-----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, ACKd9FyP50l3jQZ6XFAVqOVsOQDrLodjQb9NQkLzxXLijBrH/mqPVJhyyQU3n0Zt 4jR/PeqUlQMwHLTsTsmdEw== 0000005187-98-000011.txt : 19980814 0000005187-98-000011.hdr.sgml : 19980814 ACCESSION NUMBER: 0000005187-98-000011 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980813 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN HOME PRODUCTS CORP CENTRAL INDEX KEY: 0000005187 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 132526821 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-01225 FILM NUMBER: 98685345 BUSINESS ADDRESS: STREET 1: 5 GIRALDA FARMS CITY: MADISON STATE: NJ ZIP: 07940 BUSINESS PHONE: 9736605835 MAIL ADDRESS: STREET 1: 5 GIRALDA FARMS CITY: MADISON STATE: NJ ZIP: 07940 10-Q 1 ===================================================================== UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1998 Commission file number 1-1225 AMERICAN HOME PRODUCTS CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 13-2526821 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) FIVE GIRALDA FARMS, MADISON, N.J. 07940 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (973) 660-5000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X N The number of shares of Common Stock outstanding as of the close of business on July 31, 1998: NUMBER OF CLASS SHARES OUTSTANDING Common Stock, $0.33-1/3 par value 1,315,814,574 ====================================================================== AMERICAN HOME PRODUCTS CORPORATION AND SUBSIDIARIES INDEX PAGE NO. Part I - Financial Information 2 Item 1. Financial Statements: Consolidated Condensed Balance Sheets - June 30, 1998 and December 31, 1997 3 Consolidated Condensed Statements of Income - Three and Six Months Ended June 30, 1998 and 1997 4 Consolidated Condensed Statements of Changes in Stockholders' Equity - Six Months Ended June 30, 1998 and 1997 5 Consolidated Condensed Statements of Cash Flows - Six Months Ended June 30, 1998 and 1997 6 Notes to Consolidated Condensed Financial Statements 7-9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10-16 Part II - Other Information 17 Item 1. Legal Proceedings 17-20 Item 4. Submission of Matters to a Vote of Security-Holders 20 Item 6. Exhibits and Reports on Form 8-K 21 Signature 22 Exhibit Index EX-1 -1- PART I - FINANCIAL INFORMATION AMERICAN HOME PRODUCTS CORPORATION AND SUBSIDIARIES The consolidated condensed financial statements included herein have been prepared by American Home Products Corporation (the "Company"), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations; however, the Company believes that the disclosures are adequate to make the information presented not misleading. In the opinion of management, the financial statements include all adjustments necessary to present fairly the financial position of the Company as of June 30, 1998 and December 31, 1997, the results of its operations for the three months and six months ended June 30, 1998 and 1997, and its cash flows and changes in stockholders' equity for the six months ended June 30, 1998 and 1997. It is suggested that these financial statements and management's discussion and analysis of financial condition and results of operations be read in conjunction with the financial statements and the notes thereto included in the Company's 1997 Annual Report on Form 10-K and Quarterly Report on Form 10-Q for the quarter ended March 31, 1998. -2- AMERICAN HOME PRODUCTS CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
JUNE 30, DECEMBER 31, 1998 1997 ASSETS Cash and cash equivalents ................................. $1,433,838 $1,051,372 Marketable securities ..................................... 92,406 48,363 Accounts receivable less allowances ....................... 3,335,576 2,843,099 Inventories: Finished goods ....................................... 801,384 1,042,065 Work in progress ..................................... 718,271 657,033 Materials and supplies ............................... 633,647 713,308 2,153,302 2,412,406 Other current assets including deferred taxes ............. 993,991 1,006,086 TOTAL CURRENT ASSETS ................................. 8,009,113 7,361,326 Property, plant and equipment ............................. 6,246,445 6,722,049 Less accumulated depreciation ........................ 2,165,475 2,425,143 4,080,970 4,296,906 Goodwill and other intangibles, net of accumulated amortization ......................................... 7,852,864 8,338,695 Other assets including deferred taxes ..................... 819,243 828,184 TOTAL ASSETS ......................................... $20,762,190 $20,825,111 LIABILITIES Loans payable ............................................. $123,574 $89,041 Trade accounts payable .................................... 625,227 794,291 Accrued expenses .......................................... 3,018,162 3,019,805 Accrued federal and foreign taxes ......................... 634,714 423,881 TOTAL CURRENT LIABILITIES ............................ 4,401,677 4,327,018 Long-term debt ............................................ 3,844,526 5,031,861 Other noncurrent liabilities .............................. 2,171,800 2,248,282 Postretirement benefit obligations other than pensions..... 850,433 833,916 Minority interests ........................................ 217,844 208,782 STOCKHOLDERS' EQUITY $2 convertible preferred stock, par value $2.50 per share.. 68 72 Common stock, par value $0.33-1/3 per share ............... 438,279 435,298 Additional paid-in capital ................................ 2,847,615 2,530,696 Retained earnings ........................................ 6,362,648 5,489,292 Accumulated other comprehensive loss ...................... (372,700) (280,106) TOTAL STOCKHOLDERS' EQUITY ........................... 9,275,910 8,175,252 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ........... $20,762,190 $20,825,111 The accompanying notes are an integral part of these consolidated condensed balance sheets.
-3- AMERICAN HOME PRODUCTS CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF INCOME (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
THREE MONTHS SIX MONTHS ENDED JUNE 30, ENDED JUNE 30, 1998 1997 1998 1997 NET SALES .................................................. $3,341,960 $3,499,758 $7,008,355 $7,102,777 Cost of goods sold ......................................... 920,241 1,059,002 1,924,671 2,090,940 Selling, general and administrative expenses ............... 1,236,958 1,321,293 2,592,276 2,666,552 Research and development expenses .......................... 408,447 379,763 795,405 751,808 Interest expense, net ...................................... 50,153 104,462 122,264 201,509 Other income, net .......................................... (1,522) (4,382) (62,680) (49,831) Gain on sale of business ................................... - - (592,084) - Income before federal and foreign taxes .................... 727,683 639,620 2,228,503 1,441,799 Provision for taxes ........................................ 204,172 180,528 722,782 406,030 NET INCOME ................................................. $523,511 $459,092 $1,505,721 $1,035,769 BASIC EARNINGS PER SHARE ................................... $0.40 $0.36 $1.15 $0.80 DILUTED EARNINGS PER SHARE ................................. $0.39 $0.35 $1.13 $0.79 Dividends per share of common stock ........................ $0.215 $0.205 $0.43 $0.41 The accompanying notes are an integral part of these consolidated condensed statements.
-4- AMERICAN HOME PRODUCTS CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (IN THOUSANDS)
SIX MONTHS ENDED JUNE 30, 1998: ACCUMULATED $2 CONVERTIBLE ADDITIONAL OTHER TOTAL PREFERRED COMMON PAID-IN RETAINED COMPREHENSIVE STOCKHOLDERS' STOCK STOCK CAPITAL EARNINGS LOSS EQUITY Balance at January 1, 1998 $72 $216,792 $2,530,696 $5,707,798 ($280,106) $8,175,252 Two-for-one stock split 218,506 (218,506) Restated balance at January 1, 1998 72 435,298 2,530,696 5,489,292 (280,106) 8,175,252 Net income 1,505,721 1,505,721 Currency translation adjustments (90,377) (90,377) Unrealized loss on marketable securities (2,217) (2,217) Comprehensive income 1,413,127 Cash dividends declared (563,742) (563,742) Treasury stock acquired (376) (5,262) (60,229) (65,867) Common stock issued 2,934 301,782 304,716 Conversion of preferred stock and other exchanges (4) 423 20,399 (8,394) 12,424 Balance at June 30, 1998 $68 $438,279 $2,847,615 $6,362,648 ($372,700) $9,275,910 SIX MONTHS ENDED JUNE 30, 1997: ACCUMULATED $2 CONVERTIBLE ADDITIONAL OTHER TOTAL PREFERRED COMMON PAID-IN RETAINED COMPREHENSIVE STOCKHOLDERS' STOCK STOCK CAPITAL EARNINGS LOSS EQUITY Balance at January 1, 1997 $79 $213,328 $2,034,337 $4,750,621 ($36,273) $6,962,092 Two-for-one stock split 218,506 (218,506) Restated balance at January 1, 1997 79 431,834 2,034,337 4,532,115 (36,273) 6,962,092 Net income 1,035,769 1,035,769 Currency translation adjustments 151,872) (151,872) Unrealized loss on marketable securities (2,424) (2,424) Comprehensive income 881,473 Cash dividends declared (528,898) (528,898) Treasury stock acquired (34) (682) (6,344) (7,060) Common stock issued 2,478 257,137 259,615 Conversion of preferred stock and other exchanges (3) 55 15,360 15,412 Balance at June 30, 1997 $76 $434,333 $2,306,152 $5,032,642 ($190,569) $7,582,634 The accompany notes are an integral part of these consolidated condensed statements.
-5- AMERICAN HOME PRODUCTS CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
SIX MONTHS ENDED JUNE 30, 1998 1997 OPERATING ACTIVITIES Net income ........................................................ $1,505,721 $1,035,769 Adjustments to reconcile net income to net cash provided from operating activities: Gain on sale of business ....................................... (592,084) - Gains on sales of other assets ................................. (76,554) (100,940) Depreciation and amortization .................................. 344,780 381,531 Deferred income taxes .......................................... 32,463 (245,931) Changes in working capital, net ................................ (639,729) (613,050) Other items, net ............................................... (60,406) (72,685) Net cash provided from operating activities ....................... 514,191 384,694 INVESTING ACTIVITIES Purchases of property, plant and equipment ........................ (373,445) (343,314) Purchases of businesses, net of cash acquired ..................... - (479,694) Proceeds from sale of business .................................... 1,770,000 - Proceeds from sales of other assets ............................... 94,175 221,962 Net (purchases)/sales of marketable securities .................... (45,484) 216,295 Net cash provided from/(used for) investing activities ............ 1,445,246 (384,751) FINANCING ACTIVITIES Net repayments of debt............................................. (1,150,448) (77,582) Dividends paid .................................................... (563,742) (528,898) Exercise of stock options ......................................... 304,716 259,615 Purchases of treasury stock ....................................... (65,867) (7,060) Termination of interest rate swap agreements ...................... (96,655) - Net cash used for financing activities ............................ (1,571,996) (353,925) Effects of exchange rates on cash balances ........................ (4,975) (6,119) Increase/(decrease) in cash and cash equivalents .................. 382,466 (360,101) Cash and cash equivalents, beginning of period .................... 1,051,372 1,322,297 Cash and cash equivalents, end of period .......................... $1,433,838 $962,196 The accompanying notes are an integral part of these consolidated condensed statements. SUPPLEMENTAL INFORMATION Interest payments excluding termination of interest rate swap agreements $175,345 $222,524 Income tax and related interest payments, net of refunds 472,058 720,623
-6- AMERICAN HOME PRODUCTS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS Note 1. MERGER WITH MONSANTO COMPANY On June 1, 1998, the Company and Monsanto announced that they have entered into a definitive agreement to combine the two companies in a merger of equals transaction. The combined company will have global businesses in pharmaceuticals, agriculture, animal health, consumer health care and nutrition. Under the terms of the transaction, Monsanto stockholders will receive 1.15 shares in the combined company for each share of Monsanto stock that they own. AHP stockholders will retain their shares. AHP and Monsanto stockholders would own approximately 65 percent and 35 percent, respectively, of the combined company's shares. Both companies' Boards of Directors have approved the merger, however, it is subject to shareholder approval and satisfaction of other customary conditions, including regulatory approvals. Among other things, the transaction is contingent upon qualifying as a tax-free reorganization and being accounted for under the pooling of interests method of accounting. The transaction is expected to be completed by the end of 1998 or early 1999. These consolidated condensed financial statements do not reflect any effects of the proposed merger. Note 2. COMMON STOCK At the Company's April 23, 1998 Annual Meeting of Stockholders, an increase in the number of authorized shares of common stock from 1,200,000,000 to 2,400,000,000 was approved enabling the Company to complete a two-for-one common stock split effected in the form of a 100% stock dividend which was declared by the Company's Board of Directors in March 1998. The record date for stockholders entitled to receive the additional shares was the close of business on April 24, 1998. The par value of the common stock was maintained at the pre- split amount of $0.33-1/3 per share. All references to retained earnings, common stock, average number of common shares outstanding and per share amounts in these consolidated condensed financial statements, notes to consolidated condensed financial statements and Management's Discussion and Analysis of Financial Condition and Results of Operations prior to the record date of the stock split have been restated to reflect the two-for-one stock split on a retroactive basis. Note 3. CONTINGENCIES The Company is involved in various legal proceedings, including product liability and environmental matters of a nature considered normal to its business. It is the Company's policy to accrue for amounts related to these legal matters if it is probable that a liability has been incurred and an amount is reasonably estimable. -7- AMERICAN HOME PRODUCTS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS 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. Note 4. SALE OF SHERWOOD-DAVIS & GECK MEDICAL DEVICES BUSINESS On February 27, 1998, the Company sold the Sherwood-Davis & Geck medical devices business to a subsidiary of Tyco International Ltd. for approximately $1.77 billion, resulting in a pre-tax gain of $592,084,000. The proceeds were used primarily to reduce outstanding commercial paper. Net income, basic earnings per share and diluted earnings per share for the six months ended June 30, 1998 included an after-tax gain on the sale of $330,782,000, $0.25 and $0.25, respectively. Note 5. ACCUMULATED OTHER COMPREHENSIVE LOSS Effective January 1, 1998, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 130 - "Reporting Comprehensive Income". SFAS No. 130 increases financial reporting disclosures and has no impact on the Company's financial position or results of operations. Certain reclassifications have been made to the June 30, 1997, December 31, 1997 and December 31, 1996 consolidated financial statements to conform with the financial reporting requirements of SFAS No. 130. Accumulated other comprehensive loss is comprised substantially of currency translation adjustments. Note 6. RECENTLY ISSUED ACCOUNTING STANDARDS In June 1998, SFAS No. 133 - "Accounting for Derivative Instruments and Hedging Activities" was issued and is effective for fiscal years beginning after June 15, 1999. SFAS No. 133 requires all derivatives to be measured at fair value and recognized as assets or liabilities on the balance sheet. Changes in the fair value of derivatives should be recognized in either Net Income or Other Comprehensive Income, depending on the designated purpose of the derivative. The Company currently plans to adopt this standard effective January 1, 2000. This standard will have no material impact on the Company's results of operations or financial position. -8- AMERICAN HOME PRODUCTS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS Note 7. EARNINGS PER SHARE The following tables set forth the computations of Basic Earnings per Share and Diluted Earnings per Share:
THREE MONTHS SIX MONTHS ENDED JUNE 30, ENDED JUNE 30, (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) 1998 1997 1998 1997 Net income less preferred dividends $523,497 $459,077 $1,505,693 $1,035,739 Denominator: Average number of common shares outstanding 1,314,229 1,291,517 1,311,628 1,288,083 BASIC EARNINGS PER SHARE $0.40 $0.36 $1.15 $0.80 Denominator: Average number of common shares outstanding 1,314,229 1,291,517 1,311,628 1,288,083 Common share equivalents of outstanding stock options and deferred contingent common stock awards 21,938 20,470 22,097 19,776 Total shares 1,336,167 1,311,987 1,333,725 1,307,859 DILUTED EARNINGS PER SHARE $0.39 $0.35 $1.13 $0.79
Note 8. SUBSEQUENT EVENT On July 30, 1998, the Company completed the acquisition of the vitamin and nutritional supplement products business of Solgar Vitamin and Herb Company, Inc. and its related affiliates for approximately $425 million in cash. This transaction will be accounted for under the purchase method of accounting. Solgar is a manufacturer and marketer of over 400 vitamins, nutritional supplements and herbal products with annual sales in excess of $100 million. -9- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1998 RESULTS OF OPERATIONS Management's discussion and analysis of results of operations for the 1998 second quarter and first half has been presented on an as-reported basis except for sales variation explanations which have been presented on an as-reported and pro forma basis. The pro forma sales results reflect businesses divested and acquired in 1998 and 1997 assuming the transactions occurred as of January 1, 1997. This activity includes the divestitures of the Sherwood-Davis & Geck (effective February 27, 1998) and Storz Instrument Company (effective December 31, 1997) medical devices businesses, and the acquisition of the worldwide animal health business of Solvay S.A. (effective February 28, 1997). This activity also includes the reclassification of certain ophthalmic pharmaceutical sales from the medical devices business to pharmaceuticals (effective January 1, 1998). On an as-reported basis, worldwide net sales for the 1998 second quarter and first half decreased 5% and 1% compared with prior year levels. On a pro forma basis, worldwide net sales increased 5% for the 1998 second quarter and 4% for the first half. The increases in pro forma worldwide net sales were due primarily to higher domestic sales of pharmaceuticals and worldwide sales of agricultural products offset, in part, by unfavorable foreign exchange of 3% for both the 1998 second quarter and first half. The following tables set forth worldwide net sales results by major product category and industry segment together with the percentage changes in "As- Reported" and "Pro Forma" worldwide net sales from the comparable periods in the prior year:
THREE MONTHS AS-REPORTED PRO FORMA ($ IN MILLIONS) ENDED JUNE 30, % INCREASE % INCREASE NET SALES TO CUSTOMERS 1998 1997 (DECREASE) (DECREASE) Health Care Products: Pharmaceuticals $2,069.8 $1,934.4 7% 7% Consumer Health Care 456.2 445.8 2% 2% Medical Devices - 327.2 (100)% - Total Health Care Products 2,526.0 2,707.4 (7)% 6% Agricultural Products 816.0 792.4 3% 3% Consolidated Net Sales $3,342.0 $3,499.8 (5)% 5%
-10- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1998
SIX MONTHS AS-REPORTED PRO FORMA ($ IN MILLIONS) ENDED JUNE 30, % INCREASE % INCREASE NET SALES TO CUSTOMERS 1998 1997 (DECREASE) (DECREASE) Health Care Products: Pharmaceuticals $4,333.0 $4,032.9 7% 5% Consumer Health Care 956.8 941.3 2% 2% Medical Devices 192.0 650.5 (70)% - Total Health Care Products 5,481.8 5,624.7 (3)% 5% Agricultural Products 1,526.6 1,478.1 3% 3% Consolidated Net Sales $7,008.4 $7,102.8 (1)% 4%
The following sales variation explanations are presented on an as-reported and pro forma basis: On an as-reported basis, worldwide pharmaceutical sales increased 7% for both the 1998 second quarter and first half. On a pro forma basis, worldwide pharmaceutical sales increased 7% for the 1998 second quarter and 5% for the first half due primarily to higher sales of PREMARIN products (first half only), oral contraceptives, EFFEXOR, SYNVISC (introduced in the 1997 fourth quarter), BENEFIX (introduced in the 1997 first quarter) and NEUMEGA (introduced in the 1997 fourth quarter) offset, in part, by the voluntary market withdrawal of the Company's antiobesity products in the 1997 third quarter and lower sales of ORUVAIL and LODINE. Worldwide pharmaceutical sales for the 1998 second quarter also reflect higher sales of ZIAC, VERELAN and NAPRELAN offset, in part, by lower sales of CORDARONE due to generic competition. Worldwide pharmaceutical sales were impacted by unfavorable foreign exchange of 3% for both the 1998 second quarter and first half. On an as-reported basis, U.S. pharmaceutical sales increased 17% for the 1998 second quarter and 14% for the first half. On a pro forma basis, U.S. pharmaceutical sales increased 16% for the 1998 second quarter and 13% for the first half. The increase in pro forma U.S. pharmaceutical sales for the 1998 second quarter consisted of unit volume growth of 14% and price increases of 2%. The increase in pro forma U.S. pharmaceutical sales for the 1998 first half consisted of unit volume growth of 11% and price increases of 2%. On an as-reported basis, international pharmaceutical sales decreased 4% for the 1998 second quarter and 2% for the first half. On a pro forma basis, international pharmaceutical sales decreased 4% for the 1998 second quarter and 5% for the first half. The decrease in pro forma international pharmaceutical sales for the 1998 second quarter consisted of unit volume growth of 3% which was more than offset by price decreases of 1% and unfavorable foreign exchange of 6%. The decrease in pro forma international pharmaceutical sales for the 1998 first -11- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1998 half consisted of unit volume growth of 3% which was more than offset by unfavorable foreign exchange of 8%. On an as-reported and pro forma basis, worldwide consumer health care sales increased 2% for both the 1998 second quarter and first half due primarily to higher sales of CENTRUM products and CALTRATE offset, in part, by lower sales of cough/cold products and AXID AR. Worldwide consumer health care sales were impacted by unfavorable foreign exchange of 2% for both the 1998 second quarter and first half. On an as-reported and pro forma basis, U.S. consumer health care sales increased 4% for the 1998 second quarter and 2% for the first half. The increase in U.S. consumer health care sales for the 1998 second quarter consisted of unit volume growth of 3% and price increases of 1%. The increase in U.S. consumer health care sales for the 1998 first half consisted of unit volume growth of 1% and price increases of 1%. On an as-reported and pro forma basis, international consumer health care sales decreased 1% for the 1998 second quarter and were comparable with prior year results for the first half. The decrease in international consumer health care sales for the 1998 second quarter consisted of unit volume growth of 4% and price increases of 1% which were more than offset by unfavorable foreign exchange of 6%. International consumer health care sales for the 1998 first half consisted of unit volume growth of 5% and price increases of 2% which were offset by unfavorable foreign exchange of 7%. On February 27, 1998, the Company sold the Sherwood-Davis & Geck medical devices business resulting in a pre-tax gain of $592.1 million ($330.8 million after-tax). This transaction completed the Company's exit from the medical devices business. On an as reported basis, worldwide medical devices sales decreased 100% for the 1998 second quarter and 70% for the first half due primarily to the Sherwood-Davis & Geck divestiture as well as the sale of Storz Instrument Company effective December 31, 1997. On an as-reported and pro forma basis, worldwide agricultural products sales increased 3% for both the 1998 second quarter and first half. Worldwide agricultural products sales for both the 1998 second quarter and first half reflect higher sales of RAPTOR (a soybean herbicide introduced in the 1997 second quarter which is replacing PURSUIT and SCEPTER herbicides in certain geographies), ODYSSEY (a canola herbicide introduced in the 1997 second quarter) and COUNTER insecticide. Worldwide agricultural products sales were impacted by unfavorable foreign exchange of 2% for both the 1998 second quarter and first half. On an as-reported and pro forma basis, U.S. agricultural products sales increased 1% for the 1998 second quarter and 3% for the first half. The increase in U.S. agricultural products sales for the 1998 second quarter consisted of price increases of 9% which were offset, in part, by unit volume declines of 8%. The increase in U.S. agricultural products sales for the 1998 first half -12- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1998 consisted of price increases of 5% which were offset, in part, by unit volume declines of 2%. Due to the seasonality of the U.S. agricultural products business, which is concentrated primarily in the first six months of the year, U.S. agricultural products sales and results of operations for the 1998 second quarter and first half are not indicative of the results to be expected in subsequent fiscal quarters or for the full year. On an as- reported and pro forma basis, international agricultural products sales increased 6% for the 1998 second quarter and 4% for the first half. The increase in international agricultural products sales for the 1998 second quarter consisted of unit volume growth of 9% and price increases of 1% which were offset, in part, by unfavorable foreign exchange of 4%. The increase in international agricultural products sales for the 1998 first half consisted of unit volume growth of 9% which was offset, in part, by unfavorable foreign exchange of 5%. Cost of goods sold, as a percentage of net sales, decreased to 27.5% for both the 1998 second quarter and first half compared to 30.3% for the 1997 second quarter and 29.4% for the 1997 first half due primarily to an overall product mix improvement as increased sales of higher margin pharmaceuticals and agricultural products replaced the loss of lower margin medical devices sales resulting from the divestitures of the Sherwood-Davis & Geck and Storz Instrument Company medical devices businesses. Selling, general and administrative expenses, as a percentage of net sales, decreased to 37.0% for both the 1998 second quarter and first half versus 37.8% for the 1997 second quarter and 37.5% for the 1997 first half. Lower selling, general and administrative expenses resulting from the divestitures of the Sherwood-Davis & Geck and Storz Instrument Company medical devices businesses and lower marketing expenses for certain consumer healthcare products and pharmaceutical samples were offset, in part, by higher marketing expenses related to certain pharmaceutical promotional efforts. Research and development expenses increased 7.6% for the 1998 second quarter and 5.8% for the 1998 first half due primarily to higher pharmaceutical research and development expenditures, particularly in the biopharmaceutical area, offset, in part, by lower research and development expenses resulting from the divestitures of the Sherwood-Davis & Geck and Storz Instrument Company medical devices businesses. Interest expense, net decreased in the 1998 second quarter and first half due primarily to the reduction in long-term debt during the 1998 first quarter as the proceeds from the sale of the Sherwood-Davis & Geck medical devices business were used primarily to reduce outstanding commercial paper. Average long-term debt outstanding during the 1998 and 1997 second quarter was $3,753.3 million and $6,024.3 million, respectively. Average long-term debt outstanding during the 1998 and 1997 first half was $4,438.2 million and $5,986.5 million, respectively. -13- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1998 Other income, net for both the 1998 and 1997 second quarter and first half includes gains on the sales of non-strategic assets, including certain generic and non-core product rights offset, in part, by foreign exchange losses. Other income, net for both the 1997 second quarter and first half also includes the amount paid in settlement of a lawsuit brought by Johnson & Johnson and its wholly-owned subsidiary, Ortho Pharmaceutical Corporation. The settlement was offset by a previously established reserve for this litigation and a gain on the sale of the Company's investment in the common stock of certain publicly traded insurance companies. The following tables set forth income before taxes by industry segment:
THREE MONTHS SIX MONTHS ($ IN MILLIONS) ENDED JUNE 30, ENDED JUNE 30, INCOME BEFORE TAXES 1998 1997 1998 1997 Health Care Products $523.4 $510.3 $1,368.7 $1,280.8 Agricultural Products 284.5 259.8 474.8 431.2 Corporate (80.2) (130.5) 385.0 (1) (270.2) Consolidated Income before Taxes $727.7 $639.6 $2,228.5 $1,441.8 (1) Includes a gain on the sale of Sherwood-Davis & Geck medical devices business in the 1998 first quarter of $592.1 million.
The effective tax rate remained relatively consistent for the 1998 second quarter at 28.1% versus 28.2% for the 1997 second quarter. The effective tax rate increased to 32.4% for the 1998 first half versus 28.2% for the 1997 first half due primarily to the tax impact of the gain on the sale of the Sherwood- Davis & Geck medical devices business in the first quarter of 1998. The impact on the effective tax rate from the gain on the sale of the Sherwood-Davis & Geck medical devices business was due primarily to goodwill basis differences for tax and financial reporting purposes. Net income, basic earnings per share and diluted earnings per share increased 14%, 11% and 11%, respectively, in the 1998 second quarter compared to the 1997 second quarter. Excluding the after-tax gain on the sale of the Sherwood-Davis & Geck medical devices business in the 1998 first quarter of $330.8 million ($0.25 per share-basic and diluted) net income, basic earnings per share and diluted earnings per share increased 13%, 13% and 11%, respectively, in the 1998 first half compared to the 1997 first half. The increases in net income, basic earnings per share and diluted earnings per share for both the 1998 second quarter and first half, excluding the gain on the sale, were greater than the as-reported net sales results due primarily to increased sales of higher margin pharmaceutical and agricultural products (replacing the loss of lower margin medical devices sales) and lower selling, general and administrative expenses and interest expense, offset, in part, by higher research and development expenses. Including the gain on sale, net income, basic earnings per share and diluted earnings per share for the 1998 first half increased 45%, 44% and 43% to $1,505.7 million, $1.15 and $1.13, respectively. -14- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1998 During the 1998 first quarter, the Company initiated a review of its worldwide manufacturing and distribution systems for all of its product lines. The results of this study will be announced later this year at which time it is expected that a restructuring charge, which will offset a portion of the gain on the sale of the Sherwood-Davis & Geck medical devices business, will be required. COMPETITION The Company operates in the highly competitive healthcare and agrochemical industries. The Company is not dependent on any one patent-protected product or line of products for a substantial portion of its sales or results of operations. However, PREMARIN, one of the Company's conjugated estrogens products, manufactured from pregnant mare's urine, is the leader in its category and does contribute significantly to sales and results of operations. PREMARIN'S principal uses are to treat the symptoms of menopause and osteoporosis, a condition involving a loss of bone mass in postmenopausal women. Estrogen containing products manufactured by other companies have been marketed for many years for the treatment of menopausal symptoms, and some of these products have also obtained marketing approval for the treatment of osteoporosis. During the past several years, other manufacturers have introduced products for the treatment and/or prevention of osteoporosis. Some companies have attempted to obtain approval for generic versions of PREMARIN. These products, if approved, would be routinely substitutable for PREMARIN under many state laws and third party insurance payer plans. In May 1997, the U.S. Food and Drug Administration (FDA) announced it would not approve certain synthetic estrogen products as generic equivalents of PREMARIN given known compositional differences between the active ingredient of these products and PREMARIN. No generic equivalents to PREMARIN have been approved by the FDA to date. PREMARIN will continue to be subject to competition from competing estrogen and other products for its approved indications, and may be subject to some form of generic competition from either natural or synthetic generic conjugated estrogens products in the future. LIQUIDITY, FINANCIAL CONDITION AND CAPITAL RESOURCES Cash and cash equivalents increased $382.5 million in the 1998 first half to $1,433.8 million. Proceeds from sale of business and sales of other assets of $1,864.2 million, cash flows from operating activities of $514.2 million and proceeds from the exercise of stock options of $304.7 million were used principally for long-term debt reduction of $1,150.4 million, dividend payments of $563.7 million and capital expenditures of $373.4 million. Due to the seasonality of the U.S. agricultural products business, a significant portion of the annual U.S. agricultural products sales are recorded in the first six months of the year; however, a significant amount of the related accounts receivable are not collected until the third quarter. Capital expenditures included strategic investments in manufacturing and distribution facilities worldwide and expansion of the Company's research and development facilities. -15- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1998 At June 30, 1998, the fair value of the Company's long-term debt, including the current portion, was $4,126.7 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 $122.2 million. Proceeds from the sale of the Sherwood-Davis & Geck medical devices business were used primarily to reduce outstanding commercial paper and terminate the Company's $2.3 billion of interest rate swap agreements. The cost to unwind the interest rate swap agreements was charged against the gain on sale. At June 30, 1998, the fair value of the $663.0 million notional amount of foreign exchange forward contracts was a net receivable of $4.4 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 hedged foreign currencies, the net receivable would increase or decrease by approximately $24.7 million. Effective April 1, 1998, the Company reduced its $5 billion of revolving credit facilities to $2 billion by terminating the $2.5 billion, 364-day credit facility in its entirety and reducing the $2.5 billion, five-year credit facility to $2.0 billion. The remaining $2.0 billion, five-year credit facility supports the Company's commercial paper program and has a maturity date of July 31, 2002. At June 30, 1998, there were no borrowings outstanding under the remaining credit facility. Effective May 31, 1998, the Company, in conjunction with its entry into the merger agreement with Monsanto, rescinded its common stock repurchase program, which had been in effect since July 1994. CAUTIONARY STATEMENTS FOR FORWARD LOOKING INFORMATION Management's discussion and analysis set forth above contains certain forward looking statements, including, among other things, statements regarding the Company's financial position, results of operations and potential competition. These forward looking statements are based on current expectations. Certain factors which could cause the Company's actual results to differ materially from expected and historical results have been identified by the Company in its other periodic reports filed with the Securities and Exchange Commission including the Company's 1997 Annual Report on Form 10-K and Exhibit 99 to such report, which exhibit is hereby incorporated by reference. -16- PART II - OTHER INFORMATION Item 1. LEGAL PROCEEDINGS The Company and its subsidiaries are parties to numerous lawsuits and claims arising out of the conduct of its business, including product liability and other tort claims, the most significant of which are described in the Company's Annual Report on Form 10-K for the year ended December 31, 1997 and Quarterly Report on Form 10-Q for the quarter ended March 31, 1998. As of July 15, 1998, the Company has been served with more than 3,700 lawsuits in federal and state courts on behalf of approximately 49,000 plaintiffs alleging injuries as a result of use of the NORPLANT 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. Several single-plaintiff and multi-plaintiff trials are scheduled for the second half of 1998. 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 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. -17- As of July 15, 1998, the Company has been served or is aware that it has been named as a defendant in 1,157 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 1,157 lawsuits naming the Company as a defendant, 172 are actions that seek certification of a class, some on a national and others on a statewide basis. Of these 172 lawsuits, 136 are pending in various federal district courts and 36 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: 447 individual lawsuits are pending in various federal district courts and 538 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. 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 36 different states, with the bulk of the cases in California, New Jersey, New York, Oklahoma, Pennsylvania, Tennessee 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. -18- 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 the PONDIMIN and REDUX related litigation vigorously. Five shareholder lawsuits naming the Company as a defendant and arising out of the Company's planned merger with Monsanto have been filed in the Delaware Chancery Court, New Castle County. The five class action complaints, which have been consolidated into one action (In re Monsanto Company Shareholders Litigation, C.A. No.16416NC), name as defendants Monsanto, the members of Monsanto's board and the Company. The complaints generally allege that the Monsanto defendants breached their fiduciary duties to their shareholders by entering into the merger agreement without first engaging in an auction process or an active market check and that the Company knowingly aided and abetted Monsanto and the Monsanto directors. Plaintiffs seek preliminary and permanent injunctive relief preventing the defendants from consummating the merger, rescission of the merger if it is consummated and compensatory damages and attorneys fees. The Company intends to defend this litigation vigorously. Two putative personal injury class actions have been filed in connection with the Company's voluntary withdrawal from the market of DURACT, a non-narcotic analgesic pain reliever. McGloin v. Wyeth- Ayerst Laboratories, filed in the United States District Court for the Northern District of California (No. C-98-2596-CW), seeks the certification of a nationwide class of persons who used DURACT and who have suffered or may suffer liver damage or related conditions as a result of using the product. Chimento, et al. v. Wyeth-Ayerst Laboratories, filed in the 34th Judicial District Court of Louisiana for the Parish of St. Bernard, seeks the certification of a class of Louisiana residents who were exposed to and who suffered injury from DURACT. Plaintiffs in both cases seek compensatory and punitive damages, the refund of all purchase costs, and the creation of a court-supervised medical monitoring program for the diagnosis and treatment of liver damage and related conditions allegedly caused by DURACT. The Company intends to defend this litigation vigorously. In the brand name prescription drug antitrust litigation, the Company has settled a group of federal district cases brought by retail pharmacists. The Company has also settled the cases brought by American Drug Stores and Eckerd's Drug Stores. The settlement agreements provide that they shall not be deemed or construed to be an admission of 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 in the complaint in these cases. The settlements are not material to the Company. -19- In the opinion of the Company, although the outcome of any legal proceedings cannot be predicted with certainty, the ultimate liability of the Company in connection with its legal proceedings will not have a material adverse effect on the Company's financial position but could be material to the results of operations in any one accounting period. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS (a) The matters described under item 4(c) below were submitted to a vote of security-holders, through the solicitation of proxies pursuant to Section 14 under the Securities Exchange Act of 1934, as amended, at the Annual Meeting of Stockholders held on April 23, 1998 (the "Annual Meeting"). (b) Not applicable. (c) The following describes the matters voted upon at the Annual Meeting and sets forth the number of votes (on a pre stock split basis) cast for, against or withheld and the number of abstentions as to each such matter (except as provided below, there were no broker non-votes): (i) Election of directors:
NOMINEE FOR WITHHELD Clifford L. Alexander, Jr. 566,815,459 2,849,762 Frank A. Bennack, Jr. 566,954,896 2,710,325 Robert G. Blount 566,957,912 2,707,309 Robin Chandler Duke 566,445,024 3,220,197 Robert Essner 566,953,187 2,712,034 John D. Feerick 566,794,067 2,871,154 John P. Mascotte 566,896,954 2,768,267 Mary Lake Polan, M.D.,Ph.D. 566,981,956 2,683,265 Ivan G. Seidenberg 566,711,236 2,953,985 John R. Stafford 566,856,058 2,809,163 John R. Torell III 567,028,522 2,636,699 William Wrigley 567,005,596 2,659,625
(ii) Ratification of the appointment of Arthur Andersen LLP as principal independent public accountants for 1998:
FOR AGAINST ABSTAIN 567,542,719 723,352 1,399,150
(iii) Approval of the proposed amendment to the Corporation's Restated Certificate of Incorporation:
FOR AGAINST ABSTAIN 563,622,312 3,504,117 2,538,792
(d) Not applicable. -20- Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit No. Description (10.1) Form of Severance Agreement entered into between the Company and the executive officers specified therein pursuant to Board of Director approval on January 29, 1998. (27.1) Financial Data Schedule - Period Ended June 30, 1998. (27.2) Restated Financial Data Schedule - Period Ended June 30, 1997. (27.3) Restated Financial Data Schedule - Period Ended December 31, 1997. (27.4) Restated Financial Data Schedule - Period Ended December 31, 1996. (b) Reports on Form 8-K A Current Report on Form 8-K regarding the Company's announcement that it had entered into a definitive agreement to combine with Monsanto Company in a merger of equals transaction was filed on June 1, 1998. -21- SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. AMERICAN HOME PRODUCTS CORPORATION (Registrant) By /s/ Paul J. Jones Paul J. Jones Vice President and Comptroller (Duly Authorized Signatory and Chief Accounting Officer) Date: August 13, 1998 -22- EXHIBIT INDEX Exhibit No. Description (10.1) Form of Severance Agreement entered into between the Company and the executive officers specified therein pursuant to Board of Director approval on January 29, 1998. (27.1) Financial Data Schedule - Period Ended June 30, 1998. (27.2) Restated Financial Data Schedule - Period Ended June 30, 1997. (27.3) Restated Financial Data Schedule - Period Ended December 31, 1997. (27.4) Restated Financial Data Schedule - Period Ended December 31, 1996. EX-1 EX-10.1 2 SEVERANCE AGREEMENT This Severance Agreement (this "Agreement") is made as of July 31, 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 - -------------------------- John R. Stafford Robert G. Blount EX-27.1 3
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AMERICAN HOME PRODUCTS CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEET AS OF JUNE 30, 1998 AND CONSOLIDATED CONDENSED STATEMENT OF INCOME FOR THE SIX MONTHS ENDED JUNE 30, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS DEC-31-1998 JUN-30-1998 1,433,838 92,406 3,335,576 0 2,153,302 8,009,113 6,246,445 2,165,475 20,762,190 4,401,677 3,844,526 438,279 0 68 8,837,563 20,762,190 7,008,355 7,008,355 1,924,671 1,924,671 795,405 0 122,264 2,228,503 722,782 1,505,721 0 0 0 1,505,721 1.15 1.13 Prior period financial data schedules for periods other than the six months ended June 30, 1998 and 1997, the three months ended March 31, 1998 and 1997 and the years ended December 31, 1997 and 1996 have not been restated to reflect the two-for-one stock split effected in the form of a 100% stock dividend to stockholders of record at the close of business on April 24, 1998. This amount represents Basic Earnings per Share in accordance with the requirements of Statement of Financial Accounting Standards No. 128 - "Earning 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-27.2 4
5 THIS RESTATED SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AMERICAN HOME PRODUCTS CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEET AS OF JUNE 30, 1997 AND CONSOLIDATED CONDENSED STATEMENT OF INCOME FOR THE SIX MONTHS ENDED JUNE 30, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS DEC-31-1997 JUN-30-1997 962,196 5,717 3,206,622 0 2,494,937 7,657,578 6,545,396 2,390,254 21,428,544 4,511,565 5,952,425 434,333 0 76 7,148,225 21,428,544 7,102,777 7,102,777 2,090,940 2,090,940 751,808 0 201,509 1,441,799 406,030 1,035,769 0 0 0 1,035,769 0.80 0.79 Prior period financial data schedules for periods other than the six months ended June 30, 1998 and 1997, the three months ended March 31, 1998 and 1997 and the years ended December 31, 1997 and 1996 have not been restated to reflect the two-for-one stock split effected in the form of a 100% stock dividend to stockholders of record at the close of business on April 24, 1998. This amount represents Basic Earnings per Share in accordance with the requirements of Statement of Financial Accounting Standards No. 128 - "Earning 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-27.3 5
5 THIS RESTATED SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AMERICAN HOME PRODUCTS CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEET AS OF DECEMBER 31, 1997 AND CONSOLIDATED CONDENSED STATEMENT OF INCOME FOR THE YEAR 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 5,031,861 435,298 0 72 7,739,882 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 1.58 1.56 Prior period financial data schedules for periods other than the six months ended June 30, 1998 and 1997, the three months ended March 31, 1998 and 1997 and the years ended December 31, 1997 and 1996 have not been restated to reflect the two-for-one stock split effected in the form of a 100% stock dividend to stockholders of record at the close of business on April 24, 1998. This amount represents Basic Earnings per Share in accordance with the requirements of Statement of Financial Accounting Standards No. 128 - "Earning 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-27.4 6
5 THIS RESTATED SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AMERICAN HOME PRODUCTS CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEET AS OF DECEMBER 31, 1996 AND CONSOLIDATED CONDENSED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS DEC-31-1996 DEC-31-1996 1,322,297 221,820 2,745,835 204,121 2,389,369 7,470,419 6,254,666 2,217,933 20,785,343 4,337,635 6,020,575 431,834 0 79 6,530,179 20,785,343 14,088,326 14,088,326 4,449,783 4,449,783 1,429,056 0 433,034 2,755,460 872,057 1,883,403 0 0 0 1,883,403 1.48 1.46 Prior period financial data schedules for periods other than the six months ended June 30, 1998 and 1997, the three months ended March 31, 1998 and 1997 and the years ended December 31, 1997 and 1996 have not been restated to reflect the two-for-one stock split effected in the form of a 100% stock dividend to stockholders of record at the close of business on April 24,1998. This amount represents Basic Earnings per Share in accordance with the requirements of Statement of Financial Accounting Standards No. 128 - "Earning 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".
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