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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 June 30, 1998 Commission file number 1-1225
AMERICAN HOME PRODUCTS CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 13-2526821
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
FIVE GIRALDA FARMS, MADISON, N.J. 07940
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (973) 660-5000
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15 (d) of
the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X N
The number of shares of Common Stock outstanding as of the close of business
on July 31, 1998:
NUMBER OF
CLASS SHARES OUTSTANDING
Common Stock, $0.33-1/3 par value 1,315,814,574
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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 -
June 30, 1998 and December 31, 1997 3
Consolidated Condensed Statements of Income -
Three and Six Months Ended June 30, 1998 and 1997 4
Consolidated Condensed Statements of Changes in Stockholders'
Equity - Six Months Ended June 30, 1998 and 1997 5
Consolidated Condensed Statements of Cash Flows -
Six Months Ended June 30, 1998 and 1997 6
Notes to Consolidated Condensed Financial Statements 7-9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-16
Part II - Other Information 17
Item 1. Legal Proceedings 17-20
Item 4. Submission of Matters to a Vote of Security-Holders 20
Item 6. Exhibits and Reports on Form 8-K 21
Signature 22
Exhibit Index EX-1
-1-
<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 June 30, 1998 and
December 31, 1997, the results of its operations for the three months and six
months ended June 30, 1998 and 1997, and its cash flows and changes in
stockholders' equity for the six months ended June 30, 1998 and 1997. It is
suggested that these financial statements and management's discussion and
analysis of financial condition and results of operations be read in
conjunction with the financial statements and the notes thereto included in
the Company's 1997 Annual Report on Form 10-K and Quarterly Report on Form
10-Q for the quarter ended March 31, 1998.
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<PAGE>
<TABLE>
AMERICAN HOME PRODUCTS CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
<S> <C> <C>
ASSETS
Cash and cash equivalents ................................. $1,433,838 $1,051,372
Marketable securities ..................................... 92,406 48,363
Accounts receivable less allowances ....................... 3,335,576 2,843,099
Inventories:
Finished goods ....................................... 801,384 1,042,065
Work in progress ..................................... 718,271 657,033
Materials and supplies ............................... 633,647 713,308
2,153,302 2,412,406
Other current assets including deferred taxes ............. 993,991 1,006,086
TOTAL CURRENT ASSETS ................................. 8,009,113 7,361,326
Property, plant and equipment ............................. 6,246,445 6,722,049
Less accumulated depreciation ........................ 2,165,475 2,425,143
4,080,970 4,296,906
Goodwill and other intangibles, net of accumulated
amortization ......................................... 7,852,864 8,338,695
Other assets including deferred taxes ..................... 819,243 828,184
TOTAL ASSETS ......................................... $20,762,190 $20,825,111
LIABILITIES
Loans payable ............................................. $123,574 $89,041
Trade accounts payable .................................... 625,227 794,291
Accrued expenses .......................................... 3,018,162 3,019,805
Accrued federal and foreign taxes ......................... 634,714 423,881
TOTAL CURRENT LIABILITIES ............................ 4,401,677 4,327,018
Long-term debt ............................................ 3,844,526 5,031,861
Other noncurrent liabilities .............................. 2,171,800 2,248,282
Postretirement benefit obligations other than pensions..... 850,433 833,916
Minority interests ........................................ 217,844 208,782
STOCKHOLDERS' EQUITY
$2 convertible preferred stock, par value $2.50 per share.. 68 72
Common stock, par value $0.33-1/3 per share ............... 438,279 435,298
Additional paid-in capital ................................ 2,847,615 2,530,696
Retained earnings ........................................ 6,362,648 5,489,292
Accumulated other comprehensive loss ...................... (372,700) (280,106)
TOTAL STOCKHOLDERS' EQUITY ........................... 9,275,910 8,175,252
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ........... $20,762,190 $20,825,111
<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 SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
NET SALES .................................................. $3,341,960 $3,499,758 $7,008,355 $7,102,777
Cost of goods sold ......................................... 920,241 1,059,002 1,924,671 2,090,940
Selling, general and administrative expenses ............... 1,236,958 1,321,293 2,592,276 2,666,552
Research and development expenses .......................... 408,447 379,763 795,405 751,808
Interest expense, net ...................................... 50,153 104,462 122,264 201,509
Other income, net .......................................... (1,522) (4,382) (62,680) (49,831)
Gain on sale of business ................................... - - (592,084) -
Income before federal and foreign taxes .................... 727,683 639,620 2,228,503 1,441,799
Provision for taxes ........................................ 204,172 180,528 722,782 406,030
NET INCOME ................................................. $523,511 $459,092 $1,505,721 $1,035,769
BASIC EARNINGS PER SHARE ................................... $0.40 $0.36 $1.15 $0.80
DILUTED EARNINGS PER SHARE ................................. $0.39 $0.35 $1.13 $0.79
Dividends per share of common stock ........................ $0.215 $0.205 $0.43 $0.41
<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>
SIX MONTHS ENDED JUNE 30, 1998:
ACCUMULATED
$2 CONVERTIBLE ADDITIONAL OTHER TOTAL
PREFERRED COMMON PAID-IN RETAINED COMPREHENSIVE STOCKHOLDERS'
STOCK STOCK CAPITAL EARNINGS LOSS EQUITY
<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 1,505,721 1,505,721
Currency translation adjustments (90,377) (90,377)
Unrealized loss on marketable
securities (2,217) (2,217)
Comprehensive income 1,413,127
Cash dividends declared (563,742) (563,742)
Treasury stock acquired (376) (5,262) (60,229) (65,867)
Common stock issued 2,934 301,782 304,716
Conversion of preferred stock
and other exchanges (4) 423 20,399 (8,394) 12,424
Balance at June 30, 1998 $68 $438,279 $2,847,615 $6,362,648 ($372,700) $9,275,910
SIX MONTHS ENDED JUNE 30, 1997:
ACCUMULATED
$2 CONVERTIBLE ADDITIONAL OTHER TOTAL
PREFERRED COMMON PAID-IN RETAINED COMPREHENSIVE STOCKHOLDERS'
STOCK STOCK CAPITAL EARNINGS LOSS EQUITY
Balance at January 1, 1997 $79 $213,328 $2,034,337 $4,750,621 ($36,273) $6,962,092
Two-for-one stock split 218,506 (218,506)
Restated balance at January 1, 1997 79 431,834 2,034,337 4,532,115 (36,273) 6,962,092
Net income 1,035,769 1,035,769
Currency translation adjustments 151,872) (151,872)
Unrealized loss on marketable
securities (2,424) (2,424)
Comprehensive income 881,473
Cash dividends declared (528,898) (528,898)
Treasury stock acquired (34) (682) (6,344) (7,060)
Common stock issued 2,478 257,137 259,615
Conversion of preferred stock
and other exchanges (3) 55 15,360 15,412
Balance at June 30, 1997 $76 $434,333 $2,306,152 $5,032,642 ($190,569) $7,582,634
<FN>
<F1>
The accompany 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>
SIX MONTHS ENDED JUNE 30,
1998 1997
<S> <C> <C>
OPERATING ACTIVITIES
Net income ........................................................ $1,505,721 $1,035,769
Adjustments to reconcile net income to net cash provided
from operating activities:
Gain on sale of business ....................................... (592,084) -
Gains on sales of other assets ................................. (76,554) (100,940)
Depreciation and amortization .................................. 344,780 381,531
Deferred income taxes .......................................... 32,463 (245,931)
Changes in working capital, net ................................ (639,729) (613,050)
Other items, net ............................................... (60,406) (72,685)
Net cash provided from operating activities ....................... 514,191 384,694
INVESTING ACTIVITIES
Purchases of property, plant and equipment ........................ (373,445) (343,314)
Purchases of businesses, net of cash acquired ..................... - (479,694)
Proceeds from sale of business .................................... 1,770,000 -
Proceeds from sales of other assets ............................... 94,175 221,962
Net (purchases)/sales of marketable securities .................... (45,484) 216,295
Net cash provided from/(used for) investing activities ............ 1,445,246 (384,751)
FINANCING ACTIVITIES
Net repayments of debt............................................. (1,150,448) (77,582)
Dividends paid .................................................... (563,742) (528,898)
Exercise of stock options ......................................... 304,716 259,615
Purchases of treasury stock ....................................... (65,867) (7,060)
Termination of interest rate swap agreements ...................... (96,655) -
Net cash used for financing activities ............................ (1,571,996) (353,925)
Effects of exchange rates on cash balances ........................ (4,975) (6,119)
Increase/(decrease) in cash and cash equivalents .................. 382,466 (360,101)
Cash and cash equivalents, beginning of period .................... 1,051,372 1,322,297
Cash and cash equivalents, end of period .......................... $1,433,838 $962,196
<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 agreements $175,345 $222,524
Income tax and related interest payments, net of refunds 472,058 720,623
</FN>
</TABLE>
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<PAGE>
AMERICAN HOME PRODUCTS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Note 1. MERGER WITH MONSANTO COMPANY
On June 1, 1998, the Company and Monsanto announced that they have
entered into a definitive agreement to combine the two companies in a
merger of equals transaction. The combined company will have global
businesses in pharmaceuticals, agriculture, animal health, consumer
health care and nutrition. Under the terms of the transaction,
Monsanto stockholders will receive 1.15 shares in the combined company
for each share of Monsanto stock that they own. AHP stockholders will
retain their shares. AHP and Monsanto stockholders would own
approximately 65 percent and 35 percent, respectively, of the combined
company's shares. Both companies' Boards of Directors have approved
the merger, however, it is subject to shareholder approval and
satisfaction of other customary conditions, including regulatory
approvals. Among other things, the transaction is contingent upon
qualifying as a tax-free reorganization and being accounted for under
the pooling of interests method of accounting. The transaction is
expected to be completed by the end of 1998 or early 1999. These
consolidated condensed financial statements do not reflect any effects
of the proposed merger.
Note 2. COMMON STOCK
At the Company's April 23, 1998 Annual Meeting of Stockholders, an
increase in the number of authorized shares of common stock from
1,200,000,000 to 2,400,000,000 was approved enabling the Company to
complete a two-for-one common stock split effected in the form of a
100% stock dividend which was declared by the Company's Board of
Directors in March 1998. The record date for stockholders entitled to
receive the additional shares was the close of business on April 24,
1998. The par value of the common stock was maintained at the pre-
split amount of $0.33-1/3 per share. All references to retained
earnings, common stock, average number of common shares outstanding
and per share amounts in these consolidated condensed financial
statements, notes to consolidated condensed financial statements and
Management's Discussion and Analysis of Financial Condition and
Results of Operations prior to the record date of the stock split have
been restated to reflect the two-for-one stock split on a retroactive
basis.
Note 3. CONTINGENCIES
The Company is involved in various legal proceedings, including
product liability and environmental matters of a nature considered
normal to its business. It is the Company's policy to accrue for
amounts related to these legal matters if it is probable that a
liability has been incurred and an amount is reasonably estimable.
-7-
<PAGE>
AMERICAN HOME PRODUCTS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
In the opinion of the Company, although the outcome of any legal
proceedings cannot be predicted with certainty, the ultimate liability
of the Company in connection with its legal proceedings will not have
a material adverse effect on the Company's financial position but
could be material to the results of operations in any one accounting
period.
Note 4. SALE OF SHERWOOD-DAVIS & GECK MEDICAL DEVICES BUSINESS
On February 27, 1998, the Company sold the Sherwood-Davis & Geck
medical devices business to a subsidiary of Tyco International Ltd.
for approximately $1.77 billion, resulting in a pre-tax gain of
$592,084,000. The proceeds were used primarily to reduce outstanding
commercial paper. Net income, basic earnings per share and diluted
earnings per share for the six months ended June 30, 1998 included an
after-tax gain on the sale of $330,782,000, $0.25 and $0.25,
respectively.
Note 5. ACCUMULATED OTHER COMPREHENSIVE LOSS
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 130 - "Reporting Comprehensive
Income". SFAS No. 130 increases financial reporting disclosures and
has no impact on the Company's financial position or results of
operations. Certain reclassifications have been made to the June 30,
1997, December 31, 1997 and December 31, 1996 consolidated financial
statements to conform with the financial reporting requirements of
SFAS No. 130.
Accumulated other comprehensive loss is comprised substantially of
currency translation adjustments.
Note 6. RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, SFAS No. 133 - "Accounting for Derivative Instruments
and Hedging Activities" was issued and is effective for fiscal years
beginning after June 15, 1999. SFAS No. 133 requires all derivatives
to be measured at fair value and recognized as assets or liabilities
on the balance sheet. Changes in the fair value of derivatives should
be recognized in either Net Income or Other Comprehensive Income,
depending on the designated purpose of the derivative. The Company
currently plans to adopt this standard effective January 1, 2000.
This standard will have no material impact on the Company's results of
operations or financial position.
-8-
<PAGE>
AMERICAN HOME PRODUCTS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Note 7. EARNINGS PER SHARE
The following tables set forth the computations of Basic Earnings per
Share and Diluted Earnings per Share:
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS) 1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net income less preferred dividends $523,497 $459,077 $1,505,693 $1,035,739
Denominator:
Average number of common shares outstanding 1,314,229 1,291,517 1,311,628 1,288,083
BASIC EARNINGS PER SHARE $0.40 $0.36 $1.15 $0.80
Denominator:
Average number of common shares outstanding 1,314,229 1,291,517 1,311,628 1,288,083
Common share equivalents of outstanding stock
options and deferred contingent common stock
awards 21,938 20,470 22,097 19,776
Total shares 1,336,167 1,311,987 1,333,725 1,307,859
DILUTED EARNINGS PER SHARE $0.39 $0.35 $1.13 $0.79
</TABLE>
Note 8. SUBSEQUENT EVENT
On July 30, 1998, the Company completed the acquisition of the vitamin
and nutritional supplement products business of Solgar Vitamin and
Herb Company, Inc. and its related affiliates for approximately $425
million in cash. This transaction will be accounted for under the
purchase method of accounting. Solgar is a manufacturer and marketer
of over 400 vitamins, nutritional supplements and herbal products with
annual sales in excess of $100 million.
-9-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1998
RESULTS OF OPERATIONS
Management's discussion and analysis of results of operations for the 1998
second quarter and first half has been presented on an as-reported basis except
for sales variation explanations which have been presented on an as-reported and
pro forma basis. The pro forma sales results reflect businesses divested and
acquired in 1998 and 1997 assuming the transactions occurred as of January 1,
1997. This activity includes the divestitures of the Sherwood-Davis & Geck
(effective February 27, 1998) and Storz Instrument Company (effective December
31, 1997) medical devices businesses, and the acquisition of the worldwide
animal health business of Solvay S.A. (effective February 28, 1997). This
activity also includes the reclassification of certain ophthalmic pharmaceutical
sales from the medical devices business to pharmaceuticals (effective January 1,
1998).
On an as-reported basis, worldwide net sales for the 1998 second quarter and
first half decreased 5% and 1% compared with prior year levels. On a pro forma
basis, worldwide net sales increased 5% for the 1998 second quarter and 4% for
the first half. The increases in pro forma worldwide net sales were due
primarily to higher domestic sales of pharmaceuticals and worldwide sales of
agricultural products offset, in part, by unfavorable foreign exchange of 3% for
both the 1998 second quarter and first half.
The following tables set forth worldwide net sales results by major product
category and industry segment together with the percentage changes in "As-
Reported" and "Pro Forma" worldwide net sales from the comparable periods in the
prior year:
<TABLE>
<CAPTION>
THREE MONTHS AS-REPORTED PRO FORMA
($ IN MILLIONS) ENDED JUNE 30, % INCREASE % INCREASE
NET SALES TO CUSTOMERS 1998 1997 (DECREASE) (DECREASE)
<S> <C> <C> <C> <C>
Health Care Products:
Pharmaceuticals $2,069.8 $1,934.4 7% 7%
Consumer Health Care 456.2 445.8 2% 2%
Medical Devices - 327.2 (100)% -
Total Health Care Products 2,526.0 2,707.4 (7)% 6%
Agricultural Products 816.0 792.4 3% 3%
Consolidated Net Sales $3,342.0 $3,499.8 (5)% 5%
</TABLE>
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
SIX MONTHS AS-REPORTED PRO FORMA
($ IN MILLIONS) ENDED JUNE 30, % INCREASE % INCREASE
NET SALES TO CUSTOMERS 1998 1997 (DECREASE) (DECREASE)
<S> <C> <C> <C> <C>
Health Care Products:
Pharmaceuticals $4,333.0 $4,032.9 7% 5%
Consumer Health Care 956.8 941.3 2% 2%
Medical Devices 192.0 650.5 (70)% -
Total Health Care Products 5,481.8 5,624.7 (3)% 5%
Agricultural Products 1,526.6 1,478.1 3% 3%
Consolidated Net Sales $7,008.4 $7,102.8 (1)% 4%
</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 7% for
both the 1998 second quarter and first half. On a pro forma basis,
worldwide pharmaceutical sales increased 7% for the 1998 second quarter and
5% for the first half due primarily to higher sales of PREMARIN products
(first half only), oral contraceptives, EFFEXOR, SYNVISC (introduced in the
1997 fourth quarter), BENEFIX (introduced in the 1997 first quarter) and
NEUMEGA (introduced in the 1997 fourth quarter) offset, in part, by the
voluntary market withdrawal of the Company's antiobesity products in the
1997 third quarter and lower sales of ORUVAIL and LODINE. Worldwide
pharmaceutical sales for the 1998 second quarter also reflect higher sales
of ZIAC, VERELAN and NAPRELAN offset, in part, by lower sales of CORDARONE
due to generic competition. Worldwide pharmaceutical sales were impacted
by unfavorable foreign exchange of 3% for both the 1998 second quarter and
first half. On an as-reported basis, U.S. pharmaceutical sales increased
17% for the 1998 second quarter and 14% for the first half. On a pro forma
basis, U.S. pharmaceutical sales increased 16% for the 1998 second quarter
and 13% for the first half. The increase in pro forma U.S. pharmaceutical
sales for the 1998 second quarter consisted of unit volume growth of 14%
and price increases of 2%. The increase in pro forma U.S. pharmaceutical
sales for the 1998 first half consisted of unit volume growth of 11% and
price increases of 2%. On an as-reported basis, international
pharmaceutical sales decreased 4% for the 1998 second quarter and 2% for
the first half. On a pro forma basis, international pharmaceutical sales
decreased 4% for the 1998 second quarter and 5% for the first half. The
decrease in pro forma international pharmaceutical sales for the 1998
second quarter consisted of unit volume growth of 3% which was more than
offset by price decreases of 1% and unfavorable foreign exchange of 6%. The
decrease in pro forma international pharmaceutical sales for the 1998 first
-11-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1998
half consisted of unit volume growth of 3% which was more than offset by
unfavorable foreign exchange of 8%.
On an as-reported and pro forma basis, worldwide consumer health care sales
increased 2% for both the 1998 second quarter and first half due primarily
to higher sales of CENTRUM products and CALTRATE offset, in part, by lower
sales of cough/cold products and AXID AR. Worldwide consumer health care
sales were impacted by unfavorable foreign exchange of 2% for both the 1998
second quarter and first half. On an as-reported and pro forma basis, U.S.
consumer health care sales increased 4% for the 1998 second quarter and 2%
for the first half. The increase in U.S. consumer health care sales for
the 1998 second quarter consisted of unit volume growth of 3% and price
increases of 1%. The increase in U.S. consumer health care sales for the
1998 first half consisted of unit volume growth of 1% and price increases
of 1%. On an as-reported and pro forma basis, international consumer
health care sales decreased 1% for the 1998 second quarter and were
comparable with prior year results for the first half. The decrease in
international consumer health care sales for the 1998 second quarter
consisted of unit volume growth of 4% and price increases of 1% which were
more than offset by unfavorable foreign exchange of 6%. International
consumer health care sales for the 1998 first half consisted of unit volume
growth of 5% and price increases of 2% which were offset by unfavorable
foreign exchange of 7%.
On February 27, 1998, the Company sold the Sherwood-Davis & Geck medical
devices business resulting in a pre-tax gain of $592.1 million ($330.8
million after-tax). This transaction completed the Company's exit from the
medical devices business. On an as reported basis, worldwide medical
devices sales decreased 100% for the 1998 second quarter and 70% for the
first half due primarily to the Sherwood-Davis & Geck divestiture as well
as the sale of Storz Instrument Company effective December 31, 1997.
On an as-reported and pro forma basis, worldwide agricultural products
sales increased 3% for both the 1998 second quarter and first half.
Worldwide agricultural products sales for both the 1998 second quarter and
first half reflect higher sales of RAPTOR (a soybean herbicide introduced
in the 1997 second quarter which is replacing PURSUIT and SCEPTER
herbicides in certain geographies), ODYSSEY (a canola herbicide introduced
in the 1997 second quarter) and COUNTER insecticide. Worldwide
agricultural products sales were impacted by unfavorable foreign exchange
of 2% for both the 1998 second quarter and first half. On an as-reported
and pro forma basis, U.S. agricultural products sales increased 1% for the
1998 second quarter and 3% for the first half. The increase in U.S.
agricultural products sales for the 1998 second quarter consisted of price
increases of 9% which were offset, in part, by unit volume declines of 8%.
The increase in U.S. agricultural products sales for the 1998 first half
-12-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1998
consisted of price increases of 5% which were offset, in part, by unit
volume declines of 2%. Due to the seasonality of the U.S. agricultural
products business, which is concentrated primarily in the first six months
of the year, U.S. agricultural products sales and results of operations for
the 1998 second quarter and first half are not indicative of the results to
be expected in subsequent fiscal quarters or for the full year. On an as-
reported and pro forma basis, international agricultural products sales
increased 6% for the 1998 second quarter and 4% for the first half. The
increase in international agricultural products sales for the 1998 second
quarter consisted of unit volume growth of 9% and price increases of 1%
which were offset, in part, by unfavorable foreign exchange of 4%. The
increase in international agricultural products sales for the 1998 first
half consisted of unit volume growth of 9% which was offset, in part, by
unfavorable foreign exchange of 5%.
Cost of goods sold, as a percentage of net sales, decreased to 27.5% for both
the 1998 second quarter and first half compared to 30.3% for the 1997 second
quarter and 29.4% for the 1997 first half due primarily to an overall product
mix improvement as increased sales of higher margin pharmaceuticals and
agricultural products replaced the loss of lower margin medical devices sales
resulting from the divestitures of the Sherwood-Davis & Geck and Storz
Instrument Company medical devices businesses.
Selling, general and administrative expenses, as a percentage of net sales,
decreased to 37.0% for both the 1998 second quarter and first half versus 37.8%
for the 1997 second quarter and 37.5% for the 1997 first half. Lower selling,
general and administrative expenses resulting from the divestitures of the
Sherwood-Davis & Geck and Storz Instrument Company medical devices businesses
and lower marketing expenses for certain consumer healthcare products and
pharmaceutical samples were offset, in part, by higher marketing expenses
related to certain pharmaceutical promotional efforts.
Research and development expenses increased 7.6% for the 1998 second quarter and
5.8% for the 1998 first half due primarily to higher pharmaceutical research and
development expenditures, particularly in the biopharmaceutical area, offset, in
part, by lower research and development expenses resulting from the divestitures
of the Sherwood-Davis & Geck and Storz Instrument Company medical devices
businesses.
Interest expense, net decreased in the 1998 second quarter and first half due
primarily to the reduction in long-term debt during the 1998 first quarter as
the proceeds from the sale of the Sherwood-Davis & Geck medical devices business
were used primarily to reduce outstanding commercial paper. Average long-term
debt outstanding during the 1998 and 1997 second quarter was $3,753.3 million
and $6,024.3 million, respectively. Average long-term debt outstanding during
the 1998 and 1997 first half was $4,438.2 million and $5,986.5 million,
respectively.
-13-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1998
Other income, net for both the 1998 and 1997 second quarter and first half
includes gains on the sales of non-strategic assets, including certain generic
and non-core product rights offset, in part, by foreign exchange losses. Other
income, net for both the 1997 second quarter and first half also includes the
amount paid in settlement of a lawsuit brought by Johnson & Johnson and its
wholly-owned subsidiary, Ortho Pharmaceutical Corporation. The settlement
was offset by a previously established reserve for this litigation and a gain
on the sale of the Company's investment in the common stock of certain publicly
traded insurance companies.
The following tables set forth income before taxes by industry segment:
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
($ IN MILLIONS) ENDED JUNE 30, ENDED JUNE 30,
INCOME BEFORE TAXES 1998 1997 1998 1997
<S> <C> <C> <C> <C>
Health Care Products $523.4 $510.3 $1,368.7 $1,280.8
Agricultural Products 284.5 259.8 474.8 431.2
Corporate (80.2) (130.5) 385.0 (1) (270.2)
Consolidated Income before Taxes $727.7 $639.6 $2,228.5 $1,441.8
<FN>
<F1>
(1) Includes a gain on the sale of Sherwood-Davis & Geck medical devices business in the 1998 first
quarter of $592.1 million.
</FN>
</TABLE>
The effective tax rate remained relatively consistent for the 1998 second
quarter at 28.1% versus 28.2% for the 1997 second quarter. The effective tax
rate increased to 32.4% for the 1998 first half versus 28.2% for the 1997 first
half due primarily to the tax impact of the gain on the sale of the Sherwood-
Davis & Geck medical devices business in the first quarter of 1998. The impact
on the effective tax rate from the gain on the sale of the Sherwood-Davis & Geck
medical devices business was due primarily to goodwill basis differences for tax
and financial reporting purposes.
Net income, basic earnings per share and diluted earnings per share increased
14%, 11% and 11%, respectively, in the 1998 second quarter compared to the 1997
second quarter. Excluding the after-tax gain on the sale of the Sherwood-Davis
& Geck medical devices business in the 1998 first quarter of $330.8 million
($0.25 per share-basic and diluted) net income, basic earnings per share and
diluted earnings per share increased 13%, 13% and 11%, respectively, in the 1998
first half compared to the 1997 first half. The increases in net income, basic
earnings per share and diluted earnings per share for both the 1998 second
quarter and first half, excluding the gain on the sale, were greater than the
as-reported net sales results due primarily to increased sales of higher margin
pharmaceutical and agricultural products (replacing the loss of lower margin
medical devices sales) and lower selling, general and administrative expenses
and interest expense, offset, in part, by higher research and development
expenses. Including the gain on sale, net income, basic earnings per share and
diluted earnings per share for the 1998 first half increased 45%, 44% and 43% to
$1,505.7 million, $1.15 and $1.13, respectively.
-14-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1998
During the 1998 first quarter, the Company initiated a review of its worldwide
manufacturing and distribution systems for all of its product lines. The
results of this study will be announced later this year at which time it is
expected that a restructuring charge, which will offset a portion of the gain on
the sale of the Sherwood-Davis & Geck medical devices business, will be
required.
COMPETITION
The Company operates in the highly competitive healthcare and agrochemical
industries. The Company is not dependent on any one patent-protected product or
line of products for a substantial portion of its sales or results of
operations. However, PREMARIN, one of the Company's conjugated estrogens
products, manufactured from pregnant mare's urine, is the leader in its category
and does contribute significantly to sales and results of operations.
PREMARIN'S principal uses are to treat the symptoms of menopause and
osteoporosis, a condition involving a loss of bone mass in postmenopausal women.
Estrogen containing products manufactured by other companies have been marketed
for many years for the treatment of menopausal symptoms, and some of these
products have also obtained marketing approval for the treatment of
osteoporosis. During the past several years, other manufacturers have
introduced products for the treatment and/or prevention of osteoporosis. Some
companies have attempted to obtain approval for generic versions of PREMARIN.
These products, if approved, would be routinely substitutable for PREMARIN under
many state laws and third party insurance payer plans. In May 1997, the U.S.
Food and Drug Administration (FDA) announced it would not approve certain
synthetic estrogen products as generic equivalents of PREMARIN given known
compositional differences between the active ingredient of these products and
PREMARIN. No generic equivalents to PREMARIN have been approved by the FDA to
date. PREMARIN will continue to be subject to competition from competing
estrogen and other products for its approved indications, and may be subject to
some form of generic competition from either natural or synthetic generic
conjugated estrogens products in the future.
LIQUIDITY, FINANCIAL CONDITION AND CAPITAL RESOURCES
Cash and cash equivalents increased $382.5 million in the 1998 first half to
$1,433.8 million. Proceeds from sale of business and sales of other assets of
$1,864.2 million, cash flows from operating activities of $514.2 million and
proceeds from the exercise of stock options of $304.7 million were used
principally for long-term debt reduction of $1,150.4 million, dividend payments
of $563.7 million and capital expenditures of $373.4 million. Due to the
seasonality of the U.S. agricultural products business, a significant portion of
the annual U.S. agricultural products sales are recorded in the first six months
of the year; however, a significant amount of the related accounts receivable
are not collected until the third quarter. Capital expenditures included
strategic investments in manufacturing and distribution facilities worldwide and
expansion of the Company's research and development facilities.
-15-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1998
At June 30, 1998, the fair value of the Company's long-term debt, including the
current portion, was $4,126.7 million. If interest rates were to increase or
decrease by one percentage point, the fair value of the long-term debt would
decrease or increase by approximately $122.2 million.
Proceeds from the sale of the Sherwood-Davis & Geck medical devices business
were used primarily to reduce outstanding commercial paper and terminate the
Company's $2.3 billion of interest rate swap agreements. The cost to unwind the
interest rate swap agreements was charged against the gain on sale.
At June 30, 1998, the fair value of the $663.0 million notional amount of
foreign exchange forward contracts was a net receivable of $4.4 million. As
foreign exchange rates change from period to period, the fluctuations in the
fair value of the foreign exchange forward contracts are offset by fluctuations
in the fair value of the underlying hedged transactions. If the value of the
U.S. dollar were to increase or decrease by 10% in relation to all hedged
foreign currencies, the net receivable would increase or decrease by
approximately $24.7 million.
Effective April 1, 1998, the Company reduced its $5 billion of revolving credit
facilities to $2 billion by terminating the $2.5 billion, 364-day credit
facility in its entirety and reducing the $2.5 billion, five-year credit
facility to $2.0 billion. The remaining $2.0 billion, five-year credit facility
supports the Company's commercial paper program and has a maturity date of July
31, 2002. At June 30, 1998, there were no borrowings outstanding under the
remaining credit facility.
Effective May 31, 1998, the Company, in conjunction with its entry into the
merger agreement with Monsanto, rescinded its common stock repurchase program,
which had been in effect since July 1994.
CAUTIONARY STATEMENTS FOR FORWARD LOOKING INFORMATION
Management's discussion and analysis set forth above contains certain forward
looking statements, including, among other things, statements regarding the
Company's financial position, results of operations and potential competition.
These forward looking statements are based on current expectations. Certain
factors which could cause the Company's actual results to differ materially from
expected and historical results have been identified by the Company in its other
periodic reports filed with the Securities and Exchange Commission including the
Company's 1997 Annual Report on Form 10-K and Exhibit 99 to such report, which
exhibit is hereby incorporated by reference.
-16-
<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 Report on Form 10-Q for the
quarter ended March 31, 1998.
As of July 15, 1998, the Company has been served with more than 3,700
lawsuits in federal and state courts on behalf of approximately 49,000
plaintiffs alleging injuries as a result of use of the NORPLANT
SYSTEM, the Company's implantable contraceptive containing
levonorgestrel. Although approximately 70 of the cases have been
filed as class actions, class certification has been denied in the
federal actions as well as in every state in which the question has
been considered. On December 6, 1994, the Judicial Panel on Multi-
District Litigation ("MDL") ordered that all NORPLANT SYSTEM lawsuits
filed in federal courts be consolidated for pretrial proceedings in
the U.S. District Court (E.D. Tex.) in Beaumont. The MDL proceedings
now account for over 37,000 of the NORPLANT SYSTEM plaintiffs.
Following the denial of class certification, the MDL court scheduled
three "bellwether" trials, each involving the claims of five Texas
plaintiffs. Rather than proceeding with the first of these trials as
scheduled on February 24, 1997, the court entered summary judgment in
favor of the Company on all of plaintiffs' claims. That decision is
now on appeal to the U.S. Court of Appeals for the Fifth Circuit. No
NORPLANT SYSTEM case involving the Company has yet been tried to a
verdict. All of the cases involving the Company that have approached
trial have either been dismissed by the courts or withdrawn by the
plaintiffs, except for one trial in Hidalgo County, Texas which
resulted in a mistrial in January 1998 due to conflicts among
plaintiffs' attorneys. Several single-plaintiff and multi-plaintiff
trials are scheduled for the second half of 1998. The Company will
continue to contest the NORPLANT SYSTEM litigation vigorously.
On September 15, 1997, the Company's Wyeth-Ayerst Laboratories
Division, the manufacturer of PONDIMIN (fenfluramine hydrochloride)
tablets C-IV and the distributor of REDUX (dexfenfluramine
hydrochloride capsules) C-IV, announced a voluntary and immediate
withdrawal of these antiobesity medications. The Company took this
action on the basis of new, preliminary information provided to the
Company on September 12, 1997 by the FDA regarding heart valve
abnormalities in patients using these medications. The Company
estimates that approximately six million people used these medications
in the U.S.
-17-
<PAGE>
As of July 15, 1998, the Company has been served or is aware that it
has been named as a defendant in 1,157 lawsuits as the manufacturer of
PONDIMIN and/or the distributor of REDUX. These lawsuits have been
filed on behalf of individuals who claim to have been injured as a
result of their use of PONDIMIN and/or REDUX, either individually or
in combination with the prescription drug phentermine (which the
Company does not manufacture, distribute or market). The lawsuits
also often name as defendants other distributors and/or retailers of
PONDIMIN and/or REDUX, the manufacturers, distributors and/or
retailers of phentermine and physicians or other health care
providers. The Company anticipates that it will be named as a
defendant in additional PONDIMIN and/or REDUX lawsuits in the future.
Of the 1,157 lawsuits naming the Company as a defendant, 172 are
actions that seek certification of a class, some on a national and
others on a statewide basis. Of these 172 lawsuits, 136 are pending in
various federal district courts and 36 are pending in various state
courts. A number of the actions brought in state courts have been
removed to federal courts. Individual plaintiffs have filed the
remaining lawsuits: 447 individual lawsuits are pending in various
federal district courts and 538 individual lawsuits are pending in
various state courts. On December 10, 1997, the federal Judicial
Panel on Multidistrict Litigation transferred all pending federal
lawsuits alleging injuries from the use of REDUX and/or PONDIMIN to
the U.S. District Court for the Eastern District of Pennsylvania (MDL
1203), where they will be coordinated for all pretrial purposes before
U.S. District Judge Louis C. Bechtle. The state cases are pending in
36 different states, with the bulk of the cases in California, New
Jersey, New York, Oklahoma, Pennsylvania, Tennessee and Texas.
Plaintiffs' allegations of liability are based on various theories of
recovery, including, but not limited to, product liability, strict
liability, negligence, various breaches of warranty, conspiracy,
fraud, misrepresentation and deceit. These lawsuits typically allege
that the short or long-term use of PONDIMIN and/or REDUX,
independently or in combination (including the combination of PONDIMIN
and phentermine popularly known as "fen/phen"), causes, among other
things, primary pulmonary hypertension, valvular heart disease and/or
neurological dysfunctions. In addition, some lawsuits allege severe
emotional distress caused by the knowledge that ingestion of these
drugs, independently or in combination, could cause such injuries.
Plaintiffs typically seek relief in the form of monetary damages
(including general damages, medical care and monitoring expenses,
loss of earnings and earnings capacity, compensatory damages and
punitive damages), generally in unspecified amounts, on behalf of the
individual or the class. In addition, some actions seeking class
certification ask for certain types of purportedly equitable relief,
including, but not limited to, declaratory judgments and the
establishment of a research or medical surveillance program.
-18-
<PAGE>
The Company believes that it has meritorious defenses to these actions
and that it has acted properly at all times in dealing with PONDIMIN
and REDUX matters. The Company intends to defend the PONDIMIN and
REDUX related litigation vigorously.
Five shareholder lawsuits naming the Company as a defendant and
arising out of the Company's planned merger with Monsanto have been
filed in the Delaware Chancery Court, New Castle County. The five
class action complaints, which have been consolidated into one action
(In re Monsanto Company Shareholders Litigation, C.A. No.16416NC),
name as defendants Monsanto, the members of Monsanto's board and the
Company. The complaints generally allege that the Monsanto defendants
breached their fiduciary duties to their shareholders by entering into
the merger agreement without first engaging in an auction process or
an active market check and that the Company knowingly aided and
abetted Monsanto and the Monsanto directors. Plaintiffs seek
preliminary and permanent injunctive relief preventing the defendants
from consummating the merger, rescission of the merger if it is
consummated and compensatory damages and attorneys fees. The Company
intends to defend this litigation vigorously.
Two putative personal injury class actions have been filed in
connection with the Company's voluntary withdrawal from the market of
DURACT, a non-narcotic analgesic pain reliever. McGloin v. Wyeth-
Ayerst Laboratories, filed in the United States District Court for the
Northern District of California (No. C-98-2596-CW), seeks the
certification of a nationwide class of persons who used DURACT and who
have suffered or may suffer liver damage or related conditions as a
result of using the product. Chimento, et al. v. Wyeth-Ayerst
Laboratories, filed in the 34th Judicial District Court of Louisiana
for the Parish of St. Bernard, seeks the certification of a class of
Louisiana residents who were exposed to and who suffered injury from
DURACT. Plaintiffs in both cases seek compensatory and punitive
damages, the refund of all purchase costs, and the creation of a
court-supervised medical monitoring program for the diagnosis and
treatment of liver damage and related conditions allegedly caused by
DURACT. The Company intends to defend this litigation vigorously.
In the brand name prescription drug antitrust litigation, the Company
has settled a group of federal district cases brought by retail
pharmacists. The Company has also settled the cases brought by
American Drug Stores and Eckerd's Drug Stores. The settlement
agreements provide that they shall not be deemed or construed to be an
admission of or evidence of any violation of any statute or law or of
any liability or wrongdoing by the Company or of the truth of any of
the claims or allegations in the complaint in these cases. The
settlements are not material to the Company.
-19-
<PAGE>
In the opinion of the Company, although the outcome of any legal
proceedings cannot be predicted with certainty, the ultimate liability
of the Company in connection with its legal proceedings will not have
a material adverse effect on the Company's financial position but
could be material to the results of operations in any one accounting
period.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
(a) The matters described under item 4(c) below were submitted to a
vote of security-holders, through the solicitation of proxies
pursuant to Section 14 under the Securities Exchange Act of 1934,
as amended, at the Annual Meeting of Stockholders held on April
23, 1998 (the "Annual Meeting").
(b) Not applicable.
(c) The following describes the matters voted upon at the Annual
Meeting and sets forth the number of votes (on a pre stock split
basis) cast for, against or withheld and the number of
abstentions as to each such matter (except as provided below,
there were no broker non-votes):
(i) Election of directors:
<TABLE>
<CAPTION>
NOMINEE FOR WITHHELD
<S> <C> <C>
Clifford L. Alexander, Jr. 566,815,459 2,849,762
Frank A. Bennack, Jr. 566,954,896 2,710,325
Robert G. Blount 566,957,912 2,707,309
Robin Chandler Duke 566,445,024 3,220,197
Robert Essner 566,953,187 2,712,034
John D. Feerick 566,794,067 2,871,154
John P. Mascotte 566,896,954 2,768,267
Mary Lake Polan, M.D.,Ph.D. 566,981,956 2,683,265
Ivan G. Seidenberg 566,711,236 2,953,985
John R. Stafford 566,856,058 2,809,163
John R. Torell III 567,028,522 2,636,699
William Wrigley 567,005,596 2,659,625
</TABLE>
(ii) Ratification of the appointment of Arthur Andersen LLP as
principal independent public accountants for 1998:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
<S> <C> <C>
567,542,719 723,352 1,399,150
</TABLE>
(iii) Approval of the proposed amendment to the Corporation's
Restated Certificate of Incorporation:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
<S> <C> <C>
563,622,312 3,504,117 2,538,792
</TABLE>
(d) Not applicable.
-20-
<PAGE>
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description
(10.1) Form of Severance Agreement entered into between
the Company and the executive officers specified
therein pursuant to Board of Director approval on
January 29, 1998.
(27.1) Financial Data Schedule - Period Ended June 30, 1998.
(27.2) Restated Financial Data Schedule - Period Ended
June 30, 1997.
(27.3) Restated Financial Data Schedule - Period Ended
December 31, 1997.
(27.4) Restated Financial Data Schedule - Period Ended
December 31, 1996.
(b) Reports on Form 8-K
A Current Report on Form 8-K regarding the Company's announcement
that it had entered into a definitive agreement to combine with
Monsanto Company in a merger of equals transaction was filed on
June 1, 1998.
-21-
<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: August 13, 1998
-22-
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
(10.1) Form of Severance Agreement entered into between the Company and
the executive officers specified therein pursuant to Board of
Director approval on January 29, 1998.
(27.1) Financial Data Schedule - Period Ended June 30, 1998.
(27.2) Restated Financial Data Schedule - Period Ended June 30, 1997.
(27.3) Restated Financial Data Schedule - Period Ended December 31, 1997.
(27.4) Restated Financial Data Schedule - Period Ended December 31, 1996.
EX-1
SEVERANCE AGREEMENT
This Severance Agreement (this "Agreement") is made as of July 31,
1998, by and between AMERICAN HOME PRODUCTS CORPORATION, a Delaware corporation
(the "Company"), and [SEE ANNEX A] ("Executive").
RECITALS
WHEREAS the Board of Directors of the Company (the "Board") has
approved a severance agreement to provide Executive with certain benefits upon
the termination of his employment;
NOW THEREFORE, the parties hereto agree as follows:
1. TERM OF AGREEMENT. This Agreement shall commence on the date
hereof and shall continue in effect through December 31, 2000; provided,
however, the term of this Agreement shall automatically be extended for one
additional year beyond 2000 and successive one year periods thereafter, unless,
not later than September 30, 1998 (for the additional year ending on December
31, 2001) or September 30 of each year thereafter (for each subsequent
extension), the Company shall have given notice that it does not wish to extend
this Agreement for an additional year, in which event this Agreement shall
continue to be effective until the end of its then remaining term; provided,
further, that, notwithstanding any such notice by the Company not to extend, if
a Change in Control shall have occurred during the original or any extended term
of this Agreement, this Agreement shall continue in effect for a period of
thirty-six (36) months beyond such Change in Control. Notwithstanding the
foregoing, this Agreement shall terminate if Executive ceases to be an employee
of the Corporation and its subsidiaries for any reason prior to a Change in
Control which, for these purposes, shall include cessation of such employment as
a result of the sale or other disposition of the division, subsidiary or other
business unit by which the Executive is employed.
2. CHANGE IN CONTROL. No benefits shall be payable hereunder unless
there shall have been a Change in Control of the Company, as set forth below.
For purposes of this Agreement, a Change in Control shall be deemed to have
occurred if:
(A) any person or persons acting in concert (excluding Company benefit
plans) becomes the beneficial owner of securities of the Company having at
least 20% of the voting power of the Company's then outstanding securities
(unless the event causing the 20% threshold to be crossed is an acquisition
of voting common securities directly from the Company); or
(B) the consummation of any merger or other business combination of
the Company, sale or lease of the Company's assets or combination of the
foregoing transactions (the "Transactions") other than a Transaction
immediately following which the shareholders of the Company who owned
shares immediately prior to the Transaction (including any trustee or
fiduciary of any Company employee benefit plan) own, by virtue of their
prior ownership of the Company's shares, at least 65% of the voting power,
directly or indirectly, of (a) the surviving corporation in any such merger
or other business combination; (b) the purchaser or lessee of the Company's
assets; or (c) both the surviving corporation and the purchaser or lessee
in the event of any combination of Transactions; or
(C) within any 24 month period, the persons who were directors
immediately before the beginning of such period (the "Incumbent Directors")
shall cease (for any reason other than death) to constitute at least a
majority of the Board or the board of directors of a successor to the
Company. For this purpose, any director who was not a director at the
beginning of such period shall be deemed to be an Incumbent Director if
such director was elected to the Board by, or on the recommendation of or
with the approval of, at least two-thirds of the directors who then
qualified as Incumbent Directors (so long as such director was not
nominated by a person who has expressed an intent to effect a Change in
Control or engage in a proxy or other control contest).
3. TERMINATION FOLLOWING CHANGE IN CONTROL. If any of the events
described in Section 2 hereof constituting a Change in Control shall have
occurred, Executive shall be entitled to the benefits provided in Section 4(iv)
hereof upon the subsequent termination of Executive's employment with the
Company and its subsidiaries during the term of this Agreement unless such
termination is (A) a result of Executive's death or Retirement (except as
provided in Section 3(i) below), or (B) by Executive without Good Reason, or (C)
by the Company or any of its subsidiaries for Disability or for Cause.
(i) DISABILITY; RETIREMENT. For purposes of this Agreement,
"Disability" shall mean permanent and total disability as such term is defined
under Section 22(e)(3) of the Internal Revenue Code of 1986, as amended (the
"Code"), without regard to whether Executive is subject to the Code. Any
question as to the existence of Executive's Disability upon which Executive and
the Company cannot agree shall be determined by a qualified independent
physician selected by Executive (or, if Executive is unable to make such
selection, such selection shall be made by any adult member of Executive's
immediate family or Executive's legal representative), and approved by the
Company, said approval not to be unreasonably withheld. The determination of
such physician made in writing to the Company and to Executive shall be final
and conclusive for all purposes of this Agreement. For purposes of this
Agreement, "Retirement" shall mean Executive's voluntary termination of
employment with the Company under any of the Company's retirement plans;
provided, however, that notwithstanding the foregoing, no Retirement shall
adversely affect, interfere with or otherwise impair in any way Executive's
right to receive the payments and benefits to which he is entitled on account of
a termination without Cause or with Good Reason.
(ii) CAUSE. For purposes of this Agreement, "Cause" shall mean (A)
the conviction of, or plea of guilty or nolo contendere to, a felony or (B) the
willful engaging by an Executive in gross misconduct which is materially and
demonstrably injurious to the Company. Notwithstanding the foregoing, Executive
shall not be deemed to have been terminated for Cause unless and until there
shall have been delivered to Executive a copy of a resolution duly adopted by
the affirmative vote of not less than three-quarters (3/4) of the Incumbent
Directors of the Board at a meeting of the Board called and held for such
purpose (after reasonable notice to Executive and an opportunity for Executive,
together with Executive's counsel, to be heard before the Board), finding that,
in the good faith opinion of the Board, Executive was guilty of conduct set
forth above in this Section 3(ii) and specifying the particulars thereof in
detail.
(iii) GOOD REASON. Executive shall be entitled to terminate
employment with Good Reason. For the purpose of this Agreement, "Good Reason"
shall mean the occurrence, without Executive's express written consent, of any
of the following circumstances unless, in the case of paragraphs 3(iii) (A),
(E), (F), or (G), such circumstances are fully corrected prior to the date
specified as the Date of Termination (as defined in Section 3(v)) in the Notice
of Termination (as defined in Section 3(iv)) given in respect thereof:
(A) the assignment to Executive of any duties inconsistent with
Executive's status as an executive of the Company or its subsidiaries,
Executive's removal from his or her position (as it existed immediately
prior to the Change in Control), or a substantial diminution in the nature
or status of Executive's responsibilities from those in effect immediately
prior to the Change in Control;
(B) a reduction by the Company or any of its subsidiaries in
Executive's annual base salary as in effect on the date hereof or as the
same may be increased from time to time;
(C) a failure in any year after the Change in Control to grant stock
options whose value at the time of grant on a Black-Scholes basis is no
less than the greatest Black-Scholes value at the time of grant of stock
options granted by the Company to Executive at any one time in any of the
three years prior to the Change in Control (in calculating this value, (i)
an initial employment grant shall be excluded unless it is the only grant
made during such period, (ii) the one-time 1995 special stock option grant
made May 25, 1995 to certain designated executives shall not be included,
and (iii) any shares of restricted stock granted in lieu of shares subject
to an option shall be converted to option shares in accordance with the
formula used to determine the number of restricted shares to be granted and
shall be treated as having been granted as shares subject to an option)
(the "Stock Option Value"); provided, however, that the Black-Scholes value
of any grant on a per option share basis shall be equal to the per option
share value of a grant, if any, made on the same date as such grant and
reported in the Company's proxy statement filed prior to a Change in
Control and all determinations of the Black-Scholes value of other grants
shall be made by Towers Perrin (or, if unavailable or unwilling to serve,
any other nationally recognized compensation consulting firm chosen by the
Company and reasonably acceptable to the Executive), using the same
methodology and such assumptions consistent with those used for purposes of
the Company's latest proxy statement filed prior to the Change in Control;
(D) the relocation of Executive's place of business to a location
more than 100 miles from the location where Executive was based and
performed services immediately prior to the Change in Control; provided,
however, that any relocation of greater than 25 miles, but less than or
equal to 100 miles, will still constitute Good Reason unless Executive is
provided with relocation benefits in the aggregate no less favorable than
the 1993 Relocation Policy with respect to the relocation of the corporate
offices to Madison, New Jersey from New York City;
(E) the failure by the Company to pay to Executive any portion of any
installment of deferred compensation under any deferred compensation
program of the Company in which Executive participated within seven (7)
days of the date such compensation is due;
(F) the failure by the Company or any of its subsidiaries to continue
in effect any incentive compensation plan in which Executive participated
prior to the Change in Control, unless an equitable alternative
compensation arrangement (embodied in an ongoing substitute or alternative
plan) has been provided for Executive, or the failure by the Company or any
of its subsidiaries to continue Executive's participation in any such
incentive plan on a basis, both in terms of the amount of benefits provided
and the level of Executive's participation relative to other participants,
that is no less than existed at any time during the three years prior to
the Change in Control;
(G) except as required by law, the failure by the Company or any of
its subsidiaries to continue to provide Executive with benefits, in the
aggregate, at least as favorable as those enjoyed by Executive under the
employee benefit and welfare plans of the Company and its subsidiaries,
including, without limitation, the pension, life insurance, medical,
dental, health and accident, retiree medical, disability, deferred
compensation and savings plans, in which Executive was participating at the
time of the Change in Control, the taking of any action by the Company or
any of its subsidiaries which would directly or indirectly materially
reduce the fringe benefits enjoyed by Executive at the time of the Change
in Control, or the failure by the Company or any of its subsidiaries to
provide Executive with the number of paid vacation days to which Executive
was entitled at the time of the Change in Control;
(H) the failure of the Company to obtain a satisfactory agreement
from any successor to assume and agree to perform this Agreement, as
contemplated in Section 6 hereof; or
(I) any purported termination of Executive's employment by the
Company or its subsidiaries which is not effected pursuant to a Notice of
Termination satisfying the requirements of Section 3(iv) below (and, if
applicable, the requirements of Section 3(ii) above); for purposes of this
Agreement, no such purported termination shall be effective.
In addition, Executive shall be entitled to terminate employment for any reason
or no reason after the first anniversary of the Change in Control but within 90
days following such anniversary which shall be deemed to constitute Good Reason
hereunder as if included as a subparagraph (J) above (a "Voluntary
Termination"). In the event of any dispute about the date of the Change in
Control or the anniversary thereof, the good faith determination by Executive of
such date(s) for purposes of this provision shall be binding and conclusive on
the Company.
Executive's continued employment shall not constitute consent to, or a waiver of
rights with respect to, any circumstances constituting Good Reason hereunder.
(iv) NOTICE OF TERMINATION. Any purported termination of Executive's
employment by the Company and its subsidiaries or by Executive shall be
communicated by written Notice of Termination to the other party hereto in
accordance with Section 7 hereof. For purposes of this Agreement, a "Notice of
Termination" shall mean a notice which shall indicate the specific termination
provision in this Agreement relied upon and shall set forth in reasonable detail
(other than with respect to a Good Reason termination pursuant to Section
3(iii)(I) or a Voluntary Termination) the facts and circumstances claimed to
provide a basis for termination of Executive's employment under the provision so
indicated.
(v) DATE OF TERMINATION. "Date of Termination" shall mean (A) if
Executive's employment is terminated for Disability, thirty (30) days after
Notice of Termination is given (provided that Executive shall not have returned
to the full-time performance of Executive's duties during such thirty (30) day
period), and (B) if Executive's employment is terminated pursuant to Section
3(ii) or (iii) above or for any reason (other than Disability), the date
specified in the Notice of Termination (which, in the case of a termination
pursuant to Section 3(ii) above shall not be less than thirty (30) days, and in
the case of a termination pursuant to Section 3(iii) above shall not be less
than thirty (30) nor more than sixty (60) days, respectively, from the date such
Notice of Termination is given); provided, that, if within thirty (30) days
after any Notice of Termination is given the party receiving such Notice of
Termination notifies the other party that a dispute exists concerning the
grounds for termination, the Date of Termination shall be the date on which the
dispute is finally determined, either by mutual written agreement of the
parties, by a binding arbitration award or by a final judgment, order or decree
of a court of competent jurisdiction (which is not appealable or the time for
appeal therefrom having expired and no appeal having been perfected); provided
further that the Date of Termination shall be extended by a notice of dispute
only if such notice is given in good faith and the party giving such notice
pursues the resolution of such dispute with reasonable diligence.
Notwithstanding the pendency of any such dispute, the Company and its
subsidiaries will continue to pay Executive's full compensation in effect when
the notice giving rise to the dispute was given (including, but not limited to,
base salary and bonus) and continue Executive as a participant in all incentive
compensation, benefit and insurance plans in which Executive was participating
when the notice giving rise to the dispute was given, until the dispute is
finally resolved in accordance with this Section 3(v). Amounts paid under this
Section 3(v) are in addition to all other amounts due under this Agreement and
shall not be offset against or reduce any other amounts due under this
Agreement.
4. COMPENSATION UPON TERMINATION OR DURING DISABILITY. Following a
Change in Control of the Company, as defined by Section 2, upon termination of
Executive's employment or during a period of Disability, which, in either event,
occurs during the term of this Agreement, Executive shall be entitled to the
following benefits:
(i) During any period that Executive fails to perform Executive's
full-time duties with the Company and its subsidiaries as a result of the
Disability, Executive shall continue to receive an amount equal to Executive's
base salary and bonus at the rate in effect at the commencement of any such
period through the Date of Termination for Disability. Thereafter, Executive's
benefits shall be determined in accordance with the employee benefit programs of
the Company and its subsidiaries then in effect.
(ii) If Executive's employment shall be terminated by the Company or
any of its subsidiaries for Cause or by Executive without Good Reason (excluding
death, Disability or Retirement) the Company (or one of its subsidiaries, if
applicable) shall pay through the Date of Termination Executive's full base
salary at the rate in effect at the time Notice of Termination is given and
shall pay any amounts otherwise payable to Executive on or immediately prior to
the Date of Termination pursuant to any other compensation plans, programs or
employment agreements then in effect, and the Company shall have no further
obligations to Executive under this Agreement.
(iii) If Executive's employment shall be terminated by reason of
Executive's death or Retirement, Executive's benefits shall be determined in
accordance with the retirement and other benefit programs of the Company and its
subsidiaries then in effect, except as otherwise provided in Section 3(i).
(iv) If Executive's employment by the Company and its subsidiaries
shall be terminated (other than for death or Disability) by (a) the Company and
its subsidiaries other than for Cause or (b) Executive with Good Reason, then
Executive shall be entitled to the benefits provided below:
(A) The Company (or one of its subsidiaries, if applicable) shall pay
Executive's full base salary, at the rate in effect at the time of the
Change in Control and increased to reflect any subsequent increases in such
base salary (the "Base Salary"), and a pro-rated Bonus calculated through
the Date of Termination, no later than the thirtieth day following the Date
of Termination, plus all other amounts to which Executive is entitled under
any compensation plan of the Company applicable to Executive, at the time
such payments are due. For purposes of this Agreement, the "Bonus" shall
mean the highest amount of cash and the value (determined as of the time of
the awards in the same manner as was used for the awards) of deferred stock
awarded as an annual incentive under the Management Incentive Plan (or any
other plan, policy or arrangement) to Executive in respect of any of the
three years immediately prior to the year in which the Notice of
Termination is given.
(B) The Company shall pay Executive, on a date that is no later than
the thirtieth day following the Date of Termination, as severance pay to
Executive a severance payment equal to three (3) times the sum of (i)
Executive's Base Salary, (ii) the Bonus, and (iii) the Stock Option Value
(or, if greater, the highest value at the time of grant on a Black-Scholes
basis, determined as provided for herein, of any option grant made to
Executive after the Change in Control).
(C) The Company shall also pay to Executive, no less frequently than
monthly, all legal fees and expenses reasonably incurred by Executive in
connection with this Agreement (including all such fees and expenses, if
any, incurred in contesting or disputing the nature of any such termination
for purposes of this Agreement or in seeking to obtain or enforce any right
or benefit provided by this Agreement); and
(D) (i) Upon the date of Termination, Executive (or Executive's
spouse or applicable beneficiary in the event of Executive's death) will be
eligible to receive a benefit, when such benefits otherwise become payable,
from the Company's general funds to be calculated using the benefit
calculation provisions of the AHPC Retirement Plan - U.S. (the "DB Plan")
and, to the extent Executive participates therein, the AHPC Supplemental
Executive Retirement Plan (the "SERP") and the AHPC Executive Retirement
Plan (the "ERP") as if the provisions thereunder contained the assumptions
set forth herein, and offset by any benefits actually payable under the DB
Plan, the SERP, and the ERP not taking into account the assumptions set
forth herein. Any elections made under the DB Plan, the SERP and the ERP
for purposes of determining the form of payment will also apply for
purposes of this benefit. The assumptions to be used in calculating
Executive's benefit are: (x) Executive has continued in the employ of the
Company for an additional three years (the "Severance Period") after the
Date of Termination, and (y) Executive has earned annually from the Date of
Termination to the date of Executive's assumed continued employment
pursuant to clause (x) above the same compensation Executive earned in the
twelve months preceding the Date of Termination or in the twelve months
preceding the Change in Control, if greater. In addition, any pension
payable to Executive at age 55 (or upon the Date of Termination, if
Executive is then age 55 or over) shall not be reduced because it is
payable prior to age 65 or 60, as the case may be.
(ii) The length of the Severance Period will be added to Executive's
actual age for determining whether or when Executive has attained or will
attain age 55 for the purposes of Executive's eligibility to commence
receiving payments of benefits pursuant to Section 4(iv)(D)(i) above.
(E) Executive shall become eligible for all benefits, in addition to
those described in Section 4(iv)(D) above, made available immediately prior
to the Date of Termination (or, if greater, immediately prior to the date
of the Change in Control) to retirees of the Corporation, including,
without limitation, retiree medical coverage and life insurance benefits,
if at the time of termination Executive has already attained age 45, as if
Executive had at the Date of Termination satisfied the service and age
conditions for coverage under the applicable provisions of the Company's
employee benefit plans. If the Company is unable to provide Executive
coverage under such plans, it shall provide Executive with separate
comparable coverage, but in no event less than the retiree coverage in
place immediately prior to the Change in Control; provided, however, that
the retiree medical coverage provided by the Corporation shall be secondary
to any other medical coverage the Executive may then have.
(F) The Company will continue Executive's participation and coverage
for the Severance Period from the Date of Termination under all the
Company's life, medical, dental plans and other welfare benefit plans (but
excluding the Company's disability plans) ("Insurance Benefits"), and all
perquisites and fringe benefit plans and programs (other than the Company's
pension and 401(k) plans) (the perquisites and fringe benefits together
being the "Fringe Benefits") in which Executive is participating
immediately prior to such employment termination, under the same coverages
and on the same terms as in effect immediately prior to termination;
provided, however, that if his continued participation is not possible
under the general terms and provisions of such plans and programs, the
Company shall arrange to provide him with substantially similar benefits;
provided, further, that if any other Company plan, arrangement or agreement
provides for continuation of Insurance Benefits and Fringe Benefits then
the Executive shall receive such coverage under such other plan,
arrangement or agreement, and if the period of such coverage is shorter
than the Severance Period, then the Executive shall receive pursuant to
this section, such coverage for the remainder of the Severance Period.
(G) Upon the Date of Termination, to the extent that, under the terms
of any plan, any Company "restricted" stock awards or options shall
terminate or be forfeited upon or following Executive's termination of
employment without, in the case of options, the opportunity to exercise
after Notice of Termination and to sell the underlying shares immediately
after exercise without legal impediment, then the Executive (or any
permitted transferee) shall receive, within 10 days after the forfeiture or
termination of such award or option, an amount in respect of such
terminated or forfeited stock awards or options, equal to the sum of (i)
the Cashout Value (as defined below) of all the shares covered by the
restricted stock awards so forfeited (with units converted to shares based
on the target awards), and (ii) the excess of (a) the Cashout Value of all
the shares subject to options which were so forfeited over (b) the
aggregate exercise price of the shares subject to such forfeited options.
For purposes of this Section 4(iv)(G), the "Cashout Value" of a share shall
mean the greater of (x) the average of the closing prices paid for the
Company's common stock (or any other securities to which the restricted
shares or options relate) on any national exchange on which such shares are
traded on each of the five trading days prior to and including the date of
Executive's termination of employment (or, if no such shares are traded any
of such days, the most recent date preceding Executive's termination of
employment on which such shares were traded), and (y) the closing price
paid for the Company's common stock (or any other securities to which the
restricted shares or options relate) on any such exchange on the date of
Executive's termination of employment (or, if no such shares are traded on
such day, the most recent date preceding Executive's termination of
employment on which such shares were traded). At all times that there are
options outstanding, the Company shall keep in place an effective
registration statement (on form S-8 or otherwise) and shall take any other
further action necessary to permit the sale, without restriction, by
Executive (or any permittee transferee) of shares received upon the
exercise of options.
(H) The Company shall also provide to Executive outplacement services
or executive recruiting services provided by a professional outplacement
provider or executive recruiter at a cost to the Company of not more than
10% of the Executive's base salary (not to exceed $25,000).
5. EXCISE TAXES.
(i) In the event that any payment or benefit received or to be
received by Executive pursuant to the terms of this Agreement (the
"Contract Payments") or in connection with Executive's termination of
employment or contingent upon a Change in Control of the Company pursuant
to any plan or arrangement or other agreement with the Company (or any
affiliate) ("Other Payments" and, together with the Contract Payments, the
"Payments") would be subject to the excise tax (the "Excise Tax") imposed
by Section 4999 of the Code, as determined as provided below, the Company
shall pay to Executive, at the time specified in Section 5(ii) below, an
additional amount (the "Gross-Up Payment") such that the net amount
retained by Executive, after deduction of the Excise Tax on Contract
Payments and Other Payments and any federal, state and local income or
other tax and Excise Tax upon the payment provided for by this Section
5(i), and any interest, penalties or additions to tax payable by Executive
with respect thereto, shall be equal to the total present value of the
Contract Payments and Other Payments at the time such Payments are to be
made. For purposes of determining whether any of the Payments will be
subject to the Excise Tax and the amounts of such Excise Tax, (1) the total
amount of the Payments shall be treated as "parachute payments" within the
meaning of Section 280G(b)(2) of the Code, and all "excess parachute
payments" within the meaning of Section 280G(b)(1) of the Code shall be
treated as subject to the Excise Tax, except to the extent that, in the
opinion of independent tax counsel selected by the Company's independent
auditors and reasonably acceptable to Executive ("Tax Counsel"), a Payment
(in whole or in part) does not constitute a "parachute payment" within the
meaning of Section 280G(b)(2) of the Code, or such "excess parachute
payments" (in whole or in part) are not subject to the Excise Tax, (2) the
amount of the Payments that shall be treated as subject to the Excise Tax
shall be equal to the lesser of (A) the total amount of the Payments or (B)
the amount of "excess parachute payments" within the meaning of Section
280G(b)(1) of the Code (after applying clause (1) hereof), and (3) the
value of any noncash benefits or any deferred payment or benefit shall be
determined by Tax Counsel in accordance with the principles of Sections
280G(d)(3) and (4) of the Code. For purposes of determining the amount of
the Gross-Up Payment, Executive shall be deemed to pay federal income tax
at the highest marginal rates of federal income taxation applicable to
individuals in the calendar year in which the Gross-Up Payment is to be
made and state and local income taxes at the highest effective rates of
taxation applicable to individuals as are in effect in the state and
locality of Executive's residence in the calendar year in which the Gross-
Up Payment is to be made, net of the maximum reduction in federal income
taxes that can be obtained from deduction of such state and local taxes,
taking into account any limitations applicable to individuals subject to
federal income tax at the highest marginal rates.
(ii) The Gross-Up Payments provided for in Section 5(i) hereof shall
be made upon the earlier of (i) the payment to Executive of any Contract
Payment or Other Payment or (ii) the imposition upon Executive or payment
by Executive of any Excise Tax.
(iii) The Executive shall notify the Company in writing of any claim
by the Internal Revenue Service that, if successful, would require the
payment by the Company of a Gross-Up Payment. Such notification shall be
given as soon as practicable but no later than 10 business days after the
Executive is informed in writing of such claim and shall apprise the
Company of the nature of such claim and the date on which such claim is
requested to be paid. The Executive shall not pay such claim prior to the
expiration of the 30 day period following the date on which the Executive
gives such notice to the Company (or such shorter period ending on the date
that any payment of taxes with respect to such claim is due). If the
Company notifies the Executive in writing prior to the expiration of such
period that it desires to contest such claim, the Executive shall:
1) give the Company any information reasonably requested
by the Company relating to such claim;
2) take such action in connection with contesting such
claim as the Company shall reasonably request in writing from time to
time, including, without limitation, accepting legal representation
with respect to such claim by an attorney reasonably selected by the
Company and reasonably satisfactory to the Executive;
3) cooperate with the Company in good faith in order to
effectively contest such claim; and
4) permit the Company to participate in any proceedings
relating to such claim;
provided, however, that the Company shall bear and pay directly all costs
and expenses (including, but not limited to, additional interest and
penalties and related legal, consulting or other similar fees) incurred in
connection with such contest and shall indemnify and hold the Executive
harmless, on an after-tax basis, for any Excise Tax or other tax (including
interest and penalties with respect thereto) imposed as a result of such
representation and payment of costs and expenses.
(iv) The Company shall control all proceedings taken in connection
with such contest and, at its sole option, may pursue or forego any and all
administrative appeals, proceedings, hearings and conferences with the
taxing authority in respect of such claim and may, at its sole option,
either direct the Executive to pay the tax claimed and sue for a refund or
contest the claim in any permissible manner, and the Executive agrees to
prosecute such contest to a determination before any administrative
tribunal, in a court of initial jurisdiction and in one or more appellate
courts, as the Company shall determine; provided, however, that if the
Company directs the Executive to pay such claim and sue for a refund, the
Company shall advance the amount of such payment to the Executive on an
interest-free basis, and shall indemnify and hold the Executive harmless,
on an after-tax basis, from any Excise Tax or other tax (including interest
or penalties with respect thereto) imposed with respect to such advance or
with respect to any imputed income with respect to such advance; and
provided, further, that if the Executive is required to extend the statute
of limitations to enable the Company to contest such claim, the Executive
may limit this extension solely to such contested amount. The Company's
control of the contest shall be limited to issues with respect to which a
Gross-Up Payment would be payable hereunder and the Executive shall be
entitled to settle or contest, as the case may be, any other issue raised
by the Internal Revenue Service or any other taxing authority. In
addition, no position may be taken nor any final resolution be agreed to by
the Company without the Executive's consent if such position or resolution
could reasonably be expected to adversely affect the Executive (including
any other tax position of the Executive unrelated to the matters covered
hereby).
(v) As a result of the uncertainty in the application of Section 4999
of the Code at the time of the initial determination by the Company or the
Tax Counsel hereunder, it is possible that Gross-Up Payments which will not
have been made by the Company should have been made ("Underpayment"),
consistent with the calculations required to be made hereunder. In the
event that the Company exhausts its remedies and the Executive thereafter
is required to pay to the Internal Revenue Service an additional amount in
respect of any Excise Tax, the Company or the Tax Counsel shall determine
the amount of the Underpayment that has occurred and any such Underpayment
shall promptly be paid by the Company to or for the benefit of the
Executive.
(vi) If, after the receipt by Executive of the Gross-Up Payment or an
amount advanced by the Company in connection with the contest of an Excise
Tax claim, the Executive becomes entitled to receive any refund with
respect to such claim, the Executive shall promptly pay to the Company the
amount of such refund (together with any interest paid or credited thereon
after taxes applicable thereto). If, after the receipt by the Executive of
an amount advanced by the Company in connection with an Excise Tax claim, a
determination is made that Executive shall not be entitled to any refund
with respect to such claim and the Company does not notify the Executive in
writing of its intent to contest the denial of such refund prior to the
expiration of 30 days after such determination, such advance shall be
forgiven and shall not be required to be repaid.
6. SUCCESSORS; BINDING AGREEMENT.
(i) The Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company to expressly
assume and agree to perform this Agreement in the same manner and to the
same extent that the Company is required to perform it. Failure of the
Company to obtain such assumption and agreement prior to the effectiveness
of any such succession shall be a breach of this Agreement and shall
entitle Executive to compensation from the Company in the same amount and
on the same terms as Executive would be entitled hereunder if Executive
had terminated
Executive's employment with Good Reason following a Change in Control,
except that for purposes of implementing the foregoing, the date on which
any such succession becomes effective shall be deemed the Date of
Termination. As used in this Agreement, "Company" shall mean the Company
as hereinbefore defined and any successor to its business and/or assets as
aforesaid which assumes and agrees to perform this Agreement by operation
of law, or otherwise.
(ii) This Agreement shall inure to the benefit of and be enforceable
by Executive's personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees.
If Executive should die while any amount would still be payable to
Executive hereunder if Executive had continued to live, all such amounts,
unless otherwise provided herein, shall be paid in accordance with the
terms of this Agreement to Executive's devisee, legatee or other designee
or, if there is no such designee, to Executive's estate.
7. NOTICE. For the purpose of this Agreement, notices and all other
communications provided for in this Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by United States
registered mail, return receipt requested, postage prepaid (or its international
equivalent), addressed to Five Giralda Farms, Madison, New Jersey 07940 with
respect to the Company and on the signature page with respect to Executive,
provided that all notices to the Company shall be directed to the attention of
the Senior Vice President-General Counsel of the Company, or to such other
address as either party may have furnished to the other in writing in accordance
herewith, except that notice of change of address shall be effective only upon
receipt.
8. MISCELLANEOUS. No provision of this Agreement may be modified,
waived or discharged unless such waiver, modification or discharge is agreed to
in writing and signed by Executive and such officer as may be specifically
designated by the Board. No waiver by either party hereto at any time of any
breach by the other party hereto of, or compliance with, any conditions or
provision of this Agreement to be performed by such other party shall be deemed
a waiver of similar or dissimilar provisions or conditions at the same or at any
prior or subsequent time. The validity, interpretation, construction and
performance of this Agreement shall be governed by the internal laws of the
State of New York, without regard to its conflict of law provisions. All
references to sections of the Code shall be deemed also to refer to any
successor provisions to such sections. Any payments provided for hereunder
shall be paid net of any applicable withholding required under federal, state,
local or other applicable law. The obligations of the Company under Sections 4
and 5 shall survive the expiration of the term of this Agreement.
9. VALIDITY. The invalidity or unenforceability of any provision of
this Agreement shall not effect the validity or enforceability of any other
provision of this Agreement, which shall remain in full force and effect.
10. COUNTERPARTS. This Agreement may be executed in several
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
11. ARBITRATION; INDEMNIFICATION. Any dispute or controversy arising
under or in connection with this Agreement shall be settled exclusively by
arbitration in accordance with the rules of the American Arbitration Association
then in effect. Judgment may be entered on the arbitrator's award in any court
having jurisdiction; provided, however, that Executive shall be entitled to seek
specific performance of Executive's right to be paid until the Date of
Termination during the pendency of any dispute or controversy arising under or
in connection with this Agreement. Following any termination of employment of
the Executive (other than a termination by the Company for Cause), the Company
shall indemnify and hold harmless Executive to the fullest extent permitted
under the Company's by-laws (as in effect prior to the Change in Control) and
applicable law for any claims, costs and expenses arising out of or in
connection with Executive's employment with the Company and shall maintain
directors' and officers' liability insurance coverage for the benefit of the
Executive which provides him with coverage, if any, no less favorable than that
in effect prior to the Change in Control.
12. NONDISCLOSURE OF CONFIDENTIAL INFORMATION. Executive shall not,
without the prior written consent of the Company, use, divulge, disclose or make
accessible to any other person, firm, partnership, corporation or other entity
any Confidential Information pertaining to the business of the Company or any of
its affiliates, except (i) while employed by the Company, in the business of and
for the benefit of the Company, or (ii) when required to do so by a court of
competent jurisdiction, by any governmental agency having supervisory authority
over the business of the Company, or by any administrative body or legislative
body (including a committee thereof) with jurisdiction to order Executive to
divulge, disclose or make accessible such information. For purposes of this
Section 12, "Confidential Information" shall mean any trade secret or other non-
public information concerning the financial data, strategic business plans,
product development (or other proprietary product data), customer lists,
marketing plans and other non-public, proprietary and confidential information
of the Company or its affiliates, that, in any case, is not otherwise available
to the public (other than by Executive's breach of the terms hereof) or known to
persons in the industry generally.
13. ENTIRE AGREEMENT. No agreements or representations, oral or
otherwise, express or implied, with respect to the subject matter hereof have
been made by either party which are not expressly set forth in this Agreement.
This Agreement constitutes the entire understanding between the parties with
respect to Executive's severance pay in the event of a termination of
Executive's employment with the Company, superseding all negotiations, prior
discussions and preliminary agreements, written or oral, concerning said
severance pay; provided, however, that any payments or benefits provided in
respect of severance, or indemnification for loss of employment, pursuant to any
severance, employment or similar agreement between the Company or any of its
subsidiaries and Executive, or as required by applicable law outside the United
States, shall reduce any payments or benefits provided pursuant to this
Agreement, except that the payments or benefits provided pursuant to this
Agreement shall not be reduced below zero. Notwithstanding any provision of
this Agreement: (i) Executive shall not be required to mitigate the amount of
any payment provided by this Agreement by seeking other employment or otherwise,
nor shall the amount of any payment or benefit provided by this Agreement be
reduced by any compensation earned by Executive as the result of employment by
another employer or by retirement benefits received after the Date of
Termination or otherwise, and (ii) except as otherwise provided in this
Agreement, the obligations of the Company to make payments to Executive and to
make the arrangements, provided for herein are absolute and unconditional and
may not be reduced by any circumstances, including without limitation any set-
off, counterclaim, recoupment, defense or other right which the Company may have
against the Executive or any third party at any time.
14. FURTHER ACTION. The Company shall take any further action
necessary or desirable to implement the provisions of this Agreement or perform
its obligations hereunder (including, without limitation, amending the SERP, the
ERP, any stock option or stock bonus plan, or any other applicable plan, program
or arrangement or obtaining any necessary consents or approvals in connection
therewith).
AMERICAN HOME PRODUCTS CORPORATION
By:
Name: Rene Lewin
Title: Vice President, Human Resources
By:
Executive
Date:
Home Address:
<PAGE>
ANNEX A
List of Executive Officers
- --------------------------
John R. Stafford
Robert G. Blount
<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 JUNE 30, 1998 AND CONSOLIDATED
CONDENSED STATEMENT OF INCOME FOR THE SIX MONTHS ENDED JUNE 30,
1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.<F1>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 1,433,838
<SECURITIES> 92,406
<RECEIVABLES> 3,335,576
<ALLOWANCES> 0
<INVENTORY> 2,153,302
<CURRENT-ASSETS> 8,009,113
<PP&E> 6,246,445
<DEPRECIATION> 2,165,475
<TOTAL-ASSETS> 20,762,190
<CURRENT-LIABILITIES> 4,401,677
<BONDS> 3,844,526
<COMMON> 438,279
0
68
<OTHER-SE> 8,837,563
<TOTAL-LIABILITY-AND-EQUITY> 20,762,190
<SALES> 7,008,355
<TOTAL-REVENUES> 7,008,355
<CGS> 1,924,671
<TOTAL-COSTS> 1,924,671
<OTHER-EXPENSES> 795,405
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 122,264
<INCOME-PRETAX> 2,228,503
<INCOME-TAX> 722,782
<INCOME-CONTINUING> 1,505,721
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,505,721
<EPS-PRIMARY> 1.15<F2>
<EPS-DILUTED> 1.13<F3>
<FN>
<F1> Prior period financial data schedules for periods other than the six
months ended June 30, 1998 and 1997, the three months ended March 31,
1998 and 1997 and the years ended December 31, 1997 and 1996 have not
been restated to reflect the two-for-one stock split effected in the
form of a 100% stock dividend to stockholders of record at the close
of business on April 24, 1998.
<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>
</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 JUNE 30,
1997 AND CONSOLIDATED CONDENSED STATEMENT OF INCOME FOR THE SIX
MONTHS ENDED JUNE 30, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS. <F1>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 962,196
<SECURITIES> 5,717
<RECEIVABLES> 3,206,622
<ALLOWANCES> 0
<INVENTORY> 2,494,937
<CURRENT-ASSETS> 7,657,578
<PP&E> 6,545,396
<DEPRECIATION> 2,390,254
<TOTAL-ASSETS> 21,428,544
<CURRENT-LIABILITIES> 4,511,565
<BONDS> 5,952,425
<COMMON> 434,333
0
76
<OTHER-SE> 7,148,225
<TOTAL-LIABILITY-AND-EQUITY> 21,428,544
<SALES> 7,102,777
<TOTAL-REVENUES> 7,102,777
<CGS> 2,090,940
<TOTAL-COSTS> 2,090,940
<OTHER-EXPENSES> 751,808
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 201,509
<INCOME-PRETAX> 1,441,799
<INCOME-TAX> 406,030
<INCOME-CONTINUING> 1,035,769
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,035,769
<EPS-PRIMARY> 0.80<F2>
<EPS-DILUTED> 0.79<F3>
<FN>
<F1> Prior period financial data schedules for periods other than the six
months ended June 30, 1998 and 1997, the three months ended March 31,
1998 and 1997 and the years ended December 31, 1997 and 1996 have not
been restated to reflect the two-for-one stock split effected in the
form of a 100% stock dividend to stockholders of record at the close
of business on April 24, 1998.
<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>
</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
DECEMBER 31, 1997 AND CONSOLIDATED CONDENSED STATEMENT OF
INCOME FOR THE YEAR ENDED DECEMBER 31, 1997, AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
<F1>
<MULTIPLIER>1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,051,372
<SECURITIES> 48,363
<RECEIVABLES> 3,040,254
<ALLOWANCES> 197,155
<INVENTORY> 2,412,406
<CURRENT-ASSETS> 7,361,326
<PP&E> 6,722,049
<DEPRECIATION> 2,425,143
<TOTAL-ASSETS> 20,825,111
<CURRENT-LIABILITIES> 4,327,018
<BONDS> 5,031,861
<COMMON> 435,298
0
72
<OTHER-SE> 7,739,882
<TOTAL-LIABILITY-AND-EQUITY> 20,825,111
<SALES> 14,196,026
<TOTAL-REVENUES> 14,196,026
<CGS> 4,101,309
<TOTAL-COSTS> 4,101,309
<OTHER-EXPENSES> 1,558,035
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 370,696
<INCOME-PRETAX> 2,814,707
<INCOME-TAX> 771,584
<INCOME-CONTINUING> 2,043,123
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,043,123
<EPS-PRIMARY> 1.58<F2>
<EPS-DILUTED> 1.56<F3>
<FN>
<F1> Prior period financial data schedules for periods other than the six
months ended June 30, 1998 and 1997, the three months ended March 31,
1998 and 1997 and the years ended December 31, 1997 and 1996 have not
been restated to reflect the two-for-one stock split effected in the
form of a 100% stock dividend to stockholders of record at the close
of business on April 24, 1998.
<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>
</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 DECEMBER 31, 1996 AND CONSOLIDATED CONDENSED
STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1996,
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS. <F1>
<MULTIPLIER>1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,322,297
<SECURITIES> 221,820
<RECEIVABLES> 2,745,835
<ALLOWANCES> 204,121
<INVENTORY> 2,389,369
<CURRENT-ASSETS> 7,470,419
<PP&E> 6,254,666
<DEPRECIATION> 2,217,933
<TOTAL-ASSETS> 20,785,343
<CURRENT-LIABILITIES> 4,337,635
<BONDS> 6,020,575
<COMMON> 431,834
0
79
<OTHER-SE> 6,530,179
<TOTAL-LIABILITY-AND-EQUITY> 20,785,343
<SALES> 14,088,326
<TOTAL-REVENUES> 14,088,326
<CGS> 4,449,783
<TOTAL-COSTS> 4,449,783
<OTHER-EXPENSES> 1,429,056
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 433,034
<INCOME-PRETAX> 2,755,460
<INCOME-TAX> 872,057
<INCOME-CONTINUING> 1,883,403
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,883,403
<EPS-PRIMARY> 1.48<F2>
<EPS-DILUTED> 1.46<F3>
<FN>
<F1> Prior period financial data schedules for periods other than the six
months ended June 30, 1998 and 1997, the three months ended March 31, 1998
and 1997 and the years ended December 31, 1997 and 1996 have not been
restated to reflect the two-for-one stock split effected in the form of a
100% stock dividend to stockholders of record at the close of business on
April 24,1998.
<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>
</TABLE>
