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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998 Commission file number 1-1225
AMERICAN HOME PRODUCTS CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 13-2526821
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
FIVE GIRALDA FARMS, MADISON, N.J. 07940
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (973) 660-5000
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X No
The number of shares of Common Stock outstanding as of the close of business
on October 31, 1998:
NUMBER OF
CLASS SHARES OUTSTANDING
Common Stock, $0.33-1/3 par value 1,318,009,742
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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, 1998 and December 31, 1997 3
Consolidated Condensed Statements of Income -
Three and Nine Months Ended September 30, 1998 and 1997 4
Consolidated Condensed Statements of Changes in Stockholders'
Equity - Nine Months Ended September 30, 1998 and 1997 5
Consolidated Condensed Statements of Cash Flows -
Nine Months Ended September 30, 1998 and 1997 6
Notes to Consolidated Condensed Financial Statements 7-9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-19
Part II - Other Information 20
Item 1. Legal Proceedings 20-23
Item 5. Other Information 23
Item 6. Exhibits and Reports on Form 8-K 23
Signature 24
Exhibit Index EX-1
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<PAGE>
PART I - FINANCIAL INFORMATION
AMERICAN HOME PRODUCTS CORPORATION AND SUBSIDIARIES
The consolidated condensed financial statements included herein have been
prepared by American Home Products Corporation (the "Company"), without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules
and regulations; however, the Company believes that the disclosures are
adequate to make the information presented not misleading. In the opinion of
management, the financial statements include all adjustments necessary to
present fairly the financial position of the Company as of September 30, 1998
and December 31, 1997, the results of its operations for the three months and
nine months ended September 30, 1998 and 1997, and its cash flows and changes
in stockholders' equity for the nine months ended September 30, 1998 and
1997. It is suggested that these financial statements and management's
discussion and analysis of financial condition and results of operations be
read in conjunction with the financial statements and the notes thereto
included in the Company's 1997 Annual Report on Form 10-K and Quarterly
Reports on Form 10-Q for the quarterly periods ended March 31, 1998 and June
30, 1998.
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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,
1998 1997
<S> <C> <C>
ASSETS
Cash and cash equivalents ................................ $1,660,775 $1,051,372
Marketable securities .................................... 88,967 48,363
Accounts receivable less allowances ...................... 3,012,679 2,843,099
Inventories:
Finished goods ...................................... 894,849 1,042,065
Work in progress .................................... 615,502 657,033
Materials and supplies .............................. 670,030 713,308
2,180,381 2,412,406
Other current assets including deferred taxes ............ 1,010,485 1,006,086
TOTAL CURRENT ASSETS ................................ 7,953,287 7,361,326
Property, plant and equipment ............................ 6,421,180 6,722,049
Less accumulated depreciation ....................... 2,240,135 2,425,143
4,181,045 4,296,906
Goodwill and other intangibles, net of accumulated
amortization ........................................ 8,042,507 8,338,695
Other assets including deferred taxes .................... 860,847 828,184
TOTAL ASSETS ........................................ $21,037,686 $20,825,111
LIABILITIES
Loans payable ............................................ $54,033 $89,041
Trade accounts payable ................................... 949,754 794,291
Accrued expenses ......................................... 2,829,197 3,019,805
Accrued federal and foreign taxes ........................ 705,289 423,881
TOTAL CURRENT LIABILITIES ........................... 4,538,273 4,327,018
Long-term debt ........................................... 3,923,499 5,031,861
Other noncurrent liabilities ............................. 2,133,733 2,248,282
Postretirement benefit obligations other than pensions ... 868,833 833,916
Minority interests ....................................... 216,508 208,782
STOCKHOLDERS' EQUITY
$2 convertible preferred stock, par value $2.50 per share. 65 72
Common stock, par value $0.33-1/3 per share .............. 439,291 435,298
Additional paid-in capital ............................... 2,917,916 2,530,696
Retained earnings ........................................ 6,401,318 5,489,292
Accumulated other comprehensive loss ..................... (401,750) (280,106)
TOTAL STOCKHOLDERS' EQUITY .......................... 9,356,840 8,175,252
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY .......... $21,037,686 $20,825,111
<FN>
<F1>
The accompanying notes are an integral part of these consolidated condensed balance sheets.
</FN>
</TABLE>
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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,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
NET SALES ........................................ $3,224,119 $3,481,870 $10,232,474 $10,584,647
Cost of goods sold ............................... 809,584 970,666 2,734,255 3,061,606
Selling, general and administrative expenses ..... 1,159,164 1,300,736 3,751,440 3,967,288
Research and development expenses ................ 449,857 378,273 1,245,262 1,130,081
Interest expense, net ............................ 47,196 93,249 169,460 294,758
Other income, net ................................ (119,463) (13,160) (182,143) (62,991)
Gain on sale of business ......................... - - (592,084) -
Special charges .................................. - 180,000 - 180,000
Income before federal and foreign taxes .......... 877,781 572,106 3,106,284 2,013,905
Provision for taxes .............................. 258,786 136,574 981,568 542,604
NET INCOME ....................................... $618,995 $435,532 $2,124,716 $1,471,301
BASIC EARNINGS PER SHARE ......................... $0.47 $0.34 $1.62 $1.14
DILUTED EARNINGS PER SHARE ....................... $0.46 $0.33 $1.59 $1.12
Dividends per share of common stock .............. $0.215 $0.205 $0.645 $0.615
<FN>
<F1>
The accompanying notes are an integral part of these consolidated condensed statements.
</FN>
</TABLE>
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<PAGE>
<TABLE>
AMERICAN HOME PRODUCTS CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1998:
$2 ACCUMULATED
CONVERTIBLE ADDITIONAL OTHER TOTAL
PREFERRED COMMON PAID-IN RETAINED COMPREHENSIVE STOCKHOLDERS'
STOCK STOCK CAPITAL EARNINGS LOSS EQUITY
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1998 $72 $216,792 $2,530,696 $5,707,798 ($280,106) $8,175,252
Two-for-one stock split 218,506 (218,506)
Restated balance at January 1, 1998 72 435,298 2,530,696 5,489,292 (280,106) 8,175,252
Net income 2,124,716 2,124,716
Currency translation adjustments (119,296) (119,296)
Unrealized loss on marketable
securities (2,348) (2,348)
Comprehensive income 2,003,072
Cash dividends declared (1) (1,143,338) (1,143,338)
Treasury stock acquired (376) (5,262) (60,229) (65,867)
Common stock issued 3,917 370,553 374,470
Conversion of preferred stock
and other exchanges (7) 452 21,929 (9,123) 13,251
Balance at September 30, 1998 $65 $439,291 $2,917,916 $6,401,318 ($401,750) $9,356,840
NINE MONTHS ENDED SEPTEMBER 30, 1997:
$2 ACCUMULATED
CONVERTIBLE ADDITIONAL OTHER TOTAL
PREFERRED COMMON PAID-IN RETAINED COMPREHENSIVE STOCKHOLDERS'
STOCK STOCK CAPITAL EARNINGS LOSS EQUITY
Balance at January 1, 1997 $79 $213,328 $2,034,337 $4,750,621 ($36,273) $6,962,092
Two-for-one stock split 218,506 (218,506)
Restated balance at January 1, 1997 79 431,834 2,034,337 4,532,115 (36,273) 6,962,092
Net income 1,471,301 1,471,301
Currency translation adjustments (229,519) (229,519)
Unrealized gain on marketable
securities 1,402 1,402
Comprehensive income 1,243,184
Cash dividends declared (2) (1,074,713) (1,074,713)
Treasury stock acquired (47) (965) (9,178) (10,190)
Common stock issued 3,057 321,383 324,440
Conversion of preferred stock
and other exchanges (6) 63 16,802 16,859
Balance at September 30, 1997 $73 $434,907 $2,371,557 $4,919,525 ($264,390) $7,461,672
<FN>
<F1>
(1) Includes the 1998 fourth quarter common stock dividend of $0.225 per share
($296,534 in the aggregate) declared on September 24, 1998 and payable on
December 1, 1998.
<F2>
(2) Includes the 1997 fourth quarter common stock dividend of $0.215 per share
($279,157 in the aggregate) declared on September 25, 1997 and payable on
December 1, 1997.
<F3>
The accompanying notes are an integral part of these consolidated condensed statements.
</FN>
</TABLE>
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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,
1998 1997
<S> <C> <C>
OPERATING ACTIVITIES
Net income .......................................................... $2,124,716 $1,471,301
Adjustments to reconcile net income to net cash
provided from operating activities:
Special charges .................................................. - 180,000
Gain on sale of business ......................................... (592,084) -
Gains on sales of other assets ................................... (271,226) (123,156)
Depreciation and amortization .................................... 524,940 554,301
Deferred income taxes ............................................ 21,265 (291,470)
Changes in working capital, net .................................. (474,893) (333,330)
Other items, net ................................................. (82,650) (277,214)
Net cash provided from operating activities ......................... 1,250,068 1,180,432
INVESTING ACTIVITIES
Purchases of property, plant and equipment .......................... (582,186) (579,067)
Purchases of businesses, net of cash acquired ....................... (425,041) (479,694)
Proceeds from sale of business ...................................... 1,770,000 -
Proceeds from sales of other assets ................................. 422,251 279,459
Net sales/(purchases) of marketable securities ...................... (42,116) 168,208
Net cash provided from/(used for) investing activities .............. 1,142,908 (611,094)
FINANCING ACTIVITIES
Net repayments of debt .............................................. (1,141,016) (295,637)
Dividends paid ...................................................... (846,804) (795,556)
Exercise of stock options ........................................... 374,470 324,440
Purchases of treasury stock ......................................... (65,867) (10,190)
Termination of interest rate swap agreements ........................ (96,655) -
Net cash used for financing activities .............................. (1,775,872) (776,943)
Effects of exchange rates on cash balances .......................... (7,701) (25,434)
Increase/(decrease) in cash and cash equivalents .................... 609,403 (233,039)
Cash and cash equivalents, beginning of period ...................... 1,051,372 1,322,297
Cash and cash equivalents, end of period ............................ $1,660,775 $1,089,258
<FN>
<F1>
The accompanying notes are an integral part of these consolidated condensed statements.
<F2>
SUPPLEMENTAL INFORMATION
Interest payments excluding termination of interest rate swap agreememts $288,921 $366,181
Income tax and related interest payments, net of refunds 692,064 845,813
</FN>
</TABLE>
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<PAGE>
AMERICAN HOME PRODUCTS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Note 1. TERMINATION OF MERGER AGREEMENT WITH MONSANTO COMPANY
On June 1, 1998, the Company and Monsanto Company (Monsanto) entered
into a definitive agreement contemplating a merger transaction. On
October 13, 1998, the merger agreement was terminated. The Board of
Directors of each of the two companies determined that the
transaction was not in the best interest of their respective
stockholders. Costs directly associated with the previously proposed
merger have been expensed and were not material to the Company's
results of operations for the 1998 third quarter and first nine
months.
Note 2. COMMON STOCK
At the Company's April 23, 1998 Annual Meeting of Stockholders, an
increase in the number of authorized shares of common stock from
1,200,000,000 to 2,400,000,000 was approved enabling the Company to
complete a previously declared two-for-one common stock split
effected in the form of a 100% stock dividend. The record date for
stockholders entitled to receive the additional shares was the close
of business on April 24, 1998. The par value of the common stock was
maintained at the pre-split amount of $0.33-1/3 per share. All
references to retained earnings, common stock, average number of
common shares outstanding and per share amounts in these consolidated
condensed financial statements, notes to consolidated condensed
financial statements and Management's Discussion and Analysis of
Financial Condition and Results of Operations prior to the record
date of the stock split have been restated to reflect the two-for-one
stock split on a retroactive basis.
Note 3. CONTINGENCIES
The Company is involved in various legal proceedings, including
product liability and environmental matters of a nature considered
normal to its business. It is the Company's policy to accrue for
amounts related to these legal matters if it is probable that a
liability has been incurred and an amount is reasonably estimable.
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 4. SALE OF SHERWOOD-DAVIS & GECK MEDICAL DEVICES BUSINESS
On February 27, 1998, the Company sold the Sherwood-Davis & Geck
medical devices business to a subsidiary of Tyco International Ltd.
for approximately $1.77 billion, resulting in a pre-tax gain of
$592,084,000. The proceeds were used primarily to reduce outstanding
commercial paper. Net income, basic earnings per share and diluted
earnings per share for the nine months ended September 30, 1998
included an after-tax gain on the sale of $330,782,000, $0.25 and
$0.25, respectively.
Note 5. SOLGAR VITAMIN AND HERB COMPANY ACQUISITION
On July 30, 1998, the Company completed the acquisition of the
vitamin and nutritional supplement products business of Solgar
Vitamin and Herb Company, Inc. and its related affiliates for
approximately $425 million in cash. This transaction was
accounted for under the purchase method of accounting. The purchase
price exceeded the net assets acquired by approximately $392 million
which is being amortized over periods of 4 to 40 years. Solgar is a
manufacturer and marketer of over 400 vitamins, nutritional
supplements and herbal products with annual sales in excess of $100
million.
Note 6. ACCUMULATED OTHER COMPREHENSIVE LOSS
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 130 - "Reporting Comprehensive
Income." SFAS No. 130 increases financial reporting disclosures and
has no impact on the Company's financial position or results of
operations. Certain reclassifications have been made to the December
31, 1997, September 30, 1997 and December 31, 1996 consolidated
financial statements to conform with the financial reporting
requirements of SFAS No. 130.
Accumulated other comprehensive loss is comprised substantially of
currency translation adjustments.
-8-
<PAGE>
AMERICAN HOME PRODUCTS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Note 7. RECENTLY ISSUED ACCOUNTING STANDARDS
In September 1998, SFAS No. 133 - "Accounting for Derivative
Instruments and Hedging Activities" was issued and is effective for
fiscal years beginning after September 15, 1999. SFAS No. 133
requires all derivatives to be measured at fair value and recognized
as assets or liabilities on the balance sheet. Changes in the fair
value of derivatives should be recognized in either net income or
other comprehensive income, depending on the designated purpose of
the derivative. The Company currently plans to adopt this standard
effective January 1, 2000. This standard will not have a material
effect on the Company's results of operations or financial position.
Note 8. EARNINGS PER SHARE
The following table sets forth the computations of Basic Earnings per
Share and Diluted Earnings per Share:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS) 1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net income less preferred dividends $618,982 $435,517 $2,124,675 $1,471,256
Denominator:
Average number of common shares outstanding 1,317,329 1,298,018 1,313,549 1,291,432
BASIC EARNINGS PER SHARE $0.47 $0.34 $1.62 $1.14
Net income $618,995 $435,532 $2,124,716 $1,471,301
Denominator:
Average number of common shares outstanding 1,317,329 1,298,018 1,313,549 1,291,432
Common share equivalents of outstanding stock
options and deferred contingent common stock
awards 22,773 21,211 22,478 19,767
Total shares 1,340,102 1,319,229 1,336,027 1,311,199
DILUTED EARNINGS PER SHARE $0.46 $0.33 $1.59 $1.12
</TABLE>
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1998
RESULTS OF OPERATIONS
Management's discussion and analysis of results of operations for the 1998
third quarter and first nine months has been presented on an as-reported basis
except for sales variation explanations which have been presented on an
as-reported and pro forma basis. The pro forma sales results reflect
businesses divested and acquired in 1998 and 1997 assuming the transactions
had occurred as of January 1, 1997. This activity includes the divestitures of
the Sherwood-Davis & Geck (effective February 27, 1998) and Storz Instrument
Company (effective December 31, 1997) medical devices businesses, and the
acquisition of the worldwide animal health business of Solvay S.A. (effective
February 28, 1997). The pro forma sales results also include the
reclassification of certain ophthalmic pharmaceutical sales from the medical
devices business to pharmaceuticals (effective January 1, 1998) assuming the
reclassification had occurred as of January 1, 1997.
On an as-reported basis, worldwide net sales for the 1998 third quarter and
first nine months decreased 7% and 3% compared with prior year levels. On a
pro forma basis, worldwide net sales increased 2% for the 1998 third quarter
and 4% for the first nine months. The increases in pro forma worldwide net
sales were due primarily to higher domestic sales of pharmaceuticals offset,
in part, by unfavorable foreign exchange of 2% for the 1998 third quarter and
3% for the first nine months.
The following tables set forth worldwide net sales results by major product
category and industry segment together with the percentage changes in "As-
Reported" and "Pro Forma" worldwide net sales from the comparable periods in
the prior year:
<TABLE>
<CAPTION>
THREE MONTHS AS-REPORTED PRO FORMA
($ IN MILLIONS) ENDED SEPTEMBER 30, % INCREASE % INCREASE
NET SALES TO CUSTOMERS 1998 1997 (DECREASE) (DECREASE)
<S> <C> <C> <C> <C>
Health Care Products:
Pharmaceuticals $2,357.3 $2,284.4 3% 3%
Consumer Health Care 565.0 558.0 1% 1%
Medical Devices - 321.7 (100)% -
Total Health Care Products 2,922.3 3,164.1 (8)% 2%
Agricultural Products 301.8 317.7 (5)% (5)%
Consolidated Net Sales $3,224.1 $3,481.8 (7)% 2%
</TABLE>
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
NINE MONTHS AS-REPORTED PRO FORMA
($ IN MILLIONS) ENDED SEPTEMBER 30, % INCREASE % INCREASE
NET SALES TO CUSTOMERS 1998 1997 (DECREASE) (DECREASE)
<S> <C> <C> <C> <C>
Health Care Products:
Pharmaceuticals $6,690.3 $6,317.3 6% 4%
Consumer Health Care 1,521.8 1,499.3 1% 1%
Medical Devices 192.0 972.2 (80)% -
Total Health Care Products 8,404.1 8,788.8 (4)% 4%
Agricultural Products 1,828.4 1,795.8 2% 2%
Consolidated Net Sales $10,232.5 $10,584.6 (3)% 4%
</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 3% for
the 1998 third quarter and 6% for the first nine months. On a pro forma
basis, worldwide pharmaceutical sales increased 3% for the 1998 third
quarter and 4% for the first nine months due primarily to higher sales of
PREMARIN products, EFFEXOR, SYNVISC (introduced in the 1997 fourth
quarter), NEUMEGA (introduced in the 1997 fourth quarter), ZIAC, BENEFIX
and generic pharmaceuticals offset, in part, by the voluntary market
withdrawal of the Company's antiobesity products in the 1997 third quarter
and DURACT in the 1998 second quarter, and lower sales of ORUVAIL and
biologicals. Worldwide pharmaceutical results for the 1998 third quarter
also reflect lower sales of oral contraceptives while results for the
first nine months also reflect higher sales of oral contraceptives offset,
in part, by lower sales of LODINE. Worldwide pharmaceutical sales were
impacted by unfavorable foreign exchange of 2% for the 1998 third quarter
and 3% for the first nine months. On an as-reported basis, U.S.
pharmaceutical sales increased 8% for the 1998 third quarter and 12% for
the first nine months. On a pro forma basis, U.S. pharmaceutical sales
increased 7% for the 1998 third quarter and 11% for the first nine months.
The increase in pro forma U.S. pharmaceutical sales for the 1998 third
quarter consisted of unit volume growth of 5% and price increases of 2%.
The increase in pro forma U.S. pharmaceutical sales for the 1998 first
nine months consisted of unit volume growth of 8% and price increases of
3%.
The 1998 fourth quarter sales for the U.S. pharmaceutical business are
anticipated to decrease versus the 1997 fourth quarter due, in part, to
the impact of divested and discontinued products (NAPRELAN, VERELAN and
DURACT), generic competition with respect to certain branded products
-11-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1998
(CORDARONE-oral, ORUVAIL and LODINE) and decreases in sales of certain
other pharmaceutical products. As a result, 1998 U.S. pharmaceutical
sales, which had grown at 11% for the first nine months, are anticipated
to increase on a full year basis at approximately a 5% to 6% rate. Most
of the trends impacting the 1998 fourth quarter U.S. pharmaceutical
sales are anticipated to continue through 1999 and are anticipated to be
offset in the second half of 1999 by the expected introduction of new
products.
On an as-reported basis, international pharmaceutical sales decreased 4%
for the 1998 third quarter and 2% for the first nine months. On a pro
forma basis, international pharmaceutical sales decreased 4% for the 1998
third quarter and 5% for the first nine months. The decrease in pro forma
international pharmaceutical sales for the 1998 third quarter consisted of
price increases of 3% which were more than offset by unit volume decreases
of 1% and unfavorable foreign exchange of 6%. The decrease in pro forma
international pharmaceutical sales for the 1998 first nine months
consisted of unit volume growth of 1% and price increases of 1% which were
more than offset by unfavorable foreign exchange of 7%.
On an as-reported and pro forma basis, worldwide consumer health care
sales increased 1% for both the 1998 third quarter and the first nine
months due primarily to higher sales of nutritional supplements, including
CENTRUM products, CALTRATE, and Solgar products (acquired in the 1998
third quarter), and ADVIL offset, in part, by lower sales of cough/cold
products and AXID AR and the effect of the disposal of several non-core
products in 1997. Worldwide consumer health care sales were impacted by
unfavorable foreign exchange of 2% for both the 1998 third quarter and
first nine months. On an as-reported and pro forma basis, U.S. consumer
health care sales increased 3% for both the 1998 third quarter and the
first nine months. The increase in U.S. consumer health care sales for
the 1998 third quarter consisted of unit volume growth of 3%. The increase
in U.S. consumer health care sales for the 1998 first nine months consisted
of unit volume growth of 2% and price increases of 1%.
On an as-reported and pro forma basis, international consumer health care
sales decreased 4% for the 1998 third quarter and 1% for the first nine
months. The decrease in international consumer health care sales for the
1998 third quarter consisted of unit volume growth of 4% which was more
than offset by price decreases of 2% and unfavorable foreign exchange of
6%. International consumer health care sales for the 1998 first nine
months consisted of unit volume growth of 5% which was more than offset
by unfavorable foreign exchange of 6%.
On February 27, 1998, the Company sold the Sherwood-Davis & Geck medical
devices business which resulted in a pre-tax gain of $592.1 million
($330.8 million after-tax). This transaction completed the Company's exit
from the medical devices business. On an as reported basis, worldwide
medical devices sales decreased 100% for the 1998 third quarter and 80%
for the first nine months due primarily to the Sherwood-Davis & Geck
divestiture as well as the sale of Storz Instrument Company effective
December 31, 1997.
-12-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1998
On an as reported and pro forma basis, worldwide agricultural products
sales decreased 5% for the 1998 third quarter and increased 2% for the
first nine months. Higher sales of RAPTOR (introduced in the 1997 second
quarter) and ODYSSEY (introduced in the 1997 second quarter) herbicides,
COUNTER insecticide and ACROBAT fungicide were more than offset for the
1998 third quarter and offset partially for the first nine months by lower
sales of PURSUIT and SCEPTER herbicides due primarily to unfavorable
weather conditions, introductory sales of RAPTOR and adverse competitive
factors. Worldwide agricultural products sales were impacted by
unfavorable foreign exchange of 3% for the 1998 third quarter and 2% for
the first nine months. On an as-reported and pro forma basis, U.S.
agricultural products sales decreased 29% for the 1998 third quarter and
were comparable to prior year results for the first nine months. The
decrease in U.S. agricultural products sales for the 1998 third quarter
consisted of unit volume declines of 26% and price decreases of 3%. U.S.
agricultural products sales for the 1998 first nine months consisted of
price increases of 5% which were offset by unit volume declines of 5%.
Due to the seasonality of the U.S. agricultural products business, which
is concentrated primarily in the first six months of the year, U.S.
agricultural products sales and results of operations for the 1998 third
quarter and first nine months are not indicative of the results to be
expected for the full year. However, the adverse competitive pricing
pressures experienced in the 1998 third quarter and first nine months may
continue into the first six months of 1999.
On an as-reported and pro forma basis, international agricultural
products sales increased 4% for both the 1998 third quarter and the first
nine months. The increase in international agricultural products sales
for the 1998 third quarter consisted of unit volume growth of 7% and price
increases of 2% which were offset, in part, by unfavorable foreign
exchange of 5%. The increase in international agricultural products sales
for the 1998 first nine months consisted of unit volume growth of 9% which
was offset, in part, by unfavorable foreign exchange of 5%.
Cost of goods sold, as a percentage of net sales, decreased to 25.1% for the
1998 third quarter and 26.7% for the first nine months compared to 27.9% for
the 1997 third quarter and 28.9% for the first nine months due primarily to an
overall product mix improvement as increased sales of higher margin
pharmaceuticals partially replaced the loss of lower margin medical devices
sales resulting from the divestitures of the Sherwood-Davis & Geck and Storz
Instrument Company medical devices businesses.
Selling, general and administrative expenses, as a percentage of net sales,
decreased to 36.0% for the 1998 third quarter and 36.7% for the first nine
months versus 37.4% for the 1997 third quarter and 37.5% for the first nine
months. Lower selling, general and administrative expenses resulting from the
divestitures of the Sherwood-Davis & Geck and Storz Instrument Company medical
devices businesses and lower marketing expenses for certain pharmaceuticals and
consumer healthcare products were offset, in part, by additional expenses
relating to information technology initiatives.
-13-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1998
Research and development expenses increased 19% for the 1998 third quarter and
10% for the first nine months due primarily to higher pharmaceutical research
and development expenditures, particularly in the biopharmaceutical area,
offset, in part, by lower research and development expenses resulting from the
divestitures of the Sherwood-Davis & Geck and Storz Instrument Company medical
devices businesses.
Interest expense, net decreased 49% for the 1998 third quarter and 43% for
first nine months due primarily to the reduction in long-term debt during the
1998 first quarter as the proceeds from the sale of the Sherwood-Davis & Geck
medical devices business were used primarily to reduce outstanding commercial
paper. Average long-term debt outstanding during the 1998 and 1997 third
quarter was $3,884.0 million and $5,850.1 million, respectively. Average
long-term debt outstanding during the 1998 and 1997 first nine months was
$4,477.7 million and $5,884.2 million, respectively.
Other income, net for both the 1998 and 1997 third quarter and first nine
months included gains on the sales of non-strategic assets, including certain
non-core and generic product rights offset, in part, by foreign exchange
losses. Other income, net for the 1997 first nine months also 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.
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 1997 third quarter and
first nine months results of operations included special charges aggregating
$180.0 million ($117.0 million after-tax or $0.09 per share - basic and
diluted). The special charges reflected the one-time costs associated with
the voluntary market withdrawal and included provisions for product returns,
notification and administrative handling fees, the writedown of inventory and
supplies and other related costs. These costs did not include provisions for
any subsequent charges which may result from legal actions related to these
products.
-14-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
The following table sets forth income before taxes by industry segment:
THREE MONTHS NINE MONTHS
($ IN MILLIONS) ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
INCOME BEFORE TAXES 1998 1997 1998 1997
<S> <C> <C> <C> <C>
Health Care Products $1,004.0 $698.7 (1) $2,372.7 $1,979.5 (1)
Agricultural Products 9.3 9.1 484.1 440.3
Corporate (135.5) (135.7) 249.5 (2) (405.9)
Consolidated Income before Taxes $877.8 $572.1 $3,106.3 $2,013.9
<FN>
<F1>
(1) Includes the special charges for the voluntary market withdrawal of
PONDIMIN and REDUX in the 1997 third quarter aggregating $180.0.
<F2>
(2) Includes the gain on the sale of the Sherwood-Davis & Geck medical
devices business in the 1998 first quarter of $592.1.
</FN>
</TABLE>
The effective tax rate increased to 29.5% in the 1998 third quarter from 23.9%
for the 1997 third quarter due primarily to goodwill basis differences for tax
and financial reporting purposes on the sale of certain non-core product
rights in the 1998 third quarter and the impact of the previously discussed
special charges associated with the voluntary market withdrawal of PONDIMIN and
REDUX in the 1997 third quarter. The effective tax rate increased to 31.6% for
the 1998 first nine months from 26.9% for the 1997 first nine months due
primarily to the previously discussed factors and the gain on the sale of the
Sherwood-Davis & Geck medical devices business in the 1998 first quarter. The
impact on the effective tax rate from the gain on the sale of the Sherwood-
Davis & Geck medical devices business was due primarily to goodwill basis
differences for tax and financial reporting purposes.
Net income, basic earnings per share and diluted earnings per share increased
42%, 38% and 39%, respectively, for the 1998 third quarter compared to the
1997 third quarter. Excluding the after-tax special charges for the voluntary
market withdrawal of the Company's antiobesity products in the 1997 third
quarter of $117.0 million ($0.09 per share-basic and diluted), net income,
basic earnings per share and diluted earnings per share increased 12%, 9% and
10%, respectively, for the 1998 third quarter compared to the 1997 third
quarter. Net income, basic earnings per share and diluted earnings per share
increased 44%, 42%, and 42%, respectively, for the 1998 first nine months
compared to the 1997 first nine months. Excluding the after-tax gain on the
sale of the Sherwood-Davis & Geck medical devices business in the 1998 first
quarter of $330.8 million ($0.25 per share-basic and diluted) and the
previously discussed special charges in the 1997 third quarter, net income,
basic earnings per share and diluted earnings per share increased 13%, 11% and
11%, respectively, for the 1998 first nine months compared to the 1997 first
-15-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1998
nine months. The increases in net income, basic earnings per share and diluted
earnings per share for both the 1998 third quarter and first nine months,
excluding the gain on the sale and the special charges, were greater than the
as-reported net sales results due primarily to increased sales of higher margin
pharmaceuticals which partially replaced the loss of lower margin medical
devices sales, lower selling, general and administrative expenses and interest
expense, net, and additional one-time gains from the sale of certain non-
strategic assets offset, in part, by higher research and development expenses.
The 1998 fourth quarter results of operations are forecast to be comparable to
the 1997 fourth quarter as the impact of the U.S. pharmaceutical sales declines
will be offset by cost reductions and the planned disposal of certain non-core
assets.
During the 1998 first quarter, the Company initiated a review of its worldwide
manufacturing and distribution systems for all of its product lines. The
results of this study will be announced in the 1998 fourth quarter at which
time it is expected that a restructuring charge will be required.
YEAR 2000
As described below, the Company has recognized the importance of addressing
Year 2000 problems and has committed substantial resources to identify and
correct potential problems in order to minimize the impact on its business.
The Company's Year 2000 program is organized into three functional areas:
Information Technology (IT) which includes computer systems and related
application software, Embedded Chips (EC) which are hidden internal components
of many non-computer devices and machinery and Business Partners (BP) which
include suppliers, customers and governmental agencies. The program
methodology is organized into three phases: Phase I: Inventory, Assessment
and Project Planning; Phase II: Remediation and Testing; and Phase III:
Certification, Implementation and Contingency Planning. A substantial portion
of the Phase I activities for IT have been completed. Various Phase II
activities for IT are in process or have been substantially completed with the
application software returned to production. Similar to IT, a considerable
amount of Phase I activities for EC have been completed. The mobilization of
Phase II activities for EC is currently underway. The inventory of critical
BP at most vital locations has been substantially completed. For all three
functional areas, Phase I activities are expected to be completed by the end
of the 1999 first quarter, Phase II activities are expected to be completed by
the end of the 1999 second quarter and Phase III activities are expected to be
completed by the end of the 1999 third quarter.
-16-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1998
The costs of remediation and appropriate replacement projects for Year 2000
activities are not expected to have a material adverse effect on the Company's
results of operations or financial position.
The Company has not yet formulated its most reasonably likely worst case
scenario with respect to possible losses related to Year 2000 related problems.
Based on current plans and efforts to date, the Company believes Year 2000
issues can be addressed according to its plans and does not anticipate any
significant unforeseen events. However, if a worst case scenario comes to
fruition, the Company has the ability and intends to expend the resources
necessary to mitigate serious disruptions to business flows into the year 2000.
The Company is currently defining the Contingency Planning process and the
tools necessary to assist in the development of an action plan. The Company
will be developing business continuity plans for those areas that are critical
to the Company's business. These business continuity plans will be designed to
mitigate significant disruptions to business flows beyond the end of 1999.
The Year 2000 disclosures discussed above are based on numerous expectations
which are subject to uncertainties. Certain risk factors which could have a
material adverse effect on the Company's results of operations and financial
condition include but are not limited to: failure to identify critical systems
which will experience failures, errors in the remediation efforts, unexpected
failures by key business partners, inability to obtain new replacements for
non-compliant systems or equipment, failures by governmental agencies causing
delays in approval of new products or sales of approved products, general
economic downturn relating to Year 2000 failures in the U.S. and in other
countries, failures in global banking systems and capital markets, or extended
failures by public and private utility companies or common carriers supplying
services to the Company.
EURO CURRENCY
On January 1, 1999, eleven of the fifteen member countries of the European
Union are scheduled to adopt the "Euro" as a new common legal currency. The
Company has evaluated the impact of the Euro conversion on its businesses.
Critical areas of potential business impact have been identified and
appropriate strategies are being developed. The costs related to the Euro
conversion will not have a material adverse effect on the Company's financial
position or results of operations. However, the conversion to the Euro may
have competitive implications on the Company's pricing and marketing
strategies, the total impact of which is not known at this time.
-17-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1998
COMPETITION
The Company operates in the highly competitive healthcare and agrochemical
industries. The Company is not dependent on any one patent-protected product
or line of products for a substantial portion of its sales or results of
operations. However, PREMARIN, one of the Company's conjugated estrogens
products, manufactured from pregnant mare's urine, is the market leader in its
category and does contribute significantly to sales and results of operations.
PREMARIN'S principal uses are to treat the symptoms of menopause and
osteoporosis, a condition involving a loss of bone mass in postmenopausal women.
Estrogen-containing products manufactured by other companies have been marketed
for many years for the treatment of menopausal symptoms, and some of these
products have also obtained marketing approval for the treatment of
osteoporosis. During the past several years, other manufacturers have
introduced products for the treatment and/or prevention of osteoporosis. Some
companies have attempted to obtain approval for generic versions of PREMARIN.
These products, if approved, would be routinely substitutable for PREMARIN under
many state laws and third party insurance payer plans. In May 1997, the U.S.
Food and Drug Administration (FDA) announced it would not approve certain
synthetic estrogen products as generic equivalents of PREMARIN given known
compositional differences between the active ingredient of these products and
PREMARIN. Although the FDA has not approved any generic equivalent to
PREMARIN to date, PREMARIN will continue to be subject to competition from
competing estrogen and other products for its approved indications, and may be
subject to some form of generic competition from either natural or synthetic
generic conjugated estrogens products in the future.
LIQUIDITY, FINANCIAL CONDITION AND CAPITAL RESOURCES
Cash and cash equivalents increased $609.4 million in the 1998 first nine
months to $1,660.8 million. Proceeds from sale of business and sales of other
assets of $2,192.3 million, cash flows from operating activities of $1,250.1
million and proceeds from the exercise of stock options of $374.5 million were
used principally for long-term debt reduction of $1,141.0 million, dividend
payments of $846.8 million, capital expenditures of $582.2 million and the
purchase of the vitamin and nutritional supplement products business of Solgar
Vitamin and Herb Company, Inc. for $425.0 million. Due to the seasonality of
the U.S. agricultural products business, a significant portion of the annual
U.S. agricultural products sales are recorded in the first six months of the
year; however, a significant amount of the related accounts receivable are not
collected until the third and fourth quarters. Capital expenditures included
strategic investments in manufacturing and distribution facilities worldwide
and expansion of the Company's research and development facilities.
At September 30, 1998, the fair value of the Company's long-term debt,
including the current portion, was $4,190.7 million. If interest rates were
to increase or decrease by one percentage point, the fair value of the long-
term debt would decrease or increase by approximately $119.4 million.
-18-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1998
Proceeds from the sale of the Sherwood-Davis & Geck medical devices business
were used primarily to reduce outstanding commercial paper and terminate the
Company's remaining $2.3 billion of interest rate swap agreements. The cost to
unwind the interest rate swap agreements was charged against the gain on sale.
At September 30, 1998, the fair value of the $674.7 million notional amount of
foreign exchange forward contracts was a net payable of $2.8 million. As
foreign exchange rates change from period to period, the fluctuations in the
fair value of the foreign exchange forward contracts are offset by fluctuations
in the fair value of the underlying hedged transactions. If the value of the
U.S. dollar were to increase or decrease by 10% in relation to all hedged
foreign currencies, the net payable would increase or decrease by approximately
$23.3 million.
Effective April 1, 1998, the Company reduced its $5 billion of revolving credit
facilities to $2 billion by terminating the $2.5 billion, 364-day credit
facility in its entirety and reducing the $2.5 billion, five-year credit
facility to $2.0 billion. The remaining $2.0 billion, five-year credit
facility supports the Company's commercial paper program and has a maturity
date of July 31, 2002. At September 30, 1998, there were no borrowings
outstanding under the remaining credit facility.
Effective October 21, 1998, the Company reinstated its common stock repurchase
program which was rescinded on May 31, 1998 in connection with the previously
proposed merger agreement with Monsanto which was terminated on October 13,
1998.
CAUTIONARY STATEMENTS FOR FORWARD LOOKING INFORMATION
Management's discussion and analysis set forth above contains certain forward
looking statements, including, among other things, statements regarding the
Company's financial position, results of operations, Year 2000, Euro Currency
and potential competition. These forward looking statements are based on
current expectations. Certain factors which could cause the Company's actual
results to differ materially from expected and historical results have been
identified by the Company in its other periodic reports filed with the
Securities and Exchange Commission including the Company's 1997 Annual Report
on Form 10-K and Exhibit 99 to such report, which exhibit is hereby
incorporated by reference.
-19-
<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 product
liability and other tort claims, the most significant of which are
described in the Company's Annual Report on Form 10-K for the year
ended December 31, 1997 and Quarterly Reports on Form 10-Q for the
quarterly periods ended March 31, 1998 and June 30, 1998.
As of November 10, 1998, there were 3,729 lawsuits pending against
the Company in federal and state courts on behalf of approximately
41,350 plaintiffs alleging injuries as a result of use of the
NORPLANT SYSTEM, the Company's implantable contraceptive containing
levonorgestrel. Although approximately 70 of the cases have been
filed as class actions, class certification has been denied in the
federal actions as well as in every state in which the question has
been considered. On December 6, 1994, the Judicial Panel on
Multidistrict Litigation ("MDL") ordered that all NORPLANT SYSTEM
lawsuits filed in federal courts be consolidated for pretrial
proceedings in the U.S. District Court (E.D. Tex.) in Beaumont. The
MDL proceedings now account for over three-fourths of the NORPLANT
SYSTEM plaintiffs. Following the denial of class certification, the
MDL court scheduled three "bellwether" trials, each involving the
claims of five Texas plaintiffs. Rather than proceeding with the
first of these trials as scheduled on February 24, 1996, the court
entered summary judgment in favor of the Company on all of
plaintiffs' claims. That decision is now on appeal to the U.S.
Court of Appeals for the Fifth Circuit. All but two of the state
NORPLANT SYSTEM cases involving the Company that have approached
trial have either been dismissed by the courts or withdrawn by the
plaintiffs. The first NORPLANT SYSTEM lawsuit to go to trial
(Morales, et al. v. Wyeth-Ayerst Laboratories Division of American
Home Products Corporation, et al., District Court, Hidalgo Cty., TX,
No. C-1679-95-F) ended with a mistrial being declared on January 23,
1998, due to conflicts among plaintiffs' attorneys. The first
NORPLANT SYSTEM case to reach a jury verdict (Gaytan, et al. v.
Wyeth-Ayerst Laboratories Company, et al., District Court, Cameron
Cty., Tex., No C-95-08-3985-A) resulted in a defense verdict on
September 3, 1998. The Company will continue to contest the NORPLANT
SYSTEM litigation vigorously.
As of November 5, 1998, the Company has been served or is aware that
it has been named as a defendant in 1,824 lawsuits as the
manufacturer of PONDIMIN (fenfluramine hydrochloride) tablets C-IV
and/or the distributor of REDUX (dexfenfluramine hydrochloride
capsules) C-IV. Of the 1,824 lawsuits naming the Company as a
defendant, 188 are actions that seek certification of a class, some
on a national and others on a statewide basis. Of these 188
lawsuits, 147 are pending in the federal MDL proceedings and 41 are
pending in various state courts. A number of the actions brought in
-20-
<PAGE>
state courts have been removed to federal courts. Individual
plaintiffs have filed the remaining lawsuits: 607 individual
lawsuits are pending in the federal MDL proceedings and 1,029
individual lawsuits are pending in various state courts. On
December 10, 1997, the MDL panel transferred all pending
federal lawsuits alleging injuries from the use of REDUX and/or
PONDIMIN to the U.S. District Court (E.D. Pa.) in Philadelphia.
Approximately 20 motions for class certification have been filed in
the MDL proceedings, and the Court is expected to set those motions
for argument in the First Quarter of 1999.
The state cases are pending in 41 different states, with the bulk of
the cases in California, Florida, Kentucky, New Jersey, New York,
Oklahoma, Pennsylvania, Tennessee, Texas and Utah. In West Virginia
(Adams, et al. v. American Home Products Corporation, et al., Circuit
Court, Brooke Cty., No. 97-C-204 (1-11)) and in Florida (Petito, et
al. v. A.H. Robins Company, Inc., et al., Circuit Court, Dade Cty.,
No. 97-26031 CA 21), state courts have dismissed plaintiffs' claims
for medical monitoring on the grounds that no such cause of action
exists within those jurisdictions. Courts in four states have
decided motions by plaintiffs for class certification. Plaintiffs'
motions were denied by courts sitting in New Jersey (Bonanno, et al.
v. American Home Products Corp., et al., Superior Court, Middlesex
Cty., No. L-346-98) and Arkansas (Baker, et al. v. Wyeth-Ayerst
Laboratories Division, a Division of American Home Products
Corporation, et al., Circuit Court, Washington Cty., No. CIV
97-1192), which found that certification was precluded by the myriad
individual medical and legal issues presented by the plaintiffs'
claims. In Texas (Earthman, et al. v. American Home Products
Corporation, District Court, Montgomery Cty., No. 97-10-03790-CV), a
state court has certified a class comprised of Texas residents who
used REDUX and/or PONDIMIN for 60 days or more and who have not
already filed an individual lawsuit. The class seeks "medical
screening," which plaintiffs have defined as an initial
echocardiogram, followed in certain cases by additional testing after
one year. In Washington (St. John, et al. v. American Home Products
Corporation, et al., Superior Court, Spokane Cty., No. 97-2-06368-4),
a court has certified a class of Washington residents seeking medical
monitoring in connection with their use of REDUX and/or PONDIMIN.
Neither the definition of the Washington class nor the specific form
of monitoring sought has yet been particularized. The Company will
appeal both the Texas and Washington decisions. The Company intends
to defend all of the REDUX and PONDIMIN litigation vigorously.
The patent infringement action brought by McNeilab Inc. against
Scandipharm (No. 92-7403, E.D.Pa.) seeking $77 million (plus $10
million in interest) has been settled by the Company for $24 million
(of which $6 million will be contributed by a third party). Pursuant
to the settlement, the Company received a fully paid-up license from
McNeil enabling the Company's subsidiary, Eurand Microencapsulation,
S.A., to continue to sell pancreatic tablets.
-21-
<PAGE>
In University of Colorado et al. v. American Cyanamid (Docket No. 93-
K-1657, D.Col.), in which American Cyanamid has appealed the District
Court's award of damages for alleged misappropriation of ideas
regarding the formula for the current MATERNA Multi-Vitamins,
plaintiffs have cross-appealed the District Court's decisions denying
damages on the copyright claim, denying plaintiffs post-trial motions
regarding the calculation of damages and all other orders entered
against the plaintiffs by the District Court.
In the brand name prescription drug antitrust litigation, the Company
has settled the following cases brought by retailers that opted out
of the federal class action case: Albertson's, Inc., et al. v. Abbott
Labs., et al (Docket No. 94-C-3669, S.D.Ohio).; American Drug Stores,
Inc. v. Abbott Labs., et al. (Docket No. 97-C-8076, N.D.Ill.); Eckerd
Corp. v. Abbott Labs., et al. (Docket No. 97-C-8075, N.D.Ill.); and
two groups of cases brought by retail pharmacies, one involving five
complaints with multiple plaintiffs and the other involving 113
complaints with multiple plaintiffs. The settlements, which are not
material to the Company, provide that they shall not be deemed to be
an admission of or evidence of any violation of any statute or law or
of any liability or wrongdoing by the Company.
The Company has agreed to settle a purported class action in state
court in Tennessee, Fox v. American Cyanamid Company (No.19,996,
Ch.Ct.Tenn.), alleging violations of state antitrust and consumer
protection laws by Cyanamid concerning pricing practices relating to
marketing programs for crop protection products. The settlement,
which is subject to court approval and is not material to the Company,
is not an admission of or evidence of any violation of any statute or
law or of any liability or wrongdoing by the Company.
The Company has been named as a defendant in five lawsuits in which
plaintiffs purport to represent a statewide class of health care
workers who have been injured by needle and syringe devices
manufactured by the Company's former Sherwood-Davis & Geck subsidiary
("Sherwood"). The complaints have been filed in Texas, Ohio,
California, Alabama and Oklahoma and contain virtually identical
allegations. (Calvin v. AHPC, et al., No. 342-173329-98, Dist. Ct.,
Tarrant Cty., TX; Chavez v. AHPC, et al., No.722978, Super. Ct., San
Diego Cty., CA; Daniels v. AHPC, et al., No.2757-G, Circ. Ct.,
Montgomery Cty., AL; Palmer v. AHPC, et al., No. CJ-98-685, Dist.
Ct., Sequoyah Cty., OK; Grant v. AHPC, et al., No. C2-98-344,
U.S.D.C., S. D. Ohio). Each names the Company, Becton Dickinson and
Company, Sherwood's largest competitor, and Tyco International
(U.S.) Inc., Sherwood's current parent corporation, as well as
several distributors of medical devices. The complaints allege that
the needle and syringe devices designed and manufactured by Sherwood
are defective in that they expose healthcare workers to the risk of
accidental needlesticks and the resultant possibility of acquiring
blood-borne diseases. Each named plaintiff seeks to represent a
statewide class of healthcare workers who have sustained a
"contaminated" needlestick; reported the incident to their employer
and have tested negative for a blood-borne disease.
-22-
<PAGE>
The complaints seek recovery for the costs of treating the
needlesticks and for the emotional distress allegedly arising out of
the fear of contracting a disease from the incidents. The Company is
being defended and indemnified in each of these cases by Tyco with
respect to injuries alleged to have occurred after February 27, 1998,
the date of the closing of the sale of Sherwood to Tyco. The Company
remains responsible for injuries occurring prior to that date and is
defending and indemnifying Tyco for those injuries. A class has not
been certified in any of the cases. The Company will defend the
needlestick litigation vigorously.
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 5. OTHER INFORMATION
Under rules recently adopted by the Securities and Exchange
Commission, if a stockholder notifies the Company of such
stockholder's intent to present a proposal for consideration at the
Company's 1999 Annual Meeting of Stockholders after February 8, 1999,
the Company, acting through the persons named as proxies in the proxy
materials for such meeting, may exercise discretionary voting
authority with respect to such proposal without including information
regarding such proposal in its proxy materials.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description
(27.1) Financial Data Schedule - Nine Months Ended
September 30, 1998.
(27.2) Restated Financial Data Schedule - Nine Months
Ended September 30, 1997.
(b) Reports on Form 8-K
A Current Report on Form 8-K regarding the Company's termination
of the merger agreement with Monsanto Company was filed on
October 13, 1998.
-23-
<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
Paul J. Jones
Vice President and Comptroller
(Duly Authorized Signatory
and Chief Accounting Officer)
Date: November 16, 1998
-24-
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
(27.1) Financial Data Schedule - Nine Months Ended September 30, 1998.
(27.2) Restated Financial Data Schedule - Nine Months Ended
September 30, 1997.
EX-1
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE AMERICAN HOME PRODUCTS CORPORATION AND SUBSIDIARIES CONSOLIDATED
CONDENSED BALANCE SHEET AS OF SEPTEMBER 30, 1998 AND CONSOLIDATED
CONDENSED STATEMENT OF INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.<F1>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 1,660,775
<SECURITIES> 88,967
<RECEIVABLES> 3,012,679
<ALLOWANCES> 0
<INVENTORY> 2,180,381
<CURRENT-ASSETS> 7,953,287
<PP&E> 6,421,180
<DEPRECIATION> 2,240,135
<TOTAL-ASSETS> 21,037,686
<CURRENT-LIABILITIES> 4,538,273
<BONDS> 3,923,499
<COMMON> 439,291
0
65
<OTHER-SE> 8,917,484
<TOTAL-LIABILITY-AND-EQUITY> 21,037,686
<SALES> 10,232,474
<TOTAL-REVENUES> 10,232,474
<CGS> 2,734,255
<TOTAL-COSTS> 2,734,255
<OTHER-EXPENSES> 1,245,262
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 169,460
<INCOME-PRETAX> 3,106,284
<INCOME-TAX> 981,568
<INCOME-CONTINUING> 2,124,716
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,124,716
<EPS-PRIMARY> 1.62<F2>
<EPS-DILUTED> 1.59<F3>
<FN>
<F1> Prior period financial data schedules for periods other than the nine
months ended September 30, 1998 and 1997, the six months ended June 30,
1998 and 1997, the three months ended March 31, 1998 and 1997 and the
years ended December 31, 1997 and 1996 have not been restated to reflect
the two-for-one stock split effected in the form of a 100% stock dividend
to stockholders of record at the close of business on April 24, 1998.
<F2> This amount represents Basic Earnings per Share in accordance with the
requirements of Statement of Financial Accounting Standards No. 128 -
"Earning per Share."
<F3> This amount represents Diluted Earnings per Share in accordance with the
requirements of Statement of Financial Accounting Standards No. 128 -
"Earnings per Share."
</FN>
<PAGE>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THIS RESTATED 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. <F1>
<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> 434,907
0
73
<OTHER-SE> 7,026,692
<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> 1.14<F2>
<EPS-DILUTED> 1.12<F3>
<FN>
<F1> Prior period financial data schedules for periods other than the nine
months ended September 30, 1998 and 1997, the six months ended June 30,
1998 and 1997, the three months ended March 31, 1998 and 1997 and the
years ended December 31, 1997 and 1996 have not been restated to reflect
the two-for-one stock split effected in the form of a 100% stock dividend
to stockholders of record at the close of business on April 24, 1998.
<F2> This amount represents Basic Earnings per Share in accordance with the
requirements of Statement of Financial Accounting Standards No. 128 -
"Earning per Share."
<F3> This amount represents Diluted Earnings per Share in accordance with the
requirements of Statement of Financial Accounting Standards No. 128 -
"Earnings per Share."
</FN>
<PAGE>
</TABLE>
