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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1997 Commission File Number 1-1225
AMERICAN HOME PRODUCTS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 13-2526821
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
Five Giralda Farms, Madison, N.J. 07940
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (973) 660-5000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No
The number of shares of Common Stock outstanding as of the close of business on
October 31, 1997:
Number of
Class Shares Outstanding
Common Stock, $0.33-1/3 par value 649,656,383
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<PAGE>
AMERICAN HOME PRODUCTS CORPORATION AND SUBSIDIARIES
INDEX
Page No.
Part I - Financial Information 2
Item 1. Financial Statements:
Consolidated Condensed Balance Sheets -
September 30, 1997 and December 31, 1996 3
Consolidated Condensed Statements of Income -
Three Months Ended and Nine Months Ended
September 30, 1997 and 1996 4
Consolidated Condensed Statements of Retained
Earnings and Additional Paid-in Capital -
Nine Months Ended September 30, 1997 and 1996 5
Consolidated Condensed Statements of Cash Flows -
Nine Months Ended September 30, 1997 and 1996 6
Notes to Consolidated Condensed Financial Statements 7-9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-17
Part II - Other Information 18
Item 1. Legal Proceedings 18-20
Item 6. Exhibits and Reports on Form 8-K 20
Signature 21
Exhibit Index EX-1
- 1 -
<PAGE>
Part I - Financial Information
AMERICAN HOME PRODUCTS CORPORATION AND SUBSIDIARIES
The consolidated condensed financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and regulations
of the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations; however, the Company believes that
the disclosures are adequate to make the information presented not misleading.
In the opinion of management, the financial statements include all adjustments
necessary to present fairly the financial position of the Company as of
September 30, 1997 and December 31, 1996, the results of its operations for the
three months and nine months ended September 30, 1997 and 1996, and its cash
flows and the changes in retained earnings and additional paid-in capital for
the nine months ended September 30, 1997 and 1996. It is suggested that these
financial statements and management's discussion and analysis of financial
condition and results of operations be read in conjunction with the financial
statements and the notes thereto included in the Company's 1996 Annual Report
on Form 10-K and Quarterly Reports on Form 10-Q for the quarters ended
March 31 and June 30, 1997.
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<PAGE>
<TABLE>
AMERICAN HOME PRODUCTS CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(In Thousands Except Per Share Amounts)
<CAPTION>
September 30, December 31,
1997 1996
<S> <C> <C>
ASSETS
Cash and cash equivalents .................... $1,089,258 $1,322,297
Marketable securities ........................ 53,804 221,820
Accounts receivable less allowances .......... 2,697,693 2,541,714
Inventories:
Finished goods .......................... 1,116,727 1,121,055
Work in progress ........................ 679,124 567,240
Materials and supplies................... 696,915 701,074
2,492,766 2,389,369
Other current assets including deferred taxes. 1,132,390 995,219
Total Current Assets 7,465,911 7,470,419
Property, plant and equipment................. 6,666,300 6,254,666
Less accumulated depreciation ........... 2,450,679 2,217,933
4,215,621 4,036,733
Goodwill and other intangibles, net of
accumulated amortization ................ 8,611,623 8,517,610
Other assets including deferred taxes ........ 881,261 760,581
Total Assets $21,174,416 $20,785,343
LIABILITIES
Loans payable ................................ $53,758 $76,574
Trade accounts payable ....................... 1,114,235 940,076
Accrued expenses ............................. 3,097,959 2,810,223
Accrued federal and foreign taxes ............ 499,554 510,762
Total Current Liabilities 4,765,506 4,337,635
Long-term debt ............................... 5,747,785 6,020,575
Other noncurrent liabilities ................. 2,159,881 2,486,375
Postretirement benefit obligations other
than pensions ........................... 816,969 782,342
Minority interests ........................... 222,603 196,324
STOCKHOLDERS' EQUITY
$2 convertible preferred stock, par value
$2.50 per share ......................... 73 79
Common stock, par value $0.33-1/3 per share .. 216,401 213,328
Additional paid-in capital ................... 2,371,557 2,034,337
Retained earnings ............................ 5,145,082 4,756,270
Currency translation adjustments ............. (271,441) (41,922)
Total Stockholders' Equity .............. 7,461,672 6,962,092
Total Liabilities and Stockholders'
Equity.................................$21,174,416 $20,785,343
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
balance sheets.
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<PAGE>
<TABLE>
AMERICAN HOME PRODUCTS CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(In Thousands Except Per Share Amounts)
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Net Sales.............. $3,481,870 $3,470,922 $10,584,647 $10,607,557
Cost of goods sold .... 970,666 1,058,950 3,061,606 3,427,536
Selling, general and
administrative
expenses............. 1,300,736 1,267,663 3,967,288 3,914,852
Research and
development
expenses ............ 378,273 350,823 1,130,081 1,048,471
Interest expense, net.. 93,249 104,577 294,758 341,258
Other income, net ..... (13,160) (4,546) (62,991) (52,538)
Special charges ....... 180,000 - 180,000 -
Income before federal
and foreign taxes ... 572,106 693,455 2,013,905 1,927,978
Provision for taxes ... 136,574 202,330 542,604 556,213
Net Income ............ $435,532 $491,125 $1,471,301 $1,371,765
Net Income per Share
of Common Stock ..... $0.67 $0.77 $2.28 $2.16
Dividends per share
of common stock ..... $0.41 $0.385 $1.23 $1.155
Average number of
common shares
outstanding during
the period used in
the computation of
net income per share
of common stock ..... 649,009 637,410 645,716 633,920
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
statements.
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<PAGE>
<TABLE>
AMERICAN HOME PRODUCTS CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF RETAINED EARNINGS
AND ADDITIONAL PAID-IN CAPITAL
(In Thousands)
<CAPTION>
Nine Months Ended September 30,
RETAINED EARNINGS 1997 1996
<S> <C> <C>
Balance, beginning of period .....$4,756,270 $3,875,224
Add: Net income ................. 1,471,301 1,371,765
6,227,571 5,246,989
Less: Cash dividends declared .... 1,074,713* 731,383
Cost of treasury stock
acquired (less amounts
charged to capital) and
other items .............. 7,776 3,580
1,082,489 734,963
Balance, end of period............$5,145,082 $4,512,026
ADDITIONAL PAID-IN CAPITAL
Balance, beginning of period .... $2,034,337 $1,515,154
Add: Excess over par value
of common stock issued .. 338,185 360,688
Less: Cost of treasury
stock acquired (less
amounts charged to
retained earnings) ....... 965 1,025
Balance, end of period ...........$2,371,557 $1,874,817
</TABLE>
* Reflects the 1997 fourth quarter common stock dividend of $0.43
per share ($279,157 in the aggregate) declared on
September 25, 1997 and payable on December 1, 1997.
The accompanying notes are an integral part of these consolidated condensed
statements.
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<PAGE>
<TABLE>
AMERICAN HOME PRODUCTS CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In Thousands)
<CAPTION>
Nine Months Ended September 30,
1997 1996
<S> <C> <C>
Operating Activities
Net income ............................... $1,471,301 $1,371,765
Adjustments to reconcile net income to net
cash provided from operating activities:
Special Charges ....................... 180,000 -
Gains on sales of businesses
and other assets .................... (123,156) (51,069)
Depreciation and amortization ......... 554,301 510,316
Deferred income taxes ................. (291,470) (29,076)
Changes in working capital, net........ (333,330) (107,264)
Other, net ............................ (277,214) 27,792
Net cash provided from operating
activities ............................ 1,180,432 1,722,464
Investing Activities
Purchases of property, plant and
equipment ............................. (579,067) (523,022)
Purchases of businesses, net of
cash acquired ......................... (479,694) -
Proceeds from sales of businesses
and other assets ...................... 279,459 200,424
Proceeds from sales of/(purchases of)
marketable securities, net ............ 168,208 (18,273)
Net cash used for investing activities ... (611,094) (340,871)
Financing Activities
Net repayments of debt ................... (295,637) (1,107,195)
Dividends paid ........................... (795,556) (731,383)
Exercise of stock options ................ 324,440 353,692
Purchases of treasury stock .............. (10,190) (9,887)
Net cash used for financing
activities ............................ (776,943) (1,494,773)
Effects of exchange rates on
cash balances ......................... (25,434) (1,629)
Decrease in cash and cash equivalents .... (233,039) (114,809)
Cash and cash equivalents, beginning
of period ............................. 1,322,297 1,802,397
Cash and cash equivalents, end
of period ............................. $1,089,258 $1,687,588
The accompanying notes are an integral part of these consolidated condensed
statements.
Supplemental Information
Interest payments $366,181 $460,911
Income tax and related interest
payments, net of refunds 845,813 304,405
</TABLE>
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<PAGE>
AMERICAN HOME PRODUCTS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Note 1. Special Charges
On September 15, 1997, the Company announced the voluntary market
withdrawal of fenfluramine, manufactured and sold
under the name PONDIMIN, and dexfenfluramine, marketed under
the name REDUX. The Company took this action and withdrew
the products on the basis of new, preliminary information
regarding heart valve abnormalities in patients using these
medications. The 1997 third quarter and first nine months
results of operations include special charges aggregating
$180.0 million ($117.0 million after-tax or $0.18 per share).
The special charges reflect the one-time costs associated
with the voluntary market withdrawal and include provisions
for product returns, notification and administrative handling
fees, the writedown of inventory and supplies, and other
related costs. These costs do not include provisions for any
subsequent charges which may result from legal actions
related to these products.
Note 2. Contingencies
The Company is involved in various legal proceedings,
including product liability and environmental matters of a
nature considered normal to its business. It is the Company's
policy to accrue for amounts related to these legal matters if
it is probable that a liability has been incurred and an
amount is reasonably quantifiable.
The Company has been named as a defendant in numerous legal
actions, many of which are purported class actions, relating
to PONDIMIN and/or REDUX, which the Company estimates were
used in the U.S. prior to their voluntary market withdrawal
by approximately six million people (see Note 1). It is
likely that additional legal actions, including purported
class actions, will be filed. These actions typically allege,
among other things, that the use of PONDIMIN and/or REDUX,
independently or in combination with the prescription drug
phentermine (which the Company does not manufacture,
distribute or market), causes certain serious conditions,
including valvular heart disease. The Company believes that it
has meritorious defenses to these actions and that it has
acted properly at all times in dealing with PONDIMIN and
REDUX matters.
In the opinion of the Company, although the outcome of any
legal proceedings cannot be predicted with certainty, the
ultimate liability of the Company in connection with its
legal proceedings will not have a material adverse effect on
the Company's financial position but could be material to the
results of operations in any one accounting period.
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<PAGE>
AMERICAN HOME PRODUCTS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Note 3. Solvay S.A. Animal Health Acquisition
On February 28, 1997, the Company completed the acquisition of
the worldwide animal health business of Solvay S.A. for
approximately $460 million. The acquisition was financed
partially through the issuance of commercial paper and was
accounted for under the purchase method of accounting. The
purchase price exceeded the net assets acquired by
approximately $328 million which is being amortized over
periods of 20 to 40 years.
Note 4. Derivatives and Other Financial Instruments
Cash and cash equivalents consist primarily of certificates of
deposit, time deposits and other short-term, highly liquid
securities with original maturities of three months or less
and are stated at cost, which approximates fair value.
Long-term debt is stated at face value which approximates fair
value.
The Company enters into interest rate swap and foreign currency
agreements to manage specifically identifiable risks. The
unleveraged interest rate swap agreements convert a portion
of the commercial paper from a floating rate obligation to a
fixed rate obligation. The short-term (approximately 30 days)
foreign exchange forward contracts are part of the Company's
management of foreign currency exposures. The Company does
not speculate on interest or foreign currency exchange rates.
Interest rate swap agreements are accounted for under the
accrual method. Amounts to be paid to the counter-parties of
the agreements are accrued during the period to which the
payments relate and are reflected in interest expense. The
related amounts payable to the counter-parties are included
in accrued expenses. The fair value of the swap agreements is
not recognized in the consolidated condensed financial
statements since the agreements are accounted for as hedges.
If the swap agreements are terminated prior to maturity, any
gains or losses resulting from the termination are deferred
and amortized as an adjustment to interest expense over the
remaining life of the terminated swaps.
Foreign currency agreements are accounted for under the fair
value method. The fair value of the foreign currency
agreements is carried on the balance sheet with changes in
fair value recognized in the results of operations offsetting
any gains and losses recognized on the underlying hedged
transactions.
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<PAGE>
AMERICAN HOME PRODUCTS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Note 5. Earnings per Share
In February 1997, Statement of Financial Accounting Standards
("SFAS") No. 128 - "Earnings per Share" was issued and is
effective for interim and annual reporting periods ending
after December 15, 1997. SFAS No. 128 will require the
presentation of Basic Earnings per Share and Diluted
Earnings per Share in the Company's Consolidated Statements
of Income. Net Income per Share of Common Stock presented in
these financial statements is equivalent to Basic Earnings
per Share. Pro forma Diluted Earnings per Share for the
three months ended September 30, 1997 and 1996 were $0.65 and
$0.75. Pro forma Diluted Earnings per Share for the nine
months ended September 30, 1997 and 1996 were $2.23 and
$2.13.
Note 6. Other Recently Issued Accounting Standards
In June 1997, SFAS No. 130 - "Reporting Comprehensive Income"
and SFAS No. 131 - "Disclosures about Segments of an
Enterprise and Related Information" were issued and are
effective for periods beginning after December 15, 1997.
SFAS No. 130 establishes standards for reporting comprehensive
income and its components. SFAS No. 131 establishes standards
for reporting financial and descriptive information regarding
an enterprise's operating segments. These standards increase
financial reporting disclosures only and will have no impact
on the Company's financial position or results of operations.
- 9 -
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months and Nine Months Ended September 30, 1997
Results of Operations
Management's discussion and analysis of results of operations for the 1997
third quarter and first nine months has been presented on an as-reported basis
except for sales variation explanations which are presented on an as-reported
and pro forma basis. The pro forma sales results reflect businesses acquired
and divested in 1997 and 1996 assuming the transactions occurred as of
January 1, 1996. This activity includes the acquisition of the worldwide
animal health business of Solvay S.A. in 1997 and the divestitures of the
American Home Foods business and the Symbiosis surgical products business in
1996.
On an as-reported basis, worldwide net sales for the 1997 third quarter and
first nine months were comparable to prior year levels. On a pro forma
basis, worldwide net sales increased 6% for both the 1997 third quarter and
first nine months. The increases in pro forma worldwide net sales in both
periods were due primarily to higher domestic sales of pharmaceuticals.
Results for the 1997 first nine months also reflect higher worldwide sales of
agricultural products. Worldwide net sales were impacted by unfavorable
foreign exchange effects of 3% for the 1997 third quarter and 2% for the first
nine months.
The following tables set forth worldwide net sales results by major product
category and industry segment together with the percentage changes in "As-
Reported" and "Pro Forma" worldwide net sales from comparable periods in the
prior year:
<TABLE>
<CAPTION>
Three Months As-Reported Pro Forma
($ in Millions) Ended September 30, % Increase % Increase
Net Sales to Customers 1997 1996 (Decrease) (Decrease)
<S> <C> <C> <C> <C>
Health Care Products:
Pharmaceuticals $2,284.4 $2,026.1 13% 9%
Consumer Health Care 558.0 564.6 (1)% (1)%
Medical Devices 321.7 321.2 - -
Total Health Care
Products 3,164.1 2,911.9 9% 6%
Agricultural Products 317.7 304.3 4% 4%
Food Products - 254.8 (100)% -
Consolidated Net Sales $3,481.8 $3,471.0 - 6%
</TABLE>
- 10 -
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months and Nine Months Ended September 30, 1997
<TABLE>
<CAPTION>
Nine Months As-Reported Pro Forma
($ in Millions) Ended September 30, % Increase % Increase
Net Sales to Customers 1997 1996 (Decrease) (Decrease)
<S> <C> <C> <C> <C>
Health Care Products:
Pharmaceuticals $6,317.3 $5,705.0 11% 8%
Consumer Health Care 1,499.3 1,496.2 - -
Medical Devices 972.2 995.0 (2)% (1)%
Total Health Care
Products 8,788.8 8,196.2 7% 6%
Agricultural Products 1,795.8 1,707.3 5% 5%
Food Products - 704.1 (100)% -
Consolidated Net Sales $10,584.6 $10,607.6 - 6%
</TABLE>
The following sales variation explanations are presented on an as-reported and
pro forma basis:
On an as-reported basis, worldwide pharmaceutical sales increased 13% for
the 1997 third quarter and 11% for the first nine months. On a pro forma
basis, after adjusting for the acquisition of the worldwide animal health
business of Solvay S.A. in February 1997, worldwide pharmaceutical sales
increased 9% for the 1997 third quarter and 8% for the first nine months
due primarily to higher sales of PREMARIN products, EFFEXOR, CORDARONE,
ZOTON, infant nutritionals, ZOSYN (marketed internationally as TAZOCIN),
NAPRELAN (introduced in the 1996 second quarter), BENEFIX (introduced in
the 1997 first quarter) and DURACT (introduced in the 1997 third quarter)
offset, in part, by lower sales of other pharmaceuticals. Worldwide
pharmaceutical results for the 1997 third quarter also reflect lower
sales of antiobesity products and LODINE. On an as-reported basis, U.S.
pharmaceutical sales increased 18% for the 1997 third quarter and 17% for
the first nine months. On a pro forma basis, U.S. pharmaceutical sales
increased 17% for the 1997 third quarter and 16% for the first nine
months. The increase in pro forma U.S. pharmaceutical sales for the 1997
third quarter consisted of unit volume growth of 14% and price increases
of 3%. The increase in pro forma U.S. pharmaceutical sales for the 1997
first nine months consisted of unit volume growth of 13% and price
increases of 3%. On an as-reported basis, international pharmaceutical
sales increased 5% for the 1997 third quarter and 3% for the first nine
months. On a pro forma basis, international pharmaceutical sales
decreased 1% for both the 1997 third quarter and first nine months.
The decrease in pro forma international pharmaceutical sales for the
1997 third quarter consisted of unit volume growth of 5% and price
increases of 2% which were offset by unfavorable foreign exchange of 8%.
The decrease in pro forma international pharmaceutical sales for the
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<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months and Nine Months Ended September 30, 1997
1997 first nine months consisted of unit volume growth of 3% and price
increases of 1% which were offset by unfavorable foreign exchange of 5%.
On an as-reported and pro forma basis, worldwide consumer health care
sales decreased 1% for the 1997 third quarter and were comparable with
prior year results for the first nine months. Worldwide consumer health
care results for the 1997 third quarter and first nine months reflect
higher sales of ADVIL and CENTRUM products offset, in part, by the effect
of the disposal of several non-core products in late 1996 and early 1997.
Worldwide consumer health care results for the 1997 third quarter also
reflect lower sales of cough/cold products. On an as-reported and pro
forma basis, U.S. consumer health care sales decreased 5% for the 1997
third quarter and 3% for the first nine months. The decrease in U.S.
consumer health care sales for the 1997 third quarter consisted of unit
volume declines of 6% offset by price increases of 1%. The decrease in
U.S. consumer health care sales for the 1997 first nine months consisted
of unit volume declines of 5% offset by price increases of 2%. On an
as-reported and pro forma basis, international consumer health care sales
increased 8% for both the 1997 third quarter and first nine months. The
increase in international consumer health care sales for the 1997 third
quarter consisted of unit volume growth of 10% and price increases of 3%
which were offset by unfavorable foreign exchange of 5%. The increase in
international consumer health care sales for the 1997 first nine months
consisted of unit volume growth of 8% and price increases of 3% which
were offset by unfavorable foreign exchange of 3%.
On an as-reported and pro forma basis, worldwide medical devices sales
for the 1997 third quarter were comparable to prior year levels. On an
as-reported basis, worldwide medical devices sales decreased 2% for the
1997 first nine months. On a pro forma basis, after adjusting for the
divestiture of the Symbiosis surgical products business in March 1996,
worldwide medical devices sales decreased 1% for the 1997 first nine
months. Worldwide medical devices results for both periods reflect lower
sales of wound closure products offset, in part, by higher sales of
needles and syringes. Worldwide medical devices sales for the 1997 third
quarter consisted of unit volume growth of 5% which was offset by price
decreases of 2% and unfavorable foreign exchange of 3%. The decrease in
pro forma worldwide medical devices sales for the 1997 first nine months
consisted of unit volume growth of 3% which was offset by price decreases
of 1% and unfavorable foreign exchange of 3%.
On an as-reported and pro forma basis, worldwide agricultural products
sales increased 4% for the 1997 third quarter and 5% for the first nine
months due to higher sales of herbicides resulting primarily from
increased soybean acreage and new product launches offset, in part, by
lower sales of insecticides due primarily to poor weather conditions in
several major European markets during the current growing season. On an
as-reported and pro forma basis, U.S. agricultural products sales
- 12 -
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months and Nine Months Ended September 30, 1997
increased 8% for the 1997 third quarter and 5% for the first nine months.
The increase in U.S. agricultural products sales for the 1997 third
quarter consisted of unit volume growth of 6% and price increases of 2%.
The increase in U.S. agricultural products sales for the 1997 first nine
months consisted of unit volume growth of 3% and price increases of 2%.
Due to the seasonality of the U.S. agricultural products business, which
is concentrated primarily in the first six months of the year, U.S.
agricultural products sales and results of operations for the 1997 third
quarter and first nine months are not indicative of the results to be
expected in subsequent fiscal quarters or for the full year. On an
as-reported and pro forma basis, international agricultural products sales
increased 3% for the 1997 third quarter and 5% for the first nine months.
The increase in international agricultural products sales for the 1997
third quarter consisted of unit volume growth of 5% and price increases of
5% which were offset by unfavorable foreign exchange of 7%. The increase
in international agricultural products sales for the 1997 first nine
months consisted of unit volume growth of 7% and price increases of 4%
which were offset by unfavorable foreign exchange of 6%.
Cost of goods sold, as a percentage of net sales, decreased to 27.9% for the
1997 third quarter versus 30.5% for the 1996 third quarter, and decreased to
28.9% for the 1997 first nine months versus 32.3% for the 1996 first nine
months due primarily to favorable pharmaceutical and agricultural products
sales mix, an overall product mix improvement as higher sales of
pharmaceuticals and agricultural products replaced the loss of lower margin
food products sales, and to a lesser extent, cost savings.
Selling, general and administrative expenses, as a percentage of net sales,
increased to 37.4% for the 1997 third quarter versus 36.5% for the 1996 third
quarter, and increased to 37.5% for the 1997 first nine months versus 36.9% for
the 1996 first nine months. Higher marketing and selling expenses related to
recent pharmaceutical and agricultural product introductions were offset by the
elimination of marketing and selling expenses associated with the foods
business. Higher general and administrative expenses were due, in part, to
increased pension costs and additional goodwill amortization related to the
Genetics Institute and Solvay S.A. animal health acquisitions.
Research and development expenses increased 8% for both the 1997 third quarter
and first nine months due primarily to higher pharmaceutical research and
development expenditures and operating costs related to recent pharmaceutical
research and development facility expansions.
Interest expense, net decreased in the 1997 third quarter and first nine months
due primarily to the reduction in long-term debt during 1996. Average
long-term debt outstanding during the 1997 and 1996 third quarter was $5,850.1
million and $7,024.3 million, respectively. Average long-term debt outstanding
during the 1997 and 1996 first nine months was $5,884.2 million and $7,251.6
million, respectively.
- 13 -
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months and Nine Months Ended September 30, 1997
Other income, net for the 1997 first nine months included the amount paid in
settlement of a lawsuit brought by Johnson & Johnson and its wholly-owned
subsidiary, Ortho Pharmaceutical Corporation. The settlement was offset by a
previously established reserve for this litigation and a gain on the sale of
the Company's investment in the common stock of certain publicly traded
insurance companies.
As discussed in Note 1 to the Consolidated Condensed Financial Statements, on
September 15, 1997, the Company announced the voluntary market withdrawal of
fenfluramine, manufactured and sold under the name PONDIMIN, and
dexfenfluramine, marketed under the name REDUX. The Company took this action
and withdrew the products on the basis of new, preliminary information
regarding heart valve abnormalities in patients using these medications. The
1997 third quarter and first nine months results of operations include special
charges aggregating $180.0 million ($117.0 million after-tax or $0.18 per
share). The special charges reflect the one-time costs associated with the
voluntary market withdrawal and include provisions for product returns,
notification and administrative handling fees, the writedown of inventory and
supplies, and other related costs. These costs do not include provisions for
any subsequent charges which may result from legal actions related to these
products.
As discussed in Note 2 to the Consolidated Condensed Financial Statements and
in Item 1 - Legal Proceedings of Part II - Other Information, the Company has
been named as a defendant in numerous legal actions, many of which are
purported class actions, relating to PONDIMIN and/or REDUX. The Company
believes that it has meritorious defenses to these actions and that it has
acted properly at all times in dealing with PONDIMIN and REDUX matters. In the
opinion of the Company, although the outcome of any legal proceedings cannot be
predicted with certainty, the ultimate liability of the Company in connection
with these proceedings will not have a material adverse effect on the Company's
financial position but could be material to the results of operations in any
one accounting period.
- 14 -
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months and Nine Months Ended September 30, 1997
The following table sets forth income before taxes by industry segment:
<TABLE>
<CAPTION>
Three Months Nine Months
($ in Millions) Ended September 30, Ended September 30,
Income before Taxes 1997 1996 1997 1996
<S> <C> <C> <C> <C>
Health Care Products $698.7(1) $773.9 $1,979.5(1) $1,911.5
Agricultural Products 9.1 (7.6) 440.3 355.8
Food Products - 53.5 - 113.6
Corporate (135.7) (126.3) (405.9) (452.9)
Consolidated Income
before Taxes $572.1 $693.5 $2,013.9 $1,928.0
</TABLE>
(1) 1997 includes special charges of $180.0 associated with the
voluntary market withdrawal of PONDIMIN and REDUX.
The effective tax rate decreased to 23.9% in the 1997 third quarter from 29.2%
in the 1996 third quarter and decreased to 26.9% in the 1997 first nine months
from 28.8% in the 1996 first nine months due primarily to the reinstatement of
the U.S. research tax credit in the 1997 third quarter and the tax impact of
the previously discussed special charges associated with the voluntary market
withdrawal of PONDIMIN and REDUX.
Net income and net income per share decreased 11% and 13% for the 1997 third
quarter compared to the 1996 third quarter results and increased 7% and 6% for
the 1997 first nine months compared to the 1996 first nine months results.
Results for the 1997 third quarter and first nine months reflect the
previously discussed special charges associated with the voluntary market
withdrawal of PONDIMIN and REDUX. Excluding the special charges, net income
and net income per share increased 13% and 10% for the 1997 third quarter
compared to the 1996 third quarter results and increased 16% and 14% for the
1997 first nine months compared to the 1996 first nine months results. The
increases in net income and net income per share for both the 1997 third
quarter and first nine months excluding the special charges were greater than
the results registered for net sales due primarily to improved pharmaceutical
and agricultural products sales mix, higher sales of pharmaceuticals and
agricultural products, cost savings and lower interest expense offset, in part,
by the divestiture of the foods business and higher research and development
expenses.
Competition
The Company is not dependent on any one patent-protected product or line of
products for a substantial portion of its sales or results of operations.
However, PREMARIN, the Company's conjugated estrogens product, which has not
had patent protection for many years, does contribute significantly to sales
and results of operations. PREMARIN is not currently subject to generic
- 15 -
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months and Nine Months Ended September 30, 1997
competition in the United States and, on May 5, 1997, the U.S. Food and Drug
Administration (FDA) announced that it will not approve synthetic generic
conjugated estrogens products at this time because these products have not
been shown to contain the same active ingredient as PREMARIN. The FDA further
stated that, until the full composition of PREMARIN is determined, a synthetic
generic version cannot be approved, although a generic product derived from the
same natural source could be approved earlier under certain circumstances.
Although the Company believes that, as a result of this announcement, PREMARIN
is not likely to face generic competition in the near term, it cannot predict
the timing or outcome of continued efforts to obtain approval for a generic
conjugated estrogens product.
Liquidity, Financial Condition and Capital Resources
Cash and cash equivalents decreased $233.0 million in the 1997 first nine
months to $1,089.3 million. Cash flows from operating activities of
$1,180.4 million, proceeds from sales of other assets and marketable securities
of $447.7 million and proceeds from the exercise of stock options of $324.4
million were used principally for dividend payments of $795.6 million, capital
expenditures of $579.1 million, the purchase of the worldwide animal health
business of Solvay S.A. for $460.0 million, and long-term debt reduction of
$295.6 million. Cash flows from operating activities for the 1997 first nine
months were impacted by payments of $381.8 million related to certain
previously accrued long-term tax liabilities which were required to be paid
in connection with the filing of a tax claim and a $200.0 million contribution
to the U.S. defined benefit pension plan. Due to seasonality of the U.S.
agricultural products business, a significant portion of the annual U.S.
agricultural products sales are recorded in the first six months of the year;
however, a significant amount of the related accounts receivable are not
collected until the third quarter. As a result, cash flows from operating
activities for the 1997 first nine months are not indicative of the results
to be expected for the full year.
Capital expenditures included strategic investments in manufacturing and
distribution facilities worldwide and the expansion of the Company's research
and development facilities.
On October 22, 1997, the Company entered into a definitive agreement with
Bausch & Lomb Incorporated for the sale of the stock of Storz Instrument
Company and certain other assets relating to the Storz business for $380.0
million in cash. This transaction, which is subject to certain conditions
including the receipt of necessary governmental approvals and the closing of
the acquisition by Bausch & Lomb of Chiron Vision Corporation, is not expected
to have a material impact on the Company's results of operations. The Company
is exploring strategic alternatives for its remaining medical devices business,
including the possible sale of Sherwood-Davis & Geck and Quinton Instrument
Company.
- 16 -
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months and Nine Months Ended September 30, 1997
Cautionary Statements for Forward Looking Information
Management's discussion and analysis set forth above contains certain forward
looking statements, including statements regarding the Company's financial
position, results of operations and potential competition. These forward
looking statements are based on current expectations. Certain factors which
could cause the Company's actual results to differ materially from expected
and historical results have been identified by the Company in Exhibit 99 to the
Company's 1996 Annual Report on Form 10-K which exhibit is hereby incorporated
by reference.
- 17 -
<PAGE>
Part II - Other Information
Item 1. Legal Proceedings
The Company and its subsidiaries are parties to numerous lawsuits and
claims arising out of the conduct of its business, including those
described in the Company's Annual Report on Form 10-K for the year
ended December 31, 1996 and Quarterly Reports on Form 10-Q for the
periods ended March 31, 1997 and June 30, 1997.
In the action for patent infringement pending in U.S. District Court
(E.D., Pa.), McNeilab Inc. has increased the amount of damages it is
seeking from $60 million to approximately $77 million (plus $10
million in interest) against Scandipharm Inc., which would be
entitled to seek indemnification from a subsidiary of the Company,
Eurand Microencapsulation, S.A. This action is expected to proceed
to trial in late 1997 or early 1998.
In the brand name prescription drug litigation that has been
coordinated and consolidated for pretrial purposes under the caption
In re Brand Name Prescription Drug Antitrust Litigation (MDL 997 N.D.
Ill.), the U.S. Court of Appeals for the Seventh Circuit has (i)
dismissed challenges to the settlements of certain defendants,
including the Company, of the class action case; (ii) reversed the
District Court's decision and held that the Supreme Court's
Illinois Brick ruling that indirect purchasers do not have standing
under federal antitrust laws applies to this litigation; (iii)
reversed the District Court's grant of summary judgment to the
wholesaler defendants and to DuPont Merck; and (iv) reversed the
District Court's ruling that the Higgins case brought by Alabama
retailers should not be remanded to Alabama state court. In the
similar litigation pending in state courts, the courts in the Maine,
Michigan and Minnesota indirect consumer purchase cases have denied
motions to certify the cases as class actions.
On September 15, 1997, the Company's Wyeth-Ayerst Laboratories
division, the manufacturer of PONDIMIN (fenfluramine hydrochloride)
tablets C-IV and the distributor of REDUX (dexfenfluramine
hydrochloride capsules) C-IV, announced a voluntary and immediate
market withdrawal of these antiobesity medications. The Company took
this action on the basis of new, preliminary information provided to
the Company on September 12, 1997 by the U.S. Food and Drug
Administration (FDA) regarding heart valve abnormalities in patients
using these medications. The Company estimates that approximately
six million people used these medications in the U.S.
As of November 12, 1997, the Company has been served or is aware
that it has been named as a defendant in 303 lawsuits as the
manufacturer of PONDIMIN and/or the distributor of REDUX. These
lawsuits have been filed on behalf of individuals who claim to have
been injured as a result of their use of PONDIMIN and/or REDUX,
- 18 -
<PAGE>
either individually or in combination with the prescription drug
phentermine (which the Company does not manufacture, distribute or
market). The lawsuits also often name as defendants other
distributors and/or retailers of PONDIMIN and/or REDUX, the
manufacturers, distributors and/or retailers of phentermine and
physicians or other health care providers. Based on media reports
and other sources, the Company anticipates that it will be named as
a defendant in a significant number of additional PONDIMIN and/or
REDUX lawsuits in the future.
Of the 303 lawsuits naming the Company as a defendant, 141 are
actions that seek certification of a class, some on a national and
others on a statewide basis. Of these 141 lawsuits, 101 are
pending in various federal district courts and 40 are pending in
various state courts. A number of the actions brought in state
courts have been removed to federal courts. In addition, plaintiffs
in various federal court actions have filed motions before the
Judicial Panel on Multidistrict Litigation to transfer and
consolidate all federal litigation of a similar nature for pretrial
proceedings. Individual plaintiffs and two associations have filed
the remaining lawsuits: 96 individual lawsuits and the
associations' lawsuits are pending in various federal district
courts and 66 individual lawsuits have been brought in various
state courts.
Plaintiffs' allegations of liability are based on various theories of
recovery, including, but not limited to, product liability, strict
liability, negligence, various breaches of warranty, conspiracy,
fraud, misrepresentation and deceit. These lawsuits typically allege
that the short or long-term use of PONDIMIN and/or REDUX,
independently or in combination (including the combination of
PONDIMIN and phentermine popularly known as "fen/phen"), causes,
among other things, primary pulmonary hypertension, valvular heart
disease and/or neurological dysfunction. In addition, some lawsuits
allege severe emotional distress caused by the knowledge that
ingestion of these drugs, independently or in combination, could
cause such injuries. Plaintiffs typically seek relief in the form
of monetary damages (including general damages, medical care and
monitoring expenses, loss of earnings and earnings capacity,
compensatory damages and punitive damages), generally in unspecified
amounts, on behalf of the individual or the class. In addition, some
actions seeking class certification ask for certain types of
purportedly equitable relief, including, but not limited to,
declaratory judgments and the establishment of a research or medical
surveillance program.
On September 18, 1997, a securities fraud putative class action was
commenced in U.S. District Court in which the plaintiff alleges that
the Company (and certain officers and directors named as controlling
persons under the Securities Exchange Act of 1934) violated the
Securities Exchange Act of 1934 by failing to disclose material facts
or making material misstatements of fact regarding alleged adverse
events associated with REDUX and/or PONDIMIN. Oran v. American Home
Products Corporation, et al. (D.N.J.). The plaintiff seeks to
represent a class of individuals who purchased shares of the
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<PAGE>
Company's common stock on the open market between March 1, 1997 and
September 16, 1997 and seeks compensatory damages in an unspecified
amount.
In the opinion of the Company, although the outcome of any legal
proceedings cannot be predicted with certainty, the ultimate
liability of the Company in connection with its legal proceedings
will not have a material adverse effect on the Company's financial
position but could be material to the results of operations in any
one accounting period.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description
(10.1)* Deferred Compensation Plan.
(10.2)* Executive Retirement Plan.
(11) Computation of Earnings Per Share.
(27) Financial Data Schedule.
*Denotes management contract or compensatory plan or arrangement
to be filed as an exhibit hereto.
(b) Reports on Form 8-K
A report on Form 8-K regarding the Company's announcement of
the voluntary market withdrawal of fenfluramine, manufactured
and sold under the name PONDIMIN, and dexfenfluramine,
marketed under the name REDUX, was filed on September 15, 1997.
- 20 -
<PAGE>
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICAN HOME PRODUCTS CORPORATION
(Registrant)
By /s/
Paul J. Jones
Vice President and Comptroller
(Duly Authorized Signatory
and Chief Accounting Officer)
Date: November 14, 1997
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<PAGE>
Exhibit Index
Exhibit No. Description
(10.1)* Deferred Compensation Plan.
(10.2)* Executive Retirement Plan.
(11) Computation of Earnings Per Share.
(27) Financial Data Schedule.
*Denotes management contract or compensatory plan or arrangement required
to be filed as an exhibit hereto.
EX-1
<PAGE>
AMERICAN HOME PRODUCTS CORPORATION
DEFERRED COMPENSATION PLAN
Effective as of July 31, 1997
PURPOSE
The purpose of the Deferred Compensation Plan (the "Plan") is to encourage the
retention of a key group of management employees by allowing them to defer
various types of compensation.
SECTION ONE - DEFINITIONS
Whenever used in the Plan, the following terms shall have the following
meanings:
(a) " Administrator " - means the Committee or such entity or person to
whom the Committee may delegate responsibility for administration of the Plan.
(b) " Beneficiary " - means one or more persons or entities (including
a trust or estate) designated by an Employee, at any time or from time to time,
to receive any payment under the Plan at or after such Employee's death. Such
designation shall be made on a form provided or approved by the Administrator.
If at any time a deferred amount shall become payable at or after the death of
an Employee, and there shall not be in existence any person or entity so
designated, then "Beneficiary" means the estate of such Employee.
(c) " Board of Directors " - means the Board of Directors of the
Company.
(d) A " Change of Control " - shall be deemed to have occurred if (i)
any "person" (as that term is used in Sections 13 and 14(d)(2) of the Exchange
Act) other than a Permitted Holder (as defined below) is or becomes the
beneficial owner (as that term is used in Section 13(d) of the Exchange Act),
directly or indirectly, of fifty percent (50%) or more of either the
outstanding shares of Common Stock or the combined voting power of the
Company's then outstanding voting securities entitled to vote generally,
(ii) during any period of two (2) consecutive years, individuals who constitute
the Board of Directors of the Company at the beginning of such period cease
for any reason to constitute at least a majority thereof, unless the election
- 1 -
<PAGE>
or the nomination for election by the Company's stockholders of each new
director was approved by a vote of at least three-quarters (3/4) of the
directors then still in office who were directors at the beginning of the
period or (iii) the Company undergoes a liquidation or dissolution or a sale
of all or substantially all of the assets of the Company. No merger,
consolidation, or corporate reorganization in which the owners of the combined
voting power of the Company's then outstanding voting securities entitled to
vote generally prior to such combination, own fifty percent (50%) or more of
the resulting entity's outstanding voting securities shall, by itself, be
considered a Change of Control. As used herein, "Permitted Holder" means:
(i) the Company, (ii) any corporation, partnership, trust, or other entity
controlled by the Company and (iii) any employee benefit plan (or related
trust) sponsored or maintained by the Company or any such controlled entity.
(e) " Code " - means the Internal Revenue Code of 1986, as amended from
time to time.
(f) " Committee " - means the Compensation and Benefits Committee of
the Board of Directors.
(g) " Company " - means American Home Products Corporation, a Delaware
Corporation.
(h) " Deemed Rate of Interest " - means a rate of interest deemed
payable on amounts deferred under the Plan equal to the average of the quarter
end yields for a ten-year period ending September 30 of the prior year, of ten-
year U.S. Treasury notes plus two percent (2%). The Deemed Rate of Interest
shall be calculated, accrued, credited, and compounded quarterly by the
Treasurer of the Company. The Deemed Rate of Interest may be increased or
decreased from time to time by the Board as it may deem appropriate, provided
that no such decrease shall be effective for deemed interest accruing prior to
the latest of (i) the date of Board action implementing such decrease and (ii)
the date such decrease is communicated to Participants.
(i) " Eligible Employee " - means an employee of the Company employed
in the United States who either: (i) is a principal officer of the Company as
that term is defined at Paragraph 30 of the By-Laws of the Company, or (ii)
earns an annual base salary of not less than one hundred seventy-five thousand
dollars ($175,000) or such greater amount as may be determined from time to
time by the Committee. Whether or not a person is an Eligible Employee will
- 2 -
<PAGE>
be determined on a Plan Year by Plan Year basis, such that a person who
qualifies as an Eligible Employee in a particular Plan Year shall not qualify
as an Eligible Employee in a subsequent Plan Year in which he/she meets neither
of criteria (i) or (ii) above.
(j) " Exchange Act " - means the Securities Exchange Act of 1934, as
amended.
(k) " Effective Date " - means July 31, 1997.
(l) " Participant " - means an Eligible Employee who elects to defer
compensation under the terms of the Plan.
(m) " Plan " - means the American Home Products Corporation Deferred
Compensation Plan as set forth herein and as it may be amended and/or restated
from time to time.
(n) " Plan Year " - means the calendar year, except that the first Plan
Year which shall be the period beginning on the Effective Date and ending on
December 31, 1997.
(o) " Retirement Date " - means the date of an Employee's separation
from service on or after his/her attainment of age fifty-five (55).
(p) " SESP " - means the American Home Products Corporation
Supplemental Savings Plan, as amended from time to time.
(q) " Stock Plans " - means the 1996 Stock Incentive Plan of the
Company and all similar prior and subsequent plans of the Company providing
for the granting of stock options to officers and other key employees of the
Company.
SECTION TWO - DEFERRALS UNDER PRIOR PLANS
An Eligible Employee who, prior to the Effective Date, elected to defer part
or all of (i) the cash portion of his/her Management Incentive Plan ("MIP")
compensation, (ii) his/her base salary under the Deferred Compensation Program
("Program") of the Company, (iii) the income on the proceeds (net of after-tax
withholding and prescribed fees) of the cashless exercise of his/her stock
options under the Stock Plans i.e. proceeds from the sale of the stock
resulting from such exercise or (iv) the proceeds (net after tax withholding)
of the exercise of stock appreciation rights, may elect to have such deferrals
or proceeds considered to be credited under the Plan as of the Effective Date
in accordance with such terms and conditions as may be established by the
Committee. Thereafter, such deferrals shall continue in accordance with the
deferral and distribution provisions of the Plan; provided that amounts
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<PAGE>
attributable to such deferrals shall remain subject to the same elections
and restrictions as previously had been in effect with respect thereto, unless
thereafter changed by the Eligible Employee in accordance with the terms of
the Plan.
SECTION THREE - PARTICIPATION
(a) Participation on the Effective Date. An employee of the Company
shall become a Participant as of the Effective Date if he/she is an Eligible
Employee on the Effective Date and elects to include previously deferred
amounts under the Plan as described in Section Two above or elects to defer on
and after the Effective Date by filing a deferral election form with the
Administrator in accordance with Section 5.
(b) Participation after the Effective Date . Any Eligible Employee
who has not become a Participant on the Effective Date in accordance with
Section 3(a) above shall become a Participant as of the Effective Date of
his/her first deferral under the Plan in accordance with Section 5 following
the Effective Date.
SECTION FOUR - DEFERRALS UNDER THE PLAN
(a) Deferral of Cash Awards under the MIP.
(1) A Participant may designate a percentage of the cash
portion of his/her MIP compensation from the Company which is payable in a Plan
Year (the "Deferred MIP Compensation") to be deferred and distributed in
accordance with a written election made by the Participant in accordance with
Section 5.
(2) A Participant's Deferred MIP Compensation shall accrue deemed
interest, compounded quarterly, at the Deemed Rate of Interest from the date
such Deferred MIP Compensation otherwise would have been paid to the date of
distribution.
(3) The Company shall distribute to a Participant his/her total
Deferred MIP Compensation (together with deemed interest accrued thereon) in
accordance with the deferral period and distribution form designated by the
Participant in accordance with Section 5.
- 4 -
<PAGE>
(b) Deferral of Base Salary.
(1) A Participant may designate a percentage of his/her total annual
base salary for a Plan Year (the "Deferred Salary Compensation") to be deferred
and distributed in accordance with a written election made by the Participant
in accordance with Section 5. However, no such deferral shall be effective
unless the Participant elects with respect to the same Plan Year to have no
less than six percent (6%) of his/her total base salary deferred in accordance
with the SESP, and such SESP deferral shall be subject to the terms of the SESP
and not to this Plan.
(2) A Participant's Deferred Salary Compensation shall accrue deemed
interest, compounded quarterly, at the Deemed Rate of Interest from the date
such Deferred Salary Compensation otherwise would have been paid to the date of
distribution.
(3) The Company shall distribute to the Participant his/her total
Deferred Salary Compensation (together with deemed interest accrued thereon) in
accordance with the deferral period and distribution form designated by the
Participant in accordance with Section 5.
(4) A Participant may, upon no less than thirty (30) days' advance
written notice to the Vice President - Finance of the Company or any successor
thereto as designated by the Committee, prospectively terminate his/her
deferral of base salary, effective as of the date stated in such written notice.
Such termination shall not affect the treatment hereunder of amounts deferred
prior to the effective date of such written notice.
(c) Deferral of Proceeds from a Cashless Exercise/Sale Transaction.
(1) A Participant may designate an amount of the proceeds (net of
withheld taxes and prescribed fees) of a cashless exercise/sale transaction of
stock options granted under the Stock Plans to be held by the Company pursuant
to the Plan ("the "Deferred Stock Option Proceeds") so that deemed interest
accrued thereon in accordance with clause (2) immediately below would be
deferred and distributed in accordance with a written election made by the
Participant in accordance with Section 5.
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<PAGE>
(2) A Participant's Deferred Stock Option Proceeds shall accrue
deemed interest, compounded quarterly, at the Deemed Rate of Interest from the
date the amount of such Deferred Stock Option Proceeds otherwise would have
been paid.
(3) The Company shall distribute to a Participant his/her total
Deferred Stock Option Proceeds (together with deemed interest accrued thereon)
in accordance with the deferral period and distribution form designated by
the Participant in accordance with Section 5.
(4) For purposes of clarity, it shall be understood that the
intent of this Section 4(c) is to provide for a deferral of the Participant's
taxation only with respect to the deemed interest credited in accordance with
clause (2) above and not on the Deferred Stock Option Proceeds. As a result,
it is intended that the cashless exercise/sale transaction shall be taxable to
the Participant as if no election had been made hereunder and, upon
distribution from the Plan, only the deemed interest accrued on the Deferred
Stock Option Proceeds, and not the Deferred Stock Option Proceeds themselves,
shall be taxable to the Participant.
(d) Deferral of Proceeds from Exercise of Stock Appreciation Rights ("SARs").
(1) A Participant may designate an amount of the proceeds of the
exercise of SARs ("Deferred SAR Proceeds"), as specified on the deferral
election form, to be deferred and distributed in accordance with a written
election made by the Participant in accordance with Section 5.
(2) A Participant's Deferred SAR Proceeds shall accrue deemed
interest, compounded quarterly, at the Deemed Rate of Interest from the date
such Deferred SAR Proceeds otherwise would have been paid to the Participant.
(3) The Company shall distribute to the Participant his/her total
Deferred SAR Proceeds (together with deemed interest accrued thereon) in
accordance with the deferral period and distribution form designated by the
Participant in accordance with Section 5.
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<PAGE>
SECTION FIVE - FORM OF DEFERRAL ELECTIONS
(a) All deferrals made under Section 4 shall be evidenced by the
Participant's properly executing a deferred compensation agreement form
supplied by the Administrator in accordance with the rules set forth in this
Section 5.
(b) An election to consider amounts previously deferred to be credited
under this Plan in accordance with Section 2 must be received by the Committee
or its designee prior to the Effective Date.
(c) An election to defer MIP compensation in accordance with Section
4(a) or base salary in accordance with Section 4(b) with respect to a
particular Plan Year must be received by the Committee or its designee no later
than the last day of the preceding Plan Year. Such election must designate
the timing and form of distribution of such Deferred MIP Compensation and/or
base salary and earnings thereon in accordance with the options described in
Section 6(a) and (b), respectively.
(d) An election to have the proceeds from a cashless exercise/sale
transaction held by the Company in accordance with Section 4(c) must be
received by the Committee within the time frame established by the
Committee from time to time. Such election must designate the timing and
form of distribution of such proceeds and earnings thereon in accordance
with the options described in Section 6(c).
(e) An election to defer proceeds from the exercise of SARs in
accordance with Section 4(d) must be received by the Committee no later
than the six months prior to the exercise date of the SAR. Such election
must designate the timing and form of distribution of such deferred SAR
proceeds and earnings thereon in accordance with the options described in
Section 6(d).
(f) Notwithstanding the above, an employee who becomes an Eligible
Employee for the first time during a Plan Year shall be permitted, within the
thirty (30) day period that begins on the day he/she becomes an Eligible
Employee, to make an election to defer base salary accrued after the
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<PAGE>
effective date of such election for the remainder of the Plan Year and MIP
Compensation payable with respect to the Plan Year, provided, in the case of
MIP Compensation, that the amount, if any, of such compensation is not known
prior to the effective date of such election.
SECTION SIX - DISTRIBUTIONS
(a) Deferred MIP Compensation.
(1) Commencement of Payment of Deferral of Deferred MIP
Compensation. Deferred MIP Compensation, (together with deemed interest
accrued thereon) shall commence to be paid at the election of the
Participant either (i) ten (10) years following the date the Deferred
MIP Compensation otherwise would have been paid, or (ii) at the
Participant's Retirement Date.
(2) Form of Distribution of Deferred MIP Compensation. Deferred
MIP Compensation (together with deemed interest accrued thereon) shall be
distributed at the election of a Participant either: (i) in a lump sum payment
payable within ninety (90) days following the time designated pursuant to
Section 6(a)(1) above, or (ii) in installment payments of up to ten (10)
substantially equal annual installments, with the first installment payable
within ninety (90) days following the time designated pursuant to Section
6(a)(1) above, with the remaining installments payable within ninety (90) days
following the anniversaries of such time. The amount of each installment shall
be determined by dividing the amount credited to the Participant's account at
the time the installment is to be made (including deemed interest) by the
number of remaining installments (including the installment then due).
(b) Deferred Salary Compensation.
(1) Commencement of Payment of Deferred Salary Compensation.
Deferred Salary Compensation (together with deemed interest accrued thereon)
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<PAGE>
shall commence to be paid at the election of the Participant either: (i) ten
(10) years following the date the Deferred Salary Compensation otherwise
would have been paid, or (ii) at the Participant's Retirement Date.
(2) Form of Distribution of Deferred Salary Compensation.
Deferred Salary Compensation (together with interest accrued thereon) shall
be distributed at the election of the Participant either: (i) in a lump
sum payable within ninety (90) days following the time designated pursuant
to Section 6(b)(1) above, or (ii) in installment payments of up to ten (10)
substantially equal annual installments, with the first installment payable
within ninety (90) days following the time designated pursuant to Section
6(b)(1) above, with the remaining installments payable within ninety (90)
days following the anniversaries of such time. The amount of each
installment shall be determined by dividing the amount credited to the
Participant's account at the time the installment is to be made (including
deemed interest) by the number of remaining installments (including the
installment then due).
(c) Deferred Stock Option Proceeds.
(1) Commencement of Payment of Deferred Stock Option Proceeds.
Deferred Stock Option Proceeds (together with deemed interest accrued thereon)
shall commence to be paid at the election of a Participant either (i) not less
than three (3) years nor more than ten (10) years following the exercise of
the stock options subject to such election or, (ii) at attainment of the
Retirement Date of the Participant.
(2) Form of Distribution of Deferred Stock Option Proceeds.
Deferred Stock Option Proceeds (together with deemed interest accrued thereon)
shall be distributed at the election of a Participant either: (i) in a lump
sum payable within ninety (90) days following the time designated in Section
6(c)(1) above, or (ii) in installment payments of up to ten (10)
substantially equal annual installments, with the first installment payable
within ninety (90) days following the time designated in Section 6(c)(1)
above, with the remaining installments payable within ninety (90) days
following the anniversaries of such time. The amount of each installment
shall be determined by dividing the amount of deferrals in the Participant's
account at the time the installment is to be made (including deemed interest
thereon) by the number of installments.
(3) Early Payment of Deferred Stock Option Proceeds. A Participant
may, upon written request to the Committee, receive payment of a portion or all
of his/her Deferred Stock Option Proceeds (as elected by the Participant) prior
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to the date selected pursuant to Section 6(c)(1) above. In that event of
such early payment the deemed interest credited to the Participant for that
Plan Year shall be one percent (1%) less than the rate otherwise applicable
for the Plan Year, and shall be credited on Deferred Stock Option Proceeds
distributable under this Section 6(c)(3) only through the date of
distribution. A Participant shall not be allowed to elect to receive early
payment under this Section 6(c)(3) of any deemed interest credited to his/her
Deferred Stock Option Proceeds, but only of the Deferred Stock Option
Proceeds themselves.
(d) Deferred SAR Proceeds.
(1) Commencement of Payment of Deferred SAR Proceeds. Deferred SAR
Proceeds (together with deemed interest accrued thereon) shall commence to be
paid at the election of a Participant either (i) ten (10) years following the
exercise of the SAR subject to such election, or (ii) at the Participant's
Retirement Date.
(2) Form of Distribution of SAR Proceeds. Deferred SAR Proceeds
(together with deemed interest accrued thereon) shall be distributed at the
election of a Participant either: (i) in a lump sum payment payable within
ninety (90) days following the time designated pursuant to Section 6(d)(1)
above, or (ii) in installment payments of up to ten (10) substantially equal
annual installments, with the first installment payable within ninety (90) days
following the time period designated pursuant to Section 6(d)(1) above, with
the remaining installments payable within ninety (90) days following the
anniversaries of such time. The amount of each installment shall be determined
by dividing the amount of deferrals in the Participant's account at the time
the installment is to be made (including deemed interest thereon) by the
number of installments.
(e) Payment Upon Separation From Service. Notwithstanding the above, in
the event a Participant shall separate from service with the Company (for
reasons other than death) prior to the commencement of payment of his/her
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Deferred MIP Compensation, Deferred Salary Compensation, Deferred Stock Option
Proceeds and/or Deferred SAR Proceeds, the Participant's account shall be
distributed to the Participant in a single lump sum, together with deemed
interest accrued thereon through the date of distribution, within ninety (90)
days following such separation, provided that the foregoing shall not apply in
the case of a Participant who (i) separates from service on a Retirement Date
and (ii) had elected to receive payment of any amounts deferred under the Plan
in the form of installment payments, commencing at his/her Retirement Date (but
only with respect to amounts for which such election had been made).
(f) Payment Upon Death. Notwithstanding anything in the Plan to the
contrary, in the event a Participant dies prior to the receipt of any or all of
his/her Deferred MIP Compensation, Deferred Salary Compensation, Deferred
Option Proceeds, and/or Deferred SAR Proceeds, such amount shall be distributed
in a single lump sum to the Participant's Beneficiary(ies), together with
deemed interest accrued thereon through the date of such distribution, within
ninety (90) days following his/her death.
SECTION SEVEN - MISCELLANEOUS
(a) Funding of the Plan. The Plan is unfunded and the Company has no
obligation to set aside, earmark, or place in trust any funds with which to pay
its obligations under this Plan. The Company's obligation shall not be secured
in any way and a Participant's rights shall in no way be preferred over the
general creditors of the Company.
(b) Change of Control. In the event of a Change of Control, all
Deferred MIP Compensation, Deferred Salary Compensation, Deferred Stock Option
Proceeds and/or Deferred SAR Proceeds shall be paid to the Participant in a
lump sum, together with deemed interest accrued thereon, within ten (10) days
following the Change of Control.
(c) Employment. This Plan does not constitute an employment contract
between the Company and a Participant. Nothing in this Plan shall be construed
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to give a Participant the right to be retained in the service of the Company,
nor interfere with the right of the Company to terminate or discipline a
Participant at any time.
(d) Construction. This Plan shall be construed and interpreted under
the laws of the State of New Jersey.
(e) Taxes. The Company may withhold from distributions made from the
Plan any taxes required to be withheld under federal, state, or local law.
(f) Non-Assignable. Benefits payable under this Plan may not be
anticipated, assigned (either at law or equity), alienated, pledged,
encumbered, or subjected to attachment, garnishment, levy, execution,
or other legal process, and any attempt to effect such distribution shall be
void.
(g) Minors and Incompetents. If the Administrator determines that any
person to whom a payment is due hereunder is a minor or incompetent by reason
of physical or mental disability, the Administrator shall have the power to
cause the payments then due to such person to be made to another for the
benefit of the minor or incompetent, without responsibility of the Company or
the Administrator to see to the application of such payment, unless claim
prior to such payment is made therefor by a duly appointed legal
representative. Payments made pursuant to such power shall operate as a
complete discharge of the Company and the Administrator.
SECTION EIGHT - EMERGENCY BENEFIT
In the event that the Committee determines that the Employee has suffered an
unforeseeable financial emergency, the Administrator shall pay to the Employee
as soon as possible following such determination, an amount not in excess of
the amount needed to satisfy the emergency. Such payment shall be distributed
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first out of the Employee's Deferred Stock Option Proceeds and deemed interest
accrued thereon, second, out of Deferred MIP Compensation and deemed interest
accrued thereon, third, out of Deferred Salary Compensation and deemed
interest accrued thereon, and fourth, out of Deferred SAR Proceeds and deemed
interest accrued thereon. Deemed interest shall not be accrued for any
Employee on an amount paid to the Employee after the date of such payment.
For this purpose, an "unforeseeable financial emergency " means an
unanticipated emergency that is caused by an event beyond the control of the
Employee that would result in severe financial hardship if the emergency
distribution were not permitted. In determining whether a Participant has
suffered an unforeseeable financial emergency, the Administrator shall apply
principals similar to those contained in Treasury Regulation Section
1.457-2(h)(4).
SECTION NINE - ADMINISTRATION OF THE PLAN
The Plan shall be administered by the Administrator which shall have full
discretionary authority to interpret the Plan; to make all determinations as
may be necessary or advisable; and to adopt, amend or rescind any rules,
regulations, and procedures as it deems necessary or appropriate for the
administration of the Plan. The determinations, actions, and decisions of the
Administrator shall be binding and conclusive for all purposes and upon all
persons. The Administrator may delegate part or all of its responsibilities
under the Plan to such party or parties as it may deem necessary or
appropriate.
SECTION TEN - AMENDMENT AND TERMINATION
The Board of Directors may from time to time amend or revise the terms of the
Plan, or may discontinue the Plan at any time. However, such amendment,
revision or discontinuance of the Plan may not adversely affect an Employee's
benefit(s) accrued under the Plan prior to the date of such action.
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SECTION ELEVEN - CLAIMS PROCEDURE
If a Participant does not receive the timely payment of the benefits which
he/she believes are due under the Plan, the Participant may make a claim for
benefits in the manner hereinafter provided.
All claims for benefits under the Plan shall be made in writing and shall be
signed by the Participant. Claims shall be submitted to the Administrator. If
the Participant does not furnish sufficient information with the claim for the
Administrator to determine the validity of the claim, the Administrator shall
indicate to the Participant any additional information which is necessary for
the Administrator to determine the validity of the claim.
Each claim hereunder shall be acted on and approved or disapproved by the
Administrator within 90 days following the receipt by the Administrator of the
information necessary to process the claim. In the event the Administrator
denies a claim for benefits in whole or in part, the Administrator shall notify
the Participant in writing of the denial of the claim and notify the
Participant of his right to a review of the Administrator's decision by the
Administrator. Such notice by the Administrator shall also set forth, in a
manner calculated to be understood by the Participant, the specific reason for
such denial, the specific provisions of the Plan on which the denial is based,
a description of any additional material or information necessary to perfect
the claim with an explanation of the Plan's appeals procedure as set forth in
this Section Eleven.
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If no action is taken by the Administrator on a Participant's claim within 90
days after receipt by the Administrator, such claim shall be deemed to be
denied for purposes of the following appeals procedure. Any applicant whose
claim for benefits is denied in whole or in part may appeal for a review of
the decision by the Administrator. Such appeal must be made within three
months after the applicant has received actual or constructive notice of the
denial as provided above. An appeal must be submitted in writing within such
period and must:
(a) request a review by the Administrator of the claim for benefits
under the Plan;
(b) set forth all of the grounds upon which the Participant's request
for review is based on any facts in support thereof; and
(c) set forth any issues or comments which the Participant deems
pertinent to the appeal.
The Administrator shall act upon each appeal within 60 days after receipt
thereof unless special circumstances require an extension of the time for
processing, in which case a decision shall be rendered by the Administrator as
soon as possible but not later than 120 days after the appeal is received by
it. The Administrator may require the Participant to submit such additional
facts, documents or other evidence as the Administrator in its discretion
deems necessary or advisable in making its review. The Participant shall be
given the opportunity to review pertinent documents or materials upon
submission of a written request to the Administrator, provided the
Administrator finds the requested documents or materials are pertinent to
the appeal.
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On the basis of its review, the Administrator shall make an independent
determination of the Participant's eligibility for benefits under the Plan.
The decision of the Administrator on any appeal of a claim for benefits shall
be final and conclusive upon all parties thereto.
In the event the Administrator denies an appeal in whole or in part, it shall
give written notice of the decision to the Participant, which notice shall set
forth, in a manner calculated to be understood by the Participant, the specific
reasons for such denial and which shall make specific reference to the
pertinent provisions of the Plan on which the Administrator's decision is
based.
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AMERICAN HOME PRODUCTS CORPORATION
EXECUTIVE RETIREMENT PLAN
EFFECTIVE AS OF JANUARY 1, 1997
PURPOSE
The purpose of the American Home Products Corporation
Executive Retirement Plan (the "Plan") is to provide
competitive executive retirement benefits for key executives
and to enhance the ability of the Company to attract and
retain key senior executives.
SECTION ONE-DEFINITIONS
Except where the context indicates otherwise, any masculine
terminology used herein shall also include the feminine
gender, and the definition of any term herein in the
singular shall also include the plural. Whenever used
herein, the following terms shall have the meaning set forth
below:
1.1. "Actuarial Equivalence" means an amount of equivalent
value determined by reference to a specified set of
conversion or reduction factors. In determining either the
amount of any reduction in benefit amount or the amount of a
benefit payable under the Plan in an optional form,
actuarial equivalence shall be determined by applying the
conversion factors set forth in the AHPC Retirement Plan.
1.2 "Affiliate" means any corporation, partnership or
other organization controlling, controlled by or under
common control with the Company.
1.3. "AHPC Retirement Plan" means the American Home
Products Corporation Retirement Plan - United States, as
amended from time to time.
1.4. "Average Pension Earnings" has the same meaning
as in the AHPC Supplemental Executive Retirement Plan, as
amended from time to time.
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1.5. "Board of Directors" means the Board of Directors of
the Company.
1.6. "Code" means the Internal Revenue Code of 1986, as
amended from time to time.
1.7. "Company" means American Home Products Corporation, a
Delaware corporation.
1.8. "Contingent Annuity" has the meaning set forth in the
AHPC Retirement Plan.
1.9. "Contingent Annuitant" has the meaning set forth in the
AHPC Retirement Plan.
1.10. "Continuous Service" has the meaning set forth in the
AHPC Retirement Plan.
1.11. "Corporate Officer" means a principal officer of the
Company as described in Paragraph 30 of the By-Laws of the
Company (copy attached).
1.12. "Credited Service" means the number of years of service
credited to an Employee under and as determined in accordance
with the AHPC Retirement Plan.
1.13. "Early Plan Benefit" means the monthly benefit payable
to a Participant under Section 4.2 of the Plan.
1.14. "Early Retirement Age" means attainment of both age
fifty-five (55) or more and at least ten (10) years of Continuous
Service.
1.15. "Early Retirement Date" means the first day of the
calendar month coincident with or next following the date a
Participant attains his/her Early Retirement Age, or any
subsequent day elected by the Participant to retire
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prior to his/her attainment of Normal Retirement Age.
1.16. "Effective Date" is January 1, 1997.
1.17. "Employee" has the meaning set forth in the AHPC
Retirement Plan.
1.18. "ERISA" means the Employee Retirement Income Security Act
of 1974, as amended from time to time, including any regulations
promulgated thereunder.
1.19. "Final Average Annual Pension Earnings" means the average
of a Participant's Annual Pension Earnings (as of January 1 of
each year) for the three years during the ten-year period
immediately preceding the date of his/her Severance from Service
in which such Annual Pension Earnings were the highest.
1.20. "Minimum Eligible Compensation Level" means a Rate of
Annual Earnings equal to or greater than two hundred and
fifty thousand dollars ($250,000), which amount shall be subject
to periodic review and adjustment by the Compensation and Benefits
Committee of the Board.
1.21. "Normal Plan Benefit" means the Plan Benefit payable
monthly to a Participant pursuant to Section 4.1 of the Plan.
1.22. "Normal Retirement Age" means age sixty (60).
1.23 "Normal Retirement Date" means the first day of the
calendar month coincident with or next following the date a
Participant attains his/her Normal Retirement Age and elects to
retire.
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1.24. "Participant" means an Employee of the Company who has
met the requirements to become a Participant in the Plan pursuant
to Section Two.
1.25. "Plan" means this American Home Products Corporation
Executive Retirement Plan, as amended from time to time.
1.26. "Plan Benefit" means the benefit payable monthly to a
Participant under the terms of the Plan.
1.27. "Plan Year" means the calendar year.
1.28. "Postponed Plan Benefit" means the Plan Benefit payable
monthly to a Participant under Section 4.4 of the Plan.
1.29. "Rate of Annual Earnings" means the annual base
salary rate of a Participant as of January 1 of each Plan Year.
1.30. "Retirement Committee" has the meaning set forth in the
AHPC Retirement Plan.
1.31. "Retirement Plans" means the AHPC Retirement Plan, the
American Home Products Corporation Supplemental Executive
Retirement Plan, the American Cyanamid and Subsidiaries
Supplemental Employees Retirement Plan; the American Cyanamid
and Subsidiaries ERISA Excess Plan and/or any other retirement
plan or arrangement of the Company to the extent it provides
retirement or pension benefits (but only to the extent that
service under such plan is counted for purposes of the AHPC
Retirement Plan) each as amended from time to time.
1.32. "Severance from Service" has the meaning set forth in the
AHPC Retirement Plan.
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1.33. "Single Life Annuity" means an annuity providing payments
for the lifetime of a Participant with no survivor benefits.
1.34. "Social Security Benefit" means the estimated annual
amount of an Employee's old age retirement benefits that a
Participant will receive under the United States Social Security
system.
1.35. "Surviving Spouse" means the spouse of a deceased
Participant to whom such Participant has been validly married for
a continuous period of at least one (1) year immediately preceding
such Participant's death.
1.36. "Vested Plan Benefit" means the Plan Benefit payable
monthly to a Participant under Section 4.3 of the Plan.
SECTION TWO-ELIGIBILITY
2.1. (a) Eligibility on Effective Date. An Employee of the
Company or its Affiliate employed on the Effective Date shall
become a Participant in the Plan on the Effective Date provided
such Employee:
(1) Is a Participant in the AHPC Retirement Plan, and
(2) Either;
(A) Has a Rate of Annual Earnings equal to or
in excess of the then Minimum Eligible
Compensation Level; or
(B) Is a Corporate Officer.
(b) Eligibility After Effective Date. Any other
Employee shall become a Participant when and if he/she satisfies
the requirements under Section 2.1(a)(1) and (2) above.
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SECTION THREE-VESTING
3.1. Vesting. A Participant shall be vested upon the first to
occur of the following:
(a) Completion of five years of Continuous Service; or
(b) Attaining age 60 regardless of the number of years
of Continuous Service.
3.2. Termination Prior to Vesting. Any Participant who incurs
a Severance from Service prior to becoming vested under Section
3.1 shall not be entitled to receive a Plan Benefit.
SECTION FOUR-AMOUNT AND COMMENCEMENT OF BENEFITS
4.1. Normal Plan Benefits.
(a) Eligibility. A Participant who retires at or after
attaining his/her Normal Retirement Age, shall be eligible to
receive monthly a Normal Plan Benefit under the Plan.
(b) Amount of Normal Plan Benefit. The monthly Normal
Plan Benefit of a Participant shall be one-twelfth of the amount,
if any, by which the amount determined under subparagraph
(1) below, exceeds (to prevent duplication of benefits) the amount
determined under subparagraph (2) below, where -
(1) An amount equal to:
(A) two percent (2%) of the Participant's Final
Average Annual Pension Earnings multiplied by the
Participant's actual years of Credited Service up
to Normal Retirement Age plus, subject to
subparagraph (c) below, an additional three (3)
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years of Credited Service (not to exceed thirty
(30) years); minus
(B) 1/60 of the Participant's Social Security
Benefit multiplied by the Participant's years of
Credited Service plus, subject to subparagraph
(c) below, an additional three (3) years of
Credited Service (not to exceed thirty (30)
years).
(2) The annual amount of retirement benefits, if any
under the Retirement Plans, payable in the form of
a Single Life Annuity to the Participant at Normal
Retirement Age.
(c) Additional Credited Years of Bridge Service. The
three (3) additional years of Credited Service described in
Section 4.1(b) shall be reduced by one year for each year of
Service (or part thereof) that the Participant works beyond age
sixty two (62) years, provided however, that a Participant who
commences participation in the Plan at age sixty one (61) or
later shall accrue a monthly Normal Plan Benefit in the amount
provided in Section 4.1(b) for two (2) years before such
reductions take effect.
(d) Commencement and Duration. Monthly Normal Plan
Benefit payments for Participants who retire and elect to receive
payments shall begin as of the Participant's Normal Retirement
Date. Such payments shall continue in accordance with the payment
option elected by the Participant in Section 5.
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4.2. Early Plan Benefits.
(a) Eligibility. A Participant who incurs a Severance
from Service while a Participant on or after he has attained
his/her Early Retirement Age but prior to his/her Normal
Retirement Age shall be eligible to retire and receive an Early
Plan Benefit under the Plan.
(b) Amount of Early Plan Benefit. A Participant's
Early Plan Benefit shall be computed in the same manner as a
Normal Plan Benefit under Section 4.1(b) except that the
amount determined under Section 4.1(b)(1) shall be reduced by
three (3) percent for each year (or part thereof) by which
his/her Early Plan Benefit commences prior to the attainment
of his/her Normal Retirement Age hereunder and the amount so
determined shall then have the offset provisions set forth in
Section 4.1(b)(2) applied to determine the amount of the
Participant's Early Retirement Benefit.
(c) Commencement and Duration. A Participant who has
incurred a Severance from Service after attaining his/her Early
Retirement Age may elect to retire and commence payment as of
his/her Early Retirement Date, and such payments shall continue
in accordance with the payment option elected in Section 5.
4.3. Vested Plan Benefit.
(a) Eligibility. A Participant who incurs a Severance
from Service while a Participant after having attained five
years of Continuous Service but prior to either his/her Early
Retirement Age or his/her Normal Retirement Age, shall be eligible
to retire and receive a Vested Plan Benefit under the Plan.
(b) Amount of Vested Plan Benefit. A Participant's
Vested Plan Benefit shall be computed in the same manner as a
monthly Normal Plan Benefit under Section 4.1(b) except that the
amount determined under Section 4.1(b)(1), shall be reduced
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actuarially (by reference to the Actuarial Equivalence) for each
year (or part thereof) by which his/her Vested Plan Benefit
commences prior to the attainment of his/her Normal Retirement Age
and the amount so determined shall then have the offset provisions
set forth in Section 4.1(b)(2) applied to determine the amount of
the Vested Plan Benefit.
(c) Commencement and Duration. A Participant who has
incurred a Severance from Service while a Participant after
attaining a right to a Vested Plan Benefit in accordance with
Section 4.3(a) above may elect to commence payment of his/her
Vested Plan Benefit as of the time he/she attains age 55. Such
payments shall continue in accordance with the payment option
elected by the Participant pursuant to Section 5.
4.4. Postponed Plan Benefit.
(a) Eligibility. A Participant who remains an Employee
beyond his/her Normal Retirement Age shall be entitled to retire
and receive a Postponed Plan Benefit under the Plan.
(b) Amount. Except as otherwise provided in this
paragraph (b), a Participant's Postponed Plan Benefit shall be an
amount computed in the same manner as a monthly Normal Plan
Benefit under Subsection 4.1(b), provided, however, that:
(1) The Participant's Postponed Plan Benefit shall
be determined by taking into account all years
of actual Credited Service and Final Average
Annual Pension Earnings attributable to
employment with the Company both before and
after his/her Normal Retirement Date (not to
exceed, including the three additional years
of Credited Service, thirty (30) years);
and that
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(2) The three (3) additional years of Credited
Service described in paragraph (b)(1) above
shall be reduced for each year (or part
thereof) that the Participant works beyond
age sixty two (62), provided, however, that
a Participant who commences participation
at age sixty one (61) or later must be
eligible to receive a Normal Plan Benefit
for two (2) years before such reductions
take effect.
(c) Commencement and Duration. Postponed Plan Benefit
payments shall commence as of the first day of the calendar month
coincident with or next following a Participant's Severance from
Service. Such benefits shall continue in accordance with the
payment option selected by the Participant in accordance with
Section 5.
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SECTION FIVE-FORM AND COMMENCEMENT OF BENEFITS
5.1. Form of Benefit. Plan Benefits payable to a Participant
pursuant to Section Four shall be payable in any optional form as
elected by the Participant. The Participant may elect any
optional form of benefit payment available under the AHPC
Retirement Plan. If a Plan Benefit is payable in a form other
than a Single Life Annuity over the life of the Participant,
such Plan Benefit shall be subject to adjustment by the same
actuarial equivalent factors as are applied under the AHPC
Retirement Plan with respect to the AHPC Retirement Plan benefit
of the Participant to determine Actuarial Equivalence. Any
election made by a Participant pursuant Section 4 shall be in
writing in a form acceptable to the Retirement Committee and
filed at least six (6) months prior to his/her retirement.
SECTION SIX-SURVIVING SPOUSE BENEFIT
6.1. Surviving Spouse's Benefit.
(a) Death of Participant After Attaining Early
Retirement Age. Upon the death of a Participant while
employed by the Company after having attained his/her Early
Retirement Age his/her Surviving Spouse will be entitled to
an immediate survivors benefit under this Plan equal to one-
half of the Plan Benefit the Participant would be entitled
to receive commencing on the date of his/her death, assuming
the Participant had lived and retired on the day prior to
his death with a 50% Contingent Annuity Option in effect.
(b) Death of Participant Prior to Attaining Early
Retirement Age. Upon the death of a Participant while employed
by the Company prior to having reached Early Retirement Age but
after becoming vested under Section 3 of the Plan, his/her
Surviving Spouse shall be entitled to receive a survivors annuity
starting on the first day of the month on or after the date the
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Participant would have attained his/her Early Retirement Age.
Such annuity shall be equal to one-half of the Vested Plan Benefit
the Participant would be entitled to receive starting on the
first day of the month on or after the later of (i) the
Participant's death, or (ii) the date of the Participant would
have attained age 55, assuming the Participant had elected a 50%
Contingent Annuity.
(c) Death of Participant After a Separation of Service
but Before Commencement of Early Retirement or Vested Plan
Benefits. If a Participant has a Separation from Service while
vested and dies prior to attaining his/her Early Retirement Age
or commencing a Vested Plan Benefit, the Participant's Surviving
Spouse shall be entitled to a survivor's annuity commencing on the
later of the Participant's death or the date the Participant would
have attained age 55. The amount of such an annuity shall be
equal to one-half of the Early Retirement Benefit or the
Vested Plan Benefit the Participant was entitled to receive
as of the date of his/her Separation from Service commencing
as of the date described above assuming the Participant had
elected a 50% Contingent Annuity option.
SECTION SEVEN-AMENDMENT AND TERMINATION
7.1. Amendment or Termination. The Company reserves the right
to amend, modify, or terminate the Plan at any time for any reason.
Any such amendment, modification or termination shall be made
pursuant to a resolution of the Board of Directors and shall be
effective as of the date specified in the resolution. However, no
such amendment, modification or termination of the Plan shall
directly or indirectly deprive or adversely affect a Participant's
Plan Benefit under the Plan as in effect on the date immediately
preceding the date of such amendment, modification or termination.
7.2. Termination Benefit. In the event of a Plan termination,
each Participant shall become fully vested in his/her accrued Plan
Benefit as of the termination date. Such accrued Plan Benefit
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shall be calculated as set forth in Section 4.1(b) above, and
shall be based upon the Participant's Years of Service, Final
Average Pension Earnings, and Retirement Plans benefit as of the
termination date. For purposes of determining a Participant's
accrued Plan Benefit pursuant to this paragraph, the Participant's
Retirement Plans benefit shall be his/her accrued benefit from the
Retirement Plans payable at age sixty (60). Payment of a
Participant's accrued Plan Benefit shall not be contingent upon
his/her continuation of employment with the Company following the
Plan termination date, and such benefit shall be payable at the
date for commencement of payment of a Plan Benefit pursuant to of
Section Five.
SECTION EIGHT-MISCELLANEOUS
8.1. No Effect on Employment Rights. Nothing contained herein
will confer upon any Participant the right to be retained in the
service of the Company, nor limit the right of the Company to
discharge or otherwise deal with any Participant without regard
to the existence of the Plan.
8.2. Funding. The Plan at all times shall be entirely unfunded,
and no provision shall at any time be made with respect to
segregating any assets of the Company for payment of any benefits
hereunder. No Participant, Surviving Spouse or any other person
shall have any interest in any particular assets of the Company
by reason of a right to receive a benefit under the Plan, and any
such Participant, Surviving Spouse or other person shall have the
rights of a general unsecured creditor of the Company with respect
to any rights under the Plan. Notwithstanding the foregoing, the
Retirement Committee or the Board of Directors, in their
discretion, may segregate the assets in a separate trust (treated
for tax purposes as a Rabbi trust), for the payment of Plan
Benefits and such segregation shall not be regarded as funding
the Plan.
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8.3. Anti-assignment. To the maximum extent permitted by law,
no benefit payable under the Plan shall be subject in any manner
to anticipation, alienation, sale, transfer, assignment, pledge,
attachment, encumbrance, or charge prior to actual receipt
thereof by the payee; and any attempt so to anticipate, alienate,
sell, transfer, assign, pledge, attach, encumber, or charge prior
to such receipt shall be void.
8.4. Administration. The Retirement Committee shall be
responsible for the general operation and administration of the
Plan and for carrying out the provisions thereof. All provisions
set forth in the AHPC Retirement Plan with respect to the
administrative powers and duties of the Retirement Committee,
expenses of administration, and procedures for filing claims shall
also be applicable with respect to the Plan. The Retirement
Committee shall have the full discretionary authority to construe
and interpret the Plan, including the right to remedy possible
ambiguities, to adopt, amend, and rescind rules and regulations
for the administration of the plan, and generally to conduct and
administer the Plan and to make all determinations in connection
with the Plan as may be necessary or advisable. All such actions
of the Retirement Committee shall be conclusive and binding upon
all Participants, Beneficiaries and Surviving Spouses. The
Retirement Committee shall be entitled to rely conclusively
upon all tables, valuations, certificates, opinions, and
reports furnished by any actuary, accountant, controller,
counsel, or other person employed or engaged by the Company with
respect to the Plan.
8.5. State Law. The Plan is established under and will be
construed according to the laws of the State of New York, to the
extent that such laws are not preempted by ERISA and the
regulations promulgated thereunder.
8.6. Incapacity of Recipient. In the event a Participant, or
Surviving Spouse is declared incompetent and a conservator or
other person legally charged with the care of his/her person or
his/her estate is appointed, any benefits under the Plan to which
- 14 -
<PAGE>
such Participant, or Surviving Spouse is entitled shall be paid to
such conservator or other person legally charged with the care of
his/her person or estate.
SECTION NINE-CLAIMS PROCEDURE
If a Participant does not receive the timely payment of the
benefits which he/she believes are due under the Plan, the
Participant may make a claim for benefits in the manner
hereinafter provided.
All claims for benefits under the Plan shall be made in
writing and shall be signed by the Participant. Claims
shall be submitted to the Administrator. If the Participant
does not furnish sufficient information with the claim for
the Administrator to determine the validity of the claim,
the Administrator shall indicate to the Participant any
additional information which is necessary for the
Administrator to determine the validity of the claim.
Each claim hereunder shall be acted on and approved or
disapproved by the Administrator within 90 days following
the receipt by the Administrator of the information
necessary to process the claim. In the event the
Administrator denies a claim for benefits in whole or in
part, the Administrator shall notify the Participant in
writing of the denial of the claim and notify the
Participant of his right to a review of the Administrator's
decision by the Administrator. Such notice by the
Administrator shall also set forth, in a manner calculated
to be understood by the Participant, the specific reason for
such denial, the specific provisions of the Plan on which
- 15 -
<PAGE>
the denial is based, a description of any additional
material or information necessary to perfect the claim with
an explanation of the Plan's appeals procedure as set forth
in this Section Eleven.
If no action is taken by the Administrator on a Participant's
claim within 90 days after receipt by the Administrator, such
claim shall be deemed to be denied for purposes of the
following appeals procedure. Any applicant whose claim for
benefits is denied in whole or in part may appeal for a review
of the decision by the Administrator. Such appeal must be made
within three months after the applicant has received actual or
constructive notice of the denial as provided above. An appeal
must be submitted in writing within such period and must:
(a) request a review by the Administrator of the claim
for benefits under the Plan;
(b) set forth all of the grounds upon which the
Participant's request for review is based on any
facts in support thereof; and
(c) set forth any issues or comments which the
Participant deems pertinent to the appeal.
The Administrator shall act upon each appeal within 60 days
after receipt thereof unless special circumstances require
an extension of the time for processing, in which case a
decision shall be rendered by the Administrator as soon as
possible but not later than 120 days after the appeal is
received by it. The Administrator may require the
Participant to submit such additional facts, documents or
other evidence as the Administrator in its discretion deems
necessary or advisable in making its review. The
Participant shall be given the opportunity to review
- 16 -
<PAGE>
pertinent documents or materials upon submission of a
written request to the Administrator, provided the
Administrator finds the requested documents or materials are
pertinent to the appeal.
On the basis of its review, the Administrator shall make an
independent determination of the Participant's eligibility
for benefits under the Plan. The decision of the
Administrator on any appeal of a claim for benefits shall be
final and conclusive upon all parties thereto.
In the event the Administrator denies an appeal in whole or
in part, it shall give written notice of the decision to the
Participant, which notice shall set forth, in a manner
calculated to be understood by the Participant, the specific
reasons for such denial and which shall make specific
reference to the pertinent provisions of the Plan on which
the Administrator's decision is based.
- 17 -
<PAGE>
<TABLE> EXHIBIT 11
AMERICAN HOME PRODUCTS CORPORATION AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
(In Thousands Except Per Share Amounts)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1997
<S> <C> <C>
1. Net Income .................. $435,532 $1,471,301
2. Reported earnings per share:
a. Average number of common
shares outstanding during
the period .............. 649,009 645,716
b. Reported earnings per
share (1/2a) ............. $0.67 $2.28
3. Primary earnings per share:
a. Average number of common
shares outstanding during
the period ............... 649,009 645,716
b. Common shares deemed
outstanding from the
assumed exercise of stock
options reduced by the
number of common shares
purchased with the proceeds
(determined using the average
market price during the
period).................... 15,557 14,446
c. Deferred contingent common
stock awards .............. 494 494
d. Shares for primary earnings
per share calculation
(3a+3b+3c) ................ 665,060 660,656
e. Primary earnings per share
(1/3d)..................... $0.65 $2.23
4. Fully diluted earnings per share:
a. Average number of common
shares outstanding during
the period................. 649,009 645,716
b. Common shares deemed
outstanding from the assumed
exercise of stock options
reduced by the number of
common shares purchased
with the proceeds
(determined using the higher
of the average market price
during the period
or the market price at the
end of the period) ......... 15,557 15,191
c. Deferred contingent common
stock awards ............... 494 494
d. Shares for fully diluted
earnings per share
calculation (4a+4b+4c)...... 665,060 661,401
e. Fully diluted earnings per
share (1/4d) ............... $0.65 $2.22
</TABLE)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
EXHIBIT 27
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE AMERICAN HOME PRODUCTS CORPORATION AND SUBSIDIARIES CONSOLIDATED
CONDENSED BALANCE SHEET AS OF SEPTEMBER 30, 1997 AND CONSOLIDATED
CONDENSED STATEMENT OF INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 1,089,258
<SECURITIES> 53,804
<RECEIVABLES> 2,697,693
<ALLOWANCES> 0
<INVENTORY> 2,492,766
<CURRENT-ASSETS> 7,465,911
<PP&E> 6,666,300
<DEPRECIATION> 2,450,679
<TOTAL-ASSETS> 21,174,416
<CURRENT-LIABILITIES> 4,765,506
<BONDS> 5,747,785
<COMMON> 216,401
0
73
<OTHER-SE> 7,245,198
<TOTAL-LIABILITY-AND-EQUITY> 21,174,416
<SALES> 10,584,647
<TOTAL-REVENUES> 10,584,647
<CGS> 3,061,606
<TOTAL-COSTS> 3,061,606
<OTHER-EXPENSES> 1,130,081
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 294,758
<INCOME-PRETAX> 2,013,905
<INCOME-TAX> 542,604
<INCOME-CONTINUING> 1,471,301
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,471,301
<EPS-PRIMARY> 2.23
<EPS-DILUTED> 2.22
</TABLE>
