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 September 30, 1999
Commission file number 1-6571
SCHERING-PLOUGH CORPORATION
Incorporated in New Jersey 22-1918501
One Giralda Farms (I.R.S. Employer Identification No.)
Madison, N.J. 07940-1000 (973) 822-7000
(telephone number)
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, and (2) has been subject
to such filing requirements for the past 90 days.
YES X NO
Common Shares Outstanding as of September 30, 1999: 1,469,074,987
PART I. - FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
(UNAUDITED)
(Amounts in millions, except per share figures)
<CAPTION>
Three Months Nine Months
Ended Ended
September 30 September 30
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Net Sales . . . . . . . . . . . $2,236 $1,986 $6,873 $6,018
Costs and expenses:
Cost of sales. . . . . . . . . 438 394 1,342 1,197
Selling, general
and administrative. . . . . . 814 762 2,571 2,302
Research and development . . . 305 257 864 742
Other, net . . . . . . . . . . (7) 1 (29) 6
1,550 1,414 4,748 4,247
Income before income taxes. . . 686 572 2,125 1,771
Income taxes. . . . . . . . . . 168 140 521 434
Net Income. . . . . . . . . . . $ 518 $ 432 $1,604 $1,337
Basic earnings per common share $ .35 $ .29 $ 1.09 $ .91
Diluted earnings per common share $ .35 $ .29 $ 1.08 $ .90
Dividends per common share. . . $ .125 $ .11 $ .36 $ .315
See notes to consolidated financial statements.
</TABLE>
<TABLE>
SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(Amounts in millions, except per share figures)
<CAPTION>
September 30, December 31,
1999 1998
<S> <C> <C>
Assets
Cash and cash equivalents . . . . . . . . $ 1,665 $ 1,259
Accounts receivable, net. . . . . . . . . 1,068 704
Inventories . . . . . . . . . . . . . . . 965 841
Prepaid expenses, deferred income
taxes and other current assets . . . . . 1,092 1,154
Total current assets. . . . . . . . . 4,790 3,958
Property, plant and equipment . . . . . . 4,277 4,068
Less accumulated depreciation . . . . . . 1,451 1,393
Property, net . . . . . . . . . . . . 2,826 2,675
Intangible assets, net. . . . . . . . . . 570 565
Other assets. . . . . . . . . . . . . . . 874 642
$ 9,060 $ 7,840
Liabilities and Shareholders' Equity
Accounts payable. . . . . . . . . . . . . $ 954 $ 1,003
Short-term borrowings and current
portion of long-term debt. . . . . . . . 695 558
Other accrued liabilities . . . . . . . . 1,661 1,471
Total current liabilities . . . . . . 3,310 3,032
Long-term liabilities . . . . . . . . . . 1,010 806
Shareholders' Equity:
Preferred shares - $1 par value;
Issued: none . . . . . . . . . . . . . . - -
Common shares - $.50 par value;
Issued: 1999 and 1998 - 2,030. . . . . . 1,015 1,015
Paid-in capital . . . . . . . . . . . . . 540 365
Retained earnings . . . . . . . . . . . . 7,875 6,802
Accumulated other comprehensive income. . (262) (238)
Total . . . . . . . . . . . . . . . . 9,168 7,944
Less treasury shares, at cost - 1999
- 561 shares; 1998 - 558 shares .. . . 4,428 3,942
Total shareholders' equity. . . . . . 4,740 4,002
$ 9,060 $ 7,840
See notes to consolidated financial statements.
</table
</TABLE>
<TABLE>
SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30
(UNAUDITED)
(Amounts in millions)
<CAPTION>
1999 1998
<S> <C> <C>
Operating Activities:
Net Income. . . . . . . . . . . . . . . . $ 1,604 $ 1,337
Depreciation and amortization . . . . . . 193 172
Accounts receivable . . . . . . . . . . . (393) (61)
Inventories . . . . . . . . . . . . . . . (146) (73)
Prepaid expenses and other assets . . . . (122) (205)
Accounts payable and other liabilities . 188 358
Net cash provided by operating
activities . . . . . . . . . . . . . . . 1,324 1,528
Investing Activities:
Capital expenditures . . . . . . . . . . (338) (227)
Reduction of investments. . . . . . . . . 204 -
Purchases of investments. . . . . . . . . (288) (103)
Other, net. . . . . . . . . . . . . . . . 2 (3)
Net cash used for investing activities. . (420) (333)
Financing Activities:
Dividends paid to common shareholders . . (532) (465)
Common shares repurchased . . . . . . . . (475) (109)
Short-term borrowings, net. . . . . . . . 152 (433)
Other, net, primarily equity proceeds . . 359 37
Net cash used for financing
activities . . . . . . . . . . . . . . . (496) (970)
Effect of exchange rates on cash and
cash equivalents. . . . . . . . . . . . . (2) (2)
Net increase (decrease) in cash and
cash equivalents . . . . . . . . . . . . 406 223
Cash and cash equivalents, beginning
of period . . . . . . . . . . . . . . . . 1,259 714
Cash and cash equivalents, end of period . $ 1,665 $ 937
See notes to consolidated financial statements.
</TABLE>
SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Amounts in millions, except per share figures)
Basis of Presentation
The unaudited financial statements included herein have been
prepared pursuant to the rules and regulations of the Securities
and Exchange Commission for reporting on Form 10-Q. 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. These statements should
be read in conjunction with the accounting policies and notes to
consolidated financial statements included in the Company's 1998
Annual Report on Form 10-K.
In the opinion of management, the financial statements reflect
all adjustments necessary for a fair statement of the operations
for the interim periods presented.
Earnings Per Common Share
The shares used for basic earnings per common share and diluted
earnings per common share are reconciled as follows:
Three Months Nine Months
Ended Ended
September 30, September 30,
1999 1998 1999 1998
Average shares outstanding for
basic earnings per share . . 1,469 1,469 1,470 1,467
Dilutive effect of options and
deferred stock units . . . . 15 21 17 20
Average shares outstanding for
diluted earnings per share . 1,484 1,490 1,487 1,487
As of September 30, 1999, there were 9 million options
outstanding with exercise prices higher than the average price of
the Company's common stock during the third quarter of 1999.
Accordingly, these options are not included in the dilutive
effects indicated above.
Inventories
Inventories consisted of: September 30, December 31,
1999 1998
Finished products . . . . . . . $398 $483
Goods in process. . . . . . . . 328 174
Raw materials and supplies. . . 239 184
Total inventories . . . . . . $965 $841
Segment Reporting
Schering-Plough is a worldwide research-based pharmaceutical
company engaged in the discovery, development, manufacturing and
marketing of pharmaceutical products. Discovery and development
efforts target the field of human health. However, application
in the field of animal health can result from these efforts. The
Company views animal health applications as a means to maximize
the return on investments in discovery and development. The
Company operates primarily in the prescription pharmaceutical
marketplace. However, the Company has sought regulatory approval
to switch prescription products to over-the-counter (OTC) status
as a means of extending a product's life cycle. In this way the
OTC marketplace is yet another means of maximizing the return on
investments in discovery and development. Effective January 1,
1999, the Company changed the structure of its internal
organization to reflect this focus on pharmaceutical research and
development. As a result, the Company will report as one
segment. Previously, the Company was organized into two business
units: pharmaceuticals and healthcare.
New Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No.
133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 133, as amended by SFAS No. 137, requires
adoption no later than January 1, 2001; the Company plans to
adopt the new standard at that time. This statement is not
expected to materially impact the Company's financial statements
because management has not engaged in a formula-based program
using derivative instruments to hedge market risks.
Comprehensive Income
Comprehensive income for the three months ended September 30,
1999 and 1998 was $532 and $436, respectively. Comprehensive
income for the nine months ended September 30, 1999 and 1998 was
$1,580 and $1,312, respectively.
Legal and Environmental Matters
The Company has responsibilities for environmental clean-up under
various state, local and federal laws, including the
Comprehensive Environmental Response, Compensation and Liability
Act, commonly known as Superfund. At several Superfund sites (or
equivalent sites under state law), the Company is alleged to be a
potentially responsible party (PRP). The Company estimates its
obligations for clean-up costs for Superfund sites based on
information obtained from the federal Environmental Protection
Agency, an equivalent state agency, and/or studies prepared by
independent engineers, and on the probable costs to be paid by
other PRPs. The Company records a liability for environmental
assessments and/or clean-up when it is probable a loss has been
incurred and the amount can reasonably be estimated.
The Company is also involved in various other claims and legal
proceedings of a nature considered normal to its business,
including product liability cases. The estimated costs the
Company expects to pay in these cases are accrued when the
liability is considered probable and the amount can be reasonably
estimated. Consistent with trends in the pharmaceutical industry,
the Company is self-insured for certain events.
The recorded liabilities for the above matters at September 30,
1999 were not material. Expected insurance recoveries have not
been considered in determining the costs for environmental-
related liabilities. Management believes that, except for the
matters discussed in the following paragraphs, it is remote that
any material liability in excess of the amounts accrued will be
incurred.
The Company is a defendant in more than 160 antitrust actions
commenced (starting in 1993) in state and federal courts by
independent retail pharmacies, chain retail pharmacies and
consumers. The plaintiffs allege price discrimination and/or
conspiracy between the Company and other defendants to restrain
trade by jointly refusing to sell prescription drugs at
discounted prices to the plaintiffs.
One of the federal cases is a class action on behalf of
approximately two-thirds of all retail pharmacies in the United
States and alleges a price-fixing conspiracy. The Company agreed
to settle the federal class action for a total of $22, which has
been paid in full. The settlement provides, among other things,
that the Company shall not refuse to grant discounts on brand-
name prescription drugs to a retailer based solely on its status
as a retailer and that, to the extent a retailer can demonstrate
its ability to affect market share of a Company brand-name
prescription drug in the same manner as a managed care
organization with which the retailer competes, it will be
entitled to negotiate similar incentives subject to the rights,
obligations, exemptions and defenses of the Robinson-Patman Act
and other laws and regulations. The United States District Court
in Illinois approved the settlement of the federal class action
on June 21, 1996. In June 1997, the Seventh Circuit Court of
Appeals dismissed all appeals from that settlement, and it is not
subject to further review. The defendants that did not settle
the class action proceeded to trial in September 1998. The trial
ended in November 1998 with a directed verdict in the defendants'
favor.
Three of the state antitrust cases have been certified as class
actions. Two are class actions on behalf of certain retail
pharmacies in California and Wisconsin, and the other is a class
action in the District of Columbia, on behalf of consumers of
prescription medicine. The Company has settled the retailer class
action in Wisconsin and an alleged class action in Minnesota.
The settlements of the state antitrust cases in Wisconsin and
Minnesota have been approved by the respective courts. The
settlement amounts were not significant. In addition, an action
has been brought in Alabama purportedly on behalf of consumers in
Alabama and several other states. Plaintiffs are seeking to
maintain the action as a class action. Also, in August 1998, a
class action was brought in Tennessee purportedly on behalf of
consumers in Tennessee and several other states. The court has
conditionally certified a class of consumers, but has stayed the
case pending the resolution of an earlier-filed Tennessee case,
which the Company has settled in principle.
In April - June 1999, state consumer cases were filed in state
courts in North Dakota, West Virginia and New Mexico. The
Company has also recently settled the state consumer cases in all
of the states except Alabama, Tennessee, North Dakota, West
Virginia and New Mexico. Court approval of those settlements has
been obtained. The settlement amounts were not material to the
Company. In June 1999, the Alabama Supreme Court reversed the
denial of a motion for judgment on the pleadings in one of the
Alabama retailer cases. The court held that the Alabama
antitrust law did not apply to conspiracies alleged to be in
interstate commerce. The Company believes that this ruling
should result in the dismissal of all of the Alabama state court
cases.
Plaintiffs in these antitrust actions generally seek treble
damages in an unspecified amount and an injunction against the
allegedly unlawful conduct.
In May 1998, the Company settled six of the federal antitrust
cases brought by 26 food and drug chain retailers and several
independent retail stores. Plaintiffs in these cases comprise
collectively approximately one-fifth of the prescription drug
retail market. In April 1999, the Company settled federal
antitrust cases brought by independent pharmacists and small
pharmacy chains comprising about 2% of the prescription drug
retail market. The settlement amounts were not material to the
Company.
In April 1997, certain of the plaintiffs in the federal class
action commenced another purported class action in United States
District Court in Illinois against the Company and the other
defendants who settled the previous federal class action. The
complaint alleges that the defendants conspired not to implement
the settlement commitments following the settlement discussed
above. The District Court has denied the plaintiffs' motion for
a preliminary injunction hearing.
The Company believes all the antitrust actions are without merit
and is defending itself vigorously.
On March 13, 1996, the Company was notified that the United
States Federal Trade Commission (FTC) is investigating whether
the Company, along with other pharmaceutical companies, conspired
to fix prescription drug prices. The investigation is ongoing.
The Company vigorously denies that it has engaged in any price-
fixing conspiracy.
The Company is a defendant in a state court action in Texas
brought by Foxmeyer Health Corporation, the parent of a
pharmaceutical wholesaler that filed for bankruptcy in August
1996. The case is against another pharmaceutical wholesaler and
11 pharmaceutical companies and alleges that the defendants
conspired to drive the plaintiff's wholesaler subsidiary out of
business. The complaint also alleged that the defendants defamed
the wholesaler and interfered with its business. There are
related actions pending in the Delaware bankruptcy proceedings of
the wholesaler and certain of the plaintiff's claims against the
Company have been dismissed. The Company believes that this
action is without merit and is defending itself vigorously
against all claims.
In February 1998, Geneva Pharmaceuticals, Inc. (Geneva) submitted
an Abbreviated New Drug Application (ANDA) to the U.S. Food and
Drug Administration (FDA) seeking to market a generic form of
CLARITIN in the United States several years before the expiration
of the Company's patents. Geneva has alleged that certain of the
Company's U.S. CLARITIN patents are invalid and unenforceable.
The CLARITIN patents are material to the Company's business. In
March 1998, the Company filed suit in federal court seeking a
ruling that Geneva's ANDA submission constitutes willful
infringement of the Company's patents and that its challenge to
the Company's patents is without merit. The Company believes
that it should prevail in the suit. However, as with any
litigation, there can be no assurance that the Company will
prevail.
Copley Pharmaceutical, Inc. (Copley), Teva Pharmaceuticals, Inc.
(Teva) and Novex Pharma (Novex) notified the Company in February,
April and June 1999, respectively, that each had submitted an
ANDA to the FDA seeking to market a generic form of CLARITIN
Syrup in the United States before the expiration of certain of
the Company's patents. Each has alleged that one of those
patents is invalid and unenforceable. In March 1999, the Company
filed suit in federal court seeking a ruling that Copley's ANDA
submission and proposed marketing of a generic syrup constitute
willful infringement of the Company's patent and that its
challenge to the patent is without merit. The Company also sued
Teva in June 1999 asking for the same relief. The Company has
filed a similar suit in federal court concerning the Novex ANDA
submission. In May 1999, the Company received notice from Zenith
Goldline Pharmaceuticals (Zenith) that it had submitted an ANDA
to the FDA for generic CLARITIN tablets. In June 1999, the
Company filed suit in federal court in New Jersey seeking a
ruling that Zenith's ANDA submission and proposed marketing of a
generic tablet constitute willful infringement of the Company's
patent and that Zenith's challenge to the patent is without
merit. The Company believes that it should prevail in these
suits. However, as with any litigation, there can be no
assurance that the Company will prevail.
The Company is a party to an arbitration filed by Biogen, Inc.
(Biogen) in a dispute over the method used by Biogen to determine
the amount of royalties payable to Biogen on sales of REBETRON
Combination Therapy containing REBETOL Capsules and INTRON A
Injection. The Company believes that it will prevail in this
arbitration. However, there can be no assurance that the Company
will prevail.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations - three and nine months ended September 30,
1999 compared with the corresponding periods in 1998.
Net Sales
Consolidated net sales for the third quarter advanced $250
million or 13 percent compared with the same period in 1998. For
the nine months, net sales rose $855 million or 14 percent over
1998. Exchange rate fluctuations had no impact on the net sales
for the three or nine-month periods.
Net sales by major therapeutic category for the third quarter and
nine months were as follows ($ in millions):
Third Quarter Nine Months
1999 1998 % 1999 1998 %
Allergy & Respiratory $ 980 $ 864 13 $2,970 $2,579 15
Anti-infectives & Anticancer 413 319 29 1,243 902 38
Dermatologicals 186 134 38 497 463 7
Cardiovasculars 161 175 (8) 493 556 (11)
Other Pharmaceuticals 171 171 3 576 461 26
Animal Health 161 161 0 486 475 2
Foot Care 93 93 (1) 276 264 5
OTC 60 57 5 165 161 2
Sun Care 11 12 (2) 167 157 6
Consolidated Net Sales $2,236 $1,986 13 $6,873 $6,018 14
Worldwide net sales of allergy and respiratory products advanced
13 percent in the quarter and 15 percent for the nine-month
period due to continued strong market growth of the CLARITIN line
of nonsedating antihistamines. Worldwide net sales of the
CLARITIN brand totaled $716 million and $2,100 million for the
quarter and nine months, respectively, compared with $635 million
and $1,758 million for the corresponding periods in 1998.
Franchise sales of nasal inhaled steroid products, which include
VANCENASE allergy products and NASONEX, a once-daily
corticosteroid for allergies, increased in the quarter and year-
to-date due to market expansion in the U.S. and international
markets.
Net sales of anti-infective and anticancer products worldwide
increased 29 percent in the quarter and 38 percent for the nine
months, primarily due to the 1998 U.S. introduction of REBETRON
Combination Therapy containing REBETOL Capsules and INTRON A
Injection for the treatment of chronic hepatitis C in both
relapsed and previously untreated (naive) patients.
International sales of INTRON A (including combination therapy
with REBETOL) also contributed to the sales increase in the third
quarter and nine months due to the 1998 launch of INTRON A
solution in a multidose pen in several European markets and the
1999 launch of REBETOL in certain markets.
Dermatological products' worldwide net sales rose 38 percent in
the quarter due to timing of trade buying and 7 percent for the
first nine months due to market share growth.
Worldwide sales of cardiovascular products decreased 8 percent
for the quarter and 11 percent for the nine months primarily in
the U.S. due to generic competition for IMDUR, an oral nitrate
for angina and NORMODYNE, an alpha-beta blocker for hypertension.
Partially offsetting these declines in both periods were higher
U.S. sales of INTEGRILIN injection, a platelet receptor
glycoprotein inhibitor, following its launch in the second
quarter of 1998 and K-DUR, a sustained-release potassium
supplement, due to stronger script demand.
Other pharmaceuticals consist of products that do not fit into
the Company's major therapeutic categories and include contract
manufacturing and alliance revenues.
Costs and Expenses
Cost of sales as a percentage of sales decreased slightly to 19.6
percent in the quarter and 19.5 percent for the first nine months
from 19.9 percent in both periods of 1998. The slight decrease
in the overall rate is primarily due to better product mix.
Selling, general and administrative expenses represented 36.4
percent of sales in the third quarter of 1999, a decrease when
compared with 38.4 percent last year. For the nine-month period,
the ratio decreased to 37.4 percent versus 38.3 percent in 1998.
The decrease was primarily driven by the timing of promotional
spending.
Research and development spending rose 19 percent in the third
quarter representing 13.6 percent of sales compared with 12.9
percent in 1998. For the first nine months of 1999 spending
increased 16 percent and represented 12.6 percent of sales,
compared to 12.3 percent in 1998. The higher spending in 1999
reflects the Company's funding of both internal research efforts
and research collaborations with various partners to develop a
steady flow of innovative products. The Company expects research
and development spending for 1999 to increase more than 15
percent over prior year spending.
The effective tax rate was 24.5 percent in the three and nine
month periods of both 1999 and 1998.
Diluted earnings per common share grew 21 percent in the third
quarter to $.35 from $.29 in 1998. For the nine-month period,
diluted earnings per common share increased 20 percent from $.90
last year to $1.08. Basic earnings per common share advanced 21
percent in the quarter and 20 percent in the nine-month period.
Foreign currency exchange rate changes had no impact on basic or
diluted earnings per common share for the third quarter of 1999.
Excluding exchange, diluted earnings per share for the first nine
months of 1999 would have increased 19 percent when compared to
the same period in 1998.
Additional Factors Influencing Operations
In the United States, many of the Company's pharmaceutical
products are subject to increasingly competitive pricing as
managed care groups, institutions, government agencies and other
buying groups seek price discounts. In most international
markets, the Company operates in an environment of government-
mandated cost containment programs. Several governments have
placed restrictions on physician prescription levels and patient
reimbursements, emphasized greater use of generic drugs and
enacted across-the-board price cuts as methods of cost control.
Since the Company is unable to predict the final form and timing
of any future domestic and international governmental or other
health care initiatives, their effect on operations and cash
flows cannot be reasonably estimated.
The market for pharmaceutical products is competitive. The
Company's operations may be affected by technological advances of
competitors, patents granted to competitors, new products of
competitors and generic competition as the Company's products
mature. In addition, patent positions can be highly uncertain
and an adverse result in a patent dispute can preclude
commercialization of products or negatively affect sales of
existing products. The effect on operations of competitive
factors and patent disputes cannot be predicted.
Uncertainties inherent in government regulatory approval
processes, including among other things delays in approval of new
products, may also affect the Company's operations. The effect
on operations of regulatory approval processes cannot be
predicted.
Liquidity and financial resources - nine months ended September
30, 1999
Cash generated from operations continues to be the Company's
major source of funds to finance working capital, additions to
property, shareholder dividends and common share repurchases.
Cash provided by operating activities was $1,324 million for the
first nine months of 1999, a decrease of $204 million from 1998.
The decrease in 1999 is primarily due to increases in accounts
receivable because of timing of collections and an increase in
inventories because of specific actions to stockpile certain
products. Cash flow related to financing activities included
equity proceeds as well as proceeds from short-term borrowings.
In October 1997, the Board of Directors authorized the repurchase
of $1 billion of the Company's common shares. As of September
30, 1999 this program was approximately 62 percent complete.
In April 1999, the Board of Directors increased the quarterly
dividend by 14 percent to $.125 from $.11 per common share.
In September 1998, the Board of Directors authorized a 2-for-1
stock split of the Company's common shares. The distribution of
the split shares was made on December 2, 1998, to the
shareholders of record at the close of business on November 6,
1998. Certain 1998 amounts have been restated to reflect this
stock split.
The Company's liquidity and financial resources continue to be
sufficient to meet its operating needs.
Year 2000
Historically, many computer systems ("IT systems") and equipment
and instruments with embedded microprocessors ("non-IT systems")
were designed to recognize only the last two digits of a calendar
year. Without remediation, these systems and microprocessors
could, in the near future, encounter operating problems due to
their inability to distinguish years after 1999 from years
preceding 1999. As a result, the Company undertook an extensive
project to remediate or replace its date-sensitive IT systems and
non-IT systems.
The project involves four phases: (1) compiling an inventory of
IT and non-IT systems; (2) distinguishing "critical" systems from
"non-critical" systems; (3) remediating or replacing IT and non-
IT systems; and (4) testing the remediated or replaced IT and
non-IT systems. "Critical" systems for this purpose include
systems that may affect health and safety, product manufacturing,
product distribution, customer service and certain research
systems.
The following chart indicates the estimated state of completion
of each phase of this project as of September 30, 1999:
IT Systems Non-IT Systems
Inventory systems 100% 100%
Identify critical and
non-critical systems 100% 100%
Remediate or replace systems 100% 99%
Testing systems 100% 99%
The last two lines of the preceding table exclude non-critical,
non-IT equipment used in our research operations because the
Company has concluded that any failure of such equipment will not
adversely affect the Company's operations. Repairs or
replacements of this non-critical, non-IT equipment will continue
into the year 2000. The Company expects to complete all phases
of this project for all critical, non-IT systems by December 31,
1999.
The estimated maximum cost of the Year 2000 project is
approximately $95 million. Approximately 55 percent of the $95
million will be of an expense nature and 45 percent will be for
capitalizable replacements. As of September 30, 1999, $62
million of the $95 million has been incurred; $18 million has
been capitalized and $44 million has been expensed. This $95
million cost estimate includes the estimated cost to repair or
replace non-critical, non-IT equipment some of which will be
spent in the year 2000. No other significant information systems
projects have been deferred as a result of the Company's Year
2000 project. The book value of computers, software and
equipment that will need to be written-off as a result of not
being Year 2000 compliant is immaterial.
The Company's internal auditors have regularly reviewed progress
on the Year 2000 project and provided evaluations of the
Company's readiness to senior management.
Management believes that the Year 2000 issue will not have a
material adverse effect on the Company's internal operating
systems. However, the Company's operations may be impacted in
the event that computer disruption is encountered by third
parties with whom the Company conducts significant business.
These third parties include wholesalers, distributors, managed
care organizations, hospitals, suppliers, clinical researchers,
research partners and government agencies. The Company has been
communicating with these third parties concerning their state of
readiness. However, the Company can provide no assurance that
these third parties will not experience business disruption.
The Company currently believes that the most reasonably likely
worst case scenario concerning the Year 2000 involves potential
business disruption among the third parties with whom it conducts
significant business. If a number of these third parties
(including, in particular, wholesalers, managed care
organizations and clinical researchers) experience business
disruption due to a Year 2000 computer problem, the Company's
results of operations and cash flows could be materially
adversely affected.
The Company has developed contingency plans to address potential
business disruptions at these third parties. Contingency
planning includes increased inventory levels, establishing
secondary sources of supply and manufacturing and maintaining
backup lines of communications with our customers. However, it
is unlikely that any contingency plan can fully mitigate the
impact of significant business disruptions among these third
parties.
Certain third parties, such as retail pharmacies and wholesalers,
may order extra inventory as part of their contingency planning.
The impact to the Company of such contingency planning by third
parties cannot be predicted.
The estimates and conclusions in this description of the Year
2000 issue contain forward looking statements and are based on
management's estimates of future events. Risks to completing the
Year 2000 project include the continued availability of resources
and qualified information systems personnel.
Cautionary Statements for Forward Looking Information
Management's discussion and analysis set forth above contains
certain forward looking statements, including statements
regarding the Company's financial position and results of
operations. These forward looking statements are based on
current expectations. Certain factors have been identified by
the Company in Exhibit 99 of the Company's December 31, 1998,
Form 10-K filed with the Securities and Exchange Commission,
which could cause the Company's actual results to differ
materially from expected and historical results. Exhibit 99 from
the Form 10-K is incorporated by reference herein.
Item 3.
Market Risk Disclosures
As discussed in the 1998 Annual Report to Shareholders, the
Company's exposure to market risk from changes in foreign
currency exchange rates and interest rates, in general, is not
material.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
The Company is a party to an arbitration filed by Biogen, Inc.
(Biogen) in a dispute over the method used by Biogen to determine
the amount of royalties payable to Biogen on sales of REBETRON
Combination Therapy containing REBETOL Capsules and INTRON A Injection.
The Company believes that it will prevail in this arbitration.
However, there can be no assurance that the Company will prevail.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits - The following Exhibits are filed with this
document:
Exhibit
Number Description
10(a) - Form of amendment to form of employment
agreement between the Company and its
executive officers effective upon a change
of control
10(b) - Amended and Restated Directors' Deferred
Compensation Plan
10(c) - Amended and Restated Directors' Stock Award
Plan
10(d) - Amended and Restated Directors' Deferred
Stock Equivalency Program
27 - Financial Data Schedule
99 - Company Statement Relating to Forward
Looking Information
b) Reports on Form 8-K:
No report was filed during the three months ended September
30, 1999.
SIGNATURE(S)
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.
Schering-Plough Corporation
(Registrant)
Date November 11, 1999 /s/Thomas H. Kelly
Thomas H. Kelly
Vice President and Controller
S:\2188\3rd qtr 99 10 Q.doc 11/11/99 10:38 AM
S:\2188\3rd qtr 99 10 Q.doc 11/11/99 10:38 AM
- 3 -
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<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains financial data extracted from Schering-Plough Corporation
and Subsidiaries consolidated financial statements for the nine months ended
September 30, 1999, and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 1665
<SECURITIES> 0
<RECEIVABLES> 1068
<ALLOWANCES> 0
<INVENTORY> 965
<CURRENT-ASSETS> 4790
<PP&E> 4277
<DEPRECIATION> 1451
<TOTAL-ASSETS> 9060
<CURRENT-LIABILITIES> 3310
<BONDS> 0
0
0
<COMMON> 1015
<OTHER-SE> 3725
<TOTAL-LIABILITY-AND-EQUITY> 9060
<SALES> 6873
<TOTAL-REVENUES> 6873
<CGS> 1342
<TOTAL-COSTS> 1342
<OTHER-EXPENSES> 864
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2125
<INCOME-TAX> 521
<INCOME-CONTINUING> 1604
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1604
<EPS-BASIC> 1.09
<EPS-DILUTED> 1.08
</TABLE>
Exhibit 99
Company Statement Relating to Forward Looking Information
From press release by the Company dated October 20, 1999
(Filed Pursuant to Rule 175)
Mr. Richard J. Kogan, Chairman and Chief Executive Officer, commenting on the
Company's business results, stated "For the full year, we expect that the
increase in Schering-Plough's 1999 earnings per share will approach
20 percent."
A:\3rd qtr 1999 10Q Exhibit 99.doc
Exhibit 10 (a)
FIRST AMENDMENT TO EMPLOYMENT AGREEMENT
THIS FIRST AMENDMENT (this "Amendment") to the Employment Agreement by
and between SCHERING-PLOUGH CORPORATION, a New Jersey corporation (the
"Company"), and [name] (the "Executive") dated as of [date] (the "Employment
Agreement"), is made and entered into as of this 28th day of September, 1999.
WHEREAS, the Company and the Executive wish to amend the Employment
Agreement as set forth below;
NOW, THEREFORE, IN CONSIDERATION of the mutual promises, covenants and
agreements set forth below, it is hereby agreed as follows:
1. There is added to, and made a part of, the Employment Agreement a new
subparagraph (a)(iv) of Section 6 reading in its entirety as follows:
(iv) Notwithstanding anything to the contrary in any employee pension
benefit plan or any supplemental or excess employee pension benefit plan of
the Company (including without limitation the Retirement Plan, the SERP, the
Company's Retirement Benefits Equalization Plan (the "BEP") or any successor
or replacement plan thereto), all benefits payable to the Executive under any
supplemental or excess employee pension benefit plan of the Company
(including without limitation the SERP, the BEP or any successor or
replacement plan thereto) following a Change of Control (as defined therein)
if, on the Date of Termination, the Executive is then age 50 or over shall
not be reduced by any "reduction factors" or similar formulae or otherwise
because such benefits are payable prior to a specified age or because the
Executive has not yet reached a specified age (including, without limitation,
the Executive's earliest or normal retirement age under the terms of the
relevant plan).
2. There is added to, and made a part of, the Employment Agreement a new
subparagraph (a)(v) of Section 6 reading in its entirety as follows:
(v) In addition to the benefits provided in subparagraph (a)(ii) of this
Section 6, if the Executive is age 45 or over on the Date of Termination, the
Executive shall, upon attainment of age 55 and upon termination of the three
year period after the Executive's Date of Termination, become eligible for all
benefits under medical plans, practices, policies and programs made available
immediately prior to the Date of Termination (or, if greater, immediately prior
to
the Effective Date) to retired peer executives of the Company (including
without
limitation any supplemental coverage under the Executive Medical Benefits
Plan) as if the Executive had at the Date of Termination satisfied the age and
service conditions for coverage under the applicable provisions of such plans,
practices, policies and programs. If the Company is unable to provide the
Executive with coverage under such plans, practices, policies and programs,
the Company shall provide the Executive with separate comparable coverage
but in no event less favorable, in the aggregate, than the most favorable of
such
plans, practices, policies and programs in effect for retirees immediately
prior to
the Effective Date.
3. Except as provided above, the Employment Agreement shall continue in
effect without alteration as in effect on the date hereof. The Employment
Agreement, as
amended by this Amendment, constitutes the entire agreement of the parties and
supersedes all prior agreements and understandings with respect to the
subject matter hereof and thereof.
IN WITNESS WHEREOF, the Executive and, pursuant to due authorization from its
Board of Directors, the Company have caused this Amendment to be executed as of
the day and year first above written.
_______________________
[Executive]
SCHERING-PLOUGH CORPORATION
_______________________
Richard Jay Kogan
Chairman of the Board and
Chief Executive Officer
1
- -2-
A:\emplmt agmt revision 11 10 99.doc
SCHERING-PLOUGH CORPORATION
DIRECTORS DEFERRED COMPENSATION PLAN
As amended to October 26, 1999
I. Purpose
To provide a plan of deferred compensation for members of the
Board of Directors ("Directors") of Schering-Plough
Corporation (the "Corporation") in which Board of Directors
and Board of Directors Committee annual retainers and/or
meeting fees may be deferred.
II. Effective Date
The effective date of the Plan is July 1, 1986 (the
"Effective Date").
III. Election of Deferral
A. Prior to the Effective Date in the case of the first
calendar year, and on or before the thirty-first day of
December preceding any subsequent calendar year, an
incumbent director may, and prior to election, a nominee
for director may, instruct the Corporation, by delivery
of written notice, to irrevocably defer payment of all
or any part of any meeting fees or annual retainers
otherwise payable to the Director (the "Deferred
Amounts") for services rendered during the forthcoming
partial or whole calendar year, as the case may be, to
one or both funds of an account (the "Deferred Account")
established on the books of the Corporation.
B. At least one year prior to the date on which a Director
will terminate service as a Director, he or she may
elect to receive payment in cash of his or her Deferred
Account upon termination of service, either in (i) a
lump sum upon termination of service or any anniversary
thereof up to the twentieth anniversary or (ii) in
approximately equal annual installments of up to twenty
(20) years. If a Director elects a lump sum payment
immediately upon termination of service or installment
payments, such payment or payments shall be made or
commence, as the case may be, within thirty (30) days
following the termination of service. If no such
election is timely made, then payment of his or her
Deferred Account shall be made in a lump sum within 30
days following the termination of service. Any such
election shall be delivered in writing to the Secretary
of the Corporation and the latest such election which is
made at least one year prior to the date of termination
of service shall be deemed final and irrevocable.
C. For purposes of this Section, meeting fees shall be
deemed payable on the date of the respective meetings,
and the annual retainer shall be deemed to be payable in
four equal installments on the first day of each
quarter.
IV. Deferred Accounts
A. The Deferred Account shall consist of the following two
funds:
1. The Simple Interest Fund. A fund on which
Deferred Amounts shall earn simple interest equal
to the interest rate offered by Chase Manhattan
Bank, New York, New York, to its respective
preferred risk commercial borrowers, as published
by said bank from time to time.
2. The Schering-Plough Stock Equivalency Fund. A
fund established to record the hypothetical number
of shares of Schering-Plough Corporation Common
Stock which would have accrued had the Deferred
Amounts and any hypothetical dividends on such
shares been invested in said stock as of the close
of the business day when said Deferred Amounts
and/or dividends are payable.
For purposes of determining any amount payable
hereunder, the Deferred Account shall be valued as
of the date immediately preceding any date of
payment. With respect to the Schering-Plough Stock
Equivalency Fund, said value shall be the closing
price on the New York Stock Exchange of Schering-
Plough Common Stock on such valuation date, or if
no trading occurs on such date, on the next
preceding date on which trading occurs.
B. A Director may elect once during each calendar year
to reallocate all or a portion of his deferred
amounts to the Schering-Plough Stock Equivalency
Fund by delivering such election in writing to the
Secretary of the Corporation. Such reallocation
shall be effective upon receipt of such election by
the Secretary, or upon such later date as may be
designated in such election by the Director. A
Director may also elect by prior written notice to
the Secretary of the Corporation to reallocate, as
of the date of his termination of service as
Director, all or a portion of the funds in the
Deferred Accounts which are to be paid in annual
installments or in a deferred lump sum payment
pursuant to Section III-B.
V. Special Provisions
A. At the request of a former Director who has elected to
receive a deferred lump sum payment or installment
payments pursuant to Section III-B, the Executive
Compensation and Organization Committee of the Board of
Directors, or any successor committee thereto, may, in
its discretion, accelerate payment of any such
installment or lump sum upon a finding of severe
financial hardship resulting from the illness of or an
unexpected accident or casualty to the former Director
or a member of his or her family or to his or her
property, or due to other similar extraordinary and
unforeseeable circumstances arising as a result of
events beyond the control of the former Director. A
severe financial hardship shall not exist to the extent
the loss or expense is covered by insurance or can be
met by the sale of other liquid assets of the former
Director. Unforeseeable hardship shall not include the
college expenses of a child or the costs of purchasing a
residence.
B. In the event of the death of a Director, the Corporation
shall pay in a lump sum on the 60th day thereafter the
balance of his Deferred Account to such beneficiary or
beneficiaries as the Director may have designated in
writing or, in the event a beneficiary has not been so
designated, to the Director's estate.
VI. Miscellaneous
A. The amounts credited to the Deferred Account shall
constitute an unsecured claim against the general funds
of the Corporation.
B. No right or interest of the Director, his beneficiary,
or estate, established herein, shall be assignable or
transferable in whole or in part, either directly or by
operation of law or otherwise, including, but not by way
of limitation, execution, levy, garnishment, attachment,
pledge, bankruptcy, or in any other manner, and no right
or interest established herein shall be liable for, or
subject to, any obligation or liability of the Director.
C. Except as herein provided, this Plan shall be binding
upon the parties hereto, their heirs, executors,
administrators, successors (including but not limited to
successors resulting from any corporate merger) or
assigns.
D. This Plan may be amended or terminated at any time by
the Corporation, but no such termination or amendment
shall adversely affect a Director's rights and benefits
under this Plan, except with his consent.
E. This Plan shall be construed in accordance with the laws
of the State of New Jersey.
Exhibit 10(b)
-8-
DIRECTORS' STOCK AWARD PLAN
(Amended by Board of Directors to October 26, 1999)
1. The purposes of the Directors Stock Award Plan are (a) to
attract and retain highly qualified individuals to serve as
Directors of Schering-Plough Corporation (the
"Corporation"), (b) to relate non-employee Directors'
compensation more closely to the Corporation's performance
and its shareholders' interests, and (c) to increase non-
employee Directors' stock ownership in the Corporation.
2. The Plan shall become effective on June 28, 1988 (the
"Effective Date").
3. Upon the Effective Date, all incumbent non-employee
Directors will receive 100 shares of Common Stock of the
Corporation for each year or partial year remaining in his
or her current term of directorship.
4. From and after October 26, 1999, each non-employee Director
shall receive 2500 shares of Common Stock of the
Corporation on the day following each Annual Meeting of
Shareholders of the Corporation. Newly eligible non-
employee Directors shall receive a pro rata portion of such
award for the applicable term pending the next succeeding
Annual Meeting of Shareholders.
5. If the outstanding Common Stock of the Corporation shall at
any time be changed or exchanged by declaration of a stock
dividend, stock split, combination of shares,
recapitalization, merger, consolidation or other corporate
reorganization in which the Corporation is the surviving
corporation, the number of shares distributable pursuant to
Section 4 shall be appropriately and equitably adjusted.
6. All shares of Common Stock of the Corporation to be used
for purposes of this Plan shall be treasury shares.
7. Upon receiving a distribution of shares pursuant to this
Plan, the Director may be required to represent in writing
that he or she is acquiring such shares for his or her
account for investment and not with a view to, or for sale
in connection with, the distribution of any part thereof.
The certificate for such shares may include any legend
which the Corporation deems appropriate to reflect any
restrictions on transactions.
8. This Plan shall be construed in accordance with the laws of
the State of New Jersey and may be amended or terminated at
any time by action of the Board of Directors of the
Corporation; provided, however, that this Plan shall not be
amended more than once every six months, other than to
comport with changes in the Internal Revenue Code, the
Employee Retirement Income Security Act, or the rules
thereunder.
-2-
Exhibit 10(c)
SCHERING-PLOUGH CORPORATION
DIRECTORS DEFERRED STOCK EQUIVALENCY PROGRAM
(Approved and adopted by the Board of Directors on September 24,
1996, effective January 1, 1997, as amended to October 26, 1999)
I. Purpose
The purposes of the Schering-Plough Corporation Directors
Deferred Stock Equivalency Program ("Program") are (a) to
attract and retain highly qualified individuals to serve as
Directors of Schering-Plough Corporation ("Corporation")
and (b) to relate non-employee Directors' interests more
closely to the Corporation's performance and its
shareholders' interests.
II. Effective Date
The effective date of the Schering-Plough Corporation
Directors Deferred Stock Equivalency Program is January 1,
1997 ("Effective Date").
III. Participation
From and after the Effective Date, each Director shall be a
participant in the Program throughout his or her term of
service as a Director; except that any Director who has
attained age 72 prior to the Effective Date or is entitled
to receive employee pension benefits from the Corporation
or any of its subsidiaries shall not be a participant in
the Program. Directors who are participants in the Program
shall be entitled, effective as of the Effective Date, to
transfer to their account in the Program ("Deferred
Account") by an election made prior to the Effective Date
the lump-sum present value of their earned benefits under
the Corporation's Pension Plan for Directors based on
service through December 31, 1996. For purposes of
calculating the lump-sum present value of earned pension
benefits, a discount rate of seven percent per annum shall
be used.
IV. Amount of Deferral
The Company shall credit an amount equal to $25,000 to each
participant's Deferred Account annually as of January 1;
except that in the case of any Director who is or will be a
participant in the Program for a portion of a calendar
year, a pro rata portion of $25,000 shall be credited to
the Deferred Account of such Director. Such pro rata
amount, if applicable, shall be credited as of the date on
which the Director becomes a participant in the Program or,
in the case of a Director expected to retire in a given
calendar year, as of January 1 of such calendar year. In
addition, amounts transferred by a Director from the
Pension Plan for Directors to this Program pursuant to
Article III hereof shall be credited to the Director's
Deferred Account as of the Effective Date. For purposes
hereof, "Deferred Amounts" shall mean all amounts credited
to a Director's Deferred Account.
V. Deferred Account
(a) The Corporation shall establish a separate Deferred
Account for each participant. Deferred Amounts shall be
expressed and credited to each participant's Deferred
Account in terms of units ("Units"). As of each date on
which Deferred Amounts are credited to a participant's
Deferred Account, the Corporation shall credit to such
Deferred Account a number of Units and fractional Units
determined by dividing the Deferred Amounts credited by the
Unit Value (as defined below) of one share of the
Corporation's Common Shares. The "Unit Value" of one share
of the Corporation's Common Shares shall be the closing
price of one share of the Corporation's Common Shares on
the New York Stock Exchange on the day on which Deferred
Amounts are credited or a payment is to be valued under
Article VI (b) below, as the case may be; or if there were
no sales on that day, then the closing price on the New
York Stock Exchange on the nearest preceding day on which
there were sales. Deferred Amounts transferred from the
Pension Plan for Directors shall be credited as of the
Effective Date.
(b) When dividends are paid with respect to the
Corporation's Common Shares, the Corporation shall
calculate the amount which would have been payable in cash
or property on the Units in each participant's Deferred
Account on each dividend payment date as if each Unit
represented one issued and outstanding share of the
Corporation's Common Shares. The applicable number of
Units and fractional Units equal to the amount of such
dividends (based on the Unit Value of one share of the
Corporation's Common Shares on the dividend payment date)
shall be credited to each participant's Deferred Account.
In the event of any capital stock adjustment to the
Corporation's Common Shares or other appropriate event or
circumstance, the number of Units or fractional Units
credited to Deferred Accounts shall be correspondingly
adjusted as of the date of such capital stock adjustment or
other event or circumstance.
VI. Payment of Benefits
(a) Except as provided in Article VII below, the value of
a participant's Deferred Account shall be payable solely in
cash, either in (i) a lump sum upon termination of service
or any anniversary thereof up to the twentieth anniversary,
or (ii) in approximately equal annual installments of up to
20 years in accordance with an election made by the
participant by written notice to the Corporation given at
least one year prior to the date on which a Director will
terminate service as a Director. If the participant elects
a lump sum payment immediately upon termination of service
or installment payments, such payment or payments shall be
made or commence, as the case may be, within 30 days
following the termination of service as Director.
(b) Any lump sum payment shall be valued as of the end of
the most recent calendar month prior to the payment date.
The amount of each installment payment shall be determined
by dividing the aggregate Unit Value of the Units credited
to the participant's Deferred Account valued as of the end
of the most recent calendar month prior to the payment date
by the remaining number of unpaid installments; provided,
however, that the Corporation's Executive Compensation and
Organization Committee may, in its absolute discretion,
approve any other method of determining the amount of each
installment payment in order to achieve approximately equal
installment payments over the installment period.
VII. Death of Participant
In the event of the death of a Director, the Corporation
shall pay in a lump sum on the 60th day thereafter the
balance of his or her Deferred Account to such beneficiary
or beneficiaries as the Director may have designated in
writing or, in the event a beneficiary has not been so
designated, to the Director's estate.
VIII. Miscellaneous
A. The amounts credited to the Deferred Account shall
constitute an unsecured claim against the general funds
of the Corporation.
B. The Program is unfunded, and the Corporation will make
Plan benefit payments solely on a current disbursement
basis; provided, however, the Corporation shall provide
alternative sources of benefit payments under this
Program through one or more grantor trusts. The
existence of any such trust or trusts shall not relieve
the Corporation of any liability to make benefit
payments under this Program, but to the extent any
benefit payments are made from any such trust, such
payment shall be in satisfaction of and shall reduce
the Corporation's liabilities under this Program.
C. No right or interest of the Director, his beneficiary,
or estate, established herein, shall be assignable or
transferable in whole or in part, either directly or by
operation of law or otherwise, including, but not by
way of limitation, execution, levy, garnishment,
attachment, pledge, bankruptcy, or in any other manner,
and no right or interest established herein shall be
liable for, or subject to, any obligation or liability
of the Director.
D. Except as herein provided, this Program shall be
binding upon the parties hereto, their heirs,
executors, administrators, successors (including but
not limited to successors resulting from any corporate
merger) or assigns.
E. This Program may be amended or terminated at any time
by the Board of Directors of the Corporation, but no
such termination or amendment shall adversely affect a
Director's rights and benefits under this Plan, except
with his consent.
F. This Program shall be construed in accordance with the
laws of the State of New Jersey.
-9-
Exhibit 10(d)
