SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-K Annual Report
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 1998 Commission file
Number 1-6571
SCHERING-PLOUGH CORPORATION
Incorporated in New Jersey 22-1918501
One Giralda Farms (I.R.S. Employer
Madison, New Jersey 07940-1000 Identification No.)
(973) 822-7000 (telephone number)
Securities registered pursuant to section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
Common Shares, $.50 par value New York Stock Exchange
Preferred Share Purchase Rights* New York Stock Exchange
*At the time of filing, the Rights were not traded separately
from the Common Shares.
Indicate by check mark whether the registrant 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 has been subject to such filing requirements for the past 90
days.
YES X NO
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
Common shares outstanding as of January 29, 1999: 1,472,315,748
Aggregate market value of common shares at January 29, 1999 held
by non-affiliates based on closing price: $80 billion.
Part of Form 10-K
Documents incorporated by reference incorporated into
Schering-Plough Corporation 1998 Parts I, II and IV
Annual Report to Shareholders
Schering-Plough Corporation Proxy Part III
Statement for the annual meeting of
shareholders on April 27, 1999
Part I
Item 1. Business
General
The terms "Schering-Plough" and the "Company," as used herein,
refer to Schering-Plough Corporation and its subsidiaries, except
as otherwise indicated by the context. Schering-Plough
Corporation is a holding company which was incorporated in 1970.
Subsidiaries of Schering-Plough Corporation are engaged in the
discovery, development, manufacturing and marketing of
pharmaceutical and health care products worldwide. Products
include prescription drugs and consumer products.
Business Segment and Other Financial Information
The "Business Segment Data" as set forth in the Notes to
Consolidated Financial Statements in the Company's 1998 Annual
Report to Shareholders is incorporated herein by reference. Net
sales by major product groups for each of the three years in the
period ended December 31, 1998 were as follows (dollars in
millions):
1998 1997 1996
Allergy/Respiratory $3,375 $2,708 $2,113
Anti-infective and Anticancer 1,263 1,156 1,135
Dermatologicals 619 571 560
Cardiovasculars 750 637 533
Other Pharmaceuticals 688 649 512
Animal Health 647 389 196
Foot Care 336 300 261
Sun Care 181 148 123
OTC 205 208 210
Other Health Care Products 13 12 13
Consolidated Net Sales $8,077 $6,778 $5,656
In June 1997, the Company purchased the worldwide animal health
operations of Mallinckrodt Inc. The acquisition was recorded
under the purchase method of accounting at a cost of
approximately $490 million, which includes the assumption of debt
and direct costs of the acquisition.
Pharmaceutical Products
The Company's pharmaceutical operations include prescription
drugs and animal health products. Prescription products include:
CLARITIN, CLARITIN-D, NASONEX, PROVENTIL, THEO-DUR, VANCENASE and
VANCERIL, allergy/respiratory; CEDAX, INTRON A, REBETRON
Combination Therapy containing REBETOL capsules and INTRON A
injection, EULEXIN, GARAMYCIN, and NETROMYCIN, anti-infective and
anticancer; DIPROLENE, DIPROSONE, ELOCON, and LOTRISONE, derma-
tologicals; INTEGRILIN, IMDUR, K-DUR, NITRO-DUR and NORMODYNE,
cardiovasculars; CELESTONE, and SUBUTEX, other pharmaceuticals.
Animal health biological and pharmaceutical products include
anthelmintics, GENTOCIN and NUFLOR, antibiotics; BANAMINE, a
non-steroidal anti-inflammatory agent; TRIBRISSEN,
an antimicrobial; RALGRO, a growth promotant; nutritionals;
OTOMAX, a steroid ointment and OPTIMMUNE, an ophthalmic
ointment and vaccines.
Prescription drugs are introduced and made known to physicians,
pharmacists, hospitals and managed care organizations by trained
professional service representatives, and are sold to hospitals,
managed care organizations and wholesale and retail druggists.
Pharmaceutical products are also promoted through journal
advertising, direct mail advertising, consumer advertising and by
distributing samples to physicians. Animal health products are
promoted and sold by a separate sales force to veterinarians,
distributors and animal producers.
The Company's subsidiaries own (or have licensed rights under) a
number of patents and patent applications, both in the United
States and abroad. Patents and patent applications relating to
the Company's significant products, including without limitation
the CLARITIN family of products and INTRON A, are of material
importance to the operations of the pharmaceutical segment.
Raw materials essential to this segment are available in adequate
quantities from a number of potential suppliers. Energy is
expected to be available to the Company in sufficient quantities
to meet operating requirements.
Worldwide, the Company's pharmaceutical products are sold under
trademarks. Trademarks are considered in the aggregate to be of
material importance to the pharmaceutical business and are
protected by registration or common law in the United States and
most other markets where the products are sold.
Seasonal patterns do not have a pronounced effect on the combined
activities of this industry segment.
There is generally no significant backlog of orders since the
Company's business is normally conducted on an immediate shipment
basis.
The pharmaceutical industry is highly competitive and includes
other large companies with substantial resources for research,
product development and promotion. There are numerous domestic
and international competitors in this industry. Some of the
principal competitive techniques used by the Company for its
pharmaceutical products include research and development of new
and improved products, high product quality, varied dosage forms
and strengths and disease management programs. 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 and rebates.
During 1998, 11 percent of consolidated net sales were made to
McKesson Corporation, a major pharmaceutical and health care
products distributor; substantially all of these sales were in
the pharmaceutical segment in the United States.
Health Care Products
The product categories in the health care segment are foot care,
sun care and OTC products primarily sold in the United States.
Products include: CLEAR AWAY wart remover; DR. SCHOLL'S foot care
products; LOTRIMIN AF and TINACTIN antifungals; COPPERTONE and
SOLARCAINE sun care products; AFRIN nasal decongestant; CHLOR-
TRIMETON antihistamine; CORICIDIN and DRIXORAL cold and
decongestant products; CORRECTOL laxative; GYNE-LOTRIMIN for
vaginal yeast infections; A & D ointment; and PAAS egg coloring
products. Business in this segment is conducted through wholesale
and retail drug, food chain and mass merchandiser outlets, and is
promoted directly to the consumer through television, radio,
print and other advertising media.
Raw materials essential to this segment are available in adequate
quantities from a number of potential suppliers. A substantial
portion of the Company's sun care products are produced by third
party suppliers. However, the Company does not believe that the
loss of any one of these suppliers would have a material adverse
effect on the health care segment. Energy is expected to be
available to the Company in sufficient quantities to meet
operating requirements.
Trademarks for the major products included in this segment are
registered in the United States and some overseas countries where
these products are marketed. Trademarks are very important to
the operations of this segment.
Principally due to the seasonal sales of sun care products,
operating profits in this segment are relatively higher in the
first half of the year.
There is generally no significant backlog of orders since the
Company's business is normally conducted on an immediate shipment
basis.
The health care products' industry is highly competitive and
includes other large companies with substantial resources for
product development and promotion. There are several dozen
significant competitors in this industry. The Company believes
that in the United States it has a leading position in the foot
care and sun care categories, with its DR. SCHOLL'S lines of foot
insoles, cushions, wart removal and antifungals and its brands of
sun care products. In addition, AFRIN is among the leaders in
nasal sprays. The principal competitive techniques used by the
Company in this industry segment include the development and
introduction of new and improved products, switching prescription
products to OTC medicines, and product promotion methods to gain
and retain consumer acceptance.
During 1998, approximately 38 percent of the health care
segment's sales were to the segment's five largest customers as
compared to 38 percent and 33 percent for the years ended
December 31, 1997 and 1996, respectively.
Foreign Operations
Foreign activities are carried out primarily through wholly-owned
subsidiaries wherever market potential is adequate and circum-
stances permit. In addition, the Company is represented in some
markets through joint ventures, licensees or other distribution
arrangements. There are approximately 13,300 employees outside
the United States.
Foreign operations are subject to certain risks which are
inherent in conducting business overseas. These risks include
possible nationalization, expropriation, importation limitations
and other restrictive governmental actions. Also, fluctuations
in foreign currency exchange rates can impact the Company's
consolidated financial results. For additional information on
foreign operations, see "Management's Discussion and Analysis of
Operations and Financial Condition", "Financial Instruments" and
"Business Segment Data" in the Company's 1998 Annual Report to
Shareholders which is incorporated herein by reference.
Research and Development
The Company's research activities are primarily aimed at
discovering and developing new and enhanced pharmaceutical
products of medical and commercial significance. Company
sponsored research and development expenditures were $1,007
million, $847 million and $723 million in 1998, 1997, and 1996,
respectively. Research expenditures represented approximately 13
percent of consolidated net sales in each of the three years.
The Company's pharmaceutical research activities are concentrated
in the therapeutic areas of allergic and inflammatory disorders,
infectious and cardiovascular diseases, oncology and central
nervous system disorders. The Company also has substantial
efforts directed toward biotechnology, gene therapy and
immunology. Research activities include expenditures for both
internal research efforts and research collaborations with
various partners.
While several pharmaceutical compounds are in varying stages of
development, it cannot be predicted when or if products will
become available for commercial sale.
Government Regulation
Most products manufactured or sold by the Company are subject to
varying degrees of governmental regulation in the countries in
which operations are conducted. In the United States, the drug
industry has long been subject to regulation by various federal,
state and local agencies, primarily as to product safety,
efficacy, advertising and labeling. Compliance with the broad
regulatory powers of the Food and Drug Administration requires
significant amounts of Company time, testing and documentation,
and corresponding costs to obtain clearance of new drugs.
Similar product regulations also apply in many international
markets.
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 Company has complied and will continue to comply with the
government regulations of the countries in which operations are
conducted.
Environment
To date, compliance with federal, state and local environmental
protection laws has not had a materially adverse effect on the
Company. The Company has made and will continue to make
necessary expenditures for environmental protection. Worldwide
capital expenditures during 1998 included approximately $13
million for environmental control purposes. It is anticipated
that continued compliance with such environmental regulations
will not significantly affect the Company's financial statements
or its competitive position. For additional information on
environmental matters, see "Legal and Environmental Matters" in
the Notes to the Consolidated Financial Statements in the
Company's 1998 Annual Report to Shareholders which is
incorporated herein by reference.
Employees
There were approximately 25,100 people employed by the Company at
December 31, 1998.
Item 2. Properties
The Company's corporate headquarters is located in Madison, New
Jersey. Principal manufacturing facilities for the pharmaceutical
segment are located in Kenilworth, New Jersey, Miami, Florida,
Omaha, Nebraska, Puerto Rico, Argentina, Australia, Belgium,
Canada, Colombia, France, Ireland, Italy, Japan, Mexico,
Singapore and Spain; health care segment: Kenilworth, New Jersey,
Cleveland, Tennessee and Puerto Rico.
The Company's principal research facilities are located in
Kenilworth and Union, New Jersey and Palo Alto, California (DNAX)
and San Diego, California (Canji and Syntro) and Elkhorn,
Nebraska.
The major portion of properties are owned by the Company. These
properties are well maintained, adequately insured and in good
operating condition. The Company's manufacturing facilities have
capacities considered appropriate to meet the Company's needs.
Item 3. Legal Proceedings
Subsidiaries of the Company are defendants in 185 lawsuits
involving approximately 730 plaintiffs arising out of the use of
synthetic estrogens by the mothers of the plaintiffs. In
virtually all of these lawsuits, many other pharmaceutical
companies are also named defendants. The female plaintiffs claim
various injuries, including cancerous or precancerous lesions of
the vagina and cervix and a multiplicity of pregnancy problems.
A number of suits involve infants with birth defects born to
daughters whose mother took the drug. The total amount claimed
against all defendants in all the suits amounts to more than $2
billion. While it is not possible to precisely predict the
outcome of these proceedings, it is management's opinion that it
is remote that any material liability in excess of the amount
accrued will be incurred.
The Company is a party to, or otherwise involved in,
environmental clean-up actions or proceedings under the
Comprehensive Environmental Response, Compensation and Liability
Act (commonly known as Superfund) or equivalent state laws.
These actions or proceedings seek to require the owners or
operators of facilities that treated, stored or disposed of
hazardous substances and transporters and generators of such
substances to remediate contaminated facilities and/or reimburse
the government or private parties for their clean-up costs. The
Company, along with such owners, operators, transporters and
generators, is alleged to be a potentially responsible party
("PRP") as an alleged generator of hazardous substances found at
certain facilities. In each proceeding, the government or
private litigants allege that any one PRP, including the Company,
is jointly and severally liable for all clean-up requirements and
costs. Although joint and several liability is alleged, a PRP's
share of clean-up costs is frequently determined on the basis of
several factors, including the type and quantity of hazardous
substances; however, the allocation process varies greatly from
facility to facility and may take years to complete. The
Company's potential share of clean-up costs also depends on how
many other PRPs are involved in the action or proceeding,
insurance coverage, available indemnity contracts, and
contribution rights against other PRPs. While it is not possible
to predict with certainty the outcome of any action or
proceeding, it is management's opinion that it is remote that any
material liability in excess of 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 million, which
has been paid in full as of January 31, 1999. 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.
Four 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 two are
class actions in California and the District of Columbia, on
behalf of consumers of prescription medicine. 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. The Company
has settled the retailer class action in Wisconsin and the
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. The Company has also recently settled in principle
the state consumer cases in all of the states except Alabama and
California. Court approval of those settlements has either
already been obtained or is currently being sought. The
settlement amounts were not material to the Company. 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.
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. The settlement amounts were not material to the
Company. The Great Atlantic and Pacific Tea Company, Inc. (A&P)
was among the settling plaintiffs. Mr. James Wood, a director of
the Company, was an executive officer of A&P. Mr. Wood did not
participate in any review or deliberations by the Board of
Directors relating to this action.
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; certain of the plaintiff's claims against the
Company have been dismissed. Plaintiff is seeking damages in the
amount of $400 million. 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 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.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Executive Officers of the Registrant
The following information regarding executive officers is included
herein in accordance with Part III, Item 10.
Officers are elected to serve for one year and until their successors
shall have been duly elected.
Name and Current Position Business Experience Age
Richard Jay Kogan Present position 1998; 57
Chairman of the Board President and Chief Executive
and Chief Executive Officer Officer 1996-1998; President
And Chief Operating Officer
1986-1995
Raul E. Cesan Present position 1998; 51
President and Chief Executive Vice President
Operating Officer and President Schering-
Plough Pharmaceuticals
1994-1998
Hugh A. D'Andrade Present position 1996; 60
Vice Chairman and Executive Vice President
Chief Administrative Officer Administration 1984-1995
Joseph C. Connors Present position 1996; 50
Executive Vice President Senior Vice President and
and General Counsel General Counsel 1992-1995
Jack L. Wyszomierski Present position 1996; 43
Executive Vice President Vice President and Treasurer
and Chief Financial Officer 1991-1995
Geraldine U. Foster Present position 1994; 56
Senior Vice President Vice President - Investor
Investor Relations and Relations 1988-1994
Corporate Communications
Daniel A. Nichols Present position 1991 58
Senior Vice President
Taxes
John P. Ryan Present position 1998; 58
Senior Vice President Vice President-Human Resources
Human Resources Schering-Plough Pharmaceuticals
1988-1998
Douglas J. Gingerella Present position 1999; 40
Vice President, Corporate Staff Vice President, Corporate
Audits Audits 1995-1998; Director
Corporate Audits 1991-1995
Name and Current Position Business Experience Age
Thomas H. Kelly Present position 1991 49
Vice President and
Controller
Robert S. Lyons Present position 1991 58
Vice President
Corporate Information
Services
E. Kevin Moore Present position 1996; 46
Vice President and Staff Vice President and
Treasurer Assistant Treasurer 1993-1995;
Treasurer-Europe, The Dun and
Bradstreet Corporation 1990-1993
John E. Nine Present position 1996; 62
Vice President President - Technical Operations
and President, Schering Schering Laboratories 1990-1995
Technical Operations
William J. Silbey Present position 1996; 39
Staff Vice President, Corporate Counsel 1993-1995;
Secretary and Associate Partner - Stearns, Weaver, Miller,
General Counsel Weissler, Alhadeff & Sitterson,
P.A. 1992-1993
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters
The common share dividends and share price data as set forth in the
Company's 1998 Annual Report to Shareholders are incorporated herein
by reference.
Item 6. Selected Financial Data
The Six-Year Selected Financial & Statistical Data as set forth in
the Company's 1998 Annual Report to Shareholders is incorporated
herein by reference.
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Management's Discussion and Analysis of Operations and Financial
Condition as set forth in the Company's 1998 Annual Report to
Shareholders is incorporated herein by reference.
Item 7(a). Quantitative and Qualitative Disclosures about Market
Risk
The Market Risk Disclosures as set forth in Management's Discussion
and Analysis of Operations and Financial Condition in the Company's
1998 Annual Report to Shareholders is incorporated herein by
reference.
Item 8. Financial Statements and Supplementary Data
The Consolidated Balance Sheets as of December 31, 1998 and 1997,
and the related Statements of Consolidated Income, Consolidated
Shareholders' Equity and Consolidated Cash Flows for each of the
three years in the period ended December 31, 1998, Notes to
Consolidated Financial Statements, the Independent Auditors' Report
of Deloitte & Touche LLP dated February 12, 1999 and Quarterly Data,
as set forth in the Company's 1998 Annual Report to Shareholders,
are incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
Not applicable.
Part III
Item 10. Directors and Executive Officers of the Registrant
The information concerning directors and nominees for directors as
set forth in the Company's Proxy Statement for the annual meeting of
shareholders on April 27, 1999 is incorporated herein by reference.
Information required as to executive officers is included in Part I
of this filing under the caption "Executive Officers of the
Registrant."
Item 11. Executive Compensation
Executive compensation information as set forth in the Company's
Proxy Statement for the annual meeting of shareholders on April 27,
1999 is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and
Management
Information concerning security ownership of certain beneficial
owners and management as set forth in the Company's Proxy Statement
for the annual meeting of shareholders on April 27, 1999 is
incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
Information concerning certain relationships and related
transactions as set forth in the Company's Proxy Statement for the
annual meeting of shareholders on April 27, 1999 is incorporated
herein by reference.
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K
(a) 1. Financial Statements
The following consolidated financial statements and
independent auditors' report, included in the Company's
1998 Annual Report to Shareholders, are incorporated
herein by reference.
Statements of Consolidated Income For the
Years Ended December 31, 1998, 1997 and 1996
Statements of Consolidated Shareholders' Equity For the
Years Ended December 31, 1998, 1997 and 1996
Statements of Consolidated Cash Flows For the Years
Ended December 31, 1998, 1997 and 1996
Consolidated Balance Sheets at December 31, 1998 and
1997
Notes to Consolidated Financial Statements
Independent Auditors' Report
(a) 2. Financial Statement Schedules
Page in
Form 10-K
Independent Auditors' Report . . . . . . . . . . . 21
Schedule II - Valuation and Qualifying Accounts. . 22
Schedules not included have been omitted because they are not
applicable or not required or because the required information is
set forth in the financial statements or the notes thereto. Columns
omitted from schedules filed have been omitted because the
information is not applicable.
Financial statements of fifty percent or less owned companies
accounted for by the equity method have been omitted because,
considered individually or in the aggregate, they do not constitute
a significant subsidiary.
(a) 3. Exhibits
Exhibit
Number Description
3(a) A complete copy of the Certificate of Incorporation
as amended and currently in effect. Incorporated by
reference to Exhibit 3 (i) to the Company's Quarterly
Report for the period ended June 30, 1995 on Form 10-
Q; Certificate of Amendment of Certificate of
Incorporation incorporated by reference to Exhibit 3
to the Company's Quarterly Report for the period ended
June 30, 1997 on Form 10-Q, File No. 1-6571.
3(b) A complete copy of the By-Laws as amended and
currently in effect. Incorporated by reference to
Exhibit 4(2) to the Company's Registration Statement
on Form S-3, File No. 333-853; amendment to By-Laws
effective September 22, 1998 incorporated by reference
to Exhibit 4 to the Company's Quarterly Report for the
period ended September 30, 1998 on Form 10-Q, File No.
1-6571.
4(a) Rights Agreement between the Company and The Bank of
New York dated June 24, 1997. Incorporated by
reference to Exhibit 1 to the Form 8-A filed by the
Company on June 30, 1997, File No. 1-6571.
4(b) Indenture dated as of November 1, 1982 between the
Company and The Chase Manhattan Bank, N.A. as
Trustee. Incorporated by reference to Exhibit 4(a)to
the Company's Registration Statement on Form S-3, File
No. 2-80012.
Exhibit
Number Description
4(c) Form of Participation Rights Agreement between the
Company and The Chase Manhattan Bank (National
Association), as Trustee. Incorporated by reference
to Exhibit 4.6 to the Company's Registration
Statement on Form S-4, Amendment No. 1, File
No. 33-65107.
10(a) The Company's Executive Incentive Plan (as amended)
and Trust related thereto.* Plan incorporated by
reference to Exhibit 10 to the Company's Quarterly
Report for the period ended March 31, 1994 on
Form 10-Q; Trust Agreement incorporated by
reference to Exhibit 10(a) to the Company's Annual
Report for 1988 on Form 10-K; amendment to Trust
Agreement incorporated by reference to Exhibit 10(b)
to the Company's Quarterly Report for the period
ended March 31, 1997 on Form 10-Q, File No. 1-6571.
10(b) The Company's 1987 Stock Incentive Plan (as
amended).* Incorporated by reference to Exhibit
10(d) to the Company's Annual Report for 1990 on
Form 10-K, File No. 1-6571.
10(c) The Company's 1992 Stock Incentive Plan (as amended).*
Incorporated by reference to Exhibit 10(d) to the
Company's Annual Report for 1992 on Form 10-K, File
No. 1-6571; amendment of December 11, 1995
incorporated by reference to Exhibit 10(d)to the
Company's Annual Report for 1995 on Form 10-K, File
No. 1-6571.
10(d) The Company's 1997 Stock Incentive Plan.*
Incorporated by reference to Exhibit 10 to the
Company's Quarterly Report for the period ended
September 30, 1997 on Form 10-Q, File No. 1-6571.
10(e)(i) Employment agreement between the Company and Robert
P. Luciano (as amended).* Incorporated by reference
to Exhibit 10(e)(i) to the Company's Annual Report
for 1989 on Form 10-K; first amendment incorporated
by reference to Exhibit 10(a) to the Company's
Quarterly Report for the period ended June 30, 1994
on Form 10-Q; second amendment incorporated by
reference to Exhibit 10(e)(i) to the Company's Annual
Report for 1994 on Form 10-K; third amendment
incorporated by reference to Exhibit 10(a) to the
Company's Quarterly Report for the period ended March
31, 1998 on Form 10-Q, File No. 1-6571.
Exhibit
Number Description
10(e)(ii) Employment agreement between the Company and Richard
J. Kogan (as amended).* Incorporated by reference to
Exhibit 10(e)(ii) to the Company's Annual Report
for 1989 on Form 10-K; first amendment incorporated
by reference to Exhibit 10(b) to the Company's
Quarterly Report for the period ended June 30, 1994
on Form 10-Q; second amendment incorporated by
reference to Exhibit 10(e)(ii) to the Company's
Annual Report for 1994 on Form 10-K; third amendment
incorporated by reference to Exhibit 10(a) to the
Company's Quarterly Report for the period ended
September 30, 1995 on Form 10-Q; fourth amendment
incorporated by reference to Exhibit 10(b) to the
Company's Quarterly Report for the period ended March
31, 1998 on Form 10-Q; fifth amendment (filed with
this document), File No. 1-6571.
10(e)(iii) Employment agreement between the Company and Hugh A.
D'Andrade (as amended).* Incorporated by
reference to Exhibit 10(c) to the Company's
Quarterly Report for the period ended June 30, 1994
on Form 10-Q; first amendment incorporated by
reference to Exhibit 10(e)(iii) to the Company's
Annual Report for 1994 on Form 10-K, File No. 1-
6571; second amendment incorporated by reference to
Exhibit 10(e)(iii) to the Company's Annual Report for
1995 on Form 10-K; third amendment incorporated by
reference to Exhibit 10(c) to the Company's Quarterly
Report for the period ended March 31, 1998 on Form
10-Q; fourth amendment (filed with this document), File
No. 1-6571.
10(e)(iv) Form of employment agreement between the Company and
its executive officers effective upon a change of
control.* Incorporated by reference to Exhibit
10(e)(iv) to the Company's Annual Report for 1994 on
Form 10-K, File No. 1-6571.
10(e)(v) Agreement between the Company and Robert P. Luciano.*
Incorporated by reference to Exhibit 10(d) to the
Company's Quarterly Report for the period ended March
31, 1998 on Form 10-Q, File No. 1-6571.
10(e)(vi) Employment agreement between the Company and Raul E.
Cesan (filed with this document), File No. 1-6571.*
10(e)(vii) Agreement between the Company and Rodolfo C. Bryce.*
Incorporated by reference to Exhibit 10(a) to the
Company's Quarterly Report for the period ended June
30, 1998 on Form 10-Q, File No. 1-6571.
Exhibit
Number Description
10(f) Directors Deferred Compensation Plan and Trust related
thereto.* Incorporated by reference to Exhibit 10(f) to
the Company's Annual Report for 1991 on Form 10-K;
amendment of December 7, 1998 (filed with this document);
Trust Agreement incorporated by reference to Exhibit
10(a) to the Company's Annual Report for 1988 on Form
10-K; amendment to Trust Agreement incorporated by
reference to Exhibit 10(b) to the Company's Quarterly
Report for the period ended March 31, 1997 on Form 10-Q,
File No. 1-6571.
10(g) Supplemental Executive Retirement Plan and Trust related
thereto.* Incorporated by reference to Exhibit 10(e) to
the Company's Quarterly Report for the period ended March
31, 1998 on Form 10-Q;amendment incorporated by reference
to Exhibit 10(a) to the Company's Quarterly Report for
the period ended September 30, 1998 on Form 10-Q; Amended
and Restated Trust Agreement (filed with this document),
File No. 1-6571.
10(h) Directors' Stock Award Plan.* Incorporated by reference
to Exhibit 10 to the Company's Quarterly Report for the
period ended September 30, 1994 on Form 10-Q, File No.
1-6571; amendment of January 1, 1997 incorporated by
reference to Exhibit 10(i) to the Company's Annual Report
for 1996 on Form 10-K; amendment of April 1, 1998
incorporated by reference to Exhibit 10(h) of the
Company's Quarterly Report for the period ended March
31, 1998 on Form 10-Q, File No. 1-6571.
10(i) The Company's Deferred Compensation Plan.* Incorporated
by reference to Exhibit 10(b) to the Company's Quarterly
Report for the period ended September 30, 1995 on Form
10-Q, File No. 1-6571.
10(k) The Company's Directors Deferred Stock Equivalency
Program.* Incorporated by reference to Exhibit 10(k) to
the Company's Annual Report for 1996 on Form 10-K, File
No. 1-6571.
10(l) The Company's Form of Split Dollar Agreement and related
Collateral Assignment between the Company and its
Executive Officers.* Incorporated by reference to
Exhibit 10(l) to the Company's Annual Report for 1997 on
Form 10-K; amendments incorporated by reference to
Exhibit 10(g) to the Company's Quarterly Report for the
period ended March 31, 1998 on Form 10-Q, File No.
1-6571.
Exhibit
Number Description
10(m) The Company's Retirement Benefits Equalization Plan.*
Incorporated by reference to Exhibit 10(f) to the
Company's Quarterly Report for the period ended March 31,
1998 on Form 10-Q; amendment incorporated by reference to
Exhibit 10(b) to the Company's Quarterly Report for the
period ended September 30, 1998 on Form 10-Q, File No. 1-
6571.
12 Computation of Ratio of Earnings to Fixed Charges (filed
with this document).
13 The Financial Section of the Company's 1998 Annual Report
to Shareholders. With the exception of those portions of
said Annual Report which are specifically incorporated by
reference in this Form 10-K (filed with this document),
such report shall not be deemed filed as part of this
Form 10-K.
21 Subsidiaries of the registrant (filed with this
document).
23 Consents of experts and counsel (filed with this
document).
24 Power of attorney (filed with this document).
27 Financial Data Schedule (filed with this document).
99 Cautionary Statements regarding "Safe Harbor" provision
of the Private Securities Litigation Reform Act of 1995
(filed with this document).
All other exhibits are not applicable. Copies of above exhibits
will be furnished upon request.
* Compensatory plan, contract or arrangement.
(b) Reports on Form 8-K.
None
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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 February 25, 1999 By /s/ Thomas H. Kelly
Thomas H. Kelly
Vice President and Controller
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the date indicated.
By * By *
Richard Jay Kogan Robert P. Luciano
Chairman of the Board and Chief Director
Executive Officer and Director
By * By *
Raul E. Cesan Donald L. Miller
President and Chief Operating Director
Officer and Director
By * By *
Jack L. Wyszomierski H. Barclay Morley
Executive Vice President and Director
Chief Financial Officer
By * By *
Thomas H. Kelly Carl E. Mundy, Jr.
Vice President and Controller Director
and Principal Accounting Officer
By * By *
Hans W. Becherer Richard de J. Obsorne
Director Director
By * By *
Hugh A. D'Andrade Patricia F. Russo
Director Director
By * By *
David C. Garfield William A. Schreyer
Director Director
By * By *
Regina E. Herzlinger Robert F. W. van Oordt
Director Director
*By /s/Thomas H. Kelly By *
Thomas H. Kelly James Wood
Attorney-in-fact Director
Date: February 25,1999
INDEPENDENT AUDITORS' REPORT
Schering-Plough Corporation:
We have audited the consolidated balance sheets of Schering-
Plough Corporation and subsidiaries as of December 31, 1998
and 1997 and the related statements of consolidated income,
shareholders' equity and cash flows for each of the three
years in the period ended December 31, 1998, and have issued
our report thereon dated February 12, 1999; such financial
statements and report are included in your 1998 Annual
Report to Shareholders and are incorporated herein by
reference. Our audits also included the financial statement
schedule of Schering-Plough Corporation and subsidiaries,
listed in Item 14. This financial statement schedule is the
responsibility of the Company's management. Our
responsibility is to express our opinion based on our
audits. In our opinion, such financial statement schedule,
when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material
respects the information set forth therein.
/s/DELOITTE & TOUCHE LLP
Parsippany, New Jersey
February 12, 1999
SCHEDULE II
<TABLE>
SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
(Dollars in millions)
<CAPTION>
Valuation and qualifying accounts deducted from assets to
which they apply:
Allowances for accounts receivable:
RESERVE RESERVE RESERVE
FOR DOUBTFUL FOR CASH FOR CLAIMS
ACCOUNTS DISCOUNTS AND OTHER TOTAL
<S> <C> <C> <C>
<C>
1998
Balance at beginning of
year $ 49 $ 14 $ 24 $ 87
Additions:
Charged to costs and
expenses 14 133 19 166
Deductions from reserves (12) (129) (14) (155)
Balance at end of year $ 51 $ 18 $ 29 $ 98
1997
Balance at beginning of
year $ 50 $ 12 $ 11 $ 73
Additions:
Charged to costs and
expenses 17 103 20 140
Deductions from reserves (18) (101) (7) (126)
Balance at end of year $ 49 $ 14 $ 24 $ 87
1996
Balance at beginning of
year $ 49 $ 8 $ 12 $ 69
Additions:
Charged to costs and
expenses 2 90 10 102
Deductions from reserves (1) (86) (11) (98)
Balance at end of year $ 50 $ 12 $ 11 $ 73
</TABLE>
FIFTH AMENDMENT TO EMPLOYMENT AGREEMENT
THIS FIFTH AMENDMENT to the Employment Agreement by and
between SCHERING-PLOUGH CORPORATION, a New Jersey
corporation (the "Company"), and RICHARD J. KOGAN (the "Employee")
dated as of September 26, 1989, as amended as of June 28, 1994, and as
further amended as of March 1, 1995, and as further amended as of
October 24, 1995, and as further amended as of February 25, 1998 (as so
amended, the "Employment Agreement"), is made and entered into as of
this 1st day of November, 1998.
WHEREAS, the Company and the Employee 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. The first sentence of Section 2(a) is hereby amended to read in its
entirety as follows:
During the Employment Period, the Employee shall be employed as
Chairman of the Board and Chief Executive Officer of the Company.
2. Section 3(b) of the Employment Agreement is hereby amended by
deleting the word "average" and replacing it with the word "highest" and by
deleting the defined term "Recent Average Bonus" and replacing it with the
defined term "Recent Bonus."
3. Section 3(c) of the Employment Agreement is hereby amended by
deleting the word "average" and replacing it with the phrase "highest of the"
and by deleting the defined term "Recent Average Bonus" and replacing it
with the defined term "Recent Bonus."
4. Subparagraph (j)(i)(I)(A) of Section 3 is hereby amended to read in its
entirety as follows:
(A) is two percent (2%) of the Employee's "final average earnings" (with
"final average earnings" being defined for this purpose as the Employee's
average annual earnings during the sixty (60) consecutive months for
which his earnings were highest during the last one hundred twenty (120)
consecutive months of his employment with the Company and "earnings"
being defined for this purpose as the base pay received by the Employee
as salary, including any amounts deferred for any reason, and bonuses
awarded under the Cash Bonus Plans) times his years of service with the
Company up to twenty (20) years
plus
one percent (1%) of the same "final average earnings" times his years of
service with the Company in excess of twenty (20) years;
5. Subparagraph (j)(iv) of Section 3 is hereby amended by striking the
words "not to exceed Ten Thousand Dollars ($10,000) per year" and by
substituting the words "up to the maximum allowable under the Company's
welfare benefit plans as in effect on November 1, 1998."
6. There is added to, and made a part of, the Employment Agreement a
new subparagraph (l) of Section 3 reading in its entirety as follows:
(l) Without limiting the generality of the foregoing, during the Change of
Control Period, the incentive, savings and retirement benefit opportunities
and the other benefits provided to the Employee pursuant to Sections 3(d),
(e), (f), (g), (h) and (i) above shall in no event be less than the most
favorable such opportunities and benefits provided to the Employee by the
Company and its affiliates at any time during the 120-day period
immediately preceding the Effective Date.
7. There is added to, and made a part of, the Employment Agreement a
new paragraph (h) of Section 5 reading in its entirety as follows:
(h) Other Benefits Following Retirement: From and after the date of the
Employee's retirement from the employment of the Company (including,
without limitation, Early Retirement), he shall be entitled to be provided by
the Company with (i) limited security services, including an automobile and
driver and limited use of Company-owned aircraft (subject to reasonable
availability of the corporate aircraft) and (ii) financial planning services on
terms and conditions reasonably comparable to those provided to senior
executives.
8. Section 9 of the Employment Agreement is hereby amended to read in
its entirety as follows:
9. Confidential Information and Competitive Conduct.
(a) The Employee shall hold in a fiduciary capacity for the benefit of the
Company all secret or confidential information, knowledge or data relating
to the Company or any of its affiliated companies (collectively the "Affiliated
Companies"), and their respective businesses, which shall have been
obtained by the Employee during the Employee's employment by the
Company or any of its affiliated companies and which shall not be or
become public knowledge (other than by acts by the Employee or
representatives of the Employee in violation of this Agreement). After
termination of the Employee's employment with the Company, the
Employee shall not, without the prior written consent of the Company or as
may otherwise be required by law or legal process, communicate or
divulge any such information, knowledge or data to anyone other than the
Company and those designated by it.
(b) During the Noncompetition Period (as defined below), the Executive
shall not, without the prior written consent of the Board (which consent
shall not be unreasonably withheld), engage in or become associated with
a Competitive Activity. For purposes of this Section 9(b): (i) the
"Noncompetition Period" means (A) the period during which the Executive
is employed by the Company, plus (B) two years following the termination
of employment for any reason other than (w) termination by the Executive
with Good Reason, (x) termination by the Company without Cause, (y)
retirement at or after the Executive has attained age 62 or (z) disability;
(ii) a "Competitive Activity" means any business or other endeavor that is
engaged in research, development and/or sale of human and/or animal
pharmaceutical products, in any county of any state of the United States or
any other country; and (iii) the Executive shall be considered to have
become "associated with a Competitive Activity" if the Executive becomes
directly or indirectly involved as an owner, principal, employee, officer,
director, independent contractor, representative, stockholder, financial
backer, agent, partner, advisor, lender, or in any other individual or
representative capacity with any individual, partnership, corporation or
other organization that is engaged in a Competitive Activity.
Notwithstanding the foregoing, (i) the Executive may make and retain
investments during the Noncompetition Period which do not constitute a
controlling interest of any entity engaged in a Competitive Activity, if such
investment is made on a passive basis and the Executive does not act as
an employee, officer, director, independent contractor, representative,
agent or advisor with respect to such entity and so long as the making or
retaining of such investment is not contrary to the best interests of the
Company, (ii) if as a result of a reorganization, merger or consolidation the
Executive is assigned a position (including status, offices, title, reporting
requirements and prospects), authority, duties or responsibilities which
diminish the Executive's position, authority, duties or responsibilities
relative to the 120-day period immediately preceding such reorganization,
merger or consolidation, then this Section 9(b) shall not apply, and (iii) this
Section 9(b) shall not apply after the Effective Date.
(c) The Executive acknowledges and agrees that: (i) the purpose of the
foregoing covenants is to protect the goodwill, trade secrets and other
confidential information of the Company; (ii) because of the nature of the
business in which the Company and the Affiliated Companies are engaged
and because of the nature of the confidential information to which the
Executive has access, it would be impractical and excessively difficult to
determine the actual damages of the Company and the Affiliated
Companies in the event the Executive breached any of the covenants of
this Section 9; and (iii) remedies at law (such as monetary damages) for
any breach of the Executive's obligations under this Section 9 would be
inadequate. The Executive therefore agrees and consents that if he
commits any breach of a covenant under this Section 9 or threatens to
commit any such breach, the Company shall have the right (in addition to,
and not in lieu of, any other right or remedy that may be available to it) to
temporary and permanent injunctive relief from a court of competent
jurisdiction, without posting any bond or other security and without the
necessity of proof of actual damage. With respect to any provision of this
Section 9 finally determined by a court of competent jurisdiction to be
unenforceable, the Executive and the Company hereby agree that such
court shall have jurisdiction to reform this Agreement or any provision
hereof so that it is enforceable to the maximum extent permitted by law,
and the parties agree to abide by such court's determination. If any of the
covenants of this Section 9 are determined to be wholly or partially
unenforceable in any jurisdiction, such determination shall not be a bar to
or in any way diminish the Company's right to enforce any such covenant
in any other jurisdiction.
(d) In no event shall an asserted violation of the provisions of this Section
9 constitute a basis for deferring or withholding any amounts otherwise
payable to the Employee under this Agreement.
9. The second sentence of Section 11(a) is hereby amended by adding
the words "Chairman of the Board and" before the words "Chief Executive
Officer." 10. 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 Fifth 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 Employee and, pursuant to due
authorization from its Board of Directors, the Company have caused this
Agreement to be executed as of the day and year first above written.
/s/ Richard J. Kogan
Richard J. Kogan
SCHERING-PLOUGH CORPORATION
/s/ Jack L. Wyszomierski
Jack L. Wyszomierski
Executive Vice President and
Chief Financial Officer
50252v1
5
FOURTH AMENDMENT TO EMPLOYMENT AGREEMENT
THIS FOURTH AMENDMENT to the Employment Agreement by and
between SCHERING-PLOUGH CORPORATION, a New Jersey
corporation (the "Company"), and HUGH A. D'ANDRADE (the
"Employee") dated as of June 28, 1994, as amended as of March 1, 1995,
and as further amended as of December 11, 1995, and as further
amended as of February 25, 1998 (as so amended, the "Employment
Agreement"), is made and entered into as of this 1st day of November,
1998.
WHEREAS, the Company and the Employee 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. Section 1 of the Employment Agreement is hereby amended by
deleting the date "December 1" and replacing it with the date "July 1."
2. Section 3(b) of the Employment Agreement is hereby amended by
deleting the word "average" and replacing it with the word "highest" and by
deleting the defined term "Recent Average Bonus" and replacing it with
the defined term "Recent Bonus."
3. Section 3(c) of the Employment Agreement is hereby amended by
deleting the word "average" and replacing it with the phrase "highest of
the" and by deleting the defined term "Recent Average Bonus" and
replacing it with the defined term "Recent Bonus."
4. Subparagraph (j)(i)(I)(A) of Section 3 is hereby amended to read in its
entirety as follows:
(A) is two percent (2%) of the Employee's "final average earnings" (with
"final average earnings" being defined for this purpose as the Employee's
average annual earnings during the sixty (60) consecutive months for
which his earnings were highest during the last one hundred twenty (120)
consecutive months of his employment with the Company and "earnings"
being defined for this purpose as the base pay received by the Employee
as salary, including any amounts deferred for any reason, and bonuses
awarded under the Cash Bonus Plans) times his years of service with the
Company up to twenty (20) years
plus
one percent (1%) of the same "final average earnings" times his years of
service with the Company in excess of twenty (20) years;
5. Subparagraph (j)(iv) of Section 3 is hereby amended by striking the
words "not to exceed Ten Thousand Dollars ($10,000) per year" and by
substituting the words "up to the maximum allowable under the
Company's welfare benefit plans as in effect on November 1, 1998."
6. There is added to, and made a part of, the Employment Agreement a
new subparagraph (k) of Section 3 reading in its entirety as follows: (k)
Without limiting the generality of the foregoing, during the Change of
Control Period, the incentive, savings and retirement benefit opportunities
and the other benefits provided to the Employee pursuant to Sections
3(d), (e), (f), (g), (h) and (i) above shall in no event be less than the most
favorable such opportunities and benefits provided to the Employee by the
Company and its affiliates at any time during the 120-day period
immediately preceding the Effective Date.
7. Section 9 of the Employment Agreement is hereby amended to read
in its entirety as follows:
9. Confidential Information and Competitive Conduct.
(a) The Employee shall hold in a fiduciary capacity for the benefit of the
Company all secret or confidential information, knowledge or data relating
to the Company or any of its affiliated companies (collectively the
"Affiliated Companies"), and their respective businesses, which shall have
been obtained by the Employee during the Employee's employment by
the Company or any of its affiliated companies and which shall not be or
become public knowledge (other than by acts by the Employee or
representatives of the Employee in violation of this Agreement). After
termination of the Employee's employment with the Company, the
Employee shall not, without the prior written consent of the Company or
as may otherwise be required by law or legal process, communicate or
divulge any such information, knowledge or data to anyone other than the
Company and those designated by it.
(b) During the Noncompetition Period (as defined below), the Executive
shall not, without the prior written consent of the Board (which consent
shall not be unreasonably withheld), engage in or become associated with
a Competitive Activity. For purposes of this Section 9(b): (i) the
"Noncompetition Period" means (A) the period during which the Executive
is employed by the Company, plus (B) two years following the termination
of employment for any reason other than (w) termination by the Executive
with Good Reason, (x) termination by the Company without Cause, (y)
retirement at or after the Executive has attained age 62 or (z) disability;
(ii) a "Competitive Activity" means any business or other endeavor that is
engaged in research, development and/or sale of human and/or animal
pharmaceutical products, in any county of any state of the United States
or any other country; and (iii) the Executive shall be considered to have
become "associated with a Competitive Activity" if the Executive becomes
directly or indirectly involved as an owner, principal, employee, officer,
director, independent contractor, representative, stockholder, financial
backer, agent, partner, advisor, lender, or in any other individual or
representative capacity with any individual, partnership, corporation or
other organization that is engaged in a Competitive Activity.
Notwithstanding the foregoing, (i) the Executive may make and retain
investments during the Noncompetition Period which do not constitute a
controlling interest of any entity engaged in a Competitive Activity, if such
investment is made on a passive basis and the Executive does not act as
an employee, officer, director, independent contractor, representative,
agent or advisor with respect to such entity and so long as the making or
retaining of such investment is not contrary to the best interests of the
Company, (ii) if as a result of a reorganization, merger or consolidation the
Executive is assigned a position (including status, offices, title, reporting
requirements and prospects), authority, duties or responsibilities which
diminish the Executive's position, authority, duties or responsibilities
relative to the 120-day period immediately preceding such reorganization,
merger or consolidation, then this Section 9(b) shall not apply, and (iii) this
Section 9(b) shall not apply after the Effective Date.
(c) The Executive acknowledges and agrees that: (i) the purpose of the
foregoing covenants is to protect the goodwill, trade secrets and other
confidential information of the Company; (ii) because of the nature of the
business in which the Company and the Affiliated Companies are
engaged and because of the nature of the confidential information to
which the Executive has access, it would be impractical and excessively
difficult to determine the actual damages of the Company and the
Affiliated Companies in the event the Executive breached any of the
covenants of this Section 9; and (iii) remedies at law (such as monetary
damages) for any breach of the Executive's obligations under this Section
9 would be inadequate. The Executive therefore agrees and consents
that if he commits any breach of a covenant under this Section 9 or
threatens to commit any such breach, the Company shall have the right
(in addition to, and not in lieu of, any other right or remedy that may be
available to it) to temporary and permanent injunctive relief from a court of
competent jurisdiction, without posting any bond or other security and
without the necessity of proof of actual damage. With respect to any
provision of this Section 9 finally determined by a court of competent
jurisdiction to be unenforceable, the Executive and the Company hereby
agree that such court shall have jurisdiction to reform this Agreement or
any provision hereof so that it is enforceable to the maximum extent
permitted by law, and the parties agree to abide by such court's
determination. If any of the covenants of this Section 9 are determined to
be wholly or partially unenforceable in any jurisdiction, such determination
shall not be a bar to or in any way diminish the Company's right to enforce
any such covenant in any other jurisdiction.
(d) In no event shall an asserted violation of the provisions of this
Section 9 constitute a basis for deferring or withholding any amounts
otherwise payable to the Employee under this Agreement.
8. 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 Fourth 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 Employee and, pursuant to due
authorization from its Board of Directors, the Company have caused this
Agreement to be executed as of the day and year first above written.
/s/ Hugh A. D'Andrade
Hugh A. D'Andrade
SCHERING-PLOUGH CORPORATION
/s/ Richard Jay Kogan
Richard Jay Kogan
Chairman of the Board and
Chief Executive Officer
50251v1
4
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT made and entered into as of this
1st day of November, 1998, by and between SCHERING-PLOUGH COR-
PORATION, a New Jersey corporation (the "Company"), and Raul E.
Cesan (the "Employee");
WHEREAS, the Employee is currently serving as Execu-
tive Vice President - Pharmaceuticals of the Company and the Com-
pany desires to secure the continuing employment of the Employee
in accordance herewith;
NOW, THEREFORE, IN CONSIDERATION of the mutual prom-
ises, covenants and agreements set forth below, it is hereby
agreed as follows:
1. Employment and Term. The Company agrees to em-
ploy the Employee and the Employee agrees to remain in the employ
of the Company, in accordance with the terms and provisions of
this Agreement, for the period beginning on November 1, 1998, and
ending as of the close of business on October 31, 2003 (the "Em-
ployment Period"); provided, however, that the Employment Period
shall be extended for an additional five-year period commencing on
the Effective Date (as defined in Section 11(d) below) and ending
on the fifth anniversary of the Effective Date; and provided fur-
ther that unless on or before the May 1 immediately preceding each
October 31 on which the Employment Period would otherwise end, ei-
ther party delivers to the other party a written notice of its
election to terminate such employment on such October 31, the Em-
ployment Period shall be extended for additional one-year periods
commencing on the November 1 immediately succeeding such October
31 and ending on the following October 31; and provided further
that, if not previously terminated, the Employment Period shall
terminate on October 30, 2012.
2. Duties and Powers of Employee.
(a) Position; Location. During the Employment Pe-
riod, the Employee shall be employed as President and Chief
Operating Officer of the Company, reporting to the Chief Ex-
ecutive Officer of the Company, and with the duties and pow-
ers held by him as of the date hereof and such other duties
consistent therewith as the Chief Executive Officer may as-
sign him from time to time. The Employee's services shall
be performed at the location where the Employee is currently
employed or any office which is the headquarters of the Com-
pany and is less than 35 miles from such location.
(b) Duties. During the Employment Period, and ex-
cluding any periods of vacation and sick leave to which the
Employee is entitled, the Employee agrees to devote reason-
able attention and time during normal business hours to the
business and affairs of the Company and, to the extent nec-
essary to discharge the responsibilities assigned to the Em-
ployee hereunder, to use the Employee's reasonable best ef-
forts to perform faithfully and efficiently such responsi-
bilities. During the Employment Period it shall not be a
violation of this Agreement for the Employee to (i) serve on
corporate, civic or charitable boards or committees, (ii)
deliver lectures, fulfill speaking engagements or teach at
educational institutions and (iii) manage personal invest-
ments, so long as such activities do not significantly in-
terfere with the performance of the Employee's responsibili-
ties as an employee of the Company in accordance with this
Agreement. It is expressly understood and agreed that to
the extent that any such activities have been conducted by
the Employee prior to the date of this Agreement or subse-
quent thereto consistent with this Section 2(b), the contin-
ued conduct of such activities (or the conduct of activities
similar in nature and scope thereto) shall not thereafter be
deemed to interfere with the performance of the Employee's
responsibilities to the Company.
3. Compensation. The Employee shall receive the
following compensation for his services:
(a) Salary. So long as the Employee is employed by
the Company, he shall be paid an annual base salary ("Annual
Base Salary") at the rate of not less than $850,000 per
year, in accordance with the Company's payroll practices as
in effect from time to time, but in no event less often than
monthly, and subject to any and all required withholdings
and deductions for Social Security, income taxes and the
like. The Board of Directors of the Company (the "Board")
may from time to time direct such upward adjustments to An-
nual Base Salary as the Board deems to be necessary or de-
sirable; provided, however, that during the Change of Con-
trol Period (as defined in Section 11(b)), the Annual Base
Salary shall be reviewed at least annually and shall be in-
creased at any time and from time to time as shall be sub-
stantially consistent with increases in base salary gener-
ally awarded in the ordinary course of business to other
senior executives of the Company and its affiliated compa-
nies (as defined in Section 11(e) below). Annual Base Sal-
ary shall not be reduced after any increase thereof pursuant
to this Section 3(a). Any increase in Annual Base Salary
shall not serve to limit or reduce any other obligation of
the Company under this Agreement.
(b) Incentive Cash Compensation. So long as the Em-
ployee is employed by the Company, he shall be eligible an-
nually for awards (such aggregate awards for each year are
hereinafter referred to as the "Annual Bonus") from the Com-
pany's Executive Incentive Plan ("EIP"), and from any suc-
cessor or replacement plan, and from any other plan of the
Company or any of its affiliated companies providing for the
payment of bonuses which are payable to the Employee in cash
(the EIP and such successor, replacement or other plans be-
ing referred to herein collectively as the "Cash Bonus
Plans"), in accordance with the terms thereof; provided,
however, that, during the Change of Control Period, the Em-
ployee shall be awarded, for each fiscal year ending during
the Change of Control Period, an Annual Bonus at least equal
to the highest Annual Bonus (annualized for any fiscal year
consisting of less than twelve full months) paid or payable,
including by reason of any deferral, to the Employee by the
Company and its affiliated companies in respect of the three
most recent full fiscal years ending on or prior to the
Change of Control Date (as defined in Section 11(a) below)
(the "Recent Bonus"). Each Annual Bonus shall be paid no
later than the end of the third month of the fiscal year
next following the fiscal year for which the Annual Bonus is
awarded, unless the Employee shall elect to defer the re-
ceipt of such Annual Bonus.
(c) Special Bonus. In addition to Annual Base Sal-
ary and Annual Bonus payable as hereinabove provided, if a
Change of Control (as defined in Section 11(c) below) occurs
and the Employee remains employed with the Company and its
affiliated companies through the first anniversary of the
Change of Control Date, the Company shall pay to the Em-
ployee no later than 30 days after the date of such first
anniversary a special bonus (the "Special Bonus") in recog-
nition of the Employee's services during the crucial one-
year transition period following the Change of Control in
cash equal to the sum of (A) the Annual Base Salary in ef-
fect on such date, (B) the greater of (1) the Annual Bonus
paid or payable, including by reason of any deferral, to the
Employee (and annualized for any fiscal year consisting of
less than twelve full months) for the most recently com-
pleted fiscal year preceding such date, if any, and (2) the
Recent Bonus (such greater amount shall be hereinafter re-
ferred to as the "Highest Annual Bonus") and (C) the greater
of (1) the amounts contributed on behalf of the Employee un-
der the Company's Employees' Profit Sharing Incentive Plan
or any successor or replacement plan thereto (the "PSIP")
and the Company's Profit Sharing Benefits Equalization Plan
or any successor or replacement plan thereto (the "PSIP Ex-
cess Plan"), for the most recently completed fiscal year
preceding such date and (2) the highest of the annual
amounts contributed on behalf of the Employee under the PSIP
and PSIP Excess Plan (and annualized for any fiscal year
consisting of less than twelve full months) in respect of
the three fiscal years immediately preceding the fiscal year
in which the Effective Date occurs (such greater amount
shall be hereinafter referred to as the "Highest Annual PSIP
Contribution").
(d) Incentive and Savings and Retirement Plans. So
long as the Employee is employed by the Company, he shall be
entitled to participate in all incentive and savings (in ad-
dition to the Cash Bonus Plans) and retirement plans, prac-
tices, policies and programs applicable generally to other
senior executives of the Company and its affiliated compa-
nies.
(e) Welfare Benefit Plans. The Employee and/or the
Employee's family, as the case may be, shall be eligible for
participation in and shall receive all benefits under wel-
fare benefit plans, practices, policies and programs pro-
vided by the Company and its affiliated companies (includ-
ing, without limitation, medical, prescription, dental,
disability, salary continuance, employee life, group life,
accidental death and travel accident insurance plans and
programs) to the extent applicable generally to other senior
executives of the Company and its affiliated companies.
(f) Expenses. So long as the Employee is employed
by the Company, he shall be entitled to receive prompt reim-
bursement for all reasonable expenses incurred by the Em-
ployee in accordance with the policies, practices and proce-
dures of the Company and its affiliated companies from time
to time in effect, commensurate with his position and on a
basis at least comparable to that of other senior executives
of the Company.
(g) Fringe Benefits. So long as the Employee is em-
ployed by the Company, he shall be entitled to fringe bene-
fits in accordance with the plans, practices, programs and
policies of the Company and its affiliated companies from
time to time in effect, commensurate with his position and
at least comparable to those received by any other senior
executive of the Company.
(h) Office and Support Staff. So long as the Em-
ployee is employed by the Company, he shall be entitled to
an office or offices of a size and with furnishings and
other appointments, and to exclusive personal secretarial
and other assistance, commensurate with his position and at
least comparable to those received by any other senior ex-
ecutive of the Company.
(i) Vacation and Other Absences. So long as the Em-
ployee is employed by the Company, he shall be entitled to
paid vacation and such other paid absences whether for holi-
days, illness, personal time or any similar purposes, in ac-
cordance with the plans, policies, programs and practices of
the Company and its affiliated companies in effect from time
to time, commensurate with his position and at least compa-
rable to those received by any other senior executive of the
Company.
(j) Additional Benefits. In addition to, and not in
limitation (except as provided in Section 3(j) (ii)) of, the
foregoing, the Employee shall be entitled to the following:
(i) Supplemental Retirement Plan ("SRP"). (I)
An unfunded, non-tax-qualified annual pension supple-
ment (the "Normal Supplement"), subject to the terms
and conditions set forth below, in the amount by which
the greatest of (A) or (B) or (C), exceeds (D) ,
where:
(A) is two percent (2%) of the Em-
ployee's "final average earnings" (with "final
average earnings" being defined for this purpose
as the Employee's average annual earnings during
the sixty (60) consecutive months for which his
earnings were highest during the last one hun-
dred twenty (120) consecutive months of his em-
ployment with the Company and "earnings" being
defined for this purpose as the base pay re-
ceived by the Employee as salary, including any
amounts deferred for any reason, and bonuses
awarded under the Cash Bonus Plans) times his
years of service with the Company up to twenty
(20) years
plus
one percent (1%) of the same "final average
earnings" times his years of service with the
Company in excess of twenty (20) years;
(B) thirty-five percent (35%) of the Em-
ployee's "final average earnings", as defined
hereinabove; provided, however, that this sub-
paragraph (B) shall apply only if the Employee
is in the employ of the Company when he reaches
age sixty (60) with at least ten (10) years of
service with the Company;
(C) is fifty-five percent (55%) of the
Employee's "final average earnings", as defined
hereinabove; provided, however, that this sub-
paragraph (C) shall apply only if the Employee
is in the employ of the Company on or after he
reaches age sixty-two (62); and
(D) is the sum of (I) the Employee's
pension from the Company's qualified retirement
plan and retirement benefits equalization plan
applicable to him and (II) the amount of any
benefits paid under the Company's Supplemental
Executive Retirement Plan or any successor or
replacement plan (collectively with the SRP, the
"SERP").
(II) In the event the Employee elects to retire
prior to age sixty-five (65) ("Early Retirement"), the
Employee shall be entitled, in lieu of the Normal Sup-
plement, to an unfunded, nontax-qualified annual pen-
sion supplement (the "Early Retirement Supplement"),
subject to the terms and conditions set forth below,
equal to the amount by which (AA) exceeds (BB) below,
where:
(AA) is the amount computed in accordance
with (A) of subsection (I) of this Section
3(j)(i) or, if applicable and greater, (B) or
(C) of such subsection (I), reduced four percent
(4%) for each year that the Employee's retire-
ment precedes age sixty-two (62); provided, how-
ever, that such amount shall not be less than
thirty-five percent (35%) of the Employee's "fi-
nal average earnings" if the Employee's early
retirement occurs on or after he reaches age
sixty (60) with at least ten (10) years of serv-
ice; and
(BB) is the sum of (I) the Employee's
pension payable at early retirement from the
Company's qualified retirement plan and retire-
ment benefits equalization plan applicable to
him and (II) the amount of any benefits paid un-
der the Company's Supplemental Executive Retire-
ment Plan or any successor or replacement plan.
(III) Any SRP that becomes payable pursuant to
subsection (I) or (II) of this Section 3(j)(i) shall
be payable as follows.
(AAA) If payable, the Normal Supple-
ment or the Early Retirement Supplement, as the
case may be, shall commence to be paid upon the
date of the Employee's retirement. The Normal
Supplement or the Early Retirement Supplement,
as the case may be, shall be computed on a
straight life annuity basis, with an option to
the Employee to receive the actuarial equivalent
of such supplement under a joint and survivor's
annuity; provided, however, that in the event
the Employee retires from the employ of the Com-
pany on or after he reaches age sixty-two (62),
the Employee shall be entitled to receive the
Normal Supplement (without any reduction) on a
straight life annuity basis and after the Em-
ployee's death, his surviving spouse shall be
entitled to receive annually for the duration of
her life a survivor's benefit (the "Survivor's
Benefit") equal to the amount by which (i) 45%
of "final average earnings" (as defined in (A)
of subsection (I) of this Section 3(j)(i))
(without any reduction) exceeds (ii) the amount
payable to her set forth in clause (D) of sub-
section (I) of this Section 3(j)(i). If the Em-
ployee's benefits under the Company's qualified
retirement plan are to continue after his death
for the benefit of his surviving spouse or a
designated beneficiary, then he shall have the
right at any time to change the recipient of any
survivorship benefit payable under the SRP; pro-
vided, however, that any such change, if made
after the applicable deadline set forth in the
qualified retirement plan, shall not affect the
amount of the benefit payable under the SRP as
originally calculated or the term for which such
benefit is payable, also as originally calcu-
lated.
(BBB) Notwithstanding the foregoing,
the Employee shall be entitled to elect that the
SRP shall be paid in accordance with any op-
tional form of benefit available under the Com-
pany's qualified retirement plan or as provided
in subsection (CCC) below.
(CCC) The Employee may elect (the
"Employee's Lump Sum Election") to receive pay-
ment of the actuarial equivalent of the aggre-
gate of his Normal Supplement or Early Retire-
ment Supplement, as the case may be (the
"Employee's Benefit") and the Survivor's Benefit
in a lump sum (x) in cash on the date of his re-
tirement or on the first day of any month there-
after not later than the first day of the month
coincident with or next following the second an-
niversary of the date of his retirement or on
the fifth, tenth, fifteenth or twentieth anni-
versary of the date of his retirement or (y) in
two, three, four, five, ten, fifteen or twenty
equal annual cash installments commencing on the
date of his retirement or the first day of any
month thereafter not later than the first day of
the month coincident with or next following the
second anniversary of the date of his retire-
ment. If the Employee dies after retirement
with an Employee's Lump Sum Election in effect
but prior to the payment of the full amount of
the lump sum or annual installments due thereun-
der, payment of the unpaid amount thereof shall
be made to his surviving spouse, designated
beneficiary or estate in accordance with his
election. Payment made in accordance with this
subsection (CCC) to the Employee, his surviving
spouse, designated beneficiary or estate shall
constitute full and complete satisfaction of the
Company's obligation in respect of the Em-
ployee's Benefit and the Survivor's Benefit.
(DDD) If the Employee does not make
the Employee's Lump Sum Election, the Employee's
surviving spouse may elect (the "Survivor's Lump
Sum Election") to receive the actuarial equiva-
lent of the Survivor's Benefit, if any, in a
lump sum (x) in cash on the date of the Em-
ployee's death or the first day of any month
thereafter not later than the first day of the
month coincident with or next following the sec-
ond anniversary of the Employee's death or on
the fifth, tenth, fifteenth or twentieth anni-
versary of his death or (y) in two, three, four,
five, ten, fifteen or twenty equal annual cash
installments commencing on the date of the Em-
ployee's death or the first day of any month
thereafter not later than the first day of the
month coincident with or next following the sec-
ond anniversary of the Employee's death.
(EEE) The Employee's Lump Sum Elec-
tion and the Survivor's Lump Sum Election shall
be made, and may be rescinded, in the same man-
ner and at the same times as are prescribed for
the analogous elections under the Company's Sup-
plemental Executive Retirement Plan or any suc-
cessor or replacement plan (the "Basic SERP")
or, at any time when there is no Basic SERP in
effect, in accordance with procedures specified
by the Executive Compensation and Organization
Committee of the Board of Directors of the Com-
pany (the "Committee"). The amount of any lump
sum or installment payments of the Employee's
Benefit or Survivor's Benefit shall be computed
in the same manner as is prescribed for the
analogous computations under the Basic SERP or,
at any time when there is no Basic SERP in ef-
fect or there are no analogous computations pro-
vided under the Basic SERP, as specified by the
Committee.
(FFF) Notwithstanding any timely Em-
ployee's Lump Sum Election or Survivor's Lump
Sum Election, neither the Employee nor the Em-
ployee's surviving spouse shall have the right
to receive the SRP in a form provided for in
subsection (CCC) or subsection (DDD), as the
case may be, if the Employee's employment is
terminated for Cause (as defined below). In the
event the Employee dies before retirement or
deemed retirement, the Company shall have no ob-
ligation in respect of the Employee's Benefit,
and shall be obligated to pay the Survivor's
Benefit to his spouse, if, but only if, the Em-
ployee's spouse shall survive him.
(GGG) The Committee may, in its sole
discretion, defer the payment of any lump sum or
annual installment of the Employee's Benefit to
the Employee, if the Employee is, at the time
such amount would otherwise be paid, a "covered
employee" as defined in Section 162(m) of the
Internal Revenue Code of 1986, as amended, if
such payment would be subject to such Section's
limitation on deductibility; provided, however,
that such payment shall not be deferred to a
date later than the earliest date in the year in
which such payment would not be subject to such
limitation; and further provided that the Com-
pany shall, at the time of payment of any amount
so deferred, pay interest thereon from the due
date thereof at a rate equal to the actual yield
on three-month U.S. Treasury bills as reported
in the Wall Street Journal on the first business
day of each calendar quarter, compounded quar-
terly.
(IV) In determining the SRP, the following
rules shall apply:
(AAAA) If, during the Employment Pe-
riod, the Employee's employment terminates by
reason of death, or the Company terminates the
Employee's employment for Disability or other-
wise than for Cause, or the Employee terminates
his employment either for Good Reason or without
any reason during the Window Period (as the
terms Disability, Cause, Good Reason and Window
Period are hereinafter defined), then, in any
such event, the references to final average
earnings, age and retirement in this subpara-
graph (j) (i) of Section 3 shall be read in a
manner that takes into account the provisions in
paragraphs (a) (iv), (b) and (c) of Section 5 of
this Agreement regarding deemed compensation,
deemed age and deemed retirement, and the time
of payment of the SRP shall be determined in ac-
cordance with such provisions.
(BBBB) Except as otherwise specifi-
cally provided for in this Agreement, the provi-
sions of the Company's qualified retirement plan
and of the Basic SERP applicable to the Employee
shall apply to the SRP provided hereunder.
(ii) Executive Death Benefits. A program (co-
ordinated with the Company's regular death benefit
program for executives) which includes the following
death benefits:
(A) Executive life insurance no less fa-
vorable than that available under the Company's
executive life insurance program in effect as of
May 1, 1993;
(B) non-contributory, pre-retirement ac-
cidental death and dismemberment insurance of
Twenty-five Thousand Dollars ($25,000); and
(C) pre-retirement coverage under a 24-
hour accidental death and dismemberment program,
on a non-contributory basis, in an amount equal
to three times the Annual Base Salary.
(iii) Executive Long-Term Disability Program.
During the Employment Period, so long as the Employee
is employed by the Company, an unfunded, uninsured
program which provides a monthly supplement to the
Company's salaried employees' regular long-term dis-
ability plan applicable to the Employee, such supple-
ment (payable monthly) to be the excess of (A) over
(B) , where:
(A) is equal to fifty percent (50%) of
the sum of (i) one-twelfth of the Annual Base
Salary and (ii) one-twelfth (1/12) of the Em-
ployee's target EIP (or successor or replacement
incentive plans) award for the calendar year in
which disability commences, or if the foregoing
is inapplicable, his actual EIP (or successor or
replacement incentive plans) award for the cal-
endar year preceding the year of disability; and
(B) is equal to the Employee's benefit
from the Company's regular long-term disability
plan applicable to salaried employees, plus dis-
ability income benefits from other government
sources.
(iv) Executive Medical Plan. During the Em-
ployment Period, so long as the Employee is employed
by the Company, a plan that reimburses the Employee
for his and his dependents' medical expenses up to the
maximum allowable under the Company's welfare benefit
plans as in effect on November 1, 1998, which expenses
are not reimbursed by the Company's medical plans ap-
plicable to salaried employees.
(k) Without limiting the generality of the forego-
ing, during the Change of Control Period, the incentive,
savings and retirement benefit opportunities and the other
benefits provided to the Employee pursuant to Sections 3(d),
(e), (f), (g), (h) and (i) above shall in no event be less
than the most favorable such opportunities and benefits pro-
vided to the Employee by the Company and its affiliates at
any time during the 120-day period immediately preceding the
Effective Date.
4. Termination of Employment.
(a) Death or Disability. The Employee's employment
shall terminate automatically upon the Employee's death
during the Employment Period. If the Company determines in
good faith that the Disability (as defined below) of the
Employee has occurred during the Employment Period, it may
give to the Employee written notice in accordance with
Section 12(b) of this Agreement of its intention to
terminate the Employee's employment. In such event, the
Employee's employment with the Company shall terminate
effective on the 30th day after receipt of such notice by
the Employee (the "Disability Effective Date"), provided
that, within the 30 days after such receipt, the Employee
shall not have returned to full-time performance of the
Employee's duties. For purposes of this Agreement,
"Disability" shall mean the absence of the Employee from the
Employee's duties with the Company on a full-time basis for
180 consecutive business days as a result of incapacity due
to mental or physical illness which is determined to be
total and permanent by a physician selected by the Company
or its insurers and acceptable to the Employee or the
Employee's legal representative (such agreement as to
acceptability not to be withheld unreasonably).
(b) Cause. The Company may terminate the Employee's
employment during the Employment Period for Cause. For pur-
poses of this Agreement, "Cause" shall mean (i) repeated
violations by the Employee of the Employee's obligations un-
der Section 2 of this Agreement (other than as a result of
incapacity due to physical or mental illness) which viola-
tions (A) are demonstrably willful and deliberate on the Em-
ployee's part, (B) are committed in bad faith or without
reasonable belief that such violations are in the best in-
terests of the Company and (C) are not remedied in a reason-
able period of time after receipt of written notice from the
Company specifying such violations or (ii) the conviction of
the Employee of a felony involving moral turpitude.
(c) Good Reason; Window Period. The Employee may
terminate his employment (x) during the Employment Period
for Good Reason or (y) during the Window Period without any
reason. For purposes of this Agreement, the "Window Period"
shall mean the 30-day period immediately following the first
anniversary of the Change of Control Date. For purposes of
this Agreement, "Good Reason" shall mean:
(i) the assignment to the Employee of any du-
ties inconsistent in any respect with the Employee's
position (including status, offices, titles and re-
porting requirements), authority, duties or responsi-
bilities as contemplated by Section 2(a) of this
Agreement, or any other action by the Company which
results in a diminution in such position, authority,
duties or responsibilities, excluding for this purpose
an isolated, insubstantial and inadvertent action not
taken in bad faith and which is remedied by the Com-
pany promptly after receipt of notice thereof given by
the Employee;
(ii) the Company's requiring the Employee to be
based at any office or location other than as de-
scribed in Section 2(a) of this Agreement;
(iii) any failure by the Company to comply with
any of the provisions of Section 3 of this Agreement,
other than an isolated, insubstantial and inadvertent
failure not occurring in bad faith and which is reme-
died by the Company promptly after receipt of notice
thereof given by the Employee;
(iv) any purported termination by the Company
of the Employee's employment otherwise than as
expressly permitted by this Agreement; or
(v) any failure by the Company to comply with
and satisfy Section 10(c) of this Agreement, provided
that such successor has received at least ten days'
prior written notice from the Company or the Employee
of the requirements of Section 10(c) of this Agree-
ment.
For purposes of this Section 4 (c) , any good faith determi-
nation of "Good Reason" made by the Employee shall be con-
clusive and binding on the Company.
(d) Notice of Termination. Any termination by the
Company for Cause, or by the Employee without any reason
during the Window Period or for Good Reason, shall be commu-
nicated by Notice of Termination to the other party hereto
given in accordance with Section 12(b) of this Agreement.
For purposes of this Agreement, a "Notice of Termination"
means a written notice which (i) indicates the specific ter-
mination provision in this Agreement relied upon, (ii) to
the extent applicable, sets forth in reasonable detail the
facts and circumstances claimed to provide a basis for ter-
mination of the Employee's employment under the provision so
indicated and (iii) if the Date of Termination (as defined
in Section 4(e)) is other than the date of receipt of such
notice, specifies the termination date (which date shall be
not more than fifteen days after the giving of such notice).
The failure by the Employee or the Company to set forth in
the Notice of Termination any fact or circumstance which
contributes to a showing of Good Reason or Cause shall not
waive any right of the Employee or the Company hereunder or
preclude the Employee or the Company from asserting such
fact or circumstance in enforcing the Employee's or the Com-
pany's rights hereunder.
(e) Date of Termination. "Date of Termination"
means (i) if the Employee's employment is terminated by the
Company for Cause, or by the Employee during the Window Pe-
riod or for Good Reason, the date of receipt of the Notice
of Termination or any later date specified therein, as the
case may be, (ii) if the Employee's employment is terminated
by the Company other than for Cause or Disability, the Date
of Termination shall be the date on which the Company noti-
fies the Employee of such termination and (iii) if the Em-
ployee's employment is terminated by reason of death or Dis-
ability, the Date of Termination shall be the date of death
of the Employee or the Disability Effective Date, as the
case may be.
5. Obligations of the Company upon Termination.
(a) Good Reason or during the Window Period; Other
Than for Cause, Death or Disability. If, during the
Employment Period, the Company shall terminate the
Employee's employment other than for Cause or Disability or
the Employee shall terminate his employment either for Good
Reason or without any reason during the Window Period:
(i) the Company shall pay to the Employee in a
lump sum in cash within 30 days after the Date of Ter-
mination the aggregate of the following amounts:
(A) the sum of (1) the Employee's Annual
Base Salary through the Date of Termination to
the extent not theretofore paid, (2) the product
of (x) the Highest Annual Bonus and (y) a frac-
tion, the numerator of which is the number of
days in the current fiscal year through the Date
of Termination, and the denominator of which is
365, (3) the Special Bonus, if due to the Em-
ployee pursuant to Section 3 (c) of this Agree-
ment, to the extent not theretofore paid and (4)
any compensation previously deferred by the Em-
ployee (together with any accrued interest or
earnings thereon) and any accrued vacation pay,
in each case to the extent not theretofore paid
(the sum of the amounts described in clauses
(1), (2), (3) and (4) shall be hereinafter re-
ferred to as the "Accrued Obligations"); and
(B) the amount (such amount shall be
hereinafter referred to as the "Severance
Amount") equal to the product of (1) two and (2)
the sum of (x) the Employee's Annual Base
Salary, (y) the Highest Annual Bonus and (z) the
Highest Annual PSIP Contribution; provided,
however, that in the event the Special Bonus has
not been paid or is not payable to the Employee,
such amount shall be increased by the amount of
the Special Bonus as if such Special Bonus were
then due and payable to the Employee; and,
provided further, that the Severance Amount
shall be reduced by the present value
(determined as provided in Section 280G(d) (4)
of the Internal Revenue Code of 1986, as amended
(the "Code")), of any other amount of severance
relating to salary or bonus continuation to be
received by the Employee upon termination of
employment of the Employee under any severance
plan, policy or arrangement of the Company; and
(C) a separate lump-sum supplemental
retirement benefit (which shall be payable in
addition to the annual pension supplement
required to be paid to the Employee under
Section 3(j) above) equal to the difference
between (1) the actuarial equivalent (utilizing
for this purpose the actuarial assumptions
utilized with respect to the Company's qualified
retirement plan applicable to the Employee
during the 90-day period immediately preceding
the Date of Termination or, if more favorable to
the Employee, as in effect at any time
thereafter (the "Retirement Plan")) of the
benefit payable under the Retirement Plan and
any supplemental and/or excess retirement plan
providing benefits for the Employee, including
without limitation the SERP, which the Employee
would receive if the Employee's employment
continued at the compensation level provided for
in Section 3 of this Agreement for a period of
three years from and after the Date of
Termination, assuming for this purpose that all
accrued benefits are fully vested and that
benefit accrual formulas are no less
advantageous to the Employee than those in
effect during the 90-day period immediately
preceding the Date of Termination or, if more
favorable to the Employee, as in effect at any
time thereafter, and (2) the actuarial
equivalent (utilizing for this purpose the
actuarial assumptions utilized with respect to
the Retirement Plan during the 90-day period
immediately preceding the Date of Termination
or, if more favorable to the Employee, as in
effect at any time thereafter) of the Employee's
actual benefit (paid or payable), if any, under
the Retirement Plan and the SERP (as modified by
subparagraph (a) (iv) of this Section 5) (the
amount of such benefit shall be hereinafter
referred to as the "Supplemental Retirement
Amount"); and
(ii) for a period of three years from and after
the Date of Termination, or such longer period as any
plan, program, practice or policy may provide, the
Company shall continue benefits to the Employee and/or
the Employee's family at least equal to those which
would have been provided to them in accordance with
the plans, programs, practices and policies described
in Section 3(e) of this Agreement if the Employee's
employment had not been terminated in accordance with
the most favorable plans, practices, programs or poli-
cies of the Company and its affiliated companies as in
effect and applicable generally to other senior execu-
tives of the Company and its affiliated companies and
their families during the 90-day period immediately
preceding the Date of Termination or, if more favor-
able to the Employee, as in effect generally at any
time thereafter with respect to other senior execu-
tives of the Company and its affiliated companies and
their families; provided, however, that if the Em-
ployee becomes reemployed with another employer and is
eligible to receive medical or other welfare benefits
under another employer provided plan, the medical and
other welfare benefits described herein shall be sec-
ondary to those provided under such other plan during
such applicable period of eligibility (such continua-
tion of such benefits for the applicable period herein
set forth shall be hereinafter referred to as "Welfare
Benefit Continuation"). For purposes of determining
eligibility of the Employee for retiree benefits pur-
suant to such plans, practices, programs and policies,
the Employee shall be considered to have remained em-
ployed until the third anniversary of the Date of Ter-
mination and to have retired on the date of such third
anniversary;
(iii) to the extent not theretofore paid or pro-
vided, the Company shall timely pay or provide to the
Employee and/or the Employee's family any other
amounts or benefits required to be paid or provided or
which the Employee and/or the Employee's family is
eligible to receive pursuant to this Agreement and un-
der any plan, program, policy or practice or contract
or agreement of the Company and its affiliated compa-
nies as in effect and applicable generally to other
senior executives of the Company and its affiliated
companies and their families during the 90-day period
immediately preceding the Date of Termination or, if
more favorable to the Employee, as in effect generally
thereafter with respect to other senior executives of
the Company and its affiliated companies and their
families (such other amounts and benefits shall be
hereinafter referred to as the "Other Benefits"); and
(iv) for all purposes of subparagraph (j) (i)
of Section 3 above (including without limitation both
the computation and time of payment of the SRP), the
Employee shall be deemed to have retired at age 62 on
the Date of Termination with final average earnings
computed as if the compensation for his final three
years consisted of the compensation paid pursuant to
subparagraph (a) (i) (B) of this Section 5 and the
compensation for the two years preceding his final
three years consisted of the compensation actually
paid to him with respect to the year in which the Date
of Termination occurs (including without limitation
the compensation payable pursuant to subparagraph (a)
(i) (A) of this Section 5) and the compensation actu-
ally paid to him with respect to the year preceding
the year in which the Date of Termination occurs.
(b) Death. If the Employee's employment is
terminated by reason of the Employee's death during the
Employment Period, the Company shall have no further
obligations to the Employee's legal representatives under
this Agreement, other than for (i) payment of Accrued
Obligations (which shall be paid to the Employee's estate or
beneficiary, as applicable, in a lump sum in cash within 30
days of the Date of Termination) and the timely payment or
provision of the Welfare Benefit Continuation and Other
Benefits (excluding, in each case, Death Benefits (as
defined below)) and (ii) payment to the Employee's estate or
beneficiary, as applicable, in a lump sum in cash within 30
days of the Date of Termination of an amount equal to the
greater of (A) the sum of the Severance Amount and the
Supplemental Retirement Amount and (B) the present value
(determined as provided in Section 280G(d) (4) of the Code)
of any cash amount to be received by the Employee or the
Employee's family as a death benefit pursuant to the terms
of any plan, policy or arrangement of the Company and its
affiliated companies, including but not limited to the death
benefits described in Section 3(j) (ii), but not including
any proceeds of life insurance covering the Employee paid
for on a contributory basis by the Employee (which shall be
paid in any event as an Other Benefit) (the benefits
included in this clause (B) shall be hereinafter referred to
as the "Death Benefits"). For all purposes of determining
the Survivor's Benefit, if any, pursuant to subparagraph (j)
(i) of Section 3 above (including without limitation both
the computation and time of payment of the Survivor's
Benefit), the Employee shall be deemed to have attained age
62 and retired immediately before his death. For purposes
of determining the Supplemental Retirement Amount payable
pursuant to this subparagraph (b), references in the
definition of "Supplemental Retirement Amount" set forth in
subparagraph (a) (i) (C) of this Section 5 to the Employee's
retirement benefits shall be deemed to refer to the
Survivor's Benefit and the other retirement benefits payable
to the Employee's surviving spouse and/or beneficiaries and
estate.
(c) Disability. If the Employee's employment is
terminated by reason of the Employee's Disability during the
Employment Period, the Company shall have no further
obligations to the Employee under this Agreement, other than
for (i) payment of Accrued Obligations (which shall be paid
to the Employee in a lump sum in cash within 30 days of the
Date of Termination) and the timely payment or provision of
the Welfare Benefit Continuation and Other Benefits
(excluding, in each case, Disability Benefits (as defined
below)) and (ii) payment to the Employee in a lump sum in
cash within 30 days of the Date of Termination of an amount
equal to the greater of (A) the sum of the Severance Amount
and the Supplemental Retirement Amount and (B) the present
value (determined as provided in Section 280G(d) (4) of the
Code) of any cash amount to be received by the Employee as a
disability benefit pursuant to the terms of any plan, policy
or arrangement of the Company and its affiliated companies,
but not including any proceeds of disability insurance
covering the Employee paid for on a contributory basis by
the Employee (which shall be paid in any event as an Other
Benefit) (the benefits included in this clause (B) shall be
hereinafter referred to as the "Disability Benefits"). For
all purposes of determining the SRP pursuant to subparagraph
(j) (i) of Section 3 above (including without limitation
both the computation and the time of payment of the SRP),
the Employee shall be deemed to have retired at age 62 on
the Date of Termination.
(d) Cause; Other than for Good Reason. If the Em-
ployee's employment shall be terminated for Cause during the
Employment Period, the Company shall have no further obliga-
tions to the Employee under this Agreement other than the
obligation to pay to the Employee Annual Base Salary through
the Date of Termination plus the amount of any compensation
previously deferred by the Employee, in each case to the ex-
tent theretofore unpaid. If the Employee terminates employ-
ment during the Employment Period, excluding a termination
either for Good Reason or without any reason during the Win-
dow Period, the Company shall have no further obligations to
the Employee, other than for Accrued Obligations and the
timely payment or provision of Other Benefits. In such
case, all Accrued Obligations shall be paid to the Employee
in a lump sum in cash within 30 days of the Date of Termina-
tion.
(e) Resolution of Disputes. If there shall be any
dispute between the Company and the Employee about (i) in
the event of any termination of the Employee's employment by
the Company, whether such termination was for Cause, or (ii)
in the event of any termination by the Employee of his em-
ployment for Good Reason, whether the Employee determined in
good faith that Good Reason existed, then, unless and until
there is a final, nonappealable judgment by a court of com-
petent jurisdiction declaring that such termination was for
Cause or that such determination was not made in good faith,
the Company shall pay all amounts, and provide all benefits,
to the Employee and/or his family or other beneficiaries, as
the case may be, that the Company would be required to pay
or provide pursuant to Section 5(a) as though such termina-
tion were by the Company without Cause or by the Employee
with Good Reason; provided, however, that the Company shall
not be required to pay any disputed amounts pursuant to this
paragraph (e) except upon receipt of an undertaking by or on
behalf of the Employee to repay all such amounts to which he
is ultimately adjudged by such court not to be entitled.
(f) If the Company shall deliver to the Employee a
written notice of its election to terminate his employment,
as provided in the second proviso to Section 1, then his em-
ployment shall be deemed to have been terminated by the Com-
pany without Cause, unless such notice states that it is a
"Notice of Termination" and satisfies the requirements set
forth in Section 4(d). If the Employee shall deliver to the
Company such a notice, then his employment shall be deemed
to have been terminated by him without Good Reason, unless
such notice states that it is a "Notice of Termination" and
satisfies the requirements set forth in Section 4(d).
6. Non-exclusivity of Rights. Except as provided
in Sections 5(a)(ii), 5(b) and 5(c) of this Agreement, nothing in
this Agreement shall prevent or limit the Employee's continuing or
future participation in any plan, program, policy or practice pro-
vided by the Company or any of its affiliated companies and for
which the Employee may qualify, nor shall anything herein limit or
otherwise affect such rights as the Employee may have under any
contract or agreement entered into after the date hereof with the
Company or any of its affiliated companies. Amounts which are
vested benefits or which the Employee is otherwise entitled to re-
ceive under any plan, policy, practice or program of, or any con-
tract or agreement entered into after the date hereof with, the
Company or any of its affiliated companies at or subsequent to the
Date of Termination shall be payable in accordance with such plan,
policy, practice or program or contract or agreement except as ex-
plicitly modified by this Agreement.
7. Full Settlement. The Company's obligation to
make the payments provided for in this Agreement and otherwise to
perform its obligations hereunder shall not be affected by any
set-off, counterclaim, recoupment, defense or other claim, right
or action which the Company may have against the Employee or oth-
ers. In no event shall the Employee be obligated to seek other
employment or take any other action by way of mitigation of the
amounts payable to the Employee under any of the provisions of
this Agreement and, except as provided in Section 5(a)(ii) of this
Agreement, such amounts shall not be reduced whether or not the
Employee obtains other employment. The Company agrees to pay
promptly as incurred, to the full extent permitted by law, all le-
gal fees and expenses which the Employee may reasonably incur as a
result of any contest (regardless of the outcome thereof) by the
Company, the Employee or others of the validity or enforceability
of, or liability under, any provision of this Agreement or any
guarantee of performance thereof (including as a result of any
contest by the Employee about the amount of any payment pursuant
to this Agreement), plus in each case interest on any delayed pay-
ment at the applicable Federal rate provided for in Section
7872(f)(2)(A) of the Code.
8. Certain Additional Payments by the Company.
(a) Anything in this Agreement to the contrary not-
withstanding, in the event it shall be determined that any
payment or distribution by the Company to or for the benefit
of the Employee (whether paid or payable or distributed or
distributable pursuant to the terms of this Agreement or
otherwise, but determined without regard to any additional
payments required under this Section 8) (a "Payment") would
be subject to the excise tax imposed by Section 4999 of the
Code (or any successor provision) or any interest or penal-
ties are incurred by the Employee with respect to such ex-
cise tax (such excise tax, together with any such interest
and penalties, are hereinafter collectively referred to as
the "Excise Tax") , then the Employee shall be entitled to
receive an additional payment (a "Gross-Up Payment") in an
amount such that after payment by the Employee of all taxes
(including any interest or penalties imposed with respect to
such taxes), including, without limitation, any income taxes
(and any interest and penalties imposed with respect
thereto) and Excise Tax imposed upon the Gross-Up Payment,
the Employee retains an amount of the Gross-Up Payment equal
to the Excise Tax imposed upon the Payments.
(b) Subject to the provisions of Section 8(c) of
this Agreement, all determinations required to be made under
this Section 8, including whether and when a Gross-Up Pay-
ment is required and the amount of such Gross-Up Payment and
the assumptions to be utilized in arriving at such determi-
nation, shall be made by Deloitte & Touche (or any successor
thereto by merger or operation of law) (the "Accounting
Firm") which shall provide detailed supporting calculations
both to the Company and the Employee within 15 business days
of the receipt of a request from the Employee, or such ear-
lier time as is requested by the Company. In the event that
the Accounting Firm is serving as accountant or auditor for
the individual, entity or group effecting the Change of Con-
trol, the Employee shall appoint another nationally recog-
nized accounting firm to make the determinations required
hereunder (which accounting firm shall then be referred to
as the Accounting Firm hereunder). All fees and expenses of
the Accounting Firm shall be borne solely by the Company.
Any Gross-Up Payment, as determined pursuant to this Section
8, shall be paid by the Company to the Employee within five
days of the receipt of the Accounting Firm's determination.
If the Accounting Firm determines that no Excise Tax is pay-
able by the Employee, it shall furnish the Employee with a
written opinion that failure to report the Excise Tax on the
Employee's applicable federal income tax return would not
result in the imposition of a negligence or similar penalty.
Any determination by the Accounting Firm shall be binding
upon the Company and the Employee. As a result of the un-
certainty in the application of Section 4999 of the Code at
the time of the initial determination by the Accounting Firm
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 ex-
hausts its remedies pursuant to Section 8(c) of this Agree-
ment and the Employee thereafter is required to make a pay-
ment of any Excise Tax, the Accounting Firm shall determine
the amount of the Underpayment that has occurred and any
such Underpayment shall be promptly paid by the Company to
or for the benefit of the Employee.
(c) The Employee shall notify the Company in writing
of any claim by the Internal Revenue Service that, if suc-
cessful, would require the payment by the Company of the
Gross-Up Payment. Such notification shall be given as soon
as practicable but no later than ten business days after the
Employee is informed in writing of such claim and shall ap-
prise the Company of the nature of such claim and the date
on which such claim is requested to be paid. The Employee
shall not pay such claim prior to the expiration of the 30-
day period following the date on which he 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 Employee in writing prior
to the expiration of such period that it desires to contest
such claim, the Employee shall:
(i) give the Company any information reasona-
bly requested by the Company relating to such claim,
(ii) take such action in connection with con-
testing such claim as the Company shall reasonably re-
quest in writing from time to time, including, without
limitation, accepting legal representation with re-
spect to such claim by an attorney reasonably selected
by the Company,
(iii) cooperate with the Company in good faith
in order effectively to contest such claim, and
(iv) permit the Company to participate in any
proceedings relating to such claim;
provided, however, that the Company shall bear and pay di-
rectly all costs and expenses (including additional interest
and penalties) incurred in connection with such contest and
shall indemnify and hold the Employee harmless, on an after-
tax basis, for any Excise Tax or income tax (including in-
terest and penalties with respect thereto) imposed as a re-
sult of such representation and payment of costs and ex-
penses. Without limitation on the foregoing provisions of
this Section 8(c), the Company shall control all proceedings
taken in connection with such contest and, at its sole op-
tion, may pursue or forgo any and all administrative ap-
peals, proceedings, hearings and conferences with the taxing
authority in respect of such claim and may, at its sole op-
tion, either direct the Employee to pay the tax claimed and
sue for a refund or to contest the claim in any permissible
manner, and the Employee 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 Employee to pay such claim
and sue for a refund, the Company shall advance the amount
of such payment to the Employee, on an interest-free basis
and shall indemnify and hold the Employee harmless, on an
after-tax basis, from any Excise Tax or income tax (includ-
ing interest or penalties with respect thereto) imposed with
respect to such advance or with respect to any imputed in-
come with respect to such advance; and provided, further
that any extension of the statute of limitations relating to
payment of taxes for the taxable year of the Employee with
respect to which such contested amount is claimed to be due
is limited solely to such contested amount. Furthermore,
the Company's control of the contest shall be limited to is-
sues with respect to which a Gross-Up Payment would be pay-
able hereunder and the Employee 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.
(d) If, after the receipt by the Employee of an
amount advanced by the Company pursuant to Section 8(c) of
this Agreement, the Employee becomes entitled to receive any
refund with respect to such claim, the Employee shall (sub-
ject to the Company's complying with the requirements of
Section 8(c) of this Agreement) 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 Employee of an amount advanced by
the Company pursuant to Section 8(c) of this Agreement, a
determination is made that the Employee shall not be enti-
tled to any refund with respect to such claim and the Com-
pany does not notify the Employee in writing of its intent
to contest such denial of refund prior to the expiration of
30 days after such determination, then such advance shall be
forgiven and shall not be required to be repaid and the
amount of such advance shall offset, to the extent thereof,
the amount of Gross-Up Payment required to be paid.
9. Confidential Information and Competitive Con-
duct.
(a) The Employee shall hold in a fiduciary capacity
for the benefit of the Company all secret or confidential
information, knowledge or data relating to the Company or
any of its affiliated companies (collectively the "Affili-
ated Companies"), and their respective businesses, which
shall have been obtained by the Employee during the Em-
ployee's employment by the Company or any of its affiliated
companies and which shall not be or become public knowledge
(other than by acts by the Employee or representatives of
the Employee in violation of this Agreement). After termi-
nation of the Employee's employment with the Company, the
Employee shall not, without the prior written consent of the
Company or as may otherwise be required by law or legal pro-
cess, communicate or divulge any such information, knowledge
or data to anyone other than the Company and those desig-
nated by it.
(b) During the Noncompetition Period (as defined be-
low), the Executive shall not, without the prior written
consent of the Board (which consent shall not be unreasona-
bly withheld), engage in or become associated with a Com-
petitive Activity. For purposes of this Section 9(b): (i)
the "Noncompetition Period" means (A) the period during
which the Executive is employed by the Company, plus (B) two
years following the termination of employment for any reason
other than (w) termination by the Executive with Good Rea-
son, (x) termination by the Company without Cause, (y) re-
tirement at or after the Executive has attained age 62 or
(z) disability; (ii) a "Competitive Activity" means any
business or other endeavor that is engaged in research, de-
velopment and/or sale of human and/or animal pharmaceutical
products, in any county of any state of the United States or
any other country; and (iii) the Executive shall be consid-
ered to have become "associated with a Competitive Activity"
if the Executive becomes directly or indirectly involved as
an owner, principal, employee, officer, director, independ-
ent contractor, representative, stockholder, financial
backer, agent, partner, advisor, lender, or in any other in-
dividual or representative capacity with any individual,
partnership, corporation or other organization that is en-
gaged in a Competitive Activity. Notwithstanding the fore-
going, (i) the Executive may make and retain investments
during the Noncompetition Period which do not constitute a
controlling interest of any entity engaged in a Competitive
Activity, if such investment is made on a passive basis and
the Executive does not act as an employee, officer, direc-
tor, independent contractor, representative, agent or advi-
sor with respect to such entity and so long as the making or
retaining of such investment is not contrary to the best in-
terests of the Company, (ii) if as a result of a reorganiza-
tion, merger or consolidation the Executive is assigned a
position (including status, offices, title, reporting re-
quirements and prospects), authority, duties or responsi-
bilities which diminish the Executive's position, authority,
duties or responsibilities relative to the 120-day period
immediately preceding such reorganization, merger or con-
solidation, then this Section 9(b) shall not apply, and
(iii) this Section 9(b) shall not apply after the Effective
Date.
(c) The Executive acknowledges and agrees that: (i)
the purpose of the foregoing covenants is to protect the
goodwill, trade secrets and other confidential information
of the Company; (ii) because of the nature of the business
in which the Company and the Affiliated Companies are en-
gaged and because of the nature of the confidential informa-
tion to which the Executive has access, it would be imprac-
tical and excessively difficult to determine the actual
damages of the Company and the Affiliated Companies in the
event the Executive breached any of the covenants of this
Section 9; and (iii) remedies at law (such as monetary dam-
ages) for any breach of the Executive's obligations under
this Section 9 would be inadequate. The Executive therefore
agrees and consents that if he commits any breach of a cove-
nant under this Section 9 or threatens to commit any such
breach, the Company shall have the right (in addition to,
and not in lieu of, any other right or remedy that may be
available to it) to temporary and permanent injunctive re-
lief from a court of competent jurisdiction, without posting
any bond or other security and without the necessity of
proof of actual damage. With respect to any provision of
this Section 9 finally determined by a court of competent
jurisdiction to be unenforceable, the Executive and the Com-
pany hereby agree that such court shall have jurisdiction to
reform this Agreement or any provision hereof so that it is
enforceable to the maximum extent permitted by law, and the
parties agree to abide by such court's determination. If
any of the covenants of this Section 9 are determined to be
wholly or partially unenforceable in any jurisdiction, such
determination shall not be a bar to or in any way diminish
the Company's right to enforce any such covenant in any
other jurisdiction.
(d) In no event shall an asserted violation of the
provisions of this Section 9 constitute a basis for defer-
ring or withholding any amounts otherwise payable to the Em-
ployee under this Agreement.
10. Successors.
(a) This Agreement is personal to the Employee and
without the prior written consent of the Company shall not
be assignable by the Employee otherwise than by will or the
laws of descent and distribution. This Agreement shall in-
ure to the benefit of and be enforceable by the Employee's
legal representatives.
(b) This Agreement shall inure to the benefit of and
be binding upon the Company and its successors and assigns.
(c) 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 assume expressly and agree
to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform it if
no such succession had taken place. As used in this Agree-
ment, "Company" shall mean the Company as hereinbefore de-
fined 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.
11. Certain Definitions. The following defined
terms used in this Agreement shall have the meanings indicated:
(a) The "Change of Control Date" shall mean the
first date on which a Change of Control occurs. Anything in
this Agreement to the contrary notwithstanding, if a Change
of Control occurs and if the Employee's employment with the
Company is terminated or the Employee ceases to have the po-
sition of President and Chief Operating Officer of the Com-
pany, as set forth in Section 2(a), prior to the date on
which the Change of Control occurs, and if it is reasonably
demonstrated by the Employee that such termination or cessa-
tion (i) was at the request of a third party who has taken
steps reasonably calculated to effect the Change of Control
or (ii) otherwise arose in connection with or anticipation
of the Change of Control, then for all purposes of this
Agreement the "Change of Control Date" shall mean the date
immediately prior to the date of such termination or cessa-
tion.
(b) The "Change of Control Period" shall mean the
period commencing on the Change of Control Date and ending
on the last day of the Employment Period.
(c) "Change of Control" shall mean:
(i) The acquisition by any individual, entity
or group (within the meaning of Section 13(d)(3) or
14(d)(2) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act")) (a "Person"), of benefi-
cial ownership (within the meaning of Rule 13d-3 prom-
ulgated under the Exchange Act) of 20% or more of ei-
ther (A) the then outstanding shares of common stock
of the Company (the "Outstanding Company Common
Stock") or (B) the combined voting power of the then
outstanding voting securities of the Company entitled
to vote generally in the election of directors (the
"Outstanding Company Voting Securities"); provided,
however, that the following acquisitions shall not
constitute a Change of Control: (A) any acquisition
directly from the Company (excluding an acquisition by
virtue of the exercise of a conversion privilege), (B)
any acquisition by the Company, (C) any acquisition by
any employee benefit plan (or related trust) sponsored
or maintained by the Company or any of its affiliated
companies or (D) any acquisition by any corporation
pursuant to a transaction described in clauses (A),
(B) and (C) of subparagraph (iii) of this paragraph
(c); and provided, further, that if any Person's bene-
ficial ownership of the Outstanding Company Voting
Stock or Outstanding Company Voting Securities reaches
or exceeds 20% as a result of a transaction described
in clause (A) or (B) of the foregoing proviso, and
such Person subsequently acquires beneficial ownership
of additional common stock or voting securities of the
Company, such subsequent acquisition shall be treated
as an acquisition that causes such Person to own 20%
or more of the Outstanding Company Voting Stock or
Outstanding Company Voting Securities; or
(ii) Individuals who, as of the date hereof,
constitute the Board (the "Incumbent Board") cease for
any reason to constitute at least a majority of the
Board; provided, however, that any individual becoming
a director subsequent to the date hereof whose elec-
tion, or nomination for election by the Company's
shareholders, was approved by a vote of at least a ma-
jority of the directors then comprising the Incumbent
Board shall be considered as though such individual
were a member of the Incumbent Board, but excluding,
for this purpose, any such individual whose initial
assumption of office occurs as a result of either an
actual or threatened election contest (as such terms
are used in Rule 14a-11 of Regulation 14A promulgated
under the Exchange Act) or other actual or threatened
solicitation of proxies or consents by or on behalf of
a Person other than the Incumbent Board; or
(iii) Approval by the shareholders of the Com-
pany of a reorganization, merger or consolidation, in
each case, unless, following such reorganization,
merger or consolidation, (A) all or substantially all
of the individuals and entities who were the benefi-
cial owners, respectively, of the Outstanding Company
Common Stock and Outstanding Company Voting Securities
immediately prior to such reorganization, merger or
consolidation beneficially own, directly or indi-
rectly, more than 60% of, respectively, the then out-
standing shares of common stock and the combined vot-
ing power of the then outstanding voting securities
entitled to vote generally in the election of direc-
tors, as the case may be, of the corporation resulting
from such reorganization, merger or consolidation in
substantially the same proportions as their ownership,
immediately prior to such reorganization, merger or
consolidation of the Outstanding Company Common Stock
and Outstanding Company Voting Securities, as the case
may be, (B) no Person (excluding the Company and any
employee benefit plan (or related trust) of the Com-
pany or of the corporation resulting from such reor-
ganization, merger or consolidation) beneficially
owns, directly or indirectly, 20% or more of, respec-
tively, the then outstanding shares of common stock of
the corporation resulting from such reorganization,
merger or consolidation or the combined voting power
of the then outstanding voting securities of such cor-
poration and (C) at least a majority of the members of
the board of directors of the corporation resulting
from such reorganization, merger or consolidation were
members of the Incumbent Board at the time of the exe-
cution of the initial agreement providing for such re-
organization, merger or consolidation; or
(iv) Approval by the shareholders of the Com-
pany of (A) a complete liquidation or dissolution of
the Company or (B) the sale or other disposition of
all or substantially all of the assets of the Company,
other than to a corporation, with respect to which,
following such sale or other disposition, (I) more
than 60% of, respectively, the then outstanding shares
of common stock of such corporation and the combined
voting power of the then outstanding voting securities
of such corporation entitled to vote generally in the
election of directors is then beneficially owned, di-
rectly or indirectly, by all or substantially all of
the individuals and entities who were the beneficial
owners, respectively, of the Outstanding Company Com-
mon Stock and Outstanding Company Voting Securities
immediately prior to such sale or other disposition in
substantially the same proportion as their ownership,
immediately prior to such sale or other disposition,
of the Outstanding Company Common Stock and Outstand-
ing Company Voting Securities, as the case may be,
(II) no Person (excluding the Company and any employee
benefit plan (or related trust) of the Company or of
such corporation) then beneficially owns, directly or
indirectly, 20% or more of, respectively, the then
outstanding shares of common stock of such corporation
and the combined voting power of the then outstanding
voting securities of such corporation entitled to vote
generally in the election of directors and (III) at
least a majority of the members of the board of direc-
tors of such corporation were members of the Incumbent
Board at the time of the execution of the initial
agreement or action of the Board providing for such
sale or other disposition of assets of the Company.
(d) The "Effective Date" shall mean the first date
during the Employment Period on which a Change of Control
occurs. Anything in this Agreement to the contrary notwith-
standing, if a Change of Control occurs and if the Em-
ployee's employment with the Company is terminated or the
Employee ceases to hold the offices set forth in Section 2
above prior to the date on which the Change of Control oc-
curs, and if it is reasonably demonstrated by the Employee
that such termination of employment or cessation of status
as an officer (i) was at the request of a third party who
has taken steps reasonably calculated to effect the Change
of Control or (ii) otherwise arose in connection with or an-
ticipation of the Change of Control, then for all purposes
of this Agreement the "Effective Date" shall mean the date
immediately prior to the date of such termination of employ-
ment or cessation of status as an officer.
(e) The term "affiliated company" shall mean any
company controlled by, controlling or under common control
with the Company.
12. Miscellaneous.
(a) This Agreement shall be governed by and con-
strued in accordance with the laws of the State of New Jer-
sey, without reference to principles of conflict of laws.
The captions of this Agreement are not part of the provi-
sions hereof and shall have no force or effect. This Agree-
ment may not be amended, modified, repealed, waived, ex-
tended or discharged except by an agreement in writing
signed by the party against whom enforcement of such amend-
ment, modification, repeal, waiver, extension or discharge
is sought. No person, other than pursuant to a resolution
of the Board or a committee thereof, shall have authority on
behalf of the Company to agree to amend, modify, repeal,
waive, extend or discharge any provision of this Agreement
or anything in reference thereto.
(b) All notices and other communications hereunder
shall be in writing and shall be given by hand delivery to
the other party or by registered or certified mail, return
receipt requested, postage prepaid, addressed as follows:
If to the Employee:
c/o Schering-Plough Corporation
2000 Galloping Hill Road
Kenilworth, New Jersey 07033
If to the Company:
Schering-Plough Corporation
One Giralda Farms
Madison, New Jersey 07940-1000
Attention: General Counsel
or to such other address as either party shall have fur-
nished to the other in writing in accordance herewith. No-
tice and communications shall be effective when actually re-
ceived by the addressee.
(c) The invalidity or unenforceability of any provi-
sion of this Agreement shall not affect the validity or en-
forceability of any other provision of this Agreement.
(d) The Company may withhold from any amounts pay-
able under this Agreement such Federal state or local taxes
as shall be required to be withheld pursuant to any applica-
ble law or regulation.
(e) The Employee's or the Company's failure to in-
sist upon strict compliance with any provision hereof or any
other provision of this Agreement or the failure to assert
any right the Employee or the Company may have hereunder in-
cluding, without limitation, the right of the Employee to
terminate employment for Good Reason pursuant to Section
4(c) of this Agreement, shall not be deemed to be a waiver
of such provision or right or any other provision or right
of this Agreement.
(f) When used herein in connection with plans, pro-
grams and policies relating to the Employee, employees, com-
pensation, benefits, perquisites, executive benefits, serv-
ices and similar words and phrases, the word "Company" shall
be deemed to include Schering Corporation and Plough, Inc.,
wholly-owned subsidiaries of the Company.
(g) This instrument contains the entire agreement of
the parties, and all promises, representations, understand-
ings, arrangements and prior agreements are merged herein
and superseded hereby, including without limitation the Em-
ployment Agreement between the Company and the Executive
dated as of September 27, 1994.
IN WITNESS WHEREOF, the Employee and, pursuant to due
authorization from its Board of Directors, the Company have caused
this Agreement to be executed as of the day and year first above
written.
Raul E. Cesan
SCHERING-PLOUGH CORPORATION
Richard J. Kogan
Chairman of the Board and
Chief Executive Officer
37854-1.DOC
SCAN CLEANUP
Corporate Long Agreement Template Attached
Heading 1 - 1.
Heading 2 - (a)
Heading 3 = (i)
Heading 4 = (A)
- -29-
SCHERING-PLOUGH CORPORATION
Amendment to
Directors Deferred Compensation Plan
The Schering-Plough Corporation Directors Deferred
Compensation Plan is hereby amended, effective December 7,
1998, by deleting Paragraph III, Section B thereof and substituting
therefore the following:
III.B. At least one year prior to the date on which a Director will
terminate service as a Director, he or she shall elect to receive
payment in cash of his or her Deferred Account upon termination
of service, either in (i) a lump sum or (ii) in approximately equal
annual installments of up to ten (10) years, such payment or
payments to 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 upon termination of service.
Any election shall be delivered in writing to the Secretary of the
Corporation and the latest election which is made at least one year
prior to the date of termination of service shall be deemed final and
irrevocable.
ex-10f.doc
AMENDED AND RESTATED SERP RABBI TRUST
THIS AGREEMENT, made as of the 1st day of November,
1998 (the "Trust Agreement"), among SCHERING-PLOUGH
CORPORATION, a corporation organized and existing under
the laws of New Jersey (the "Company"), THE NORTHERN
TRUST COMPANY, having its principal offices in Chicago,
Illinois (the "Trustee") and BUCK CONSULTANTS, INC.
having its principal offices in New York, New York (the
"Trustee's Agent").
W I T N E S S E T H
WHEREAS, the Trust Agreement was originally entered
into as of March 31, 1987 by and among the Company, The
Chase Manhattan Bank (National Association) as trustee,
and The Wyatt Company as trustee's agent (the "Original
Trust Agreement");
WHEREAS, the Original Trust Agreement was amended and
restated through October 1, 1993, further amended as of
October 1, 1995, and amended and restated through
January 22, 1997;
WHEREAS, the Company wishes to amend and restate the
Original Trust Agreement, as so amended and restated,
to provide for mandatory contributions upon a potential
change of control;
WHEREAS, the Company has incurred and expects to
continue to incur certain unfunded retirement income,
deferred compensation liability and other obligations
to or with respect to certain key management employees
and directors pursuant to the terms of the following
plans and employment agreements of the Company: (i)
the Supplemental Executive Retirement Plan (the
"SERP"); (ii) the Retirement Benefits Equalization Plan
(the "BEP"); (iii) the Pension Plan for Directors (the
"Directors Pension Plan"); (iv) the Employment
Agreement with Hugh A. D'Andrade dated as of June 28,
1994, as amended by the First Amendment thereto dated
as of March 1, 1995, the Second Amendment thereto dated
as of December 11, 1995, the Third Amendment thereto
dated as of February 25, 1998, the Fourth Amendment
thereto dated as of November 1, 1998, and as
subsequently amended from time to time the (the
"D'Andrade Agreement"); (v) the Employment Agreement
with Richard J. Kogan dated as of September 26, 1989,
as amended by the First Amendment thereto dated as of
June 28, 1994, the Second Amendment thereto dated as of
March 1, 1995, the Third Amendment thereto dated as of
October 24, 1995, the Fourth Amendment thereto dated as
of February 25, 1998, the Fifth Amendment thereto dated
as of November 1, 1998, and as subsequently amended
from time to time (the "Kogan Agreement"); (vi) the
Employment Agreement with Robert P. Luciano dated as of
September 26, 1989, as amended by the First Amendment
thereto dated as of June 28, 1994, the Second Amendment
thereto dated as of March 1, 1995, the Third Amendment
thereto dated as of February 25, 1998, and as
subsequently amended from time to time (the "Luciano
Agreement"); (vii) the Employment Agreement with Raul
E. Cesan dated as of November 1, 1998 (the "Cesan
Agreement"); (viii) the Deferred Compensation Plan (the
"Deferred Compensation Plan") (the plans and employment
agreements listed in clauses (i) through (viii) being
hereinafter collectively referred to as the "A Plans");
(ix) the Directors Deferred Stock Equivalency Program
(the "Directors Equivalency Program" or the "S Plan");
and (x) such other plans and employment agreements for
the Corporation as the Executive Compensation and
Organization Committee may designate from time to time
as A Plans or S Plans (all such plans and employment
agreements being hereinafter individually called a
"Plan" or collectively the "Plans");
WHEREAS, the Company desires to provide additional
assurance to some or all such key management employees
and directors (the "Participants") and their surviving
spouses, beneficiaries or estates under the Plans
(collectively, the "Beneficiaries") that their unfunded
retirement benefit and deferred compensation rights
under the Plans will in the future be met or
substantially met by application of the procedures set
forth herein;
WHEREAS, the Company wishes to establish separate
accounts (hereinafter the "Accounts") with respect to
some or all of the Participants in the Plans in order
to provide a source of payments as such are required
under the terms of such Plans;
WHEREAS, the Company shall, in its discretion or as
expressly required by the provisions of this Agreement,
make contributions to the Trust on behalf of the
Accounts;
WHEREAS, amounts in each separate Account, and the
earnings thereon, shall be used by the Trustee to
satisfy the liabilities of the Company under the Plan
or Plans with respect to the Participant for whom such
separate Account has been established and such
utilization shall be in accordance with the procedures
set forth herein;
WHEREAS, upon satisfaction of all liabilities of the
Company under the Plan or Plans with respect to a
Participant and Beneficiary in respect of whom a
separate Account has been established, the balance, if
any, remaining in such Account shall be allocated to
the Accounts of other Participants and Beneficiaries
for whom such Accounts have been established in
accordance with the procedures set forth herein; and
WHEREAS, upon satisfaction of all liabilities of the
Company under the Plans with respect to all
Participants in respect of whom separate Accounts have
been established, the balance, if any, remaining in
such Accounts shall revert to the Company, except that
all amounts in all such Accounts shall at all times be
subject under this Agreement to the claims of the
Company's creditors as hereinafter provided;
NOW, THEREFORE, in consideration of the premises and
mutual and independent promises herein, the parties
hereto covenant and agree as follows:
ARTICLE I
1.1 The Company hereby establishes with the Trustee
an irrevocable Trust consisting of such sums of money
and such property acceptable to the Trustee as shall
from time to time be paid or delivered to the Trustee
and the earnings and profits thereon. All such money
and property, all investments made therewith and
proceeds thereof, less the payments or other
distributions which, at the time of reference, shall
have been made by the Trustee, as authorized herein,
are referred to herein as the "Trust Property" and
shall be held by the Trustee collectively in two
separate funds (the "SERP A Fund" and the "SERP S
Fund"; each individually a "Fund" and collectively, the
"Funds"), IN TRUST, in accordance with the provisions
of this Agreement. The Trust Property relating to each
Fund may be held by the Trustee without distinction or
separation by virtue of Plan Participants' interests in
their Accounts maintained by the Trustee's Agent as
hereinafter provided. The SERP A Fund shall be
utilized to fund the retirement income, deferred
compensation liability and other obligations to or with
respect to certain key management employees and
directors pursuant to the terms of the A Plans. The
SERP S Fund shall be utilized to fund the deferred
compensation liability to directors pursuant to the
terms of the S Plans.
1.2 The Trustee shall hold, manage, invest and
otherwise administer each Fund pursuant to the terms of
this Agreement. The Trustee shall be responsible only
for contributions actually received by it hereunder.
The amount of each contribution by the Company to each
Fund shall be determined in the sole discretion of the
Company and the Trustee shall have no duty or
responsibility with respect thereto.
1.3 The Trustee's Agent shall maintain in an
equitable manner a separate Account record for each
Participant for each applicable Plan. Each account
record shall indicate the Participant's share of the
relevant Fund under such Plan. The Company shall
certify to the Trustee's Agent at the time of each
contribution to a Fund the amount of such contribution
being made in respect of each Participant under each
Plan. Each such contribution shall be credited to the
Participant's Account in SERP A Fund or SERP S Fund as
of the last business day of the calendar quarter in
which such contribution is made. Each Fund shall be
revalued by the Trustee as of the last business day of
each calendar quarter ("Valuation Date") at current
market values, as determined by the Trustee, and the
Trustee shall certify the value thereof to the
Trustee's Agent. The Trustee's Agent shall apportion
each Fund as revalued as of such Valuation Date less
any contributions made by the Company during the
preceding quarter among the Accounts of Participants in
proportion to their respective interests in each Fund
on the immediately preceding Valuation Date, except
that for purposes of such apportionment the Accounts of
Participants as of the Valuation Date shall not include
any contributions or forfeitures credited to their
Accounts as of such Valuation Date and any payments to
the Participants made after the immediately preceding
Valuation Date shall be charged to their Accounts as of
the immediately preceding Valuation Date. Where a
Participant's Account within a Fund may be applied to
provide benefits to or in respect of such Participant
under more than one Plan, the separate account record
for such Participant under each such Plan shall be
maintained by the Trustee's Agent in such manner as the
Trustee's Agent, in its sole discretion, considers to
be appropriate.
ARTICLE II
2.1 Notwithstanding any provision in this Agreement
to the contrary, if at any time while the Trust is
still in existence the Company becomes insolvent (as
defined herein), the Trustee shall upon written notice
thereof suspend the payment of all benefits from each
Fund and shall thereafter hold each Fund in suspense
for the benefit of the Company's creditors until it
receives a court order directing the disposition of
each Fund; provided, however, the Trustee may deduct or
continue to deduct its fees and expenses and other
expenses of the Trust, including taxes, pending the
receipt of such court order. The Company shall be
considered to be insolvent if (a) it is unable to pay
its debts as they fall due or (b) bankruptcy or
insolvency proceedings are initiated by its creditors
or the Company or any third party under the Bankruptcy
Act of the United States or the bankruptcy laws of any
State alleging that the Company is insolvent or
bankrupt. By its approval and execution of this
Agreement, the Company represents and agrees that its
Board of Directors and Chief Executive Officer, as from
time to time acting, shall have the fiduciary duty and
responsibility on behalf of the Company's creditors to
give to the Trustee prompt written notice of any event
of the Company's insolvency and the Trustee shall be
entitled to rely thereon to the exclusion of all
directions or claims to pay benefits thereafter made.
If the Trust Department of the Trustee receives written
allegations of an event of insolvency from a third
party, the Trustee shall request that the Company's
independent auditors determine whether the Company is
insolvent; the Trustee may conclusively rely on written
certification of solvency or insolvency received from
such auditors. If, after an event of insolvency, the
Company later becomes solvent without the entry of a
court order concerning the disposition of the Trust
Property or any bankruptcy or insolvency proceedings
referred to in (b) above are dismissed, the Company
shall by written notice so inform the Trustee and the
Trustee shall thereupon resume all its duties and
responsibilities under this Agreement without regard
for this Section 2.1 until and unless the Company again
becomes insolvent as such term is defined herein.
2.2 The Company represents and agrees that the Trust
established under this Agreement does not fund and is
not intended to fund the Plans or any other employee
benefit plan or program of the Company. Such Trust is
and is intended to be a depository arrangement with the
Trustee for the setting aside of cash and other assets
of the Company as and when it so determines in its sole
discretion for the meeting of part or all of its future
retirement obligations and deferred compensation
liability to or with respect to some or all of the
Participants and their Beneficiaries under the Plans.
Except as set forth in Article XI, contributions by the
Company to the Trust shall be in amounts determined
solely by the Company and shall be in respect of only
those Plan Participants selected by the Company from
time to time as it determines. The purpose of this
Trust is to provide funds from which retirement
benefits and deferred compensation may be payable under
the Plans and as to which Plan Participants with
Accounts hereunder and their Beneficiaries may, by
exercising the procedures set forth herein, have access
to some or all of their benefits as such become due
without having the payment of such benefits subject to
the administrative control of the Company unless the
Company is adjudicated to be bankrupt or insolvent.
The Company further represents that each of the SERP,
the Deferred Compensation Plan and the BEP is an
unfunded deferred compensation plan for a select group
of management and highly compensated employees and as
such is exempt from the application of the Employee
Retirement Income Security Act of 1974 ("ERISA") except
for the disclosure requirements applicable to such Plan
for which the Company bears full responsibility as to
compliance; and that each of the Directors Pension
Plan, Directors Equivalency Program and the employment
agreements with each of Messrs. Cesan, D'Andrade, Kogan
and Luciano is not an employee benefit plan and is not
subject to ERISA. The Company further represents that
the Plans are not qualified under Section 401 of the
United States Internal Revenue Code and therefore are
not subject to any of the Code requirements applicable
to tax-qualified plans.
ARTICLE III
3.1 By their acceptance of this Trust the Trustee
hereby agrees to the designation by the Company of Buck
Consultants, Inc. as the Trustee's Agent and Buck
Consultants, Inc. agrees to act as such Trustee's Agent
under this Trust Agreement. It is herein recognized
that said Trustee's Agent is also acting as the
independent consulting actuary of the Company with
respect to the Plans and that the Trustee shall have no
responsibility hereunder for the continued retention of
such Trustee's Agent and/or any responsibility assigned
to said Agent or its performance thereof. In the event
the Company replaces or no longer uses said firm as its
independent consulting actuary, the Trustee in its sole
discretion may, but need not, designate a new Trustee's
Agent or may continue to use the same Trustee's Agent.
Buck Consultants, Inc. and any successor Trustee's
Agent appointed hereunder may resign at any time by
delivering sixty (60) days advance written notice to
the Company and to the Trustee, in which event the
Trustee shall designate a new Trustee's Agent;
provided, however, any Trustee's Agent appointed by the
Trustee shall be independent of the Company. The
Company shall pay or reimburse the Trustee for all fees
and expenses of the Trustee's Agent and shall indemnify
and hold the Trustee harmless for any liability, loss,
suit or expense (including attorneys' fees) in
connection with or arising out of actions or omissions
of said Trustee's Agent (including any direction to or
failure to direct the Trustee) and shall indemnify and
hold the Trustee's Agent harmless for any actions or
omissions of the Trustee.
3.2 Except for the records dealing solely with the
Funds and their respective investments, which shall be
maintained by the Trustee, the Trustee's Agent shall
maintain all the Plan Participant records contemplated
by this Agreement, including the maintenance of the
separate Accounts of each Participant under this
Agreement and the maintenance of the data necessary to
determine, from time to time, the benefits of
Participants under the Plans. The Trustee's Agent
shall also prepare and distribute Participants'
statements when requested by the Company or a
Participant and shall be responsible for information
with respect to payments to Participants and their
Beneficiaries and shall perform such other duties and
responsibilities as the Trustee determines is necessary
or advisable to achieve the objectives of this
Agreement and the Trustee shall have no responsibility
therefor and shall be entitled to rely fully upon the
information provided by the Trustee's Agent.
3.3 Upon the establishment of this Trust or as soon
thereafter as practicable, the Company shall furnish to
the Trustee's Agent all the information necessary to
determine the benefits payable to or with respect to
each Participant in the Plans, including any benefits
payable after the Participant's death and the recipient
of same. The Company shall regularly, at least
annually, furnish revised up-dated information to the
Trustee's Agent. Based on the foregoing information
the Trustee's Agent shall prepare an annual benefits
statement in respect of each Participant and shall
furnish a copy of same to the Participant or his
Beneficiary and to the Company. In the event the
Company refuses or neglects to provide up-dated
Participant information, as contemplated herein, the
Trustee's Agent shall be entitled to rely upon the most
recent information furnished to it by the Company.
3.4 Upon the direction of the Company or upon the
proper application of a Participant or Beneficiary of a
deceased Participant, the Trustee's Agent shall
determine a Participant's or Beneficiary's eligibility
for benefits and the amount thereof and, if benefits
are payable, shall prepare a certification of same to
the Trustee. Such certification shall include the
amount of such benefits, the manner of payment and the
name, last known address and social security number of
the recipient and shall be updated annually and upon
receipt by the Trustee's Agent of a notice of a benefit
change under the Plan from the Company. Upon the
receipt of such certified statement and appropriate
federal, state and local tax withholding information,
the Trustee shall commence cash distributions from the
relevant Fund or Funds in accordance therewith to the
person or persons so indicated and to the Company with
respect to taxes required to be withheld and the
Trustee's Agent shall charge the Participant's Account
or Accounts established hereunder. The Trustee's Agent
shall also furnish a copy of such certification to the
Participant or to the Beneficiary of a deceased
Participant. The Trustee's Agent shall also give
written notice to the Trustee that a Participant's
Account balance has been reduced to a certain minimum
agreed to by the Trustee and the Trustee's Agent under
procedures which will enable the Trustee to cease
payment when such Account balance has been reduced to
zero. The Company shall have full responsibility for
the payment of all withholding taxes to the appropriate
taxing authority and shall furnish each Participant or
Beneficiary with the appropriate tax information form
evidencing such payment and the amount thereof.
3.5 All benefits payable from either Fund to a
Participant or his Beneficiary under a Plan or Plans
shall be charged solely against the relevant Account of
such Participant. When the Trustee's Agent determines
that all Company liabilities under all Plans to a
Participant and Beneficiary have been satisfied, the
Trustee's Agent shall prepare a certification to the
Trustee and to the Company showing the balance, if any,
remaining in such Participant's Account or Accounts
(the "Balance"). In making such determination the
Trustee's Agent may rely upon written certification
from the Company that the Participant or his
Beneficiary has died or that such Company liabilities
have been satisfied by cash payments made by the
Company or otherwise; provided, however, the Trustee's
Agent may require additional documentation of any such
Company confirmation if the Trustee's Agent considers
such to be appropriate under the circumstances. Any
Balance remaining in such Participant's Account or
Accounts shall be reallocated by the Trustee's Agent to
the Accounts of the other Participants and
Beneficiaries in the manner set forth below; provided,
however, in no event shall any Balance be allocated to
the Account of any Participant or Beneficiary
established after the Company delivers a written notice
to the Trustee and the Trustee's Agent that Accounts
established after the date of such notice shall not be
entitled to share in any reallocations under this
Section 3.5. Any such notice shall be irrevocable by
the Company notwithstanding any amendments to this
Trust Agreement made thereafter and any attempt to
revoke such notice shall be disregarded by the Trustee
and the Trustee's Agent.
Each Balance determined in accordance with the
preceding paragraph shall be maintained as a separate
Participant's Account subject to quarterly revaluation
pursuant to Section 1.3 until the following or
coinciding December 31st, as of which date the
Trustee's Agent shall aggregate and revalue all such
Balances and reallocate such amount ("Total Balances")
to the eligible Accounts of the remaining Participants
and Beneficiaries in both Funds, including Accounts
which may have previously been reduced to a zero
balance. Such reallocation shall be made:
a) by determining the amount by which the value of
each Participant's and Beneficiary's accrued
benefits under the Plan or Plans exceed the value
of his Account or Accounts as of such December
31st;
b) by adding all the amounts determined under (a);
and
c) by allocating to each Participant's and
Beneficiary's Account or Accounts the amount of
the Total Balances (not in excess of the amount
computed under (b)) in the ratio of the amount
computed for each Account under (a) to the total
amount computed under (b).
If the amount of the Total Balances exceeds the amount
computed under (b), the excess shall be maintained as a
separate Account until the following December 31st or
until any earlier termination of the Trust, at which
date the value of such Account shall be treated as an
additional Balance for purposes of this Section 3.5.
For defined benefit type plans, the value of each
Participant's and Beneficiary's accrued benefits under
the Plan or Plans shall be calculated using the
procedures and actuarial assumptions used in
terminating a single employer plan under 29 CFR Part
4044, Subpart B of the Pension Benefit Guaranty
Corporation regulations. For defined contribution type
plans and employment agreements, the value of each
Participant's and Beneficiary's accrued benefits shall
be determined in accordance with the relevant Plan or
Plans.
Upon the satisfaction of all liabilities of the
Company under the Plans to Participants and
Beneficiaries for whom Accounts have been established
hereunder, the Trustee's Agent shall prepare a
certification to the Trustee and to the Company and the
Trustee shall thereupon hold or distribute the Trust
Property in accordance with the written instructions of
the Company. At no time except (a) to the extent used
to satisfy claims of the Company's creditors in the
event of the Company's insolvency, as defined in
Section 2.1, (b) after the satisfaction of all
liabilities of the Company under the Plans in respect
of Participants and Beneficiaries having Accounts
hereunder, or (c) after a Potential Change of Control
(as defined in Section 11.1) in accordance with Section
11.2 hereof, shall any part of the Trust Property
revert to the Company. The Trustee and the Trustee's
Agent shall have no responsibility for determining
whether any Participant or Beneficiary has died and
shall be entitled to rely upon information furnished by
the Company.
3.6 Nothing provided in this Agreement shall relieve
the Company of its liabilities to pay the retirement
benefits and deferred compensation liabilities provided
under the Plans except to the extent such liabilities
have been satisfied. It is the intent of the Company
to have each Account established hereunder treated as a
separate trust designed to satisfy in whole or in part
the Company's legal liability under the Plans in
respect of the Participant for whom such Account has
been established and to have the balance of each Fund
revert to the Company only after its legal liability
under the relevant Plan or Plans has been met. The
Company, therefore, agrees that all income, deductions
and credits of each such Account belong to it as owner
for income tax purposes and will be included on the
Company's income tax returns.
ARTICLE IV
4.1 The Company shall provide the Trustee's Agent
with a certified copy of the Plans and all amendments
thereto and of the resolutions of the Board of
Directors of the Company or the relevant subsidiary
approving the Plans and all amendments thereto,
promptly upon their adoption. Any action by the
Company pursuant to the terms of this Trust Agreement
shall, except as otherwise provided herein, be by
written instrument signed by an officer of the Company
authorized to act hereunder or any delegee authorized
to act for the Company. After the execution of this
Agreement, the Company shall promptly file with the
Trustee and the Trustee's Agent a certified list of the
names and specimen signatures of the officers of the
Company and any delegee authorized to act for it. The
Company shall promptly notify the Trustee and the
Trustee's Agent of the addition or deletion of any
person's name to or from such list, respectively.
Until receipt by the Trustee and/or the Trustee's Agent
of notice that any person is no longer authorized so to
act, the Trustee or the Trustee's Agent may continue to
rely on the authority of the person. All
certifications, notices and directions by any such
person or persons to the Trustee or the Trustee's Agent
shall be in writing signed by such person or persons.
The Trustee and the Trustee's Agent may rely on any
such certification, notice or direction purporting to
have been signed by or on behalf of such person or
persons that the Trustee or the Trustee's Agent
believes to have been signed thereby. The Trustee and
the Trustee's Agent may rely on any certification,
notice or direction of the Company that the Trustee or
the Trustee's Agent believes to have been signed by a
duly authorized officer or agent of the Company. The
Trustee and the Trustee's Agent shall have no
responsibility for acting or not acting in reliance
upon any notification believed by the Trustee or the
Trustee's Agent to have been so signed by a duly
authorized officer or agent of the Company. The
Company shall be responsible for keeping accurate books
and records with respect to the employees and Directors
of the Company, their compensation and their rights and
interests in the Funds under the Plans.
4.2 The Company shall make its contributions to the
Trust in accordance with appropriate corporate action
and the Trustee shall have no responsibility with
respect thereto, except to add such contributions to
the appropriate Fund or Funds.
4.3 The Company shall indemnify and hold harmless
the Trustee for any liability or expenses, including
without limitation reasonable attorneys' fees, incurred
by the Trustee with respect to holding, managing,
investing or otherwise administering the Funds or
carrying out its duties hereunder, except to the extent
that such liabilities or expenses arise from actions
constituting gross negligence or willful misconduct by
the Trustee under this Agreement.
4.4 The Company shall indemnify and hold harmless
the Trustee's Agent for any liability or expenses,
including without limitation reasonable attorneys'
fees, incurred by the Trustee's Agent with respect to
keeping the records for Participants' Accounts,
reporting thereon to Participants, certifying benefit
information to the Trustee, determining the status of
Accounts and benefits hereunder and otherwise carrying
out its obligations under this Agreement, except to the
extent that such liabilities or expenses arise from
actions constituting negligence or willful misconduct
by the Trustee's Agent.
ARTICLE V
5.1 The Trustee shall not be liable in discharging
its duties hereunder, including without limitation its
duty to invest and reinvest the Trust Property relating
to each Fund, if it acts in good faith and in
accordance with the terms of this Agreement with
respect to the Trustee's responsibilities under this
Agreement.
5.2 Subject to investment guidelines agreed to in
writing from time to time by the Company and the
Trustee, the Trustee shall have the power in investing
and reinvesting the Trust Property with respect to each
Fund, in its sole discretion:
(a) To invest and reinvest in any property, real,
personal or mixed, wherever situated and whether
or not productive of income or consisting of
wasting assets, including without limitation,
common and preferred stocks, bonds, notes,
debentures (including convertible stocks and
securities but not including any stock or security
of the Trustee, the Company or any affiliate
thereof), futures, option and forward contracts,
leaseholds, mortgages, certificates of deposit or
demand or time deposits (including any such
deposits with the Trustee), shares of investment
companies and mutual funds, interests in
partnerships and trusts, insurance policies and
annuity contracts, and oil, mineral or gas
properties, royalties, interests or rights,
without being limited to the classes of property
in which trustees are authorized to invest by any
law or any rule of court of any state and without
regard to the proportion any such property may
bear to the entire amount of each Fund; provided,
however, the Trustee is authorized to receive and
hold any stock or security of the Company which is
contributed by the Company to either Fund and the
Trustee shall not sell any such stock or security
of the Company until the Company so directs;
(b) To invest and reinvest all or any portion of the
Trust Property held in the Funds collectively
through the medium of any common, collective or
commingled trust fund that may be established and
maintained by the Trustee, subject to the
instrument or instruments establishing such trust
fund or funds and with the terms of such
instrument or instruments, as from time to time
amended, being incorporated into this Agreement to
the extent of the equitable share of the Funds in
any such common collective or commingled trust
fund;
(c) To retain any property at any time received by
the Trustee;
(d) Subject to subsection (a) above, to sell or
exchange any property held by it at public or
private sale, for cash or on credit, to grant and
exercise options for the purchase or exchange
thereof, to exercise all conversion or
subscription rights pertaining to any such
property and to enter into any covenant or
agreement to purchase any property in the future;
(e) To participate in any plan of reorganization,
consolidation, merger, combination, liquidation or
other similar plan relating to property held by it
and to consent to or oppose any such plan or any
action thereunder or any contract, lease,
mortgage, purchase, sale or other action by any
person;
(f) To deposit any property held by it with any
protective, reorganization or similar committee,
to delegate discretionary power thereto, and to
pay part of the expenses and compensation thereof
and any assessments levied with respect to any
such property so deposited;
(g) To extend the time of payment of any obligation
held by it;
(h) To hold uninvested any moneys received by it,
without liability for interest thereon, until such
moneys shall be invested, reinvested or disbursed;
(i) To exercise all voting or other rights with
respect to any property held by it and to grant
proxies, discretionary or otherwise;
(j) For the purposes of the Trust, to borrow money
from others, to issue its promissory note or notes
therefor, and to secure the repayment thereof by
pledging any property held by it;
(k) To manage, administer, operate, insure, repair,
improve, develop, preserve, mortgage, lease or
otherwise deal with, for any period, any real
property or any oil, mineral or gas properties,
royalties, interests or rights held by it directly
or through any corporation, either alone or by
joining with others, using other Trust assets for
any such purposes, to modify, extend, renew, waive
or otherwise adjust any provision of any such
mortgage or lease and to make provision for
amortization of the investment in or depreciation
of the value of such property;
(l) To employ suitable agents and counsel, who may
be counsel to the Company or the Trustee and to
pay their reasonable expenses and compensation
from the relevant Fund to the extent not paid by
the Company;
(m) To cause any property held by it to be
registered and held in the name of one or more
nominees, with or without the addition of words
indicating that such securities are held in a
fiduciary capacity, and to hold securities in
bearer form;
(n) To settle, compromise or submit to arbitration
any claims, debts or damages due or owing to or
from the Trust, respectively, to commence or
defend suits or legal proceedings to protect any
interest of the Trust, and to represent the Trust
in all suits or legal proceedings in any court or
before any other body or tribunal; provided,
however, that the Trustee shall not be required to
take any such action unless it shall have been
indemnified by the Company to its reasonable
satisfaction against liability or expenses it
might incur therefrom;
(o) To organize under the laws of any state a
corporation or trust for the purpose of acquiring
and holding title to any property which it is
authorized to acquire hereunder and to exercise
with respect thereto any or all of the powers set
forth herein; and
(p) Generally, to do all acts, whether or not
expressly authorized, that the Trustee may deem
necessary or desirable for the protection of the
Trust Property.
Notwithstanding the foregoing, the Trustee shall upon
the written direction of the Company invest all or part
of the amount to the credit of any Participant's
Account in a commercial annuity or insurance contract
selected by the Company and the Trustee shall have no
responsibility for any such investment other than as
owner and custodian thereof; provided, however, that
following a Change of Control (a "Change of Control"
for purposes of any one of the SERP, BEP, Cesan
Agreement, D'Andrade Agreement or Kogan Agreement shall
constitute a Change of Control for purposes of this
Agreement), the Company may only direct the Trustee to
invest in a commercial annuity or insurance contract of
an insurance company that is rated at least AA (or its
equivalent) by Standard & Poor's or Moody's. The
Trustee shall have no duty or obligation to review or
confirm such rating. The Company shall promptly notify
Trustee of any Change of Control or Potential Change of
Control (as defined in Section 11.1). Trustee may
conclusively rely upon such notice and shall have no
duty to determine whether a Change of Control or
Potential Change of Control has occurred.
5.3 The Company may at any time direct the Trustee
to segregate all or a portion of each Fund in a
separate investment account or accounts and may appoint
one or more investment managers to direct the
investment and reinvestment of each such investment
account or accounts. In such event, the Company shall
notify the Trustee of the appointment of each such
investment manager. Thereafter, the Trustee shall make
every sale or investment with respect to such
investment account as directed in writing by the
investment manager. It shall be the duty of the
Trustee to act strictly in accordance with each
direction. The Trustee shall be under no duty to
question any such direction of the investment manager,
to review any securities or other property held in any
such investment account or accounts acquired by it
pursuant to such directions or to make any
recommendations to the investment managers with respect
to such securities or other property. Notwithstanding
the foregoing, the Trustee, without obtaining prior
approval or direction from an investment manager, shall
invest cash balances held by it from time to time in
short term cash equivalents including, but not limited
to, through the medium of any short term common,
collective or commingled trust fund established and
maintained by the Trustee subject to the instrument
establishing such trust fund, U.S. Treasury Bills,
commercial paper (including such forms of commercial
paper as may be available through the Trustee's Trust
Department), certificates of deposit, and similar type
securities, with a maturity not to exceed fifteen
months; and, furthermore, sell such short term
investments as may be necessary to carry out the
instructions of an investment manager regarding more
permanent type investment and directed distributions.
The Trustee shall not be liable or responsible for any
loss resulting to either Fund by reason of any sale or
purchase of an investment directed by an investment
manager nor by reason of the failure to take any action
with respect to any investment which was acquired
pursuant to any such direction in the absence of
further directions of such investment manager, or
solely as a result of the performance by the Trustee or
its officers, employees or agents, of any custodial,
reporting, recording or bookkeeping functions with
respect to any such investment account, except to the
extent that such performance constituted gross
negligence or willful misconduct on the part of the
Trustee. Notwithstanding anything in this Agreement to
the contrary, the Trustee shall be indemnified and
saved harmless by the Company from and against any and
all personal liability to which the Trustee may be
subjected by carrying out any directions of an
investment manager issued pursuant hereto or for
failure to act in the absence of directions of the
investment manager including all expenses reasonably
incurred in its defense in the event the Company fails
to provide such defense; provided, however, the Trustee
shall not be so indemnified if it participates
knowingly in, or knowingly undertakes to conceal, an
act or omission of an investment manager, having actual
knowledge that such act or omission is a breach of a
fiduciary duty; provided further, however, that the
Trustee shall not be deemed to have knowingly
participated in or knowingly undertaken to conceal an
act or omission of an investment manager with knowledge
that such act or omission was a breach of fiduciary
duty by merely complying with directions of an
investment manager or for failure to act in the absence
of directions of an investment manager. The Trustee
may rely upon any order, certificate, notice, direction
or other documentary confirmation purporting to have
been issued by the investment manager which the Trustee
believes to be genuine and to have been issued by the
investment manager. The Trustee shall not be charged
with knowledge of the termination of the appointment of
any investment manager until it receives written notice
thereof from the Company.
5.4 No person dealing with the Trustee shall be
under any obligation to see to the proper application
of any money paid or property delivered to the Trustee
or to inquire into the Trustee's authority as to any
transaction. The Trustee's Agent's obligations are
limited solely to those explicitly set forth herein and
the Trustee's Agent shall have no responsibility,
authority or control, direct or indirect, over the
maintenance or investment of the Trust Property and
shall have no obligation in respect of the Trustee or
the Trustee's compliance with the Trustee's Agent's
certifications to the Trustee.
5.5 The Trustee shall distribute cash or property
from the Funds in accordance with Article III hereof.
The Trustee may make any distribution required
hereunder by mailing its check for the specified
amount, or delivering the specified property, to the
person to whom such distribution or payment is to be
made, at such address as may have been last furnished
to the Trustee, or if no such address shall have been
so furnished, to such person in care of the Company, or
(if so directed by the Company) by crediting the
Account of such person or by transferring funds to such
person's Account by bank or wire transfer.
5.6 If at any time there is no person authorized to
act under this Agreement in behalf of the Company, the
Board of Directors of the Company shall have the
authority to act hereunder.
ARTICLE VI
6.1 The Company shall pay any Federal, state or
local taxes on the Trust Property, or any part thereof,
and on the income therefrom.
6.2 The Company shall pay to the Trustee its
reasonable expenses for the management and
administration of the Funds, including without
limitation reasonable expenses of counsel and other
agents employed by the Trustee, and reasonable
compensation for its services as Trustee hereunder in
accordance with its Published Schedule of Compensation
in effect from time to time. The Company shall also
pay to the Trustee for transmission to the Trustee's
Agent the fees and expenses of the Trustee's Agent,
unless the Company pays such directly to the Trustee's
Agent. Such expenses, fees and compensation shall be a
charge on the Funds and shall constitute a lien in
favor of the Trustee and Trustee's Agent until paid by
the Company.
ARTICLE VII
7.1 The Trustee shall maintain records with respect
to each Fund that show all its receipts and
disbursements hereunder. The records of the Trustee
with respect to the Funds shall be open to inspection
by the Company, or its representatives, at all
reasonable times during normal business hours of the
Trustee and may be audited not more frequently than
once each fiscal year by an independent certified
public accountant engaged by the Company; provided,
however, the Trustee shall be entitled to additional
compensation from the Company in respect of audits or
auditors' requests which the Trustee determines to
exceed the ordinary course of the usual scope of such
examinations of its records.
7.2 Within a reasonable time after the close of each
fiscal year of the Company (or as agreed to by the
Company and Trustee), or upon termination of the duties
of the Trustee hereunder, the Trustee shall prepare and
deliver to the Company a statement of transactions
reflecting its acts and transactions as Trustee during
such fiscal year, portion thereof or during such period
from the close of the last fiscal year or last
statement period to the termination of the Trustee's
duties, respectively, including a statement of the then
current value of each Fund. The Trustee's Agent shall
also prepare and furnish to the Company a statement of
the then current value of each Account. Any such
statement shall be deemed an Account stated and
accepted and approved by the Company, and the Trustee
shall be relieved and discharged, as if such Account
had been settled and allowed by a judgment or decree of
a court of competent jurisdiction, unless protested by
written notice to the Trustee within sixty (60) days of
receipt thereof by the Company.
The Trustee shall have the right to apply at any time
to a court of competent jurisdiction for judicial
settlement of any Account of the Trustee not previously
settled as herein provided or for the determination of
any question of construction or for instructions. In
any such action or proceeding it shall be necessary to
join as parties only the Trustee and the Company
(although the Trustee may also join such other parties
as it may deem appropriate), and any judgment or decree
entered therein shall be conclusive.
ARTICLE VIII
8.1 The Trustee may resign at any time by delivering
written notice thereof to the Company; provided,
however, that no such resignation shall take effect
until the earlier of (i) sixty (60) days from the date
of delivery of such notice to the Company or (ii) the
appointment of a successor trustee.
8.2 Subject to Section 11.3, the Trustee may be
removed at any time by the Company, pursuant to a
resolution of the Board of Directors of the Company,
upon delivery to the Trustee of a certified copy of
such resolution and sixty (60) days' written notice,
unless such notice period is waived in whole or in part
by the Trustee, of (i) such removal and (ii) the
appointment of a successor trustee.
8.3 Except as otherwise provided in Section 11.3,
upon the resignation or removal of the Trustee, a
successor trustee shall be appointed by the Company.
Such successor trustee shall be a bank or trust company
which is established under the laws of the United
States or a State within the United States and which is
not related, directly or indirectly, to the Company.
Such appointment shall take effect upon the delivery to
the Trustee of (a) a written appointment of such
successor trustee, duly executed by the Company, and
(b) a written acceptance by such successor trustee,
duly executed thereby. Any successor trustee shall
have all the rights, powers and duties granted the
Trustee hereunder.
8.4 If, within sixty (60) days of the delivery of
the Trustee's written notice of resignation, a
successor trustee shall not have been appointed, the
Trustee may apply to any court of competent
jurisdiction for the appointment of a successor
trustee.
8.5 Upon the resignation or removal of the Trustee
and the appointment of a successor trustee, and after
the acceptance and approval of the Trustee's accounting
of the Trust Property, the Trustee shall transfer and
deliver the Trust Property to such successor. Under no
circumstances shall the Trustee transfer or deliver the
Trust Property to any successor which is not a bank or
trust company as hereinabove defined.
ARTICLE IX
9.1 The Trust established pursuant to this Agreement
may not be terminated by the Company prior to the
satisfaction of all liabilities with respect to all
Participants in the Plans and their Beneficiaries.
Upon receipt of a written certification from the
Trustee's Agent that all liabilities have been
satisfied with respect to all Participants in the Plans
and their Beneficiaries, the Company pursuant to a
resolution of its Board of Directors may terminate the
Trust upon delivery to the Trustee of (a) a certified
copy of such resolution, (b) an original certification
of the Trustee's Agent that all such liabilities have
been satisfied and (c) a written instrument of
termination duly executed and acknowledged in the same
form as this Agreement.
9.2 Upon the termination of the Trust in accordance
with Section 9.1, the Trustee shall, after the
acceptance and approval of its account, distribute the
Trust Property to the Company. Upon completing such
distribution, the Trustee shall be relieved and
discharged. The powers of the Trustee shall continue
as long as any part of either Fund remains in its
possession.
9.3 The Company may at any time liquidate the
Account of any Participant under this Agreement in the
event the amount to the credit of such Account falls
below $5,000. In such event, the Trustee, upon receipt
of written instructions from the Company, shall
distribute in cash the amount to the credit of any such
terminated Account, as determined by the Trustee's
Agent, to the Participant in respect of whom such
Account was established or, if such Participant is dead
or incompetent, to his Beneficiary.
ARTICLE X
10.1 This Agreement may be amended, in whole or in
part, at any time and from time to time, by the
Company, pursuant to a resolution of the Board of
Directors thereof by delivery to the Trustee and the
Trustee's Agent of a certified copy of such resolution
and a written instrument duly executed and acknowledged
in the same form as this Agreement, except that the
duties and responsibilities of the Trustee and the
Trustee's Agent shall not be increased without the
Trustee's or the Trustee's Agent's written consent;
provided, however, any such amendment affecting any
Account, the procedures for distribution thereof or the
reallocation of Balances under Section 3.5 shall not
become effective until sixty (60) days after a copy of
such amendment has been delivered by registered mail by
the Company or the Trustee's Agent to each Participant
or his Beneficiary. In the event the Company, Trustee
or Trustee's Agent receives written objections to such
amendment from such person within such sixty (60) day
period, the party receiving such objections shall
provide a copy of same to the other parties and such
amendment shall be ineffective and void in respect of
the Participant or Beneficiary so objecting to the
amendment.
ARTICLE XI
11.1 Notwithstanding anything to the contrary
herein, in the event of a Potential Change of Control
(as defined below), the Company shall contribute to
Fund A an amount (the "Change of Control Contribution")
as determined by Trustee's Agent sufficient to fund one
hundred percent (100%) of (a) each Participant's and
Beneficiary's projected benefits under the SERP and the
BEP, based on the assumptions that each of the
Participants under those Plans is retiring immediately
following the Change of Control and has elected a lump
sum payout, and (b) any and all benefits (cash and non-
cash) payable under the employment agreements of
Messrs. Cesan, Kogan and D'Andrade, assuming
termination immediately following the Change of
Control, payable as a lump sum, whether or not such
Participant then has an account in either of the Funds.
For purposes of this Agreement, "Potential Change of
Control" means (x) the public announcement by any
person (including without limitation the Company) of an
intention, commitment or agreement to take any actions
that, if consummated, would result in a Change of
Control, or (y) the adoption by the Board of Directors
of the Company of a resolution to the effect that for
purposes of this Trust a "Potential Change of Control"
has occurred.
11.2 At any time after the earlier of (a) the second
anniversary of a Potential Change of Control, so long
as the Board has not determined that it is reasonably
certain that a Change of Control will in fact be
consummated as a result of the Potential Change of
Control or any subsequent event, and (b) the date on
which it first becomes reasonably certain that a Change
of Control will not be consummated as a result of the
Potential Change of Control or any subsequent event, as
determined by the Board of Directors of the Company or
its delegee, the Company, at its written request to the
Trustee, shall be entitled to have the Change of
Control Contribution, as adjusted for gains and losses,
returned. Trustee shall have no duty or obligation to
make such determination or review the Company's
determination with regard to the occurrence or status
of a Potential Change of Control.
11.3 Following a Change of Control, the Company
shall not be permitted to remove the Trustee or the
Trustee's Agent for three years. During this three-
year period, in the event of the fraud, gross
negligence or willful misconduct of the Trustee or the
Trustee's Agent, the Company shall be permitted to
apply to a court of competent jurisdiction for
replacement of such Trustee or Trustee's Agent. All
fees charged by the Trustee and the Trustee's Agent
during this three-year period must be customary for
similar accounts of Trustee or Trustee's Agent, as the
case may be. If the Trustee or Trustee's Agent resigns
during this three-year period, the appointment by the
Company of a new Trustee or Trustee's Agent would be
subject to approval by a majority in interest of all
affected Participants.
ARTICLE XII
12.1 This Agreement shall be construed and
interpreted under, and the Trust hereby created shall
be governed by, the laws of the State of Illinois
insofar as such laws do not contravene any applicable
Federal laws, rules or regulations.
12.2 Neither the gender nor the number (singular or
plural) of any word shall be construed to exclude
another gender or number when a different gender or
number would be appropriate.
12.3 No right or interest of any Participant under
a Plan in either Fund shall be transferable or
assignable, except by will or the laws of descent and
distribution, or shall be subject to alienation,
anticipation or encumbrance, and no right or interest
of any Participant or Beneficiary in any Plan or in
either Fund shall be subject to any garnishment,
attachment or execution. A Participant may designate in
writing a Beneficiary of such Participant's right or
interest in the event of his or her death in accordance
with the terms of the relevant Plan. Notwithstanding
the foregoing, the Trust Property shall at all times
remain subject to claims of creditors of the Company in
the event the Company is adjudicated to be bankrupt or
insolvent as provided herein and Participants and
Beneficiaries shall have no claims to either Fund
superior to that of any other unsecured creditors in
such event.
12.4 The Company agrees that by the establishment
of this Trust it hereby forgoes any judicial review of
certifications by the Trustee's Agent as to the benefit
payable to any persons hereunder. If a dispute arises
as to the amounts or timing of any such benefits or the
persons entitled thereto under a Plan or this
Agreement, the Company agrees that such dispute shall
be resolved by binding arbitration proceedings
initiated in accordance with the rules of the American
Arbitration Association and that the results of such
proceedings shall be conclusive and shall not be
subject to judicial review. It is expressly understood
that pending the resolution of any such dispute,
payment of benefits shall be made and continued (except
in the event of the Company's insolvency) by the
Trustee in accordance with the certification of the
Trustee's Agent and that the Trustee and the Trustee's
Agent shall have no liability with respect to such
payments. The Company also agrees to pay the entire
cost of any arbitration or legal proceeding including
the legal fees of the Trustee, the Trustee's Agent and
the Plan Participant or the Beneficiary of any deceased
Plan Participant regardless of the outcome of any such
proceeding and until so paid the expenses thereof shall
be a charge on and lien against the Funds.
12.5 This Agreement shall be binding upon and inure
to the benefit of any successor to the Company or its
business as the result of merger, consolidation,
reorganization, transfer of assets or otherwise and any
subsequent successor thereto. In the event of any such
merger, consolidation, reorganization, transfer of
assets or other similar transaction, the successor to
the Company or its business or any subsequent successor
thereto shall promptly notify the Trustee and Trustee's
Agent in writing of its successorship and furnish the
Trustee and the Trustee's Agent with the information
specified in Section 4.1 of this Agreement. In no
event shall any such transaction described herein
suspend or delay the rights of Plan Participants or the
Beneficiaries of deceased Participants to receive
benefits hereunder.
12.6 This Agreement may be executed in any number
of counterparts, each of which shall be deemed to be an
original, but all of which shall together constitute
only one Agreement.
12.7 Communications to the Trustee shall be sent to
The Northern Trust Company, 50 South LaSalle Street,
Chicago, Illinois 60675 or to such other address as the
Trustee may specify in writing. Communications to the
Trustee's Agent shall be sent to Buck Consultants,
Inc., One Pennsylvania Plaza, New York, New York 10119-
4798 or to such other address as the Trustee's Agent
may specify in writing. No communication shall be
binding upon the Trustee or Trustee's Agent until it is
received by the Trustee or Trustee's Agent.
Communications to the Company shall be sent to the
Company's principal offices or to such other address as
the Company may specify in writing.
12.8 In the event any Participant or his
Beneficiary is determined to be subject to Federal
income tax on any amount to the credit of his Account
under this Agreement prior to the time of payment
hereunder, the entire amount so taxable shall be
distributed by the Trustee as of the next Valuation
Date to such Participant or Beneficiary. Such
distribution shall be at the direction of the Company
or the Trustee's Agent upon receipt of documentation
from the Company or the Trustee's Agent indicating that
an amount to the credit of a Participant's account is
subject to Federal income tax. An amount to the credit
of a Participant's Account shall be determined to be
subject to Federal income tax upon the earliest of: (a)
a final determination by the United States Internal
Revenue Service addressed to the Participant or his
Beneficiary which is not appealed to the courts; (b) a
final determination by the United States Tax Court or
any other Federal Court affirming any such
determination by the Internal Revenue Service; or (c)
an opinion by counsel, satisfactory to the Company,
addressed to the Company, the Trustee and the Trustee's
Agent, that, by reason of Treasury Regulations,
amendments to the Internal Revenue Code, published
Internal Revenue Service rulings, court decisions or
other substantial precedent, amounts to the credit of
Participants' Accounts hereunder are subject to Federal
income tax prior to payment. The Company shall
undertake at its sole expense to defend any tax claims
described herein which are asserted by the Internal
Revenue Service against any Participant or Beneficiary,
including attorney fees and costs of appeal, and shall
have the sole authority to determine whether or not to
appeal any determination made by the Service or by a
lower court. The Company also agrees to reimburse any
Participant or Beneficiary for any interest or
penalties in respect of tax claims hereunder upon
receipt of documentation of same. Any distributions
from either Fund to a Participant or Beneficiary under
this Section 12.8 shall be applied in accordance with
the provisions of the relevant Plan or Plans to reduce
Company liabilities to such Participant and/or
Beneficiary under such Plan or Plans; provided,
however, that in no event shall any Participant,
Beneficiary or estate of any Participant or Beneficiary
have any obligation to return all or any part of such
distribution to the Company if such distribution
exceeds benefits payable under the relevant Plan or
Plans.
IN WITNESS WHEREOF, the parties hereto have caused
this Trust Agreement to be duly executed and their
respective corporate seals to be hereto affixed this
1st day of November, 1998.
Attest: THE NORTHERN TRUST COMPANY
By_____________________________
Its Vice President
Attest: SCHERING-PLOUGH CORPORATION
By_____________________________
Its Vice President
Attest: BUCK CONSULTANTS, INC.
By____________________________
Its
50292v1
- - 56 -
37032-16
<TABLE>
Exhibit 12
SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in millions)
<CAPTION>
Year Ended December 31,
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Income Before Income Taxes from
Continuing Operations . . . . . . $2,326 $1,913 $1,606 $1,395 $1,227
Add : Fixed Charges
Interest Expense . . . . . . . . . 19 40 45 57 56
1/3 Rentals. . . . . . . . . . . . 19 15 12 11 9
Capitalized Interest . . . . . . . 9 15 11 11 11
Total Fixed Charges. . . . . . . 47 70 68 79 76
Less: Capitalized Interest . . . . . 9 15 11 11 11
Add : Amortization of
Capitalized Interest. . . . . . . . 7 5 5 5 4
Earnings Before Income Taxes and
Fixed Charges (other than
Capitalized Interest) . . . . . . . $2,371 $1,973 $1,668 $1,468 $1,296
Ratio of Earnings to Fixed Charges . 50 28 25 19 17
"Earnings" consist of income before income taxes and fixed charges (other than
capitalized interest). "Fixed charges" consist of interest expense, capitalized
interest and one-third of rentals which Schering-Plough believes to be a reasonable
estimate of an interest factor on leases.
</TABLE>
Exhibit 13
Financial Section of the Company's 1998 Annual Report to
Shareholders.
Management's Discussion and Analysis of Operations and Financial
Condition
Net Sales
Consolidated net sales in 1998 totaled $8.1 billion, an increase
of 19 percent over 1997, due to volume growth of 19 percent and price
increases of 2 percent, tempered by unfavorable foreign exchange of 2
percent. The acquisition of the Mallinckrodt animal health business in June
1997 favorably impacted sales growth by 3 percent. The sales of this
business were included for only half the year in 1997 and for the full
year in 1998.
The consolidated net sales increase reflects significant gains
for the CLARITIN brand of nonsedating antihistamines. Worldwide CLARITIN
brand net sales totaled $2.3 billion in 1998 compared with $1.7 billion in
1997.
Consolidated 1997 net sales of $6.8 billion advanced 20 percent
over 1996, reflecting volume growth of 20 percent and price
increases of 3 percent, tempered by unfavorable foreign exchange
of 3 percent. The Mallinckrodt animal health acquisition
favorably impacted sales growth by 3 percent. The consolidated
net sales increase reflects worldwide CLARITIN brand sales growth
of 50 percent in 1997.
Worldwide 1998 pharmaceutical sales of $7.3 billion rose 20
percent over 1997, due to volume growth of 20 percent and price
increases of 2 percent, moderated by unfavorable foreign exchange
of 2 percent. Worldwide sales of pharmaceutical products in 1997
increased 21 percent over 1996, reflecting volume growth of 22
percent and price increases of 3 percent, moderated by
unfavorable foreign exchange of 4 percent.
Domestic prescription pharmaceutical product sales grew 25
percent in 1998. Sales of allergy/respiratory products increased
31 percent, due to continued strong growth of the CLARITIN
brand; increases in the nasal inhaled steroid products, which
include VANCENASE allergy products and NASONEX, a once-daily
corticosteroid for allergic rhinitis; and VANCERIL asthma
products.
Domestic sales of anti-infective and anticancer products rose 26
percent compared with 1997, due to INTRON A and REBETRON
Combination Therapy, containing REBETOL (ribavirin) Capsules and
INTRON A (interferon alfa-2b, recombinant) Injection, for the
treatment of chronic hepatitis C. These sales increases were
moderated by lower sales of EULEXIN, a prostate cancer therapy,
due to generic and branded competition, and CEDAX, a broad-
spectrum oral cephalosporin antibiotic, due to lower market share
and a decline in the cephalosporin market.
U. S. sales of cardiovascular products advanced 18 percent,
reflecting market expansion and market share growth for IMDUR, an
oral nitrate for angina, and K-DUR, a potassium supplement. Late
in 1998, a generic oral nitrate entered the market and the
Company responded with its own generic product. Dermatological
product sales increased 12 percent, due to higher sales of
LOTRISONE, an antifungal/anti-inflammatory cream.
Domestic prescription pharmaceutical sales in 1997 advanced 29
percent versus 1996, led by gains in allergy/respiratory
products, primarily reflecting strong growth of the CLARITIN
brand and increases for VANCERIL asthma and VANCENASE allergy
products. Sales growth was recorded in all other product
categories.
In 1998, sales of international ethical pharmaceutical products
increased 6 percent. Excluding the impact of foreign exchange,
sales would have risen approximately 11 percent. The
following international ethical pharmaceutical sales commentary
excludes the impact of foreign exchange.
International sales of allergy/respiratory products advanced 10
percent over 1997, led by growth for the CLARITIN brand and the
launch of NASONEX in several markets. Cardiovascular product
sales rose 19 percent and sales of dermatological products
increased 11 percent. International sales of anti-infective and
anticancer products rose 6 percent in 1998, reflecting higher
sales of CEDAX and INTRON A, tempered by lower sales of EULEXIN.
In 1997, international ethical pharmaceutical sales increased 13
percent over 1996, led by growth for the CLARITIN brand, while
all other therapeutic areas also contributed to the increase.
Worldwide sales of animal health products increased 66 percent in
1998. Adjusting for the 1997 acquisition of the Mallinckrodt
animal health business, 1998 sales would have increased 12
percent. Sales growth was driven by BANAMINE, a non-steroidal
anti-inflammatory agent, and NUFLOR, a broad-spectrum, multi-
species antibiotic. Sales of animal health products in 1997
increased 16 percent over 1996 after adjusting for the 1997
acquisition and foreign exchange.
Sales of health care products in 1998 increased 10 percent
compared with 1997. Price increases accounted for 3 percent of
the sales increase. Foot care product sales rose 12 percent, due
primarily to DR. SCHOLL'S product line extensions and market
share growth for antifungal products. Sun care sales were up 22
percent due to early 1999 season purchases. Over-the-counter
(OTC) product sales decreased 2 percent.
In 1997, health care product sales increased 10 percent
reflecting volume increases of 9 percent and price increases of
1 percent. The sales increase largely reflects higher sales of
sun care and foot care products, tempered by lower OTC product
sales.
Income Before Income Taxes
Income before income taxes totaled $2.3 billion in 1998, an
increase of 22 percent over 1997. In 1997, income before income
taxes was $1.9 billion, up 19 percent over $1.6 billion in 1996.
<TABLE>
Summary of Costs and Expenses:
(Dollars in millions)
<CAPTION>
% Increase
1998 1997 1996
1998/97 1997/96
<S> <C> <C> <C> <C> <C>
Cost of sales . . . . . . $1,601 $1,308 $1,078 22 % 21 %
% of net sales. . . . . . 19.8 % 19.3 % 19.1 %
Selling, general and
administrative. . . . . $3,141 $2,664 $2,209 18 % 21 %
% of net sales . . . . . 38.9 % 39.3 % 39.1 %
Research and development. $1,007 $ 847 $ 723 19 % 17 %
% of net sales . . . . . 12.5 % 12.5 % 12.8 %
</TABLE>
Cost of sales as a percentage of net sales in 1998 increased
versus 1997, primarily due to higher royalties and the inclusion
of Mallinckrodt animal health products, which generally have
lower gross margins, partially offset by a favorable sales mix of
other pharmaceutical products. The increase of 1997 cost of
sales as a percentage of net sales versus 1996 reflects the
inclusion of Mallinckrodt animal health products during the
second half of 1997, partially offset by a favorable sales mix of
other pharmaceutical products.
Selling, general and administrative expenses in 1998 decreased as
a percentage of sales compared with 1997, as sales growth
outpaced expansion of the field force and increased promotional
and selling-related spending, primarily for CLARITIN, NASONEX and
new products such as INTEGRILIN and REBETRON Combination Therapy.
The 1997 increase as a percentage of sales from 1996 reflects an
expansion of the field force and increased promotional and
selling-related spending, primarily for CLARITIN and INTRON A.
Research and development expenses totaled $1.0 billion, or 19
percent above 1997, and represented 12.5 percent of sales in
1998. The higher spending reflects the Company's funding of both
internal research efforts and research collaborations with
various partners to develop a steady flow of innovative products.
Income Taxes
The Company's effective tax rate was 24.5 percent in 1998, 1997
and 1996. The effective tax rate for each period was lower than
the U.S. statutory income tax rate, principally due to tax
incentives in certain jurisdictions where manufacturing
facilities are located. For additional information, see "Income
Taxes" in the Notes to Consolidated Financial Statements.
Net Income
Net income in 1998 increased 22 percent to $1.8 billion. Net
income in 1997 increased 19 percent over 1996. Differences in
year-to-year exchange rates reduced net income growth in 1998 and
1997. After eliminating these exchange differences, net income
would have risen approximately 24 percent in 1998 and 22 percent
in 1997.
Earnings Per Common Share
Basic earnings per common share rose 22 percent in 1998 to $1.20
and 20 percent in 1997 to $0.98. Diluted earnings per common share rose
22 percent in 1998 to $1.18 and 18 percent in 1997 to $0.97. The
strengthening of the U.S. dollar against most foreign currencies
decreased growth in earnings per common share in 1998 and 1997.
Excluding the impact of exchange rate fluctuations, diluted
earnings per common share would have increased approximately
24 percent in 1998 and 22 percent in 1997.
Over the past three years, the Board of Directors has authorized
several share repurchase programs. Under these programs,
approximately 32 million common shares were repurchased during
1998, 1997 and 1996. A $1 billion program was authorized in
September 1997 and commenced in January 1998. At December 31,
1998, approximately 3.4 million shares had been acquired under
the 1997 authorization and the program was approximately 14
percent complete.
Year 2000
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. With the arrival of the Year 2000, these systems and
microprocessors may encounter operating problems due to their
inability to distinguish years after 1999 from years preceding
1999. As a result, the Company is engaged in 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 December 31, 1998:
IT Systems Non-IT Systems
Inventory systems 100% 70%
Identify critical and
non-critical systems 100% 70%
Remediate or replace systems 95% 40%
Testing systems 95% 35%
The Company expects to be 100 percent complete with all phases of
this project by December 31, 1999.
The estimated cost of the Year 2000 project is approximately $95
million. The increase in this estimate from the Company's
previously reported amount is due to an increase in the number of
non-IT systems within the Company's research operation that the
Company believes will require remediation or replacement.
Approximately 55 percent of the $95 million will be of an expense
nature and 45 percent will be for capitalizable replacements. As
of December 31, 1998, $43 million of the $95 million has been
incurred; $14 million has been capitalized and $29 million has
been expensed. The expense for 1998 was $16 million, which is
approximately 10 percent of the Company's overall annual
information systems budget. 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 are reviewing progress on the
Year 2000 project and provide evaluations of the Company's
readiness to senior management on a regular basis.
Since the Company expects to complete its Year 2000 project by
December 1999, 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 initiated communications with these third parties
concerning their state of readiness and intends to continue these
communications throughout 1999. 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.
During 1999, the Company intends to develop contingency plans to
address potential business disruptions at these third parties.
Contingency planning may include increasing 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.
Euro
On January 1, 1999, certain member countries of the European
Union established a new common currency, the euro. Also on
January 1, 1999, the participating countries fixed the rate of
exchange between their existing legacy currencies and the euro.
The new euro currency will eventually replace the legacy
currencies currently in use in each of the participating
countries. Euro bills and coins will not be issued until January
1, 2002.
Companies operating within the participating countries may, at
their discretion, choose to operate in either legacy currencies
or the euro until January 1, 2002. The Company expects its
affected subsidiaries to continue to operate in their respective
legacy currencies for at least two years. The Company can,
however, accommodate transactions for customers and suppliers
operating in either legacy currency or euros.
The Company believes that the creation of the euro will not
significantly change its market risk with respect to foreign
exchange. Having a common European currency may result in
certain changes to competitive practices, product pricing and
marketing strategies. Although we are unable to quantify these
effects, if any, management at this time does not believe the
creation of the euro will have a material effect on the Company.
Acquisition
In June 1997, the Company acquired the worldwide animal health
operations of Mallinckrodt Inc. for approximately $490 million,
which includes the assumption of debt and direct costs of the
acquisition. The addition of Mallinckrodt has created broader
product lines and expanded geographic distribution capabilities
for our animal health products. For additional information, see
"Acquisition" in the Notes to Consolidated Financial Statements.
Environmental Matters
The Company has obligations for environmental clean-up under
various state, local and federal laws, including the
Comprehensive Environmental Response, Compensation and Liability
Act, commonly known as Superfund. Environmental expenditures
have not had and, based on information currently available, are
not anticipated to have a material impact on the Company. For
additional information, see "Legal and Environmental Matters" in
the Notes to Consolidated Financial Statements.
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. Similarly, the effect on
operations and cash flows of decisions of managed care groups and
other buying groups concerning formularies, pharmaceutical
reimbursement policies and availability of the Company's
pharmaceutical products 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 are increasingly being
challenged by competitors and the outcome can be highly
uncertain. 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
Cash generated from operations continues to be the Company's
major source of funds to finance working capital, capital
expenditures, acquisitions, shareholder dividends and common
share repurchases.
Cash provided by operating activities totaled $2,026 million in
1998, $1,845 million in 1997 and $1,459 million in 1996.
Capital expenditures amounted to $389 million in 1998, $405
million in 1997 and $336 million in 1996. It is anticipated that
capital expenditures will exceed $550 million in 1999.
Commitments for future capital expenditures totaled $153 million
at December 31, 1998.
Common shares repurchased in 1998 totaled 3.4 million shares at a
cost of $141 million. In 1997, 4.8 million shares were
repurchased for $132 million and, in 1996, 23.3 million shares
were repurchased at a cost of $388 million.
Dividend payments of $627 million were made in 1998, compared
with $542 million in 1997 and $474 million in 1996. Dividends
per common share were $0.425 in 1998, up from $0.368 in 1997 and
$0.32 in 1996.
Cash and cash equivalents totaled $1,259 million, $714 million
and $535 million at December 31, 1998, 1997 and 1996,
respectively. Short-term borrowings and current portion of long-
term debt totaled $558 million at year-end 1998, $581 million in
1997 and $855 million in 1996. In 1996, the Company funded the
repayment of current maturities of long-term debt through
increased short-term borrowings.
The Company's ratio of debt to total capital decreased to 12
percent in 1998 from 18 percent in 1997, resulting from both an
increase in shareholders' equity and a decrease in borrowings.
The Company's liquidity and financial resources continue to be
sufficient to meet its operating needs. As of December 31, 1998,
the Company had $1.1 billion in unused lines of credit, including
$851 million available under the $1 billion multi-currency
unsecured revolving credit facility expiring in 2001. The
Company had A-1+ and P-1 ratings for its commercial paper,
and AA and Aa3 general bond ratings from Standard & Poor's
and Moody's, respectively, as of December 31, 1998.
Market Risk Disclosures
The Company is exposed to market risk primarily from changes in
foreign currency exchange rates and, to a lesser extent, from
interest rates. The following describes the nature of the risks
and demonstrates that, in general, such market risk is not
material to the Company.
Foreign Currency Exchange Risk
The Company operates in more than 40 countries worldwide. In
1998, sales outside the United States accounted for approximately
37 percent of worldwide sales. Virtually all these sales were
denominated in currencies of the local country. As such, the
Company's reported profits and cash flows are exposed to changing
exchange rates. In 1998, the general strengthening of the U.S.
dollar vis-a-vis foreign currencies reduced sales by
approximately 2 percent. The effect of foreign exchange reduced
1998 diluted earnings per common share by 2 percent.
To date, management has not deemed it cost-effective to engage in
a formula-based program of hedging the profits and cash flows of
foreign operations using derivative financial instruments.
Because the Company's foreign subsidiaries purchase significant
quantities of inventory payable in U.S. dollars, managing the
level of inventory and related payables and the rate of inventory
turnover provides a level of protection against adverse changes
in exchange rates. In addition, the risk of adverse exchange
rate change is mitigated by the fact that the foreign operations
are widespread, with no single foreign country accounting for
more than 5 percent of consolidated net sales in 1998. The
widespread nature of the Company's foreign operations is the
primary reason that the overall economic weakness in certain
Asian and Latin American countries is not expected to
significantly impact future operations of the Company.
In addition, at any point in time, the Company's foreign
subsidiaries hold financial assets and liabilities that are
denominated in currencies other than U.S. dollars. These
financial assets and liabilities consist primarily of short-term,
third-party and intercompany receivables and payables. Changes
in exchange rates affect these financial assets and liabilities.
For the most part, however, gains or losses arise from
translation and, as such, do not significantly affect net income.
On occasion, the Company has used derivatives to hedge specific
short-term risk situations involving foreign currency exposures.
However, these derivative transactions have not been material.
See "Accounting Policies" in the Notes to Consolidated Financial
Statements for information regarding Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities."
Interest Rate and Equity Price Risk
The financial assets of the Company that are exposed to changes
in interest rates and equity prices are primarily limited to debt
and equity securities held in non-qualified trusts for employee
benefits. These trust investments totaled approximately $168
million at December 31, 1998. Due to the long-term nature of the
liabilities that these assets fund, the Company's exposure to
market risk is low. A decline in market value of these
investments would not necessitate any near-term funding of the
trusts. The other financial assets of the Company do not give
rise to significant interest rate risk due to their short
duration.
The financial liabilities of the Company that are exposed to
changes in interest rates are limited primarily to short-term
borrowings (long-term borrowings are not significant). Although
all the short-term borrowings are floating rate debt, the
interest rate risk posed by these borrowings is low because the
amount of debt historically has been small in relation to annual
cash flow. The Company has the ability to pay off this debt
relatively quickly if interest rates were to increase
significantly. The other financial liabilities of the Company do
not give rise to significant interest rate risk due to their
short duration.
For the reasons discussed above, the Company has not engaged in
managing interest rate and equity price risk using derivative
financial instruments.
International Cash Management
In the early 1990s, the Company utilized a series of interest
rate swaps as part of its international cash management strategy.
For additional information, see "Financial Instruments" in the
Notes to Consolidated Financial Statements. These swaps subject
the Company to a moderate degree of market risk. The Company
accounts for these swaps using fair value accounting with changes
in the fair value recorded in earnings. The fair value of these
swaps was less than $100 thousand at December 31, 1998. The fair
value of these swaps at December 31, 1997, was a liability of $1
million. It is estimated that a 10 percent change in interest
rate structure could change the fair value of the swaps by
approximately $4 million.
Securities Litigation Reform Act
Safe Harbor Statement under the Private Securities
Litigation Reform Act of 1995: Certain matters discussed in this
Annual Report are forward-looking statements that involve risks
and uncertainties, including but not limited to economic,
litigation, competitive, regulatory, governmental and
technological factors affecting the Company's operations,
markets, products, services and prices, and other factors
discussed in Exhibit 99 of the Company's December 31, 1998, Form
10-K filed with the Securities and Exchange Commission.
Schering-Plough Corporation and Subsidiaries
<TABLE>
Statements of Consolidated Income
(Amounts in millions, except per share figures)
<CAPTION>
For The Years Ended December 31, 1998 1997 1996
<S> <C> <C> <C>
Net sales . . . . . . . . . . . . . . . . . . . $8,077 $6,778 $5,656
Costs and expenses:
Cost of sales . . . . . . . . . . . . . . . . 1,601 1,308 1,078
Selling, general and administrative . . . . . 3,141 2,664 2,209
Research and development. . . . . . . . . . . 1,007 847 723
Other expense, net. . . . . . . . . . . . . . 2 46 40
Total costs and expenses . . . . . . . . . . 5,751 4,865 4,050
Income before income taxes. . . . . . . . . . . 2,326 1,913 1,606
Income taxes. . . . . . . . . . . . . . . . . 570 469 393
Net income. . . . . . . . . . . . . . . . . . . $1,756 $1,444 $1,213
Basic earnings per common share . . . . . . . . $ 1.20 $ .98 $ .82
Diluted earnings per common share . . . . . . . $ 1.18 $ .97 $ .82
See Notes to Consolidated Financial Statements.
</TABLE>
Schering-Plough Corporation and Subsidiaries
<TABLE>
Statements of Consolidated Cash Flows
(Amounts in millions)
<CAPTION>
For The Years Ended December 31, 1998 1997 1996
<S> <C> <C> <C>
Operating Activities:
Net income . . . . . . . . . . . . . . . . . . . . . $1,756 $1,444 $1,213
Depreciation and amortization. . . . . . . . . . . . 238 200 173
Accounts receivable. . . . . . . . . . . . . . . . . (67) (40) 2
Inventories. . . . . . . . . . . . . . . . . . . . . (102) (43) (112)
Prepaid expenses and other assets. . . . . . . . . . (116) (127) (144)
Accounts payable and other liabilities . . . . . . . 317 411 327
Net cash provided by operating activities. . . . . . 2,026 1,845 1,459
Investing Activities:
Purchase of business, net of cash acquired . . . . . - (354) -
Capital expenditures . . . . . . . . . . . . . . . . (389) (405) (336)
Reduction of investments . . . . . . . . . . . . . . - 36 1
Purchases of investments . . . . . . . . . . . . . . (319) (77) (78)
Other, net . . . . . . . . . . . . . . . . . . . . . - (8) 5
Net cash used for investing activities . . . . . . . (708) (808) (408)
Financing Activities:
Cash dividends paid to common shareholders . . . . . (627) (542) (474)
Common shares repurchased. . . . . . . . . . . . . . (141) (132) (388)
Net change in short-term borrowings. . . . . . . . . (19) (290) 113
Repayment of long-term debt. . . . . . . . . . . . . (42) (1) (140)
Other, net . . . . . . . . . . . . . . . . . . . . . 57 116 53
Net cash used for financing activities . . . . . . . (772) (849) (836)
Effect of exchange rates on cash and cash equivalents. (1) (9) (1)
Net Increase in Cash and Cash Equivalents . . . . . . 545 179 214
Cash and Cash Equivalents, Beginning of Year . . . . . 714 535 321
Cash and Cash Equivalents, End of Year . . . . . . . . $1,259 $ 714 $ 535
See Notes to Consolidated Financial Statements.
</TABLE>
Schering-Plough Corporation and Subsidiaries
<TABLE>
Consolidated Balance Sheets
(Amounts in millions, except per share figures)
<CAPTION>
At December 31, 1998 1997
<S> <C> <C>
ASSETS
__________________________________________________________________________
Current Assets:
Cash and cash equivalents. . . . . . . . . . . $1,259 $ 714
Accounts receivable, less allowances:
1998, $98; 1997, $87 . . . . . . . . . . . . 704 645
Inventories. . . . . . . . . . . . . . . . . . 841 713
Prepaid expenses, deferred income taxes
and other current assets. . . . . . . . . . . 1,154 848
Total current assets . . . . . . . . . . . . . 3,958 2,920
Property, at cost:
Land . . . . . . . . . . . . . . . . . . . . . 48 47
Buildings and improvements . . . . . . . . . . 1,836 1,716
Equipment. . . . . . . . . . . . . . . . . . . 1,677 1,585
Construction in progress . . . . . . . . . . . 507 402
Total. . . . . . . . . . . . . . . . . . . . . 4,068 3,750
Less accumulated depreciation. . . . . . . . . 1,393 1,224
Property, net. . . . . . . . . . . . . . . . . 2,675 2,526
Intangible Assets, net. . . . . . . . . . . . . . . 565 481
Other Assets. . . . . . . . . . . . . . . . . . . . 642 580
$7,840 $6,507
1998 1997
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable . . . . . . . . . . . . . . . $1,003 $ 803
Short-term borrowings and current portion of
long-term debt . . . . . . . . . . . . . . . 558 581
U.S., foreign and state income taxes . . . . . 505 474
Accrued compensation . . . . . . . . . . . . . 279 274
Other accrued liabilities. . . . . . . . . . . 687 759
Total current liabilities. . . . . . . . . . . 3,032 2,891
Long-Term Liabilities:
Long-term debt . . . . . . . . . . . . . . . . 4 46
Deferred income taxes. . . . . . . . . . . . . 291 278
Other long-term liabilities. . . . . . . . . . 511 471
Total long-term liabilities. . . . . . . . . . 806 795
Shareholders' Equity:
Preferred shares - authorized shares: 50,
$1 par value; issued: none . . . . . . . . . - -
Common shares - authorized shares: 1998,
2,400, $.50 par value;
1997, 1,200, $1 par value;
issued: 1998, 2,030; 1997, 1,015. . . . . . 1,015 1,015
Paid-in capital. . . . . . . . . . . . . . . . 365 96
Retained earnings. . . . . . . . . . . . . . . 6,802 5,673
Accumulated other comprehensive income . . . . (238) (244)
Total. . . . . . . . . . . . . . . . . . . . . 7,944 6,540
Less treasury shares, at cost - 1998, 558;
1997, 282 . . . . . . . . . . . . . . . . . 3,942 3,719
Total shareholders' equity . . . . . . . . . . 4,002 2,821
$7,840 $6,507
See Notes to Consolidated Financial Statements.
</TABLE>
Schering-Plough Corporation and Subsidiaries
<TABLE>
Statements of Consolidated Shareholders' Equity
(Amounts in millions)
<CAPTION>
Accumulated
Other Total
Compre- Share-
Common Paid-in Retained Treasury hensive holders'
Shares Capital Earnings Shares Income Equity
<S> <C> <C> <C> <C> <C> <C>
Balance December 31, 1995 $503 $50 $4,342 $(3,168) $(104) $1,623
Comprehensive income:
Net income 1,213 1,213
Foreign currency translation,
net of tax (28) (28)
Unrealized gain (loss) on
investments held available
for sale, net (8) (8)
Total comprehensive income 1,177
Cash dividends on common
shares (474) (474)
Stock incentive plans 92 (4) 88
Common shares repurchased (388) (388)
Settlement of warrants 3 (23) (20)
Shares issued for acquisition 1 53 54
__________________________________________________________
Balance December 31, 1996 507 172 5,081 (3,560) (140) 2,060
Comprehensive income:
Net income 1,444 1,444
Foreign currency translation,
net of tax (101) (101)
Unrealized gain (loss) on
investments held available
for sale, net (3) (3)
Total comprehensive income 1,340
Cash dividends on common
shares (542) (542)
Stock incentive plans 122 (27) 95
Common shares repurchased (132) (132)
Effect of 2-for-1 stock split 508 (198) (310)
_
___________________ _________________________
Balance December 31, 1997 1,015 96 5,673 (3,719) (244) 2,821
Comprehensive income:
Net income 1,756 1,756
Foreign currency translation,
net of tax 5 5
Unrealized gain (loss) on
investments held available
for sale, net 1 1
Total comprehensive income 1,762
Cash dividends on common
shares (627) (627)
Stock incentive plans 269 (82) 187
Common shares repurchased (141) (141)
_ _____________________
_________________
Balance December 31, 1998 $1,015 $365 $6,802 $(3,942) $(238) $4,002
See Notes to Consolidated Financial Statements.
</TABLE>
Notes to Consolidated Financial Statements
(Dollars in millions, except per share figures)
Accounting Policies
Principles of Consolidation - The consolidated financial
statements include Schering-Plough Corporation and its
subsidiaries. Intercompany balances and transactions are
eliminated. Certain prior year amounts have been reclassified to
conform to the current year presentation.
Use of Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and use assumptions that affect
certain reported amounts and disclosures; actual amounts may
differ.
Cash and Cash Equivalents - Cash and cash equivalents include
operating cash and highly liquid investments, generally with
maturities of three months or less.
Debt and Equity Investments - Investments, included in other non-
current assets, primarily consist of debt and equity securities
held in non-qualified trusts to fund benefit obligations.
Inventories - Inventories are valued at the lower of cost or
market. Cost is determined by using the last-in, first-out
method for a substantial portion of inventories located in the
United States. The cost of all other inventories is determined
by the first-in, first-out method.
Other Current Assets - An advance of $200 is included in other
current assets at December 31, 1998. This advance, made in
connection with a licensing arrangement, was collected in January
1999. Carrying value approximates fair value.
Depreciation - Depreciation is provided over the estimated useful
lives of the properties, generally by use of the straight-line
method. Average useful lives are 50 years for buildings, 25
years for building improvements and 12 years for equipment.
Depreciation expense was $191, $166 and $149 in 1998, 1997 and
1996, respectively.
Intangible Assets - Intangible assets principally include
goodwill, patents, trademarks and licenses. Intangible assets
are recorded at cost and amortized on the straight-line method
over periods not exceeding 40 years. Accumulated amortization of
intangible assets was $138 and $99 at December 31, 1998 and 1997,
respectively. Intangible assets are periodically reviewed to
determine recoverability by comparing their carrying values to
expected future cash flows.
Foreign Currency Translation - The net assets of most of the
Company's foreign subsidiaries are translated into U.S. dollars
using current exchange rates. The U.S. dollar effects that arise
from translating the net assets of these subsidiaries at changing
rates are recorded in the foreign currency translation adjustment
account which is included in other comprehensive income. For the
remaining foreign subsidiaries, non-monetary assets and
liabilities are translated using historical rates, while monetary
assets and liabilities are translated at current rates, with the
U.S. dollar effects of rate changes included in income.
Exchange gains and losses arising from translating intercompany
balances of a long-term investment nature are recorded in the
foreign currency translation adjustment account. Other exchange
gains and losses are included in income.
Net foreign exchange losses included in income were $2, $6 and
$11 in 1998, 1997 and 1996, respectively.
Earnings Per Common Share - Basic earnings per common share are
computed by dividing income by the weighted-average number of
common shares outstanding. Diluted earnings per common share are
computed by dividing income by the sum of the weighted-average
number of common shares outstanding plus the dilutive effect of
shares issuable through deferred stock units and the exercise of
stock options and warrants.
<TABLE>
The shares used for basic earnings per common share and diluted
earnings per common share are reconciled as follows:
<CAPTION>
(shares in
millions)
1998 1997 1996
<S> <C> <C> <C>
Average shares outstanding
for basic earnings per share. . . . . . 1,468 1,464 1,471
Dilutive effect of warrants, options
and deferred stock units. . . . . . . . 20 16 16
Average shares outstanding
for diluted earnings per share. . . . . 1,488 1,480 1,487
</TABLE>
Derivatives - The Company has outstanding certain long-term
interest rate swap contracts that were used for international
cash management purposes during the early 1990s. These interest
rate swaps are recorded at fair value, with changes in fair value
recorded in earnings. Annual net cash flows for payments and
receipts under these interest rate swap contracts are not
material. The net asset or liability under these interest rate
swaps is recorded in other current assets or other accrued
liabilities, as applicable. See "Financial Instruments" footnote
for more details.
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 must be adopted by the Company no
later than January 1, 2000. The Company is currently evaluating
when to adopt SFAS No. 133. Management does not deem it cost-
effective to engage in a formula-based program using derivative
instruments to hedge its market risks. Accordingly, this
statement is not expected to materially impact the Company's
financial statements.
Comprehensive Income - During 1998, the Company adopted SFAS No.
130, "Reporting Comprehensive Income." Comprehensive income,
which is reported in the Statements of Consolidated Shareholders'
Equity, is defined as the total change in shareholders' equity
during the period other than from transactions with shareholders.
For the Company, comprehensive income consists of net income, the
net change in the accumulated foreign currency translation
adjustment account and the net change in unrealized gains and
losses on securities classified for SFAS No. 115 purposes as held
available for sale. Accumulated other comprehensive income
consists of the accumulated foreign currency translation
adjustment account and accumulated unrealized gains and losses.
At December 31, 1998 and 1997, the accumulated foreign currency
translation adjustment account, net of tax, totaled $247 and
$252, respectively.
Acquisition
On June 30, 1997, the Company acquired the worldwide animal
health business of Mallinckrodt Inc. for approximately $490,
which includes the assumption of debt and direct costs of the
acquisition. The acquisition was recorded under the purchase
method of accounting. The excess of the purchase price over the
fair value of identifiable net assets acquired is included in
intangible assets, net. The results of operations of the
purchased animal health business have been included in the
Company's Statements of Consolidated Income from the date of
acquisition. Pro forma results of the Company, assuming the
acquisition had been made at the beginning of each period
presented, would not be materially different from the results
reported.
Financial Instruments
<TABLE>
The table below presents the carrying values and estimated fair values for the
Company's financial instruments, including
derivative financial instruments. Estimated fair values were determined based on
market prices, where available, or dealer
quotes.
<CAPTION>
December 31, 1998 December 31, 1997
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
<S> <C> <C> <C> <C>
ASSETS:
Cash and cash equivalents $1,259 $1,259 $714 $714
Debt and equity investments 213 213 180 180
LIABILITIES:
Short-term borrowings and
current portion of long-
term debt 558 558 581 581
Long-term debt 4 4 46 46
Derivative Financial
Instruments:
Interest rate swap contracts - - 1 1
</TABLE>
Credit and Market Risk
Most financial instruments expose the holder to credit risk for
non-performance and to market risk for changes in interest and
currency rates. The Company mitigates credit risk on derivative
instruments by dealing only with financially sound
counterparties. Accordingly, the Company does not anticipate
loss for non-performance. The Company does not enter into
derivative instruments to generate trading profits. Refer to
"Market Risk Disclosures" in Management's Discussion and Analysis
of Operations and Financial Condition for a discussion regarding
the market risk of the Company's financial instruments.
International Cash Management
In 1991 and 1992, the Company utilized interest rate swaps as
part of its international cash management strategy. The notional
principal of the 1991 arrangement is $650 and the notional
principal of the 1992 arrangement is $950. Both the $650 and $950
arrangements have 20-year terms. At December 31, 1998, the $650
and $950 arrangements provide for the payment of interest based
upon LIBOR and the receipt of interest based upon an annual
election of various floating rates. As a result, the Company
remains subject to a moderate degree of market risk through
maturity of the swaps.
Commitments
Total rent expense amounted to $58 in 1998, $44 in 1997 and $37 in
1996. Future minimum rental commitments on non-cancelable
operating leases as of December 31, 1998, range from $29 in 1999
to $5 in 2003, with aggregate minimum lease obligations of $16 due
thereafter. The Company has commitments related to future capital
expenditures totaling $153 as of December 31, 1998.
Borrowings
The Company has a $1 billion committed, multi-currency unsecured
revolving credit facility expiring in 2001 from a syndicate of
financial institutions. This facility is available for general
corporate purposes and is considered as support for the Company's
commercial paper borrowings. This line of credit does not
require compensating balances; however, a nominal commitment fee
is paid. At December 31, 1998, $149 had been drawn down under
this facility. In addition, the Company's foreign subsidiaries
had available $267 in unused lines of credit from various
financial institutions at December 31, 1998. Generally, these
foreign credit lines do not require commitment fees or
compensating balances and are cancelable at the option of the
Company or the financial institutions.
Short-term borrowings consist of commercial paper issued in the
United States, bank loans, notes payable and amounts drawn down
under the revolving credit facility. Commercial paper
outstanding at December 31, 1998 and 1997 was $339 and $389,
respectively. The weighted-average interest rate for short-term
borrowings at December 31, 1998 and 1997 was 5.7 percent and 5.6
percent, respectively.
The Company has a shelf registration statement on file with the
Securities and Exchange Commission covering the issuance of up to
$200 of debt securities. The terms of these securities will be
determined at the time of sale. As of December 31, 1998, no debt
securities have been issued pursuant to this registration.
Interest Costs and Income
<TABLE>
Interest costs were as follows:
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Interest cost incurred . . . . . . . . . . . . $28 $55 $56
Less: amount capitalized on
construction. . . . . . . . . . . . . . 9 15 11
Interest expense . . . . . . . . . . . . . . . $19 $40 $45
Cash paid for interest, net of
amount capitalized . . . . . . . . . . . . . $19 $37 $52
</TABLE>
Interest income for 1998, 1997 and 1996 was $59, $56 and $33,
respectively. Interest income and interest expense are included
in other expense, net.
Shareholders' Equity
On September 22, 1998, the Board of Directors voted to increase
the number of authorized common shares from 1.2 billion to 2.4
billion and approved a 2-for-1 stock split. Distribution of the
September 22, 1998, split shares was made on December 2, 1998.
On April 22, 1997, the Board of Directors voted to increase the
number of authorized common shares from 600 million to 1.2
billion and approved a 2-for-1 stock split. Distribution of the
April 22, 1997, split shares was made on June 3, 1997. All per
share amounts herein have been adjusted to reflect both stock
splits.
<TABLE>
A summary of treasury share transactions follows (shares in millions):
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Share balance at January 1 282 142 139
Shares issued under stock
incentive plans (9) (4) (3)
Purchase of treasury shares 3 2 6
Effect of 2-for-1 stock split 282 142 -
Share balance at December 31 558 282 142
</TABLE>
The Company has Preferred Share Purchase Rights outstanding that
are attached to, and presently only trade with, the Company's
common shares and are not exercisable. The rights will become
exercisable only if a person or group acquires 20 percent or more
of the Company's common stock or announces a tender offer which,
if completed, would result in ownership by a person or group of 20
percent or more of the Company's common stock. Should a person
acquire 20 percent or more of the Company's outstanding common
stock through a merger or other business combination transaction,
each right will entitle its holder (other than such acquirer) to
purchase common shares of Schering-Plough having a market value of
twice the exercise price of the right. The exercise price of the
rights is $100.
Following the acquisition by a person or group of beneficial
ownership of 20 percent or more but less than 50 percent of the
Company's common stock, the Board of Directors may call for the
exchange of the rights (other than rights owned by such acquirer),
in whole or in part, at an exchange ratio of one common share or
one two-hundredth of a share of Series A Junior Participating
Preferred Stock, per right. Also, prior to the acquisition by a
person or group of beneficial ownership of 20 percent or more of
the Company's common stock, the rights are redeemable for $.005
per right at the option of the Board of Directors. The rights
will expire on July 10, 2007, unless earlier redeemed or
exchanged. The Board of Directors is also authorized to reduce the
20 percent thresholds referred to above to not less than the
greater of (i) the sum of .001% and the largest percentage of the
outstanding shares of common stock then known to the Company to be
beneficially owned by any person or group of affiliated or
associated persons and (ii) 10 percent, except that following the
acquisition by a person or group of beneficial ownership of 20
percent or more of the Company's common stock no such reduction
may adversely affect the interests of the holders of the rights.
Stock Incentive Plans
Under the terms of the Company's 1997 Stock Incentive Plan, 72
million of the Company's common shares may be granted as stock
options or awarded as deferred stock units to officers and
certain employees of the Company through December 2002. Option
exercise prices equal the market price of the common shares at
their grant dates. Options expire not later than 10 years after
the date of grant. Standard options granted generally have a
one-year vesting term. Other options granted vest 20 percent per
year for five years starting five years after the date of grant.
Deferred stock units are payable in an equivalent number of
common shares; the shares are distributable in a single
installment or in five equal annual installments generally
commencing one year from the date of the award.
<TABLE>
The following table summarizes stock option activity over the past three years
under the current and prior plans (number of
options in millions):
<CAPTION>
1998 1997 1996
Weighted- Weighted- Weighted-
Number Average Number Average Number Average
of Exercise of Exercise of Exercise
Options Price Options Price Options Price
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
January 1. . . . 42 $12.20 41 $ 9.57 39 $ 7.11
Granted . . . . 11 39.06 9 20.57 12 14.36
Exercised . . . (10) 10.47 (8) 7.76 (9) 5.71
Canceled
or expired . . (1) 30.87 - - (1) 10.39
Outstanding at
December 31. . . 42 $19.31 42 $12.20 41 $ 9.57
Options exercisable
at December 31. . 25 $12.02 26 $ 9.28 22 $ 6.96
</TABLE>
The Company accounts for its stock compensation arrangements
using the intrinsic value method. If the fair value method of
accounting was applied as defined in SFAS No. 123, "Accounting
for Stock-Based Compensation," the Company's pro forma net income
would have been $1,704, $1,421 and $1,197 for 1998, 1997 and
1996, respectively. Pro forma basic earnings per share would
have been $1.16, $.97 and $.82 for 1998, 1997 and 1996,
respectively, and pro forma diluted earnings per share would have
been $1.15, $.96 and $.81 for 1998, 1997 and 1996, respectively.
<TABLE>
The weighted-average fair value per option granted in 1998, 1997 and 1996 was
$9.24, $4.60 and $3.11, respectively. The
fair value was estimated using the Black-Scholes option pricing model based on
the following assumptions:
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Dividend yield 2.4% 2.6% 2.8%
Volatility 24% 20% 20%
Risk-free interest rate 5.5% 6.1% 5.7%
Expected term of options (in years) 5 5 5
</TABLE>
In 1998, 1997 and 1996, the Company awarded deferred stock units totaling 2.5
million, 3.0 million and 3.6 million,
respectively. The expense recorded in 1998, 1997 and 1996 for deferred stock
units was $45, $32 and $27, respectively.
Inventories
<TABLE>
Year-end inventories consisted of the following:
<CAPTION>
1998 1997
<S> <C> <C>
Finished products . . . . . . . . . . . . . . $483 $334
Goods in process. . . . . . . . . . . . . . . 174 191
Raw materials and supplies. . . . . . . . . . 184 188
Total inventories . . . . . . . . . . . . . . $841 $713
</TABLE>
Inventories valued on a last-in, first-out basis comprised
approximately 28 percent and 34 percent of total inventories at
December 31, 1998 and 1997, respectively. The estimated
replacement cost of total inventories at December 31, 1998 and
1997 was $864 and $745, respectively.
Retirement Plans and Other Post-retirement Benefits
The Company has defined benefit pension plans covering eligible
employees in the United States and certain foreign countries, and
the Company provides post-retirement health care benefits to its
eligible U.S. retirees and their dependents.
<TABLE>
The components of net pension and other post-retirement benefit expense
(income) were as follows:
<CAPTION>
Post-retirement
Health Care
Retirement Plans Benefits
1998 1997 1996 1998 1997 1996
<S> <C> <C> <C> <C> <C> <C>
Service cost $41 $37 $37 $ 5 $ 4 $ 5
Interest cost 59 54 50 11 11 11
Expected return on plan assets (89) (81) (76) (17) (15) (15)
Amortization of transition (assets)
liabilities, net (9) (8) (8) - - -
Amortization of prior service cost 2 2 2 (1) (1) -
Amortization of actuarial gains and losses 1 1 1 - - -
Net expense (income) $5 $5 $6 $(2) $(1) $1
</TABLE>
<TABLE>
The components of the changes in the benefit obligations were as follows:
<CAPTION>
Post-retirement
Health Care
Retirement Plans Benefits
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Benefit obligations at January 1. . . . $867 $755 $162 $156
Service cost . . . . . . . . . . . . . 41 37 5 4
Interest cost . . . . . . . . . . . . . 59 54 11 11
Assumption changes. . . . . . . . . . . 51 44 10 9
Effects of exchange rate changes. . . . 5 (13) - -
Benefits paid . . . . . . . . . . . . . (62) (43) (8) (8)
Actuarial (gains) and losses . . . . . 22 7 (3) (10)
Business combinations/divestitures . . - 26 - -
Plan amendments. . . . . . . . . . . . 4 - - -
Benefit obligations at December 31. . . $987 $867 $177 $162
Benefit obligations of overfunded plans $790 $704 $177 $162
Benefit obligations of underfunded plans $197 $163
</TABLE>
<TABLE>
The components of the changes in plan assets were as follows:
<CAPTION>
Post-retirement
Health Care
Retirement Plans Benefits
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Fair value of plan assets, primarily
stocks and bonds, at January 1. . . . . $1,039 $913 $210 $192
Actual return on plan assets . . . . . . 135 130 26 26
Contributions. . . . . . . . . . . . . . 13 9 - -
Effects of exchange rate changes . . . . - (10) - -
Benefits paid . . . . . . . . . . . . . (42) (35) (8) (8)
Business combinations/divestitures . . . - 32 - -
Fair value of plan assets at December 31 $1,145 $1,039 $228 $210
Plan assets of overfunded plans $1,086 $ 994 $228 $210
Plan assets of underfunded plans $ 59 $ 45
</TABLE>
In addition to the plan assets indicated above, at December 31,
1998 and 1997, securities of $70 and $79, respectively, were held
in non-qualified trusts designated to provide pension benefits
for certain underfunded plans.
<TABLE>
The following is a reconciliation of the funded status of the plans to the
Company's balance sheet at December 31:
<CAPTION>
Post-retirement
Health Care
Retirement Plans Benefits
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Plan assets in excess of benefit
obligations . . . . . . . . . . . . . . $158 $172 $51 $ 48
Unrecognized net transition asset . . . . (45) (54) - -
Unrecognized prior service cost . . . . . 12 10 (6) (6)
Unrecognized net actuarial (gain) loss. . (14) (43) (51) (49)
Net asset (liability) . . . . . . . . . . $111 $ 85 $(6) $ (7)
</TABLE>
<TABLE>
The weighted-average assumptions employed at December 31, 1998 and 1997 were:
<CAPTION>
Post-retirement
Health Care
Retirement Plans Benefits
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Discount rate 6.6% 6.9% 6.5% 7.0%
Long-term expected rate of return on
plan assets 9.9% 9.6% 9.0% 9.0%
Rate of increase in future compensation 4.1% 4.1%
</TABLE>
The weighted-average assumed health care cost trend rates used for
post-retirement measurement purposes were 7.4 percent for 1999,
trending down to 5.0 percent by 2003. A 1 percent increase or
decrease in the assumed health care cost trend rate would increase
or decrease combined post-retirement service and interest cost by
$3 and the post-retirement benefit obligation by $24.
The Company has a defined contribution profit-sharing plan
covering substantially all its full-time domestic employees who
have completed one year of service. The annual contribution is
determined by a formula based on the Company's income,
shareholders' equity and participants' compensation. Profit-
sharing expense totaled $66, $58 and $60 in 1998, 1997 and 1996,
respectively.
Income Taxes
<TABLE>
U.S. and foreign operations contributed to income before income taxes as
follows:
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
United States. . . . . . . . . . . . . $1,609 $1,349 $1,090
Foreign. . . . . . . . . . . . . . . . 717 564 516
Total income before income taxes . . . $2,326 $1,913 $1,606
</TABLE>
<TABLE>
The components of income tax expense were as follows:
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Current:
Federal. . . . . . . . . . . . . . . $442 $306 $296
Foreign. . . . . . . . . . . . . . . 184 160 122
State. . . . . . . . . . . . . . . . 14 10 14
Total current. . . . . . . . . . . . 640 476 432
Deferred:
Federal and state. . . . . . . . . . (19) 30 (25)
Foreign. . . . . . . . . . . . . . . (51) (37) (14)
Total deferred . . . . . . . . . . . (70) (7) (39)
Total income tax expense . . . . . . . $570 $469 $393
</TABLE>
<TABLE>
The difference between the U.S. statutory tax rate and the Company's effective
tax rate was due to the following:
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
U.S. statutory tax rate. . . . . . . . . 35.0% 35.0% 35.0%
Increase (decrease) in taxes resulting
from:
Lower rates in other jurisdictions,
net . . . . . . . . . . . . . . . . . (10.6) (10.0) (10.3)
Research tax credit. . . . . . . . . . (.8) (.6) (.4)
All other, net . . . . . . . . . . . . .9 .1 .2
Effective tax rate . . . . . . . . . . . 24.5% 24.5% 24.5%
</TABLE>
The lower rates in other jurisdictions, net, are primarily
attributable to certain employment and capital investment actions
taken by the Company. As a result, income from manufacturing
activities in these jurisdictions is subject to lower tax rates
through 2010.
As of December 31, 1998 and 1997, the Company had total deferred
tax assets of $741 and $632, respectively, and deferred tax
liabilities of $506 and $475, respectively. Valuation allowances
are not significant. Significant deferred tax assets at December
31, 1998 and 1997 were for operating costs not currently
deductible for tax purposes and totaled $425 and $390,
respectively. Significant deferred tax liabilities at December 31,
1998 and 1997 were for depreciation differences, $233 and $234,
respectively, and retirement plans, $61 and $54, respectively.
Other current assets include deferred income taxes of $521 and
$438 at December 31, 1998 and 1997, respectively.
Deferred taxes are not provided on undistributed earnings of
foreign subsidiaries (considered to be permanent investments),
which at December 31, 1998, approximated $3,475. Determining the
tax liability that would arise if these earnings were remitted is
not practicable.
As of December 31, 1998, the U.S. Internal Revenue Service has
completed its examination of the Company's tax returns for all
years through 1988 and there are no unresolved issues outstanding
for those years.
Total income tax payments during 1998, 1997 and 1996 were $458,
$368 and $306, 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 reasonably be
estimated. Consistent with trends in the pharmaceutical industry,
the Company is self-insured for certain events.
The recorded liabilities for the above matters at December 31,
1998 and 1997 and the related expenses incurred during the three
years ended December 31, 1998, 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 as of January 31, 1999. 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.
Four 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 two are
class actions in California and the District of Columbia, on
behalf of consumers of prescription medicine. 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. The Company
has settled the retailer class action in Wisconsin and the
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. The Company has also recently settled in principle
the state consumer cases in all of the states except Alabama and
California. Court approval of those settlements has either
already been obtained or is currently being sought. The
settlement amounts were not material to the Company. 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.
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. 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 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.
<TABLE>
Quarterly Data(Unaudited)
<CAPTION>
Three Months Ended March 31, June 30, September 30, December 31,
1998 1997 1998 1997 1998 1997 1998 1997
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales. . . . $1,908 $1,568 $2,124 $1,720 $1,986 $1,709 $2,059 $1,781
Cost of sales. . 380 289 423 330 394 326 404 363
Gross profit . . 1,528 1,279 1,701 1,390 1,592 1,383 1,655 1,418
Selling, general
and
administrative. 712 594 828 679 762 681 839 710
Research and
development . . 224 179 261 209 257 220 265 239
Other, net . . . (4) 9 9 8 1 15 (4) 14
Income before
income taxes. . 596 497 603 494 572 467 555 455
Income taxes . . 146 122 148 121 140 114 136 112
Net income . . . $ 450 $375 $ 455 $ 373 $ 432 $ 353 $419 $ 343
Basic earnings per
common share. . $ .31 $.26 $ .31 $ .25 $ .29 $ .24 $.29 $ .23
Diluted earnings
per common share .30 .25 .31 .25 .29 .24 .28 .23
Dividends per
common share. . .095 .083 .11 .095 .11 .095 .11 .095
Common share prices:
High. . . . . . 42 3/4 20 13/32 46 11/16 24 11/16 53 17/32 27 9/32 57 1/2 31 23/32
Low . . . . . . 30 27/32 16 9/32 39 1/16 17 5/8 43 23 1/2 45 13/16 25 27/32
Average shares
outstanding for
basic EPS
(in millions). 1,466 1,463 1,467 1,464 1,469 1,465 1,470 1,465
Average shares
outstanding for
diluted EPS
(in millions). 1,485 1,476 1,488 1,480 1,490 1,482 1,489 1,482
Certain 1997 amounts have been restated to reflect the 1998 2-for-1 stock split.
The Company's common shares are listed and
principally traded on the New York Stock Exchange. The approximate number of
holders of record of common shares as of December
31, 1998, was 47,000.
</TABLE>
Business Segment Data
Schering-Plough Corporation is a holding company whose subsidiaries are
engaged in the discovery, development,
manufacturing and marketing of pharmaceutical and health care products
worldwide. The Company is organized and
operates in the pharmaceutical and health care businesses. Pharmaceutical
products include prescription drugs and
animal health products. Health care products include foot care, sun care and
over-the-counter products sold
primarily in the United States. The following information is presented in
accordance with the requirements of SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related Information."
<TABLE>
Net Sales and Operating Profit by Segment
<CAPTION>
Net Sales Operating Profit
1998 1997 1996 1998 1997 1996
<S> <C> <C> <C> <C> <C> <C>
Pharmaceutical products. . . $7,342 $6,110 $5,049 $2,261 $1,885 $1,592
Health care products . . . . 735 668 607 160 151 138
Total net sales and operating
profit. . . . . . . . . . . 8,077 6,778 5,656 2,421 2,036 1,730
General corporate
revenue and expense . . . . (76) (83) (79)
Interest expense . . . . . . (19) (40) (45)
Consolidated net sales
and pre-tax profit. . . . . $8,077 $6,778 $5,656 $2,326 $1,913 $1,606
</TABLE>
<TABLE>
Assets, Capital Expenditures and Depreciation and Amortization by Segment
<CAPTION>
Capital Depreciation and
Assets Expenditures Amortization
1998 1997 1996 1998 1997 1996 1998 1997 1996
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Pharmaceutical
products. . . . . . $5,981 $5,114 $4,099 $357 $380 $316 $218 $180 $152
Health care products. 424 398 375 31 24 17 15 15 16
Operating segment
totals. . . . . . . 6,405 5,512 4,474 388 404 333 233 195 168
Corporate . . . . . . 1,435 995 924 1 1 3 5 5 5
Consolidated
assets, capital
expenditures,
depreciation and
amortization. . . . $7,840 $6,507 $5,398 $389 $405 $336 $238 $200 $173
</table
The Company operates in more than 40 countries outside the United
States. Sales outside the United States comprised 37 percent, 39
percent, and 42 percent of consolidated sales in 1998, 1997 and 1996,
respectively. No single foreign country accounted for more than 5
percent of consolidated sales during the past three years, except for
Japan and France, which accounted for 5.5 percent and 5.4 percent of
consolidated sales in 1996, respectively.
</TABLE>
<TABLE>
Net Sales by Geographic Area
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
United States. . . . . . . . . . . . . $5,113 $4,151 $3,283
Europe and Canada. . . . . . . . . . . 1,889 1,620 1,460
Latin America. . . . . . . . . . . . . 578 453 385
Pacific Area and Asia. . . . . . . . . 497 554 528
Consolidated net sales . . . . . . . . $8,077 $6,778 $5,656
</TABLE>
Net sales are presented in the geographic area in which the Company's
customers are located. During 1998, 11 percent of consolidated net
sales was made to McKesson Corporation, a major pharmaceutical and
health care products distributor; substantially all these sales were
in the Company's pharmaceutical segment. During 1997 and 1996, no
single customer accounted for more than 10 percent of consolidated net
sales.
<TABLE>
Long-lived Assets by Geographic Location
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
United States. . . . . . . . . . . . . $1,516 $1,348 $1,317
Ireland. . . . . . . . . . . . . . . . 338 340 310
Singapore. . . . . . . . . . . . . . . 268 271 166
Puerto Rico. . . . . . . . . . . . . . 160 161 164
Other foreign countries. . . . . . . . 598 606 432
Total. . . . . . . . . . . . . . . . . $2,880 $2,726 $2,389
</TABLE>
Long-lived assets shown by geographic location are primarily property.
Substantially all intangible assets are attributable to the
pharmaceutical segment and, by their nature, do not have a physical or
geographic location; accordingly, intangible assets are not included
above.
Report by Management
Management is responsible for the preparation and the integrity
of the accompanying financial statements. These statements are
prepared in accordance with generally accepted accounting
principles and require the use of estimates and assumptions that
affect the reported amounts of assets, liabilities, sales and
expenses. In management's opinion, the consolidated financial
statements present fairly the Company's results of operations,
financial position and cash flows. All financial information in
this Annual Report is consistent with the financial statements.
The Company maintains, and management relies on, a system of
internal accounting controls and related policies and procedures
that provide reasonable assurance of the integrity and
reliability of the financial statements. The system provides, at
appropriate cost and within the inherent limitations of all
internal control systems, that transactions are executed in
accordance with management's authorization, are properly recorded
and reported in the financial statements and that assets are
safeguarded. The Company's internal accounting control system
provides for careful selection and training of supervisory and
management personnel and requires appropriate segregation of
responsibilities and delegation of authority. In addition, the
Company maintains a corporate code of conduct for purposes of
determining possible conflicts of interest, compliance with laws
and confidentiality of proprietary information.
The Company's independent auditors, Deloitte & Touche LLP, audit
the annual consolidated financial statements. They evaluate the
Company's internal accounting controls and perform tests of
procedures and accounting records to enable them to express their
opinion on the fairness of these statements. In addition, the
Company has an internal audit function that regularly performs
audits using programs designed to test compliance with Company
policies and procedures, and to verify the adequacy of internal
accounting controls and other financial policies. The internal
auditors' and independent auditors' recommendations concerning
the Company's system of internal accounting controls have been
considered and appropriate action has been taken with respect to
those recommendations.
The Finance, Compliance and Audit Committee of the Board of
Directors consists solely of non-employee directors. The
Committee meets periodically with management, the internal
auditors and the independent auditors to review audit results,
financial reporting, internal accounting controls and other
financial matters. Both the independent auditors and internal
auditors have full and free access to the Committee.
/S/Richard Jay Kogan /S/Jack L. Wyszomierski /S/Thomas H. Kelly
Chairman of the Board and Executive Vice President Vice President
Chief Executive and Chief Financial and Controller
Officer Officer
INDEPENDENT AUDITORS' REPORT
DELOITTE & TOUCHE
Schering-Plough Corporation, its Directors and Shareholders:
We have audited the accompanying consolidated balance sheets of
Schering-Plough Corporation and subsidiaries as of December 31,
1998 and 1997 and the related statements of consolidated income,
shareholders' equity and cash flows for each of the three years
in the period ended December 31, 1998. These financial statements
are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial state-
ments based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of
Schering-Plough Corporation and subsidiaries at December 31, 1998
and 1997 and the results of their operations and their cash flows
for each of the three years in the period ended December 31,
1998, in conformity with generally accepted accounting
principles.
/S/DELOITTE & TOUCHE LLP
Parsippany, New Jersey
February 12, 1999
Schering-Plough Corporation and Subsidiaries
<TABLE>
Six-Year Selected Financial & Statistical Data(Dollars in millions, except per
share figures)
1998 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C> <C>
Operating Results
Net sales . . . . . . . . . . . . . $8,077 $6,778 $5,656 $5,104 $4,537 $4,229
Income before income taxes. . . . . 2,326 1,913 1,606 1,395 1,227 1,073
Income from continuing operations
before cumulative effect of
accounting change. . . . . . . . . 1,756 1,444 1,213 1,053 926 816
Discontinued operations . . . . . . - - - (166) (4) 9
Cumulative effect of accounting
change . . . . . . . . . . . . . . - - - - - (94)
Net income. . . . . . . . . . . . . 1,756 1,444 1,213 887 922 731
Basic EPS from continuing
operations before cumulative
effect of accounting change. . . . 1.20 .98 .82 .71 .61 .52
Discontinued operations . . . . . . - - - (.11) (.01) .01
Cumulative effect of accounting
change . . . . . . . . . . . . . . - - - - - (.06)
Basic earnings per common share . . 1.20 .98 .82 .60 .60 .47
Diluted EPS from continuing
operations before cumulative
effect of accounting change. . . . 1.18 .97 .82 .70 .60 .51
Diluted earnings per common share . 1.18 .97 .82 .59 .60 .46
Investments
Research and development . . . . . $1,007 $ 847 $ 723 $ 657 $ 610 $ 567
Capital expenditures . . . . . . . 389 405 336 304 286 345
Financial Condition
Property, net . . . . . . . . . . . $2,675 $2,526 $2,246 $2,099 $2,082 $1,968
Total assets. . . . . . . . . . . . 7,840 6,507 5,398 4,665 4,326 4,317
Long-term debt. . . . . . . . . . . 4 46 46 87 186 182
Shareholders' equity. . . . . . . . 4,002 2,821 2,060 1,623 1,574 1,582
Net book value per common share . . 2.72 1.93 1.41 1.11 1.06 1.02
Financial Statistics
Income from continuing operations
before cumulative effect of
accounting change as a
percent of sales . . . . . . . . . 21.7% 21.3% 21.4% 20.6% 20.4% 19.3%
Net income as a percent of sales. . 21.7% 21.3% 21.4% 17.4% 20.3% 17.3%
Return on average shareholders'
equity . . . . . . . . . . . . . . 51.5% 59.2% 65.9% 55.5% 58.4% 46.0%
Effective tax rate . . . . . . . . 24.5% 24.5% 24.5% 24.5% 24.5% 24.0%
Other Data
Cash dividends per common share . . $ .425 $ .368 $.32 $ .281 $ .248 $ .218
Cash dividends on common shares . . 627 542 474 416 379 340
Depreciation and amortization . . . 238 200 173 157 145 131
Number of employees . . . . . . . . 25,100 22,700 20,600 20,100 20,000 20,300
Average shares outstanding
for basic EPS(in millions) . . . . 1,468 1,464 1,471 1,479 1,530 1,561
Average shares outstanding
for diluted EPS(in millions) . . . 1,488 1,480 1,487 1,498 1,547 1,580
Common shares outstanding
at year-end (in millions). . . . . 1,472 1,465 1,461 1,457 1,488 1,548
Certain amounts for years prior to 1998 have been restated for the effect of the
1998 2-for-1 stock split.
</table
</TABLE>
Schering-Plough Corporation and Subsidiaries
Subsidiaries of Registrant
As of December 31, 1998
Exhibit 21
State or Country
of Incorporation
Subsidiaries of Registrant or Organization
AESCA Chemisch Pharmazeutische Fabrik GmbH Austria
American Image Productions, Inc. Tennessee
American Scientific Laboratories, Inc. Delaware
Ark Products Limited United Kingdom
Avondale Chemical Co., Ltd. Ireland
Beneficiadora e Industrializadora S.A. de C.V. Mexico
Canji, Inc. Delaware
Chemibiotic (Ireland) Limited Ireland
Colombia Veterinary Holdings, Inc. Panama
Coopers Animal Health Limited United Kingdom
Coopers Brasil Ltda. Brazil
Coopers Uruguay S.A. Uruguay
Dashtag United Kingdom
Desarrollos Farmaceuticos Y Cosmeticos S.A. Spain
DNAX Research Institute of Molecular & Cellular Biology, Inc. California
Douglas Industries, Inc. Delaware
Dr. Scholl's Foot Comfort Shops, Inc. Delaware
Essex (Taiwan) Ltd. Taiwan
Essex Chemie A.G. Switzerland
Essex Farmaceutica S. A. Colombia
Essex Farmaceutica Portuguesa, Lda Portugal
Essex Italia S.p.A. Italy
Essex Pharma GmbH Germany
Essex Pharmaceuticals, Inc. Philippines
Essexfarm, S. A. Ecuador
Farmaceutica Essex, S. A. Spain
Garden Insurance Co., Ltd. Bermuda
Integrated Therapeutics Group, Inc. Delaware
Key Pharma S.A. Argentina
Key Pharma S.A. Ecuador
Key Pharma, A. G. Switzerland
Key Pharma, S.A. Spain
Key Pharmaceuticals Export Co., Inc. U.S. Virgin Islands
Key Pharmaceuticals, Inc. Florida
Kirby Medical Products Cia Ltda Chile
Kirby-Warrick Pharmaceuticals Limited United Kingdom
Laboratorio Essex, C.A. Venezuela
Laboratorio S.P. White's, C.A. Venezuela
Laboratorios Essex S.A. Argentina
Loftus Bryan Chemicals Limited Ireland
Macol, S.A. Colombia
Mallinckrodt Veterinary Limited Ireland
Medexa, S.A. de C.V. Mexico
Med-Nim (Proprietary) Limited South Africa
MedAdvisor, Inc. Delaware
P.T. Schering-Plough Indonesia Indonesia
Pharmaceutical Supply Corporation Delaware
Pharmaco(Canada) Ltd. Canada
Pharmaco, Inc. Delaware
Pitman-Moore Animal Health Limited New Zealand
Plough (Australia) Pty. Limited Australia
Plough (UK) Limited United Kingdom
Plough Benelux S.A. Belgium
Plough Broadcasting Co., Inc. Delaware
Plough Consumer Products (Asia) Ltd. Hong Kong
Plough Consumer Products (Philippines) Inc. Philippines
Plough de Venezuela, C.A. Venezuela
Plough Export, Inc. Tennessee
Plough Farma, Lda. Portugal
Plough France S.A. France
Plough Hellas Limited Greece
Plough Laboratories, Inc. Tennessee
Plough S.p.A. Italy
Plough Services AG Switzerland
PPL, Inc. Tennessee
Pro Medica AB Sweden
Professional Pharmaceutical Corporation Delaware
Professional Vaccine Corporation Delaware
S-P RIL Limited United Kingdom
S-P Veterinary (UK) Limited United Kingdom
S-P Veterinary Holdings Limited United Kingdom
S-P Veterinary Limited United Kingdom
Scheramex S.A. de C.V. Mexico
Scherico, Ltd. Switzerland
Schering Canada Inc. Canada
Schering Corporation New Jersey
Schering Institutional Sales Corporation Delaware
Schering Laboratories Advertising Inc. Delaware
Schering Sales Corporation Delaware
Schering Sales Management, Inc. Nevada
Schering Transamerica Corporation New Jersey
Schering-Plough Korea South Korea
Schering-Plough (Bray) Limited Ireland
Schering-Plough France
Schering-Plough Grenada Limited Grenada
Schering-Plough (Proprietary) Limited South Africa
Schering-Plough A/S Denmark
Schering-Plough A/S Norway
Schering-Plough AB Sweden
Schering-Plough Animal Health Limited Australia
Schering-Plough Animal Health Limited Hong Kong
Schering-Plough Animal Health Limited New Zealand
Schering-Plough Animal Health Limited Thailand
Schering-Plough Animal Health Operations Sdn Bhd Malaysia
Schering-Plough Animal Health Sdn Bhd Malaysia
Schering-Plough Animal Health Corporation Delaware
Schering-Plough Animal Health, Inc. Philippines
Schering-Plough Animal Health Corporation Delaware
Schering-Plough Animal Health Pte. Ltd. Singapore
Schering-Plough B.V. Netherlands
Schering-Plough C.A. Venezuela
Schering-Plough Central East A.G. Switzerland
Schering-Plough (China) Ltd. Bermuda
Schering-Plough Compania Limitada Chile
Schering-Plough Coordination Center N.V./S.A. Belgium
Schering-Plough Corp., U.S.A. Delaware
Schering-Plough Corporation Philippines
Schering-Plough del Caribe, Inc. New Jersey
Schering-Plough del Ecuador, S.A. Ecuador
Schering-Plough del Peru S.A. Peru
Schering-Plough External Affairs, Inc. Delaware
Schering-Plough Farma Lda. Portugal
Schering-Plough Farmaceutica Ltda. Brazil
Schering-Plough HealthCare Holding Co. Delaware
Schering-Plough HealthCare Products Advertising Corp. Tennessee
Schering-Plough HealthCare Products Canada, Inc. Canada
Schering-Plough HealthCare Products Sales Corporation California
Schering-Plough HealthCare Products, Inc. Delaware
Schering-Plough Holdings France, SAS France
Schering-Plough Holdings Ltd. United Kingdom
Schering-Plough II - Veterinaria, Lda. Portugal
Schering-Plough INT Limited United Kingdom
Schering-Plough International, Inc. Delaware
Schering-Plough Investment Co., Inc. Delaware
Schering-Plough Investments Limited Delaware
Schering-Plough Kabushiki Kaisha Japan
Schering-Plough Labo N.V. Belgium
Schering-Plough Legislative Resources, L.L.C. Delaware
Schering-Plough Limited Iran
Schering-Plough Limited Taiwan
Schering-Plough Limited Thailand
Schering-Plough Limited United Kingdom
Schering-Plough Ltd. Switzerland
Schering-Plough N.V./S.A. Belgium
Schering-Plough Overseas Limited Delaware
Schering-Plough OY Finland
Schering-Plough Pharmaceutical Industrial and Commercial S.A. Greece
Schering-Plough Pensions Ireland Limited Ireland
Schering-Plough Products, Inc. Delaware
Schering-Plough Pty. Limited Australia
Schering-Plough Real Estate Company, Inc. Delaware
Schering-Plough Real Property Holdings, Inc. Delaware
Schering-Plough Research Institute Delaware
Schering-Plough S.A. Paraguay
Schering-Plough S.A. Argentina
Schering-Plough S.A. Colombia
Schering-Plough S.A. Panama
Schering-Plough S.A. Spain
Schering-Plough S.A. Uruguay
Schering-Plough S.A. de C.V. Mexico
Schering-Plough S.p.A. Italy
Schering-Plough Sante Animale France
Schering-Plough Sdn. Bhd. Malaysia
Schering-Plough Tibbi Urunler Ticaret, A.S. Turkey
Schering-Plough Veterinaire France
Schering-Plough Veterinaria, S.A. de C.V. Mexico
Schering-Plough Veterinary BV Netherlands
Schering-Plough Veterinary Corporation Nevada
Schering-Plough Veterinary NV/SA Belgium
Schering-Plough Veterinary Ltd. Thailand
Schering-Plough Veterinary Operations, Inc. Delaware
Schering-Plough Veterinary S.A. Greece
Sentipharm A.G. Switzerland
Shanghai Schering-Plough Pharmaceutical Company, Ltd. China
SOL Limited Bermuda
SP Biotech, S.A. Spain
SP HealthCare Products Corporation Delaware
SP Neurotech, S.A. Spain
Suntan Sensations, Inc. California
Syntro Corporation Delaware
Syntro Zeon, LC Kansas
SyntroVenture Corporation Kansas
SyntroVet Incorporated Kansas
Tasman Vaccine Laboratory (UK) Limited United Kingdom
Technobiotic Ltd. Australia
The Coppertone Corporation Florida
Undra S.A. de C.V. Mexico
UNICET, SAS France
Warrick Pharmaceuticals Corporation Delaware
Warrick Pharmaceuticals Limited United Kingdom
Wellnex Pharmaceuticals India
Werthenstein Chemie A.G. Switzerland
White Laboratories Ltd. United Kingdom
White Laboratories of Canada Ltd. Canada
White Laboratories, Inc. New Jersey
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in
Registration Statements No. 2-83963, No. 33-19013, No. 33-
50606 and No. 333-30331 on Form S-8, Registration Statement
No. 333-853 on Form S-3, Post Effective Amendment No. 1 to
Registration Statement No. 2-84723 on Form S-8, Post-
Effective Amendment No. 1 to Registration Statement No. 2-
80012 on Form S-3, Post-Effective Amendment No. 1 to
Registration Statement No. 2-77740 on Form S-3
and Registration Statements No. 333-12909, No. 333-30355
on Form S-3 of our reports dated February 12, 1999,
appearing in and incorporated by
reference in this Annual Report on Form 10-K of Schering-
Plough Corporation for the year ended December 31, 1998.
/s/ DELOITTE & TOUCHE, LLP
Parsippany, New Jersey
February 25, 1999
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned
officers and/or directors of Schering-Plough Corporation, a New
Jersey corporation (herein called the "Corporation"), does hereby
constitute and appoint William J. Silbey, Thomas H. Kelly and
Benjamin Croce, or any of them, his or her true and lawful
attorney or attorneys and agent or agents, to do any and all acts
and things and to execute any and all instruments which said
attorney or attorneys and agent or agents may deem necessary or
advisable to enable the Corporation to comply with the Securities
Exchange Act of 1934, as amended, and any rules, regulations,
requirements or requests of the Securities and Exchange Commission
thereunder or in respect thereof in connection with the filing
under said Act of the Annual Report of the Corporation on Form 10-
K for the fiscal year ended December 31, 1998 (herein called the
"Form 10-K"); including specifically, but without limiting the
generality of the foregoing, the power and authority to sign the
respective names of the undersigned officers and/or directors as
indicated below to the Form 10-K and/or to any amendment of the
Form 10-K and each of the undersigned does hereby ratify and
confirm all that said attorney or attorneys and agent or agents,
or any of them, shall do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, each of the undersigned has subscribed these
presents this 23rd day of February, 1999.
/s/ Richard Jay Kogan_____________ /s/ Jack L. Wyszomierski
Richard Jay Kogan, Chairman and Jack L. Wyszomierski, Executive
Chief Executive Officer; Director Vice President and Chief
Financial Officer
/s/ Thomas H. Kelly______________ /s/ H. Barclay Morley___________
Thomas H. Kelly, Vice President H. Barclay Morley
and Controller; Principal Director
Accounting Officer
/s/ Hans W. Becherer_________ /s/ Carl E. Mundy, Jr.
Hans W. Becherer Carl E. Mundy, Jr.
Director Director
/s/ Raul E. Cesan____________ /s/ Richard de J. Osborne_______
Raul E. Cesan Richard de J. Osborne
Director Director
/s/ Hugh A. D'Andrade_____________/s/ Patricia F. Russo___________
Hugh A. D'Andrade Patricia F. Russo
Director Director
/s/ David C. Garfield___________ /s/ William A. Schreyer_________
David C. Garfield William A. Schreyer
Director Director
/s/ Regina E. Herzlinger________ /s/ Robert F. W. van Oordt______
Regina E. Herzlinger Robert F. W. van Oordt
Director Director
/s/ Robert P. Luciano_____________/s/ James Wood__________________
Robert P. Luciano James Wood
Director Director
/s/ Donald L. Miller
Donald L. Miller
Director
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains financial data extracted from Schering-Plough Corporation
Consolidated Financial Statements and 10-K schedules for the year ended December
31, 1998, and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-1-1998
<PERIOD-END> DEC-31-1998
<CASH> 1259
<SECURITIES> 0
<RECEIVABLES> 704
<ALLOWANCES> 98
<INVENTORY> 841
<CURRENT-ASSETS> 3958
<PP&E> 4068
<DEPRECIATION> 1393
<TOTAL-ASSETS> 7840
<CURRENT-LIABILITIES> 3032
<BONDS> 4
0
0
<COMMON> 1015
<OTHER-SE> 2987
<TOTAL-LIABILITY-AND-EQUITY> 7840
<SALES> 8077
<TOTAL-REVENUES> 8077
<CGS> 1601
<TOTAL-COSTS> 1601
<OTHER-EXPENSES> 1007
<LOSS-PROVISION> 14
<INTEREST-EXPENSE> 19
<INCOME-PRETAX> 2326
<INCOME-TAX> 570
<INCOME-CONTINUING> 1756
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1756
<EPS-PRIMARY> 1.20
<EPS-DILUTED> 1.18
</TABLE>
EXHIBIT 99
CAUTIONARY STATEMENTS REGARDING SAFE HARBOR
PROVISIONS
OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The Company is filing this cautionary statement identifying important
factors that could cause the Company's actual results to differ materially
from those projected in forward looking statements of the Company made
by, or on behalf of, the Company. Those factors include:
- - Competitive factors including technological advances attained by
competitors; patents granted to competitors; new products of
competitors coming to the market; generic competition as the
Company's products mature.
- - Increased pricing pressure both in the United States and abroad from
managed care buyers, institutions and government agencies. In the
United States, among other developments, consolidation among
managed care organizations may increase price pressures and may
result in managed care organizations having greater influence over
prescription decisions through formulary decisions and other policies.
- - Government laws and regulations affecting domestic and international
operations including, among other laws and regulations, those
resulting from healthcare reform initiatives in the United States at the
state and federal level and in other countries, as well as laws and
regulations relating to trade, monetary and fiscal policies, taxes, price
controls, and possible nationalization.
- - Patent positions can be highly uncertain and patent disputes are not
unusual. An adverse result in a patent dispute can preclude
commercialization of products or negatively impact sales of existing
products.
- - Uncertainties of the FDA approval process and the regulatory approval
processes of non-U.S. countries, including, without limitation, delays
in approval of new products.
- - Difficulties in product development. Pharmaceutical product
development is highly uncertain. Products that appear promising in
the early phases of development may fail to reach market for
numerous reasons. They may be found to be ineffective or to have
harmful side effects in clinical or pre-clinical testing, they may fail to
receive the necessary regulatory approvals, they may turn out not to
be economically feasible because of manufacturing costs or other
factors or they may be precluded from commercialization by the
proprietary rights of others.
- - Recalls of pharmaceutical products as a consequence of previously
unknown side-effects or for other reasons may occur.
- - Major products such as CLARITIN and INTRON A/REBETRON
Combination Therapy accounted for a material portion of the
Company's 1998 revenues. If any major product, such as CLARITIN
and INTRON A/REBETRON Combination Therapy, were to become
subject to a problem such as loss of patent protection, previously
unknown side-effects or if a new, more effective treatment should be
introduced, the impact on revenues could be significant.
- - Operating problems in the Company's computer systems and
equipment and instruments with embedded microprocessors due to
their inability to distinguish years after 1999 from years preceding
1999 and the failure of the Company to identify or fix all such "Year
2000" problems.
- - Inability of a major supplier or major clinical research organization or
major customer (such as a large drug wholesaler, distributor or
managed care organization) to continue operations due to "Year
2000" problems.
- - Failure of the Company to foresee and correct systems and
commercial arrangements to address the new European currency
(euro) introduced in January 1999.
- - Significant litigation adverse to the Company.
- - Fluctuations in interest rates and foreign currency exchange rates.
