Company sponsors defined benefit and defined contribution plans for most domestic and certain foreign locations. Pension plan benefits for defined benefit plans are based primarily on participants' compensation and years of credited service. It has been the Company's policy to fund all current and prior year service costs under defined benefit retirement plans. Contributions to defined contribution plans are based on a percentage of employees' compensation. Pension expense recognized for defined contribution plans totaled $65,645,000 in 1997, $66,674,000 in 1996 and $57,992,000 in 1995. Net periodic pension cost of defined benefit pension plans was as follows (principally U.S. pension plans):
(In thousands) 1997 1996 1995 - ------------------------------------------------------------------------------- Service cost on benefits earned during the year .......... $ 66,236 $ 58,434 $ 55,283 Interest cost on projected benefit obligation .............. 213,055 194,056 180,859 Actual return on plan assets ..................... (419,424) (240,809) (490,286) Net amortization and deferral .................... 220,891 42,266 328,791 --------------------------------------- Net periodic pension cost ......... $ 80,758 $ 53,947 $ 74,647 =======================================
Net periodic pension cost was higher in 1997 compared with 1996 due primarily to a plan amendment which revised the benefit formula of the American Home Products Corporation Retirement Plan - U.S. from a final 10-year average to an average of the five highest paid years within the final 10 years of service. Net periodic pension cost was lower in 1996 compared with 1995 due primarily to the unusually high actual return on plan assets in 1995 offset, in part, by an increase in pension costs related to a change in mortality assumptions to reflect increased life expectancies. 30 The actuarial present value of benefit obligations and funded status of the Company's defined benefit pension plans, as of December 31, was as follows (principally U.S. pension plans):
(In thousands) 1997 1996 - ------------------------------------------------------------------------------- Benefit obligations: Vested benefits ............................ $ 2,705,359 $ 2,479,139 Nonvested benefits ......................... 100,398 110,482 ---------------------------- Accumulated benefit obligation ............... 2,805,757 2,589,621 Effect on benefits from projected compensation increases ..................... 263,856 268,923 ---------------------------- Projected benefit obligation ................. 3,069,613 2,858,544 Plan assets at fair value, primarily listed stocks and bonds .................... 2,723,177 2,332,432 ---------------------------- Projected benefit obligation in excess of plan assets ...................... 346,436 526,112 Unrecognized net loss ........................ (7,400) (55,013) Unrecognized net transition obligation ................................. (8,713) (3,827) Unrecognized prior service cost .............. (111,780) (134,064) ---------------------------- Net pension liability ........................ $ 218,543 $ 333,208 ============================
The increase in plan assets in 1997 is due primarily to a higher than expected return on plan assets during the year and a $200,000,000 contribution to the American Home Products Corporation Retirement Plan - U.S. The change in the unrecognized net loss in 1997 is due primarily to the deferral of the difference between the expected return on plan assets and the actual return on plan assets offset, in part, by an unrecognized loss due to a decrease in the discount rate. Assumptions used in developing the projected benefit obligation as of December 31 were as follows:
1997 1996 1995 - ------------------------------------------------------------------------------ Discount rate ................................ 7.25% 7.5% 7.5% Rate of increase in compensation ............. 4.0% 4.0% 4.0% Rate of return on plan assets ................ 9.5% 9.0% 9.0% ==========================
Postretirement Benefits: The Company provides postretirement health care and life insurance benefits for retired employees of most domestic locations and Canada. Most full-time employees become eligible for these benefits after attaining specified age and service requirements. Net periodic postretirement health care cost included the following components:
(In thousands) 1997 1996 1995 - -------------------------------------------------------------------------------- Service cost on benefits earned during the year ................ $19,494 $20,474 $15,057 Interest cost on accumulated postretirement benefit obligation (APBO) ..................... 70,791 68,902 61,693 Net amortization ........................ 2,280 4,436 290 --------------------------------- Net periodic postretirement health care cost ...................... $92,565 $93,812 $77,040 =================================
Net periodic postretirement health care cost was higher in 1996 compared with 1995 due primarily to a change in mortality assumptions to reflect increased life expectancies. The APBO as of December 31 was as follows:
(In thousands) 1997 1996 - ------------------------------------------------------------------------------- Retirees ..................................... $ 656,138 $ 648,763 Fully eligible active participants ........... 105,642 124,131 Other active participants .................... 219,218 209,278 -------------------------- APBO ......................................... 980,998 982,172 Unrecognized net loss ........................ (89,118) (141,510) Unrecognized prior service cost .............. (2,964) (3,320) -------------------------- Accrued postretirement benefit obligation ......................... 888,916 837,342 Less current portion ......................... 55,000 55,000 -------------------------- $ 833,916 $ 782,342 ==========================
The change in the unrecognized net loss in 1997 is due primarily to an unrecognized gain from favorable claims experience offset, in part, by an unrecognized net loss from changes in certain actuarial assumptions and other actuarial losses. Assumptions used in developing the APBO were as follows:
1997 1996 1995 - ------------------------------------------------------------------------------- Discount rate ..................... 7.25% 7.5% 7.5% Increase in per capita cost of health care benefits that gradually decreases and is held constant thereafter beginning in 2004 for 1997, 2002 for 1996 and 2003 for 1995 ........................... 8.5%-5.0% 9.0%-6.0% 10.0%-6.0% =========================================
A one percentage point increase in the assumed health care cost trend rates would increase the APBO as of December 31, 1997 by approximately $122,344,000, and the total of the service and interest cost components of net periodic postretirement health care cost would increase by approximately $13,141,000. 31 Capital Stock 7. There were 1,200,000,000 shares of common stock and 5,000,000 shares of preferred stock authorized at December 31, 1997. Of the authorized preferred shares, there is a series of shares (28,845 outstanding) which is designated as $2 convertible preferred stock. Each share of the $2 series is convertible at the option of the holder into 18 shares of common stock. This series may be called for redemption at $60 per share plus accrued dividends. Changes in outstanding common shares during 1997, 1996 and 1995 are summarized as follows:
(In thousands except shares of preferred stock) 1997 1996 1995 - ------------------------------------------------------------------------------- Balance, beginning of year ........... 639,983 627,400 611,962 Issued for stock options and Management Incentive Plan ..................... 10,558 12,746 15,584 Conversions of preferred stock (2,588, 2,709 and 2,371 shares in 1997, 1996 and 1995, respectively) ............ 46 49 42 Purchase of shares for treasury ....................... (210) (212) (188) ----------------------------------- Balance, end of year ................. 650,377 639,983 627,400 ===================================
Stock Options 8. The Company has three Stock Option Plans and three Stock Incentive Plans. Under the three Stock Incentive Plans, options to purchase a maximum of 30,000,000, 28,000,000 and 24,000,000 shares, respectively, may be granted at prices not less than 100% of the fair market value at the date of option grant. No further grants will be made under the three Stock Option Plans. At December 31, 1997, 13,227,540 shares were available for future grants under the Stock Incentive Plans. The plans provide for the granting of incentive stock options as defined under the Internal Revenue Code. Under the plans, grants may be made to selected officers and employees of non-qualified stock options with a 10-year term or incentive stock options with a term not exceeding 10 years. The plans provide for the granting of stock appreciation rights (SAR), which permit the optionee to surrender an exercisable option for an amount equal to the excess of the market price of the common stock over the option price when the right is exercised. A pre-tax charge of $54,815,000 and $62,716,000 was incurred related to SARs in 1996 and 1995 due to an increase in the market price of the Company's common stock and the increased number of outstanding SARs. In 1997, outstanding SARs were canceled and did not have an impact on the Company's results of operations. The Stock Incentive Plans, among other things, provide for the issuance of up to 4,000,000 of the shares covered by the plans as restricted stock performance awards under each plan. Restricted stock performance awards representing 44,200, 53,500 and 52,200 units were granted in 1997, 1996 and 1995, respectively, under the plans to certain key executives. These units are converted to shares of restricted stock based on the achievement of certain performance criteria over a three-year period of restriction. Transactions involving the plans are summarized as follows:
- --------------------------------------------------------------------------------------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Option Shares 1997 Price 1996 Price 1995 Price - --------------------------------------------------------------------------------------------------- Outstanding January 1 ..... 40,139,345 $38.07 47,486,784 $34.12 42,936,064 $30.23 ----------- ----------- ----------- Granted ................... 13,934,385 72.40 7,970,950 53.16 20,839,500 38.33 Canceled .................. (2,059,302) 45.79 (1,117,450) 42.92 (817,080) 35.74 Exercised (1997 - $17.80 to $53.06 per share) ....... (10,361,290) 35.86 (14,200,939) 32.95 (15,471,700) 28.92 ----------- ----------- ----------- Outstanding December 31 (1997 - $17.80 to $72.44 per share) ....... 41,653,138 49.72 40,139,345 38.07 47,486,784 34.12 =========== =========== =========== Exercisable December 31 ... 26,736,090 38.56 30,492,611 34.27 27,203,484 30.97 =========== =========== ===========
32 The following table summarizes information regarding stock options outstanding at December 31, 1997:
Options Outstanding Options Exercisable - -------------------------------------------------------------------------------- --------------------------------- Weighted Average Weighted Average Weighted Average Range of Number Remaining Exercise Number Exercise Exercise Prices Outstanding Contractual Life Price Exercisable Price - -------------------------------------------------------------------------------- --------------------------------- $17.80 to 28.72 1,498,850 1.6 years $23.95 1,498,850 $23.95 28.73 to 39.65 20,170,900 6.4 years 35.43 19,249,232 35.30 39.66 to 50.58 331,558 7.9 years 45.80 319,558 45.69 50.59 to 61.51 6,032,250 8.4 years 53.06 5,658,450 53.06 61.52 to 72.44 13,619,580 9.4 years 72.34 10,000 62.69 ---------- ---------- 17.80 to 72.44 41,653,138 7.5 years 49.72 26,736,090 38.56 ========== ==========
In April 1994, the stockholders approved the Restricted Stock Plan for Non-Employee Directors. Under the plan, a maximum of 50,000 restricted shares may be granted to non-employee directors at not less than 100% of the fair market value at the date of grant. The restricted shares will not be delivered until the end of the restricted period which does not exceed five years. Effective January 1, 1996, the Company adopted the provisions of SFAS No. 123 -- "Accounting for Stock-Based Compensation." As permitted by the statement, the Company has elected to continue to account for stock-based compensation using the intrinsic value method under Accounting Principles Board Opinion No. 25. Accordingly, no compensation expense has been recognized for stock options other than for SARs granted in tandem with stock options. If compensation expense for the Company's stock options issued in 1997, 1996 and 1995 had been determined based on the fair value method of accounting, as defined in SFAS No. 123, the Company's net income and net income per share would have been reduced to the pro forma amounts indicated below:
(In thousands except per share amounts) 1997 1996 1995 - ------------------------------------------------------------------------------------ Net income less preferred dividends: As reported ...................... $ 2,043,063 $ 1,883,338 $ 1,680,347 Pro forma ........................ $ 1,981,826 $ 1,841,092 $ 1,647,014 Basic earnings per share: As reported ...................... $ 3.16 $ 2.96 $ 2.71 Pro forma ........................ $ 3.06 $ 2.90 $ 2.66 Diluted earnings per share: As reported ...................... $ 3.11 $ 2.92 $ 2.69 Pro forma ........................ $ 3.02 $ 2.86 $ 2.63 =============================================
The fair value of issued stock options is estimated on the date of grant using a variant of the Black-Scholes option pricing model incorporating the following assumptions for stock options granted in 1997, 1996 and 1995, respectively: expected volatility (the amount by which the stock price is expected to fluctuate) of 18.3%, 15.0% and 15.7%; expected dividend yield of 3.7%, 4.3% and 4.4%; risk-free interest rate of 6.5%, 6.4% and 6.1%; and expected life of four years. The weighted average fair value of stock options granted during 1997, 1996 and 1995 was $11.72, $6.83 and $4.88 per option share, respectively. Income Taxes 9. The provision for income taxes consisted of:
(In thousands) 1997 1996 1995 - ------------------------------------------------------------------------------- Current: Domestic ............... $ 531,770 $ 348,649 $ 545,434 Foreign ................ 460,028 421,816 357,916 --------------------------------------------- 991,798 770,465 903,350 Deferred: Domestic ............... (221,789) 89,033 (143,861) Foreign ................ 1,575 12,559 (1,209) --------------------------------------------- (220,214) 101,592 (145,070) --------------------------------------------- $ 771,584 $ 872,057 $ 758,280 =============================================
33 Deferred tax assets (liabilities), inclusive of valuation allowances for certain deferred tax assets, were reflected in the Consolidated Balance Sheets at December 31 as follows:
(In thousands) 1997 1996 - -------------------------------------------------------------------------------- Net current deferred tax assets .............. $ 721,811 $ 668,215 Net noncurrent deferred tax assets ........... 508,092 303,034 --------------------------- Net deferred tax assets ...................... $1,229,903 $ 971,249 ===========================
Deferred income taxes are provided for the temporary differences between the financial reporting basis and the tax basis of the Company's assets and liabilities. Deferred tax assets result principally from the recording of certain accruals and reserves which currently are not deductible for tax purposes. Deferred tax liabilities result principally from the use of accelerated depreciation for tax purposes and from temporary differences in the recognition of gains and losses from certain investments. The components of the Company's deferred tax assets and liabilities at December 31 were as follows:
(In thousands) 1997 1996 - ------------------------------------------------------------------------------- Deferred tax assets: Product and environmental liabilities and other operating accruals .............. $ 787,656 $ 700,736 Postretirement, pension and other employee benefits ......................... 496,905 451,431 Net operating loss and other tax credit carryforwards ...................... 207,664 203,464 Restructuring and reorganization accruals ................... 201,104 225,644 Inventory reserves ......................... 188,749 178,505 Investments and advances ................... 45,838 60,123 Other ...................................... 43,089 42,123 ---------------------------- Total deferred tax assets .................... 1,971,005 1,862,026 ---------------------------- Deferred tax liabilities: Investments ................................ $ (13,595) $ (249,573) Depreciation ............................... (287,658) (268,875) Pension benefits and other employee benefits ......................... (77,429) (17,566) Other ...................................... (62,996) (59,923) ---------------------------- Total deferred tax liabilities ............... (441,678) (595,937) ---------------------------- Deferred tax asset valuation allowances ....................... (299,424) (294,840) ---------------------------- Net deferred tax assets ...................... $ 1,229,903 $ 971,249 ============================
Valuation allowances have been established for certain deferred tax assets related primarily to net operating loss carryforwards and portions of other deferred tax assets as the Company determined that it was more likely than not that these benefits will not be realized. During 1997, the valuation allowance increased by $4,584,000 due primarily to additional allowances related to net operating loss carryforwards. During 1996, the valuation allowance increased by $88,196,000 due primarily to additional allowances related to net operating loss carryforwards resulting from the Company's acquisition of the remaining equity interest in G.I. (see Note 2). During 1995, the valuation allowance decreased by $44,332,000 due primarily to the reversal of allowances of $89,936,000 on investments which were sold during the year. These decreases were offset partially by additional allowances of $45,604,000 related primarily to net operating loss carryforwards. Reconciliations between the Company's effective tax rate and the U.S. statutory rate are summarized as follows:
Tax Rate 1997 1996 1995 - ------------------------------------------------------------------------------ U.S. statutory rate ........................ 35.0% 35.0% 35.0% Effect of Puerto Rico and Ireland manufacturing operations ............................... (6.1) (5.6) (6.4) Research credits ........................... (1.8) (0.6) (0.6) ACY goodwill amortization .................. 2.7 2.8 3.3 Gain on sale of foods business ............. -- (6.4) -- Special charges related to the acquisition of G.I ....................... -- 8.5 -- Other, net ................................. (2.4) (2.1) (0.2) -------------------------- Effective tax rate ......................... 27.4% 31.6% 31.1% ==========================
The effective tax rate decreased in 1997 due primarily to the reinstatement of the U.S. research tax credit in 1997 and the net tax impact of the gain on the sale of the foods business (see Note 2) and special charges related to the acquisition of the remaining equity interest in G.I. in 1996 (see Note 3). The tax impact related to the gain on the sale of the foods business in 1996 was due to basis differences for tax and financial reporting purposes. No tax benefit was recorded with regard to the special charges related to the acquisition of the remaining equity interest in G.I. in 1996 due to the non-deductibility of the acquired in-process research and development and the uncertainty of the realizability of G.I. net operating loss carryforwards. 34 Total income tax payments, net of tax refunds, for the years ended December 31, 1997, 1996 and 1995 amounted to $1,021,505,000, $435,069,000 and $992,393,000, respectively. Contingencies 10. The Company is involved in various legal proceedings, including product liability and environmental matters of a nature considered normal to its business. See Note 5 for a discussion of environmental matters. It is the Company's policy to accrue for amounts related to these legal matters if it is probable that a liability has been incurred and an amount is reasonably estimable. The Company has been named as a defendant in numerous legal actions, many of which are purported class actions, relating to Pondimin and/or Redux, which the Company estimates were used in the United States prior to their voluntary market withdrawal by approximately 6 million people. 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. The Company is a defendant in numerous cases that have been consolidated in federal district court in Illinois as Brand Name Prescription Drugs Antitrust Litigation (MDL 997) relating to claims made by certain retail pharmacies against the Company and other pharmaceutical manufacturers. The Company and other pharmaceutical manufacturers also are defendants in similar litigation brought on behalf of consumers and in some cases on behalf of pharmacies in various state courts. In MDL 997, the Company has settled the claims in the class action case and continues as a defendant in other cases. The Company believes it has complied with the antitrust laws and other applicable laws and has settled this matter in order to avoid the costs and risks of litigation. The settlement agreement is not an admission of any violation of law. The Company had accrued for the costs of this settlement at December 31, 1995. The Company is self-insured against ordinary product liability risks and has liability coverage in excess of certain limits from various insurance carriers. In the opinion of the Company, although the outcome of any legal proceedings cannot be predicted with certainty, the ultimate liability of the Company in connection with its legal proceedings will not have a material adverse effect on the Company's financial position but could be material to the results of operations in any one accounting period. The Company leases certain property and equipment for varying periods under operating leases. Future minimum rental payments under non-cancelable operating leases with terms in excess of one year in effect at December 31, 1997 are as follows:
(In thousands) - ------------------------------------------------------------------------------ 1998 .......................................................... $ 110,511 1999 .......................................................... 99,143 2000 .......................................................... 94,373 2001 .......................................................... 82,047 2002 .......................................................... 78,315 Thereafter .................................................... 121,173 ----------- Total rental commitments ...................................... $ 585,562 ===========
Rental expense for all operating leases was $133,179,000 in 1997, $121,147,000 in 1996 and $110,143,000 in 1995. 35 11. Company Data by Industry Segment
(In millions) Years Ended December 31, 1997 1996 1995 - ------------------------------------------------------------------------------------------ Net Sales to Customers - ------------------------------------------------------------------------------------------ Health Care Products: Pharmaceuticals .................... $ 8,669.1 $ 7,924.0 $ 7,521.2 Consumer Health Care .............. 2,091.3 2,054.6 1,994.8 Medical Devices .................... 1,316.2 1,331.5 1,131.4 ------------------------------------------------ 12,076.6 11,310.1 10,647.4 Agricultural Products ................. 2,119.4 1,988.9 1,909.8 Food Products ......................... -- 789.3 818.9 ------------------------------------------------ Consolidated Total .................... $ 14,196.0 $ 14,088.3 $ 13,376.1 ================================================ Income before Taxes - ------------------------------------------------------------------------------------------ Health Care Products(1)(5)(6)(7) ...... $ 2,909.2 $ 2,770.4 $ 1,989.3 Agricultural Products(7) .............. 429.9 337.7 272.5 Food Products ......................... -- 129.1 66.5 Corporate(2)(3)(4)(6) ................. (524.4) (481.7) 110.4 ------------------------------------------------ Consolidated Total .................... $ 2,814.7 $ 2,755.5 $ 2,438.7 ================================================ Total Assets at December 31, - ------------------------------------------------------------------------------------------ Health Care Products .................. $ 13,256.3 $ 12,902.6 $ 12,584.8 Agricultural Products ................. 4,763.9 4,727.5 4,671.2 Food Products ......................... -- -- 485.9 Corporate ............................. 2,804.9 3,155.2 3,621.0 ------------------------------------------------ Consolidated Total .................... $ 20,825.1 $ 20,785.3 $ 21,362.9 ================================================ Depreciation and Amortization Expense - ------------------------------------------------------------------------------------------ Health Care Products(7) ............... $ 535.7 $ 483.6 $ 488.2 Agricultural Products(7) .............. 154.8 145.5 141.0 Food Products ......................... -- 15.2 23.8 Corporate ............................. 11.5 13.8 26.2 ------------------------------------------------ Consolidated Total .................... $ 702.0 $ 658.1 $ 679.2 ================================================ Capital Expenditures - ------------------------------------------------------------------------------------------ Health Care Products .................. $ 704.2 $ 545.5 $ 521.4 Agricultural Products ................. 115.8 48.6 52.1 Food Products ......................... -- 9.2 26.4 Corporate ............................. 10.4 48.9 37.6 ------------------------------------------------ Consolidated Total .................... $ 830.4 $ 652.2 $ 637.5 ================================================
Company Data by Geographic Segment
(In millions) Years Ended December 31, 1997 1996 1995 - ------------------------------------------------------------------------------------------ Net Sales to Customers - ------------------------------------------------------------------------------------------ United States ......................... $ 8,278.6 $ 8,334.9 $ 7,878.1 Europe and Africa ..................... 3,147.0 3,212.4 3,085.6 Canada and Latin America .............. 1,520.1 1,333.3 1,291.8 Asia and Australia .................... 1,250.3 1,207.7 1,120.6 ------------------------------------------------ Consolidated Total .................... $ 14,196.0 $ 14,088.3 $ 13,376.1 ================================================ Income before Taxes - ------------------------------------------------------------------------------------------ United States(1)(2)(3)(4)(5)(6)(7) .... $ 1,578.4 $ 1,447.2 $ 681.8 Europe and Africa(5)(7) ............... 777.9 831.2 526.7 Canada and Latin America(4)(5)(7) ..... 293.2 294.0 1,080.8 Asia and Australia(5)(7) .............. 165.2 183.1 149.4 ------------------------------------------------ Consolidated Total .................... $ 2,814.7 $ 2,755.5 $ 2,438.7 ================================================ Total Assets at December 31, - ------------------------------------------------------------------------------------------ United States ......................... $ 13,899.4 $ 13,730.1 $ 14,746.0 Europe and Africa ..................... 4,090.7 4,279.8 3,894.2 Canada and Latin America .............. 1,604.4 1,506.0 1,547.4 Asia and Australia .................... 1,230.6 1,269.4 1,175.3 ------------------------------------------------ Consolidated Total .................... $ 20,825.1 $ 20,785.3 $ 21,362.9 ================================================
(1) 1997 includes the special charges of $180.0 associated with the voluntary market withdrawal of Pondimin and Redux identified as follows: Health Care Products - $180.0, United States - $180.0 (see Note 3). (2) 1996 includes the gain on the sale of a majority interest in the foods business of $813.5 identified as follows: Corporate - $813.5, United States - $813.5 (see Note 2). (3) 1996 includes the special charges of $697.9 identified as follows: Corporate - $697.9, United States - $697.9 (see Note 3). (4) 1995 includes the gain on the sale of the South American oral health care business of $959.8 identified as follows: Corporate - $959.8, United States - $144.9, Canada and Latin America - $814.9 (see Note 2). (5) 1995 includes the restructuring charge of $180.2 identified as follows: Health Care Products - $180.2, United States - $66.2, Europe and Africa - $100.3, Canada and Latin America - $9.1, Asia and Australia - $4.6 (see Note 3). (6) 1995 includes the special charges of $436.7 identified as follows: Health Care Products - $208.5, Corporate - $228.2, United States - $436.7 (see Note 3). (7) 1997 includes ACY goodwill amortization of $226.5 identified as follows: Health Care Products - $130.8, Agricultural Products - $95.7, United States - $144.6, Europe and Africa - $50.4, Canada and Latin America - $17.3, Asia and Australia - $14.2. 1996 includes ACY goodwill amortization of $227.3 identified as follows: Health Care Products - $131.1, Agricultural Products - $96.2, United States - $146.0, Europe and Africa - $49.5, Canada and Latin America - $17.5, Asia and Australia - $14.3. 1995 includes ACY goodwill amortization of $233.3 identified as follows: Health Care Products - $134.6, Agricultural Products - $98.7, United States - $149.8, Europe and Africa - $50.8, Canada and Latin America - $18.0, Asia and Australia - $14.7. 36 Report of Independent Public Accountants To the Board of Directors and Shareholders of American Home Products Corporation: We have audited the accompanying consolidated balance sheets of American Home Products Corporation (a Delaware corporation) and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of income, retained earnings, additional paid-in capital and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of American Home Products Corporation and subsidiaries as of December 31, 1997 and 1996, and the results of their operations and cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. Arthur Andersen LLP New York, N.Y. January 27, 1998 Management Report on Financial Statements Management has prepared and is responsible for the Company's consolidated financial statements and related notes. They have been prepared in accordance with generally accepted accounting principles and necessarily include amounts based on judgments and estimates made by management. All financial information in this Annual Report is consistent with the financial statements. The Company maintains internal accounting control systems and related policies and procedures designed to provide reasonable assurance that assets are safeguarded, that transactions are executed in accordance with management's authorization and are properly recorded, and that accounting records may be relied upon for the preparation of financial statements and other financial information. The design, monitoring and revision of internal accounting control systems involve, among other things, management's judgment with respect to the relative cost and expected benefits of specific control measures. The Company also maintains an internal auditing function which evaluates and formally reports on the adequacy and effectiveness of internal accounting controls, policies and procedures. The Company's financial statements have been audited by independent public accountants who have expressed their opinion with respect to the fairness of these statements. The Audit Committee of the Board of Directors, composed of non-employee directors, meets periodically with the independent public accountants and internal auditors to evaluate the effectiveness of the work performed by them in discharging their respective responsibilities and to assure their independent and free access to the Committee. John R. Stafford Robert G. Blount Chairman, President and Senior Executive Vice Chief Executive Officer President and Chief Financial Officer 37 Quarterly Financial Data
- ------------------------------------------------------------------------------------------------------------------------------- First Quarter Second Quarter Third Quarter Fourth Quarter (In thousands except per share amounts) 1997 1997 1997 1997 - ------------------------------------------------------------------------------------------------------------------------------- Net Sales ....................................... $ 3,603,019 $ 3,499,758 $ 3,481,870 $ 3,611,379 Gross Profit .................................... 2,571,081 2,440,756 2,511,204 2,571,676 Net Income ...................................... 576,677 459,092 435,532(1) 571,822 Basic Earnings per Share ........................ 0.90 0.71 0.67(1) 0.88 Diluted Earnings per Share ...................... 0.89 0.70 0.66 0.87 - ------------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------------- First Quarter Second Quarter Third Quarter Fourth Quarter 1996 1996 1996 1996 - ------------------------------------------------------------------------------------------------------------------------------- Net Sales ....................................... $ 3,646,814 $ 3,489,821 $ 3,470,922 $ 3,480,769 Gross Profit .................................... 2,440,860 2,327,189 2,411,972 2,458,522 Net Income ...................................... 489,363 391,277 491,125 511,638(2) Basic Earnings per Share ........................ 0.78 0.62 0.77 0.80(2) Diluted Earnings per Share ...................... 0.76 0.61 0.76 0.79 - -------------------------------------------------------------------------------------------------------------------------------
(1) Third quarter 1997 includes the special charges aggregating $180,000 ($117,000 after-tax or $0.18 per share) associated with the voluntary market withdrawal of Pondimin and Redux. (2) Fourth quarter 1996 includes the after-tax gain of $706,279 ($1.10 per share) on the sale of a majority interest in the American Home Foods business and special charges aggregating $697,854 ($1.09 per share) related to the acquisition of the remaining equity interest in Genetics Institute, Inc. Market Prices of Common Stock and Dividends
1997 Range of Prices* 1996 Range of Prices* - ------------------------------------------------------------------------------------------------------ Dividends Dividends High Low per Share High Low per Share - ------------------------------------------------------------------------------------------------------ First Quarter ................. $ 68.88 $ 57.63 $ 0.41 $55.25 $47.06 $ 0.385 Second Quarter ................ 80.75 57.00 0.41 56.13 50.00 0.385 Third Quarter ................. 84.88 68.38 0.41 64.88 52.63 0.385 Fourth Quarter ................ 78.81 67.44 0.43 66.50 58.63 0.410 - ------------------------------------------------------------------------------------------------------
* Prices are those of the New York Stock Exchange - Composite Transactions. 38 Management's Discussion and Analysis of Financial Condition and Results of Operations The following commentary should be read in conjunction with the Consolidated Financial Statements and Notes to Consolidated Financial Statements on pages 22 to 36. Results of Operations Management's discussion and analysis of results of operations for 1997 has been presented on an as-reported basis except for sales variation explanations which have been presented on an as-reported and a pro forma basis. The pro forma sales results reflect businesses acquired and divested in 1997 and 1996 (except for the divestiture of Storz Instrument Company that was completed on December 31, 1997), assuming the transactions occurred as of January 1, 1996. This activity includes the acquisition of the worldwide animal health business of Solvay S.A. and the divestitures of the foods business and a surgical products business. Management's discussion and analysis of results of operations for 1996 has been presented on an as-reported basis except for sales variation explanations which have been presented on an as-reported and a pro forma basis. The 1996 pro forma sales results reflect all businesses disposed of, discontinued and acquired in 1996 and 1995, assuming all transactions occurred as of January 1, 1995. This activity includes the dispositions of the foods business, the medicated feed additives business, the oral health care business and a surgical products business, the discontinuance of the U.S. infant nutritional business and the acquisition of an animal health care business. The 1996 pro forma sales results also include revenues of the ophthalmic products business, which was reported as "held for sale" in 1995. Net sales increased 1% to $14.2 billion in 1997 on an as-reported basis. On a pro forma basis, net sales increased 5%. The pro forma results reflect higher domestic sales of pharmaceuticals and worldwide sales of agricultural products. The increase in pro forma 1997 sales was composed of volume increases of 6% and price increases of 2%, which were offset by unfavorable foreign exchange of 3%. Worldwide pro forma sales of health care products increased 5%, and agricultural products increased 7% in 1997. Net sales increased 5% to $14.1 billion in 1996 on an as-reported basis. On a pro forma basis, net sales increased 7%. The pro forma results reflect higher worldwide sales of pharmaceuticals, consumer health care and agricultural products. The increase in pro forma 1996 sales was composed of volume increases of 6% and price increases of 2%, which were offset by unfavorable foreign exchange of 1%. Worldwide pro forma sales of health care products increased 7%, and agricultural products increased 4% in 1996. The following table sets forth 1997, 1996 and 1995 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 prior years:
1997 vs. 1996 1996 vs. 1995 ----------------------- ----------------------- Years Ended December 31, As-Reported Pro Forma As-Reported Pro Forma (Dollar amounts in millions) ------------------------------------- % Increase % Increase % Increase % Increase Net Sales to Customers 1997 1996 1995 (Decrease) (Decrease) (Decrease) (Decrease) - --------------------------------------------------------------------------------------------------------------------------------- Industry Segment Health Care Products: Pharmaceuticals $ 8,669.1 $ 7,924.0 $ 7,521.2 9% 7% 5% 9% Consumer Health Care 2,091.3 2,054.6 1,994.8 2% 2% 3% 5% Medical Devices 1,316.2 1,331.5 1,131.4 (1)% -- 18% -- ------------------------------------- Total Health Care Products 12,076.6 11,310.1 10,647.4 7% 5% 6% 7% Agricultural Products 2,119.4 1,988.9 1,909.8 7% 7% 4% 4% Food Products -- 789.3 818.9 -- -- (4)% -- ------------------------------------- Consolidated Net Sales $ 14,196.0 $ 14,088.3 $ 13,376.1 1% 5% 5% 7% =====================================
39 Worldwide pharmaceutical sales increased 9% for the year ended 1997. U.S. pharmaceutical sales increased 15% for the year ended 1997. After adjusting for the acquisition of the animal health business of Solvay S.A. in 1997, pro forma U.S. pharmaceutical sales increased 14% for the year ended 1997 due primarily to higher sales of Premarin products, Effexor, Cordarone, Ziac, Naprelan (introduced in 1996), BeneFix (introduced in 1997), Duract (introduced in 1997), Oruvail and veterinary products offset, in part, by lower sales of Lodine and the voluntary market withdrawal of the Company's antiobesity products. The increase in pro forma U.S. pharmaceutical sales for the year ended 1997 consisted of unit volume growth of 11% and price increases of 3%. International pharmaceutical sales increased 2% for the year ended 1997. After adjusting for the acquisition of the animal health business of Solvay S.A. in 1997, pro forma international pharmaceutical sales decreased 2% for the year ended 1997. Higher sales of Zoton, Effexor, Premarin products and Zosyn were offset by lower sales of other pharmaceutical products. The decrease in pro forma international pharmaceutical sales for the year ended 1997 consisted of unit volume growth of 3% and price increases of 1%, which were more than offset by unfavorable foreign exchange of 6%. Worldwide pharmaceutical sales increased 5% for the year ended 1996. U.S. pharmaceutical sales increased 7% for the year ended 1996. U.S. sales gains were offset, in part, by lower sales of veterinary and infant nutritional products resulting from the sale of the medicated feed additives business in 1995 and the discontinuance of the U.S. infant nutritional business in 1996. After adjusting for the effects of businesses disposed of, discontinued and acquired in 1996 and 1995, pro forma U.S. pharmaceutical sales increased 11% for the year ended 1996. The sales gains were due primarily to higher sales of the Company's antiobesity products Pondimin and Redux (introduced in 1996), Premarin products, recombinant Factor VIII, Naprelan (introduced in 1996), Cordarone, Ziac, Lodine, Effexor and veterinary products offset, in part, by lower sales of other cardiovascular and pharmaceutical products. The increase in pro forma U.S. pharmaceutical sales for the year ended 1996 consisted of unit volume growth of 9% and price increases of 2%. International pharmaceutical sales increased 3% for the year ended 1996. International sales gains were impacted by lower sales of veterinary products resulting from the sale of the medicated feed additives business in 1995. After adjusting for the effects of businesses disposed of and acquired in 1995, pro forma international pharmaceutical sales increased 6% for the year ended 1996. International pharmaceutical sales gains were due primarily to higher sales of Zoton, Effexor, veterinary products, infant nutritionals, Tazocin and Premarin products. Launches of several pharmaceutical products in additional international markets, in particular Effexor, contributed to the international sales increases in 1996. The increase in pro forma international pharmaceutical sales for the year ended 1996 consisted of unit volume growth of 8%, which was offset by unfavorable foreign exchange of 2%. Worldwide consumer health care sales increased 2% for the year ended 1997. U.S. consumer health care sales decreased 1% for the year ended 1997. U.S. results reflect higher sales of Advil and Centrum products, which were more than offset by the effect of the disposal of several non-core products in late 1996 and early 1997 and lower sales of Orudis KT. The decrease in U.S. consumer health care sales for the year ended 1997 consisted of unit volume declines of 3%, which were offset by price increases of 2%. International consumer health care sales increased 9% for the year ended 1997 due primarily to higher sales of Centrum products (which were launched in additional international markets) and Advil. The increase in international consumer health care sales for the year ended 1997 consisted of unit volume growth of 9% and price increases of 4%, which were offset by unfavorable foreign exchange of 4%. Worldwide consumer health care sales increased 3% for the year ended 1996. U.S. consumer health care sales increased 2% for the year ended 1996. U.S. sales gains were due primarily to introductory sales of Axid AR, Children's Advil and Orudis KT and higher sales of Centrum products offset, in part, by lower sales of Advil, Anacin and family planning products. The increase in U.S. consumer health care sales for the year ended 1996 consisted of price increases of 2%. International consumer health care sales increased 6% for the year ended 1996. After adjusting for the effect of the sale of the oral health care business in 1995, pro forma international consumer health care sales increased 12% for the year ended 1996. International sales gains were due primarily to higher sales of Centrum products (which were launched in additional international markets), Advil, cough/cold products and other consumer health care products. The increase in pro forma international consumer health care sales for the year ended 1996 consisted of unit volume growth of 11% and price increases of 4%, which were offset by unfavorable foreign exchange of 3%. Worldwide medical devices sales decreased 1% for the year ended 1997. After adjusting for the divestiture of a surgical products business in 1996, pro forma worldwide medical devices sales for the year ended 1997 were comparable with 1996 as higher sales of tubes and catheters were offset by lower sales of wound closure products. Pro forma worldwide medical devices sales for the year ended 1997 consisted of unit volume growth of 4%, which was offset by price decreases of 1% and unfavorable foreign exchange of 3%. Worldwide medical devices sales increased 18% for the year ended 1996 due primarily to the ophthalmic products business being reported as "held for sale" in 1995. When the 40 sales of this business are included in 1995 and after adjusting for the divestiture of a surgical products business in 1996, pro forma worldwide medical devices sales were comparable to the year ended 1995. Higher sales of needles and syringes and cardiopulmonary instrumentation were offset by lower sales of ophthalmic products. Pro forma worldwide medical devices sales for the year ended 1996 consisted of unit volume growth of 2%, which was offset by unfavorable foreign exchange of 2%. Worldwide agricultural products sales increased 7% for the year ended 1997. U.S. agricultural products sales increased 6% for the year ended 1997. U.S. sales gains were due primarily to introductory sales of Steel and Lightning herbicides and higher sales of Prowl and Squadron herbicides due, in part, to increased soybean acreage. The increase in U.S. agricultural products sales for the year ended 1997 consisted of unit volume growth of 3% and price increases of 3%. Due to the seasonality of the U.S. agricultural products business, which is concentrated primarily in the first six months of the year, a majority of the U.S. agricultural products sales and results of operations are realized in the first half of the year. International agricultural products sales increased 7% for the year ended 1997 due to higher sales of Pursuit and Scepter herbicides, particularly in Latin America, resulting primarily from increased soybean acreage, Counter insecticide and Acrobat fungicide offset, in part, by lower sales of other insecticides and fungicides. International agricultural products sales for the year ended 1997 consisted of unit volume growth of 11% and price increases of 2%, which were offset by unfavorable foreign exchange of 6%. Worldwide agricultural products sales increased 4% for the year ended 1996. U.S. agricultural products sales increased 4% for the year ended 1996. U.S. sales gains were due primarily to higher sales of Counter insecticide and Prowl and Assert herbicides offset, in part, by lower sales of Prestige herbicide. The increase in U.S. agricultural products sales for the year ended 1996 consisted of unit volume growth of 2% and price increases of 2%. International agricultural products sales increased 4% for the year ended 1996. International sales gains were due primarily to higher sales of Stomp (marketed as Prowl in the United States) herbicide, Fastac and Cascade insecticides, and Acrobat and Caramba fungicides offset, in part, by the discontinuance of a licensed herbicide product. The increase in international agricultural products sales for the year ended 1996 consisted of unit volume growth of 4% and price increases of 3%, which were offset by unfavorable foreign exchange of 3%. In November 1996, the Company completed the sale of a majority interest (80%) in the American Home Foods business. Sales of food products decreased 4% for the year ended 1996 due to the divestiture. Sales of the foods business were consolidated by the Company through October 31, 1996, representing 10 months of operating activity compared with a full year in 1995. Cost of goods sold, as a percentage of net sales, decreased to 28.9% for the year ended 1997 compared with 31.6% in 1996 due primarily to an overall product mix improvement as higher sales of pharmaceuticals and agricultural products replaced the loss of lower margin food products sales, a favorable pharmaceutical and agricultural products sales mix, and, to a lesser extent, cost savings and synergies. Cost savings and synergies resulted from the restructuring and consolidation of various manufacturing and quality control functions, primarily in the pharmaceutical business, related to the American Cyanamid Company (ACY) acquisition and the Company's previously announced Organizational Effectiveness and Supply Chain programs. Cost of goods sold, as a percentage of net sales, decreased to 31.6% for the year ended 1996 compared with 33.9% in 1995 due primarily to the combination of a favorable pharmaceutical and agricultural products sales mix and, to a lesser extent, cost savings and synergies. Selling, general and administrative expenses, as a percentage of net sales, increased to 37.3% for the year ended 1997 compared with 37.1% in 1996. Higher marketing and selling expenses related to 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, Inc. (G.I.) and Solvay S.A. animal health acquisitions. Selling, general and administrative expenses, as a percentage of net sales, decreased to 37.1% for the year ended 1996 compared with 37.2% in 1995. Cost savings and synergies were offset, in part, by increased marketing and selling expenses related to pharmaceutical and consumer health care product introductions and pharmaceutical disease and health management programs. Research and development expenses increased 9.0% for the year ended 1997 compared with 1996 due primarily to higher pharmaceutical research and development expenditures and operating costs related to recent pharmaceutical research and development facility expansions. Research and development expenses increased 5.5% for the year ended 1996 compared with 1995 as ACY acquisition-related synergies were more than offset by increased research and development expenditures. Pharmaceutical research and development expenditures accounted for 80% and 78% of 41 total research and development expenditures in 1997 and 1996, respectively. Pharmaceutical research and development expenses, as a percentage of worldwide pharmaceutical sales, exclusive of infant nutritional sales, were 16% and 15% in 1997 and 1996, respectively. Interest expense, net decreased for the years ended 1997 and 1996 due primarily to the reduction in long-term debt during 1997 and 1996. Average long-term debt outstanding during 1997 and 1996 was $5,526.2 million and $6,914.7 million, respectively. Other income, net for the year ended 1997 included gains on the sales of non-strategic assets, including Storz Instrument Company and affiliated companies, investments in the common stock of certain publicly traded insurance companies, a portion of the 20% equity interest in the foods business, and certain generic and non-core product rights, which were substantially offset by the settlement of a lawsuit brought by Johnson & Johnson and its wholly owned subsidiary, Ortho Pharmaceutical Corporation, and other contingent liability adjustments (excluding any charges which may result from legal actions related to Pondimin and Redux). Other income, net for the year ended 1996 consisted primarily of gains on the sales of non-strategic assets, including Symbiosis Corp. and certain non-core product rights. As discussed in Note 3 to the Consolidated Financial Statements, on September 15, 1997, the Company announced the voluntary market withdrawal of fenfluramine HCl, manufactured and sold under the name Pondimin, and dexfenfluramine HCl, marketed under the name Redux. The Company took this action and withdrew the products on the basis of new, preliminary information regarding heart valve abnormalities in patients using these medications. The 1997 results of operations included special charges aggregating $180.0 million ($117.0 million after-tax or $0.18 per share) to record the one-time costs associated with the voluntary market withdrawal. The special charges included provisions for product returns, notification and administrative handling fees, the writedown of inventory and supplies, and other related costs. These costs did not include provisions for any subsequent charges which may result from legal actions related to these products. As discussed in Note 10 to the Consolidated Financial Statements, the Company has been named as a defendant in numerous legal actions, many of which are purported class actions, relating to Pondimin and/or Redux. It is likely that additional legal actions, including purported class actions, will be filed. The Company believes that it has meritorious defenses to these actions and that it has acted properly at all times in dealing with Pondimin and Redux matters. In the opinion of the Company, although the outcome of any legal proceedings cannot be predicted with certainty, the ultimate liability of the Company in connection with these proceedings will not have a material adverse effect on the Company's financial position but could be material to the results of operations in any one accounting period. The effective tax rate decreased to 27.4% in 1997 from 31.6% in 1996 due primarily to the reinstatement of the U.S. research tax credit in 1997 and the net tax impact of the gain on the sale of a majority interest in the foods business and the special charges related to the acquisition of the remaining equity interest in G.I. in 1996. The effective tax rate increased to 31.6% in 1996 from 31.1% in 1995 due primarily to the tax impact of the special charges related to the acquisition of the remaining equity interest in G.I. offset, in part, by the tax impact of the gain on the sale of a majority interest in the foods business. Net income and basic earnings per share for the year ended 1997 on an as-reported basis increased 8% and 7%, respectively, above 1996 levels. Results for the year ended 1997 included the previously discussed after-tax special charges aggregating $117.0 million or $0.18 per share associated with the voluntary market withdrawal of Pondimin and Redux. Net income and basic earnings per share for the year ended 1996 included an after-tax gain on the sale of a majority interest in the foods business of $706.3 million or $1.11 per share and the special charges related to the acquisition of the remaining equity interest in G.I. aggregating $697.9 million or $1.10 per share. Excluding the special charges from 1997 results and the gain on the sale of a majority interest in the foods business and the special charges from 1996 results, net income and basic earnings per share for the year ended 1997 increased 15% and 13%, respectively, over 1996 amounts. Excluding the special items from 1997 and 1996 results, diluted earnings per share for the year ended 1997 increased 13% compared with 1996. The increases in net income, basic earnings per share and diluted earnings per share, excluding the special items, were due primarily to higher domestic sales of pharmaceuticals and worldwide sales of agricultural products, a favorable pharmaceutical and agricultural products sales mix, lower interest expense, and cost savings and synergies offset, in part, by the divestiture of the foods business and higher pharmaceutical research and development expenditures. Net income and basic earnings per share for the year ended 1996 on an as-reported basis increased 12% and 9%, respectively, above 1995 levels. Net income and basic earnings per share for the year ended 1996 included an after-tax gain on the sale of a majority interest in the foods business of $706.3 million or $1.11 per share and the special charges related to the acquisition of the remaining equity interest in 42 G.I. aggregating $697.9 million or $1.10 per share. Net income and basic earnings per share for 1995 included after-tax special charges aggregating $308.3 million or $0.50 per share, an after-tax restructuring charge of $117.2 million or $0.19 per share and an after-tax gain of $623.9 million or $1.01 per share from the sale of the oral health care business. Excluding the gain on the sale of a majority interest in the foods business and the special charges from 1996 results and the special charges, restructuring charge and the gain on the sale of the oral health care business from 1995 results, net income and basic earnings per share for the year ended 1996 increased 27% and 23%, respectively, over 1995 amounts. Excluding the special items from 1996 and 1995 results, diluted earnings per share for the year ended 1996 increased 23% compared with 1995. The increases in net income, basic earnings per share and diluted earnings per share, excluding the special items, were due primarily to higher worldwide sales of pharmaceuticals, agricultural products and consumer health care products, a favorable pharmaceutical and agricultural products sales mix, cost savings and synergies, and lower interest expense offset, in part, by increased pharmaceutical and consumer health care marketing and selling expenses and higher pharmaceutical research and development expenditures. The Company currently is in the process of identifying, evaluating and implementing changes to computer systems and applications necessary to achieve a year 2000 date conversion with no effect on customers or disruption to business operations. These actions are necessary to ensure that the systems and applications will recognize and process the year 2000 and beyond. Major areas of potential business impact have been identified and are being reviewed, and initial conversion efforts are under way. The total cost of compliance and its effect on the Company's future results of operations are not anticipated to be material in any given year. Competition The Company operates in the highly competitive health care and agrochemical industries. The Company is not dependent on any one patent-protected product or line of products for a substantial portion of its sales or results of operations. However, Premarin, 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 currently is not subject to generic competition in the United States, and, on May 5, 1997, the U.S. Food and Drug Administration (FDA) announced that it would not approve synthetic 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, the Company cannot predict the timing or outcome of continued efforts to obtain approval for a generic conjugated estrogens product. While the introduction of generic competition ordinarily is expected to significantly impact the market for a brand name product, the extent of such impact on Premarin and related products cannot be predicted with certainty due to a number of factors, including the nature of the product and the recently introduced combination estrogen and progestin products in the Premarin family. Liquidity, Financial Condition and Capital Resources Cash flows from operations continued to be strong in 1997. Cash flows from operating activities of $1,695.5 million, proceeds from sales of businesses and other assets of $874.9 million, proceeds from the exercise of stock options of $369.6 million and proceeds from sales of marketable securities, net of $172.2 million were used principally for dividend payments of $1,073.2 million, long-term debt reduction of $976.9 million, capital expenditures of $830.4 million and the purchase of the worldwide animal health business of Solvay S.A. for $460.0 million. These activities resulted in a net decrease in cash and cash equivalents during 1997. Cash flows from operating activities for the year ended 1997 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 American Home Products Corporation Retirement Plan - U.S. As a result, cash flows from operating activities for the year ended 1997 are not indicative of the results to be expected for 1998. Capital expenditures included strategic investments in manufacturing and distribution facilities worldwide and the expansion of the Company's research and development facilities. The Company believes that the foreign currency risks to which it is exposed are not reasonably likely to have a material adverse effect on the Company's cash flows, results of operations or financial position given the concentration of sales in the United States. No single foreign currency accounted for more than 5% of 1997 worldwide sales. More specifically, Asian-Pacific financial instability did not have a material 43 impact on the Company's results of operations in 1997 since these operations are not material to the Company's consolidated operations. In addition, the Company believes that if Asian-Pacific financial instability continues, it will not have a material impact on the Company's future results of operations. The Company initially established credit facilities with a syndicate of lenders to finance the ACY acquisition. The credit facilities, as amended, are composed of a $2.5 billion, five-year credit facility and a $2.5 billion, 364-day credit facility. In 1995, the Company issued, under a $3.5 billion shelf registration statement, $1.0 billion of 7.70% notes due February 2000 and $1.0 billion of 7.90% notes due February 2005. Net proceeds from these issuances were used to repay commercial paper. The notes are unsecured and unsubordinated and may not be redeemed prior to maturity. In connection with the $2.0 billion note issue, the Company terminated $2.0 billion of the interest rate swap agreements that previously had been entered into. The carrying values of cash and cash equivalents approximate fair value due to the short-term, highly liquid nature of the cash equivalents which have original maturities of three months or less. Interest rate fluctuations would not have a significant effect on the fair value of cash equivalents held by the Company. At December 31, 1997, the fair value of the Company's long-term debt, excluding the interest rate swap agreements discussed below, was $5,255.7 million. If interest rates were to increase or decrease by one percentage point, the fair value of the long-term debt would decrease or increase by approximately $121.7 million. At December 31, 1997, the fair value of the remaining $2.3 billion of interest rate swap agreements was a payable of $98.5 million. If interest rates were to increase or decrease by one percentage point, the payable would decrease or increase by approximately $50.2 million. At December 31, 1997, the fair value of the $977.5 million notional amount of foreign exchange forward contracts was a net receivable of $14.4 million. As foreign exchange rates change from period to period, the fluctuations in the fair value of the foreign exchange forward contracts are offset by fluctuations in the fair value of the underlying hedged transactions. If the value of the U.S. dollar were to increase or decrease by 10% in relation to all foreign currencies, the net receivable would increase or decrease by approximately $81.6 million. The ratio of earnings to fixed charges increased to 6.4 in 1997 from 5.6 in 1996. The increase was due primarily to reduced fixed charges, which resulted from lower interest expense due to the reduction in long-term debt, and increased earnings from operations before taxes. The reduction in long-term debt in 1997 was due primarily to cash flows from operating activities. In December 1997, the Company signed a definitive agreement with a subsidiary of Tyco International Ltd. for the sale of the Sherwood-Davis & Geck medical devices business. Under the transaction, which is subject to certain customary closing conditions, including the receipt of necessary governmental approvals, the Company will receive $1.77 billion in cash at closing. The completion of the transaction is expected to take place during the first quarter of 1998 and, excluding the gain on sale, will not have a material impact on the Company's future results of operations. This transaction will complete the Company's exit from the medical devices business. The Company's objectives are to continue to further reduce its current debt position, including, but not limited to, additional sales of non-strategic assets. Management is confident that cash flows from operating activities will be adequate to repay both the principal and interest on the remaining ACY acquisition financing without requiring the disposition of any significant strategic core businesses or assets and, further, to allow the Company to continue to fund its operations, pay dividends and maintain its ongoing programs of capital expenditures, including the amount already committed at December 31, 1997 of approximately $313 million, without restricting its ability to make further acquisitions as may be appropriate. Company Statements for Forward-Looking Information This Annual Report, including management's discussion and analysis set forth above, contains certain forward-looking statements, including statements regarding the Company's results of operations, financial position 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 and the Company's 1997 Annual Report on Form 10-K which will be filed by March 31, 1998. 44 American Home Products Corporation Corporate Data Independent Auditors Arthur Andersen LLP 1345 Avenue of the Americas New York, NY 10105 Executive Offices American Home Products Corporation Five Giralda Farms Madison, NJ 07940 (973) 660-5000 Annual Meeting The Annual Meeting of Shareholders will be held on Thursday, April 23, 1998, at the Governor Morris Hotel in Morristown, New Jersey. Form 10-K A copy of the Company's Annual Report on Form 10-K may be obtained by any shareholder without charge upon request to: American Home Products Corporation Treasurer's Department Five Giralda Farms Madison, NJ 07940 (973) 660-6936 Shareholder Account Information ChaseMellon Shareholder Services, L.L.C. is the transfer agent, registrar, dividend disbursing agent and dividend reinvestment agent for the Company. Shareholders of record with questions about lost certificates, lost or missing dividend checks, or notification of change of address should contact: ChaseMellon Shareholder Services, L.L.C. Overpeck Center 85 Challenger Road Ridgefield Park, NJ 07660 (800) 565-2067 For the hearing impaired: (800) 231-5469 (TDD) Internet address: http://www.chasemellon.com Master Investment Plan The plan provides shareholders of record with the opportunity to automatically reinvest dividends or to make cash purchases of additional shares of the Company's common stock. Inquiries should be directed to ChaseMellon Shareholder Services, L.L.C. Equal Employment Opportunity Our established affirmative action and equal employment programs demonstrate our long-standing commitment to provide job and promotional opportunities for all qualified persons regardless of age, color, disability, national origin, race, religion, sex, sexual orientation, status as a Vietnam-era veteran or a special disabled veteran, or any military uniformed services obligation. Policy on Health, Safety and Environmental Protection A copy of the Company's "Policy on Health, Safety and Environmental Protection" may be obtained upon written request to: American Home Products Corporation Department of Environment and Safety Five Giralda Farms Madison, NJ 07940 AHP on the Internet American Home Products' Internet address is: http://www.ahp.com Product designations appearing in differentiated type are trademarks. 45 American Home Products Corporation Principal Officers Principal Corporate Officers John R. Stafford (6),(7) Chairman, President and Chief Executive Officer Robert G. Blount (6),(7) Senior Executive Vice President Robert Essner (6),(7) Executive Vice President Joseph J. Carr (6),(7) Senior Vice President Louis L. Hoynes, Jr. (6),(7) Senior Vice President and General Counsel Robert I. Levy, M.D. (6),(7) Senior Vice President- Science and Technology William J. Murray (6),(7) Senior Vice President David M. Olivier (6),(7) Senior Vice President John B. Adams Vice President-Corporate Development Egon E. Berg Vice President and Associate General Counsel Thomas G. Cavanagh Vice President-Investor Relations John R. Considine (6),(7) Vice President-Finance Bruce Fadem Vice President-Corporate Systems and Chief Information Officer Tuan Ha-Ngoc Vice President-Strategic Development William A. Hawkins (6),(7) Vice President-Medical Device and Specialty Pharmaceutical Divisions Leo C. Jardot Vice President-Government Relations Gerald A. Jibilian Vice President and Associate General Counsel Paul J. Jones (6) Vice President and Comptroller Rene R. Lewin (6) Vice President-Human Resources Thomas M. Nee (6) Vice President-Taxes Marily H. Rhudy Vice President-Public Affairs Steven A. Tasher Vice President-Environmental Affairs and Associate General Counsel Jack M. O'Connor Treasurer Eileen M. Lach Secretary Principal Division and Subsidiary Officers Global Agricultural Products, American Cyanamid Company Howard L. Minigh, Ph.D.(7), President Cyanamid Agricultural Products Research Mark W. Atwood, Ph.D., President Cyanamid International Agricultural Products Marco A. Fonseca (7), President Fort Dodge Animal Health Division E. Thomas Corcoran (7), President Immunex Corporation* Edward V. Fritzky, Chairman and Chief Executive Officer Quinton Instrument Company Steven C. Tallman, President Specialty Pharmaceuticals Division David G. Strunce, President Whitehall International, Inc. Jean-Claude Leroux (7), President Whitehall-Robins Healthcare Kenneth J. Martin (7), President Wyeth-Ayerst Global Pharmaceuticals Bernard Poussot (7), President Wyeth-Ayerst Global Pharmaceuticals- North America Joseph M. Mahady (7), President Wyeth-Ayerst Research L. Patrick Gage, Ph.D. (7), President (6) Finance Committee (7) Operations Committee * AHP is majority owner Design: Context Inc., South Norwalk, CT Text: Charles S. Rhudy Executive Photography: William Taufic Location Photography: Ted Horowitz, George Simian, Mark Tuschman Product Photography: Jim Barber Printing: Avanti/Case-Hoyt [Recycle This report is printed Logo] on recycled paper. 46 Board of Directors [Photos Omitted] John R. Stafford (1),(5) Chairman, President and Chief Executive Officer Clifford L. Alexander, Jr. (2),(4),(5) President, Alexander & Associates, Inc. Frank A. Bennack, Jr. (1),(3),(5) President and Chief Executive Officer, The Hearst Corporation Robert G. Blount (1) Senior Executive Vice President Robin Chandler Duke (3),(5) National Chair, Population Action International Robert Essner Executive Vice President John D. Feerick (2),(3),(5) Dean, Fordham University School of Law John P. Mascotte (3),(5) President and CEO, Blue Cross, Blue Shield of Kansas City Mary Lake Polan, M.D., Ph.D. (4),(5) Professor and Chairman, Department of Gynecology and Obstetrics, Stanford University School of Medicine Ivan G. Seidenberg (2),(5) Chairman, Vice President and Chief Operating Officer, Bell Atlantic Corporation John R. Torell III (4),(5) Chairman, Torell Management Inc. William Wrigley (2),(5) President and Chief Executive Officer, Wm. Wrigley Jr. Company Directors Emeriti - -------------------------------------- John W. Culligan Retired - Former Chairman of the Board William F. Laporte Retired - Former Chairman of the Board (1) Executive Committee (2) Audit Committee (3) Compensation and Benefits Committee (4) Corporate Issues Committee (5) Nominating Committee American Home Products Corporation [Logo] Five Giralda Farms Madison, New Jersey 07940 EX-21 12 EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT DECEMBER 31, 1997
State or Country Name of Incorporation Domestic A.H. Robins Company, Incorporated Delaware AHP Subsidiary Holding Corporation Delaware American Cyanamid Company Maine Ayerst Laboratories, Incorporated New York Ayerst-Wyeth Pharmaceuticals Incorporated Delaware Berdan Insurance Company Vermont Cyanamid Agricultural de Puerto Rico, Inc. New Jersey Cyanamid International Corporation Limited Delaware Genetics Institute, Inc. Delaware Immunex Corporation Washington Lederle Parenterals, Inc. New Jersey Lederle Piperacillin, Inc. New Jersey MDP Holdings, Inc. Delaware Quinton Instrument Company Washington Route 24 Holdings, Inc. Delaware *Sherwood Medical Company Delaware Wyeth-Ayerst International Inc. New York Wyeth Laboratories Inc. New York Wyeth Nutritionals Inc. Delaware Foreign AHP Finance B.V. Netherlands AHP Manufacturing B.V. Netherlands Cyanamid Agro France Cyanamid de Argentina S.A. Delaware Cyanamid GmbH Germany Cyanamid Iberica, S.A. Spain Cyanamid (Japan) Ltd. Japan *Cyanamid of Great Britain Limited Great Britain Cyanamid Quimica do Brasil Ltda. Brazil Cyanamid Taiwan Corporation Taiwan Dimminaco AG Switzerland John Wyeth & Brother Limited Great Britain Laboratorios Wyeth-Whitehall Ltda. Brazil *Nippon Sherwood Medical Industries Ltd. Japan Wyeth (H.K.) Limited Hong Kong Wyeth Australia Pty. Limited Australia Wyeth-Ayerst Canada Inc. Canada Wyeth-Lederle France Wyeth-Lederle S.p.A. Italy State or Country Name of Incorporation Wyeth Lederle Portugal (Farma), Lda. Portugal Wyeth-Pharma G.m.b.H. Germany Wyeth Philippines, Inc. Philippines Wyeth S.A. de C.V. Mexico
*These subsidiaries and the majority of Cyanamid of Great Britain Limited's assets were divested on February 27, 1998 as part of the Company's sale of the Sherwood-Davis & Geck medical devices business. There have been omitted from the above list the names of subsidiaries which, considered in the aggregate as a single subsidiary, would not constitute a significant subsidiary. EX-23 13 EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference in this Form 10-K of our report dated January 27, 1998 included in American Home Products Corporation's (the Company) Annual Report to Shareholders for the year ended December 31, 1997. Furthermore, we consent to the incorporation of our reports dated January 27, 1998 included in or made part of this Form 10-K, into the Company's previously filed Registration Statements on Form S-3 (File Nos. 33-45324 and 33-57339) and on Form S-8 (File Nos. 2-96127, 33-24068, 33-41434, 33-53733, 33-55449, 33-45970, 33-14458, 33-50149, 33-55456 and 333-15509). ARTHUR ANDERSEN LLP New York, N.Y. March 27, 1998 EX-27 14
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AMERICAN HOME PRODUCTS CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1997 AND CONSOLIDATED STATEMENT OF INCOME FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS DEC-31-1997 DEC-31-1997 1,051,372 48,363 3,040,254 197,155 2,412,406 7,361,326 6,722,049 2,425,143 20,825,111 4,327,018 5,031,861 216,792 0 72 7,958,388 20,825,111 14,196,026 14,196,026 4,101,309 4,101,309 1,558,035 0 370,696 2,814,707 771,584 2,043,123 0 0 0 2,043,123 3.16 3.11 This amount represents Basic Earnings per Share in accordance with the requirements of Statement of Financial Accounting Standards No. 128 - "Earnings per Share". This amount represents Diluted Earnings per Share in accordance with the requirements of Statement of Financial Accounting Standards No. 128 - "Earnings per Share".
EX-99 15 Exhibit No. 99 Exhibit 99 to the Annual Report on Form 10-K for the Fiscal Year Ended December 31, 1997 Cautionary Statements Regarding "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995 The Company may from time to time make written or verbal forward-looking statements. Forward-looking statements may appear in periodic reports filed with the Securities and Exchange Commission (including the Company's Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q), in press releases, in the Company's Annual Report to Shareholders and other reports to shareholders, and in other communications made by the Company. These forward-looking statements can be identified by their use of words such as "anticipates","expects", "plans", "will", "estimates", "forecasts", "projects" and other words of similar meaning. These forward-looking statements address various matters including the Company's financial position, results of operations, competition, liquidity, financial condition, capital resources, market position and product development. These forward-looking statements are based on current expectations. The Company undertakes no obligation to update any forward-looking statements, but investors are advised to consult any further disclosures by the Company on this subject in its subsequent filings pursuant to the Securities Exchange Act of 1934. As permitted by the Private Securities Litigation Reform Act of 1995, the Company is hereby filing the following cautionary statements identifying important factors which, among others, could cause the Company's actual results to differ materially from expected and historical results: Changing business conditions including inflation and fluctuations in interest rates and foreign currency exchange rates. Competitive factors including managed care groups, institutions and government agencies seeking price discounts; technological advances attained by competitors; patents granted to competitors; potential generic competition for PREMARIN and for other health care and agricultural products as such products mature. Government laws and regulations affecting U.S. and international operations, including trade, monetary and fiscal policies, taxes (including the Section 936 income tax credit), price controls, changes in governments and legal systems, as well as actions affecting approvals of products and licensing. Inherent uncertainty of pharmaceutical research, difficulties or delays in product development and commercialization including, but not limited - page - to, the inability to identify viable new chemical compounds, successfully complete clinical trials, obtain and maintain regulatory approval for the compounds in the U.S. as well as the other countries in which the Company conducts its business, and gain and maintain market acceptance of approved products. Difficulties or delays in product development can also affect the Company's other businesses. Unexpected safety or efficacy concerns arising with respect to marketed products, whether or not scientifically justified, leading to product recalls, withdrawals or declining sales. Growth in costs and expenses, including changes in product mix, and the impact of any acquisitions or divestitures, restructuring and other unusual items that could result from evolving business strategies, evaluation of asset realization, and changing organizational structures. Product liability litigation related to the Company's health care and other products including, without limitation, litigation associated with the Company's antiobesity products, PONDIMIN and REDUX. Other legal factors include, without limitation, antitrust litigation, environmental concerns and patent disputes with competitors, any of which could preclude commercialization of products or negatively affect the profitability of existing products. Changes in accounting standards promulgated by the Financial Accounting Standards Board, the Securities and Exchange Commission, and the American Institute of Certified Public Accountants which are adverse to the Company. Continued consolidation in the health care and agrochemical industries could affect the Company's competitive position. -----END PRIVACY-ENHANCED MESSAGE-----