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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, 1999 Commission file number 1-1225
AMERICAN HOME PRODUCTS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 13-2526821
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
Five Giralda Farms, Madison, N.J. 07940
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (973) 660-5000
Indicate by check mark whether the registrant(1) has
filed all reports required to be filed by Section 13 or
15(d)of the Securities Exchange Act of 1934 during the
preceding 12 months(or for such shorter period that the
registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No
The number of shares of Common Stock outstanding as of the close of business on
July 31, 1999:
Number of
Class Shares Outstanding
Common Stock, $0.33-1/3 par value 1,306,655,535
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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, 1999 and December 31, 1998 3
Consolidated Condensed Statements of Income -
Three and Six Months Ended June 30, 1999 and 1998 4
Consolidated Condensed Statements of Changes in Stockholders'
Equity - Six Months Ended June 30, 1999 and 1998 5
Consolidated Condensed Statements of Cash Flows -
Six Months Ended June 30, 1999 and 1998 6
Notes to Consolidated Condensed Financial Statements 7-9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-19
Part II - Other Information 20
Item 1. Legal Proceedings 20-22
Item 4. Submission of Matters to a Vote of Security-Holders 22-23
Item 6. Exhibits and Reports on Form 8-K 23
Signature 24
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, 1999 and December 31, 1998, the results of its
operations for the three months and six months ended June 30, 1999 and 1998, and
its cash flows and changes in stockholders' equity for the six months ended June
30, 1999 and 1998. 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 1998 Annual Report on Form 10-K and Quarterly
Report on Form 10-Q for the quarter ended March 31, 1999.
2
<PAGE>
AMERICAN HOME PRODUCTS CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(In Thousands Except Per Share Amounts)
June 30, December 31,
1999 1998
------------ ------------
ASSETS
Cash and cash equivalents......................... $ 1,779,610 $ 1,182,319
Marketable securities............................. 438,160 119,210
Accounts receivable less allowances............... 3,213,364 3,276,597
Inventories:
Finished goods.................................. 1,012,632 1,012,679
Work in progress................................ 597,962 604,647
Materials and supplies.......................... 581,331 620,592
------------ ------------
2,191,925 2,237,918
Other current assets including deferred taxes..... 1,178,200 1,139,588
------------ ------------
Total Current Assets............................ 8,801,259 7,955,632
Property, plant and equipment..................... 6,734,265 6,718,364
Less accumulated depreciation................... 2,413,797 2,428,699
------------ ------------
4,320,468 4,289,665
Goodwill and other intangibles, net of
accumulated amortization ....................... 7,851,859 7,995,082
Other assets including deferred taxes............. 791,358 838,689
------------ ------------
Total Assets.................................... $ 21,764,944 $ 21,079,068
============ ============
LIABILITIES
Loans payable..................................... $ 1,464,587 $ 79,728
Trade accounts payable............................ 630,100 680,961
Accrued expenses.................................. 3,015,728 3,037,239
Accrued federal and foreign taxes................. 414,201 412,793
------------ ------------
Total Current Liabilities....................... 5,524,616 4,210,721
Long-term debt.................................... 3,624,694 3,859,163
Other noncurrent liabilities...................... 2,200,844 2,312,261
Postretirement benefit obligations other
than pensions................................... 880,574 860,908
Minority interests................................ 250,362 221,219
STOCKHOLDERS' EQUITY
$2 convertible preferred stock, par value
$2.50 per share................................. 62 64
Common stock, par value $0.33-1/3 per share....... 435,871 437,466
Additional paid-in capital........................ 3,212,556 3,072,874
Retained earnings................................. 6,173,142 6,432,729
Accumulated other comprehensive loss.............. (537,777) (328,337)
------------ ------------
Total Stockholders' Equity...................... 9,283,854 9,614,796
------------ ------------
Total Liabilities and Stockholders' Equity...... $ 21,764,944 $ 21,079,068
============ ============
The accompanying notes are an integral part of these consolidated condensed
balance sheets.
3
<PAGE>
<TABLE>
AMERICAN HOME PRODUCTS CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(In Thousands Except Per Share Amounts)
Three Months Six Months
Ended June 30, Ended June 30,
1999 1998 1999 1998
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Net Sales ................... $ 3,319,292 $ 3,341,960 $ 6,761,644 $ 7,008,355
----------- ----------- ------------ -----------
Cost of goods sold .......... 950,657 920,241 1,863,569 1,924,671
Selling, general and
administrative expenses... 1,237,771 1,236,958 2,464,048 2,592,276
Research and development
expenses.................. 450,706 408,447 859,133 795,405
Interest expense, net ....... 54,949 50,153 111,280 122,264
Other income, net ........... (8,072) (1,522) (84,164) (62,680)
Gain on sale of business..... - - - (592,084)
Special charge............... 82,000 - 82,000 -
----------- ----------- ------------ -----------
Income before federal and
foreign taxes............. 551,281 727,683 1,465,778 2,228,503
Provision for taxes.......... 152,608 204,172 412,187 722,782
----------- ----------- ------------ -----------
Net Income .................. $ 398,673 $ 523,511 $ 1,053,591 $ 1,505,721
=========== =========== ============ ===========
Basic Earnings per Share .... $ 0.30 $ 0.40 $ 0.80 $ 1.15
=========== =========== ============ ===========
Diluted Earnings per Share .. $ 0.30 $ 0.39 $ 0.79 $ 1.13
=========== =========== ============ ===========
Dividends per share of
common stock.............. $ 0.225 $ 0.215 $ 0.45 $ 0.43
=========== =========== ============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
statements.
4
<PAGE>
<TABLE>
AMERICAN HOME PRODUCTS CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In Thousands)
Six Months Ended June 30, 1999:
<CAPTION>
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, 1999.... $ 64 $ 437,466 $ 3,072,874 $ 6,432,729 ($328,337) $ 9,614,796
Net income.................... 1,053,591 1,053,591
Currency translation
adjustments................. (208,209) (208,209)
Unrealized loss on marketable
securities.................. (1,231) (1,231)
------------
Comprehensive income.......... 844,151
------------
Cash dividends declared....... (589,570) (589,570)
Treasury stock acquired....... (4,408) (57,867) (716,419) (778,694)
Common stock issued........... 2,635 176,945 179,580
Conversion of preferred stock
and other exchanges......... (2) 178 20,604 (7,189) 13,591
------------- ---------- ------------ ------------ ------------ ------------
Balance at June 30, 1999...... $ 62 $ 435,871 $ 3,212,556 $ 6,173,142 ($537,777) $ 9,283,854
============= ========== ============ ============ ============ ============
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
------------- ---------- ------------ ------------ ------------ ------------
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
============= ========== ============ ============ ============ ============
The accompanying notes are an integral part of these consolidated condensed
statements.
</TABLE>
5
<PAGE>
<TABLE>
AMERICAN HOME PRODUCTS CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In Thousands)
Six Months Ended June 30,
1999 1998
------------ ------------
<S> <C> <C>
Operating Activities
Net income .................................... $ 1,053,591 $ 1,505,721
Adjustments to reconcile net income to net cash
provided from operating activities:
Special charge ............................. 82,000 -
Gain on sale of business ................... - (592,084)
Gains on sales of other assets.............. (83,567) (76,554)
Depreciation and amortization............... 354,969 344,780
Deferred income taxes....................... 31,953 32,463
Changes in working capital, net............. (222,484) (639,729)
Other items, net............................ 11,313 (60,406)
------------ ------------
Net cash provided from operating activities.... 1,227,775 514,191
------------ ------------
Investing Activities
Purchase of property, plant and equipment...... (408,064) (373,445)
Proceeds from sale of business ................ - 1,770,000
Proceeds from sales of other assets............ 152,999 94,175
Net purchases of marketable securities......... (320,323) (45,484)
------------ ------------
Net cash provided from/(used for) investing
activities ................................. (575,388) 1,445,246
------------ ------------
Financing Activities
Net proceeds from/(repayment of) debt.......... 1,153,092 (1,150,448)
Dividends paid................................. (589,570) (563,742)
Exercise of stock options...................... 179,580 304,716
Purchases of treasury stock.................... (778,694) (65,867)
Termination of interest rate swap agreements... - (96,655)
------------ ------------
Net cash used for financing activities......... (35,592) (1,571,996)
------------ ------------
Effects of exchange rates on cash balances..... (19,504) (4,975)
------------ ------------
Increase in cash and cash equivalents.......... 597,291 382,466
Cash and cash equivalents, beginning of period. 1,182,319 1,051,372
------------ ------------
Cash and cash equivalents, end of period....... $ 1,779,610 $ 1,433,838
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
statements.
Supplemental Information
Interest payments excluding termination of
interest rate swap agreements $ 144,261 $ 175,345
Income tax payments, net of refunds 367,603 472,058
6
<PAGE>
AMERICAN HOME PRODUCTS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Note 1. Special Charge
In July 1999, the Company announced that it was temporarily suspending
shipments and recommending postponement of administration of
ROTASHIELD, the Company's rotavirus vaccine. The Company took this
action in response to questions raised by reports of intussusception
(a cause of bowel obstruction)in certain infants immunized with
ROTASHIELD. The 1999 second quarter and first half results of
operations include a special charge aggregating $82.0 million ($53.0
million after-tax or $0.04 per share-diluted). The special charge is to
provide for the estimated costs related to product returns, inventory
and other costs in the event the product is not returned to the market.
Note 2. Contingencies
The Company is involved in various legal proceedings, including product
liability and environmental matters of a nature considered normal to
its business. It is the Company's policy to accrue for amounts related
to these legal matters if it is probable that a liability has been
incurred and an amount is reasonably estimable.
In the opinion of the Company, although the outcome of any legal
proceedings cannot be predicted with certainty, the ultimate liability
of the Company in connection with its legal proceedings will not have
a material adverse effect on the Company's financial position but could
be material to the results of operations in any one accounting period.
Note 3. Restructuring Program
In December 1998, the Company recorded a charge for restructuring and
related asset impairments to recognize the reorganization of its
worldwide supply chains and distribution systems, and the globalization
of certain business units. Since the end of 1998, the Company has
begun its personnel reductions and initiated/completed the closure/sale
of certain manufacturing facilities/distribution centers. Cash
expenditures aggregated $43.0 million for severance and exit costs in
the 1999 first half, which were applied against the restructuring
accruals. At June 30, 1999, $183.9 million of these restructuring
accruals were outstanding.
7
<PAGE>
AMERICAN HOME PRODUCTS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Note 4. Company Data by Operating Segment
The Company has four reportable segments: Pharmaceuticals,
Consumer Health Care, Agricultural Products, and Corporate and
All Other.
Net Sales
---------------------------------------------
Three Months Six Months
($ in millions) Ended June 30, Ended June 30,
Operating Segment 1999 1998 1999 1998
----------------- ---------- ---------- ---------- ---------
Pharmaceuticals $2,239.6 $2,069.8 $4,535.3 $4,333.0
Consumer Health Care 503.6 456.2 1,065.9 956.8
Agricultural Products 576.1 816.0 1,160.4 1,526.6
---------- ---------- ---------- ---------
3,319.3 3,342.0 6,761.6 6,816.4
Corporate and All
Other - - - 192.0
---------- ---------- ---------- ---------
Total $3,319.3 $3,342.0 $6,761.6 $7,008.4
========== ========== ========== =========
Income Before Taxes (1)
---------------------------------------------
Three Months Six Months
($ in millions) Ended June 30, Ended June 30,
Operating Segment 1999 1998 1999 1998
----------------- ---------- ---------- ---------- ---------
Pharmaceuticals (2) $395.9 $430.9 $1,096.1 $1,135.3
Consumer Health Care 103.5 92.5 227.1 206.0
Agricultural Products 141.5 284.5 299.7 474.8
---------- ---------- ---------- ---------
640.9 807.9 1,622.9 1,816.1
Corporate and All
Other (3) (89.6) (80.2) (157.1) 412.4
---------- ---------- ---------- ---------
Total $551.3 $727.7 $1,465.8 $2,228.5
========== ========== ========== =========
(1) The second quarter results include goodwill amortization for
1999 and 1998 as follows: Pharmaceuticals - $38.3 and $38.6,
Consumer Health Care - $8.0 and $4.0, Agricultural Products
- $24.2 and $24.2.
The first half results include goodwill amortization for 1999
and 1998 as follows: Pharmaceuticals - $76.8 and $79.5,
Consumer Health Care - $16.1 and $8.0, Agricultural Products -
$48.5 and $48.5 and Corporate and All Other - $0.9 for 1998 only.
(2) Income before taxes for pharmaceuticals in the 1999 second quarter
and first half includes a special charge for $82.0 related to the
temporary suspension of shipments and recommended postponement of
administration of ROTASHIELD, the Company's rotavirus vaccine.
(3) Income before taxes for Corporate and All Other in the 1998 first
half includes the gain on the sale of the Sherwood-Davis & Geck
medical devices business of $592.1, which was sold effective
February 27, 1998.
8
<PAGE>
AMERICAN HOME PRODUCTS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Note 5. Earnings per Share
The following table sets forth the computations of Basic Earnings per
Share and Diluted Earnings per Share:
<TABLE>
Three Months Six Months
Ended June 30, Ended June 30,
(In thousands except per share amounts) 1999 1998 1999 1998
--------------------------------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net income less preferred dividends $ 398,661 $ 523,497 $1,053,566 $1,505,693
Denominator:
Average number of common shares
outstanding 1,310,194 1,314,229 1,311,074 1,311,628
---------- ---------- ---------- ----------
Basic Earnings per Share $ 0.30 $ 0.40 $ 0.80 $ 1.15
========== ========== ========== ==========
Net income $ 398,673 $ 523,511 $1,053,591 $1,505,721
Denominator:
Average number of common shares
outstanding 1,310,194 1,314,229 1,311,074 1,311,628
Common share equivalents of
outstanding stock options
and deferred contingent
common stock awards 21,813 21,938 22,384 22,097
---------- ---------- ---------- ----------
Total shares 1,332,007 1,336,167 1,333,458 1,333,725
---------- ---------- ---------- ----------
Diluted Earnings per Share $ 0.30 $ 0.39 $ 0.79 $ 1.13
========== ========== ========== ==========
</TABLE>
9
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months and Six Months Ended June 30, 1999
Results of Operations
Worldwide net sales for the 1999 second quarter and first half were 1% and 4%
lower compared with prior year levels. After adjusting for the sale of the
Sherwood-Davis & Geck medical devices business which was sold effective February
27, 1998, worldwide net sales for the 1999 first half were 1% lower compared
with prior year levels. The decreases were due primarily to lower U.S. sales of
agricultural products and animal health products offset, in part, by higher
worldwide sales of pharmaceuticals and consumer health care products for both
the 1999 second quarter and first half.
The following table sets forth worldwide net sales results by operating segment
together with the percentage changes from the comparable periods in the prior
year:
<TABLE>
Net Sales
-----------------------------------------------------------------------
Three Months Six Months
($ in Millions) Ended June 30, %Increase Ended June 30, %Increase
Operating Segment 1999 1998 (Decrease) 1999 1998 (Decrease)
- --------------------- --------- --------- ---------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Pharmaceuticals $ 2,239.6 $ 2,069.8 8 % $ 4,535.3 $ 4,333.0 5 %
Consumer Health Care 503.6 456.2 10 % 1,065.9 956.8 11 %
Agricultural Products 576.1 816.0 (29)% 1,160.4 1,526.6 (24)%
--------- --------- ---------- --------- --------- ----------
3,319.3 3,342.0 (1)% 6,761.6 6,816.4 (1)%
Corporate and All
Other - - - - 192.0 (100)%
--------- --------- ---------- --------- --------- ----------
Total $ 3,319.3 $ 3,342.0 (1)% $ 6,761.6 $ 7,008.4 (4)%
========= ========= ========== ========= ========= ==========
</TABLE>
Worldwide pharmaceutical sales increased 8% for the 1999 second quarter and 5%
for the 1999 first half due primarily to higher sales of EFFEXOR XR (due to
expanded indications), ENBREL (introduced in the 1998 fourth quarter), ZOSYN,
ZIAC and generic pharmaceuticals, which were offset, in part, by lower sales of
oral contraceptives (due to the timing of certain promotional programs),
NAPRELAN and VERELAN (both divested in the 1998 third quarter), animal health
products and CORDARONE (first half only). Lower sales of animal health products
were due primarily to customers reducing consumption of livestock-related animal
health products, in part, as a result of continuing commodity price declines in
the livestock markets. This trend is expected to continue into 2000. Worldwide
pharmaceutical sales were impacted by unfavorable foreign exchange of 2% for the
1999 second quarter and 1% for the first half. U.S. pharmaceutical sales
increased 11% for the 1999 second quarter and 5% for the first half. The
increase in U.S. pharmaceutical sales for the 1999 second quarter consisted of
unit volume growth of 9% and price increases of 2%. The increase in U.S.
pharmaceutical sales for the 1999 first half consisted of unit volume growth of
2% and price increases of 3%. International pharmaceutical sales increased 4%
for the 1999 second quarter and 5% for the first half. The increase in
international pharmaceutical sales for the 1999 second quarter consisted of
10
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months and Six Months Ended June 30, 1999
unit volume growth of 5% and price increases of 3%, which were offset, in part,
by unfavorable foreign exchange of 4%. The increase in international
pharmaceutical sales for the 1999 first half consisted of unit volume growth of
5% and price increases of 3%, which were offset, in part, by unfavorable foreign
exchange of 3%.
Worldwide consumer health care sales increased 10% for the 1999 second quarter
and 11% for the 1999 first half due primarily to higher sales of nutritional
supplements, which consist of SOLGAR products (acquired in the 1998 third
quarter), CENTRUM products including CENTRUM herbals (introduced in the 1998
fourth quarter) and CALTRATE, and CHAPSTICK (due to product line extensions).
SOLGAR products contributed 6% to the increase for both the 1999 second quarter
and first half. Worldwide consumer health care sales were impacted by
unfavorable foreign exchange of 2% for both the 1999 second quarter and first
half. U.S. consumer health care sales increased 16% for both the 1999 second
quarter and first half. The increase in U.S. consumer health care sales for the
1999 second quarter and first half consisted of unit volume growth of 15% (7%
for both periods due to the acquisition of SOLGAR products) and price increases
of 1%. International consumer health care sales increased 2% for the 1999 second
quarter and 4% for the first half. The increase in international consumer health
care sales for the 1999 second quarter consisted of unit volume growth of 1% (4%
due to the acquisition of SOLGAR products, which more than offset a volume
decline of 3%) and price increases of 7%, which were offset, in part, by
unfavorable foreign exchange of 6%. The increase in international consumer
health care sales for the 1999 first half consisted of unit volume growth of 5%
(4% due to the acquisition of SOLGAR products) and price increases of 4%, which
were offset, in part, by unfavorable foreign exchange of 5%.
Worldwide agricultural products sales decreased 29% for the 1999 second quarter
and 24% for the 1999 first half due primarily to lower U.S. sales of herbicides,
primarily PURSUIT, RAPTOR, PROWL and SCEPTER. The lower sales results were due
principally to various competitive factors and reduced demand for grain coupled
with high inventories from record harvests over the last two years. As a result
of these inventory levels, commodity prices have declined causing farmers to
reduce input costs by lowering application rates and choosing the lowest cost
crop protection product. Worldwide agricultural products sales were impacted by
unfavorable foreign exchange of 1% for the 1999 second quarter. Foreign exchange
had no impact on worldwide agricultural products sales for the 1999 first half.
U.S. agricultural products sales decreased 52% for the 1999 second quarter and
41% for the 1999 first half. The decrease in U.S. agricultural products sales
for the 1999 second quarter consisted of unit volume declines of 38% and price
decreases of 14%. The decrease in U.S. agricultural products sales for the 1999
first half consisted of unit volume declines of 31% and price decreases of 10%.
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 1999 second quarter and first
half are not indicative of the results to be expected in subsequent fiscal
quarters or for the full year. International agricultural products sales
decreased 2% for the 1999 second quarter and 4% for the 1999 first half. The
decrease in international agricultural products sales for the 1999 second
11
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months and Six Months Ended June 30, 1999
quarter consisted of unit volume declines of 1% and unfavorable foreign exchange
of 2% offset, in part, by price increases of 1%. The decrease in international
agricultural products sales for the 1999 first half consisted of unit volume
declines of 3% and unfavorable foreign exchange of 1%.
Corporate and all other includes the results of the divested Sherwood-Davis &
Geck medical devices business. The decrease for the 1999 first half is due
entirely to the divestiture of the medical devices business effective February
27, 1998.
Cost of goods sold, as a percentage of net sales, increased to 28.6% for the
1999 second quarter and 27.6% for the 1999 first half compared to 27.5% for both
the 1998 second quarter and first half due primarily to unfavorable sales mix in
both the pharmaceuticals and agricultural products segments.
Selling, general and administrative expenses, as a percentage of net sales,
increased to 37.3% for the 1999 second quarter and decreased to 36.4% for the
1999 first half compared to 37.0% for both the 1998 second quarter and first
half. The increase in the 1999 second quarter is due primarily to higher selling
expenses, primarily marketing costs, related to certain pharmaceutical and
consumer health care product launches in late 1998 and in 1999, pre-launch
marketing costs for certain pharmaceutical products expected to be launched by
the end of 1999 and additional co-promotion expenses offset, in part, by lower
selling expenses, primarily marketing, and general expenses of the agricultural
products business as a result of cost reduction efforts. The decrease in the
1999 first half is due primarily to lower selling and general expenses for the
agricultural products business as previously discussed, the divested medical
devices business and lower corporate expenses offset, in part, by higher
pharmaceutical and consumer health care selling expenses, primarily marketing
costs, as previously discussed.
Research and development expenses increased 10% for the 1999 second quarter and
8% for the 1999 first half due primarily to higher pharmaceutical research and
development expenditures offset, in part, by lower research and development
expenses for the agricultural products and animal health businesses as a result
of cost containment efforts.
Interest expense, net, increased 10% for the 1999 second quarter and decreased
9% for the 1999 first half. The increase in interest expense, net, for the 1999
second quarter is due primarily to an increase in borrowings of commercial paper
to finance treasury stock acquisitions as part of the stock repurchase program.
The decrease in interest expense, net, for the 1999 first half is due primarily
to the reduction in long-term debt from the proceeds of the divestiture of the
medical devices business during the 1998 first quarter and lower interest rates
offset, in part, by an increase in borrowings of commercial paper to finance
treasury stock acquisitions as previously discussed. Weighted average long-term
12
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months and Six Months Ended June 30, 1999
debt, including loans payable, outstanding during the 1999 and 1998 second
quarter was $4,690.5 million and $3,945.5 million, respectively. Weighted
average long-term debt, including loans payable, outstanding during the 1999 and
1998 first half was $4,460.7 million and $4,294.2 million, respectively.
Other income, net, increased for the 1999 second quarter due primarily to
higher gains on the sales of non-strategic assets, including certain non-core
and generic product rights offset, in part, by unfavorable foreign exchange
results and Year 2000 conversion costs. Other income, net, increased for the
1999 first half due primarily to higher gains on the sales of non-strategic
assets as previously discussed, lower unfavorable foreign exchange results and
Year 2000 conversion costs.
In July 1999, the Company announced that it was temporarily suspending shipments
and recommending postponement of administration of ROTASHIELD, the Company's
rotavirus vaccine. The Company took this action in response to questions raised
by reports of intussusception (a cause of bowel obstruction) in certain infants
immunized with ROTASHIELD. The 1999 second quarter and first half results of
operations include a special charge aggregating $82.0 million ($53.0 million
after-tax or $0.04 per share-diluted). The special charge is to provide for the
estimated costs related to product returns, inventory, and other costs in the
event the product is not returned to the market.
The following table sets forth worldwide income before taxes (IBT) by operating
segment together with the percentage changes from the comparable period in the
prior year:
<TABLE>
Income Before Taxes
----------------------------------------------------------
Three Months Six Months
($ in Millions) Ended June 30, %Increase Ended June 30, %Increase
Operating Segment 1999 1998 (Decrease) 1999 1998 (Decrease)
- ---------------------- ------- -------- ---------- --------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Pharmaceuticals (1) $ 395.9 $ 430.9 (8)% $1,096.1 $1,135.3 (3)%
Consumer Health Care 103.5 92.5 12 % 227.1 206.0 10 %
Agricultural Products 141.5 284.5 (50)% 299.7 474.8 (37)%
------- -------- ---------- --------- -------- ----------
640.9 807.9 (21)% 1,622.9 1,816.1 (11)%
Corporate and All
Other (2) (89.6) (80.2) (12)% (157.1) 412.4 -
------- -------- ---------- --------- -------- ----------
Total (3) $ 551.3 $ 727.7 (24)% $1,465.8 $2,228.5 (34)%
======= ======== ========== ========= ======== ==========
</TABLE>
(1) IBT for Pharmaceuticals in the 1999 second quarter and first half includes
the special charge of $82.0 related to the temporary suspension of shipments
and recommended postponement of administration of ROTASHIELD, the Company's
rotavirus vaccine. Excluding the special charge, IBT for pharmaceuticals
increased 11% for the 1999 second quarter and 4% for the 1999 first half.
13
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months and Six Months Ended June 30, 1999
(2) IBT for Corporate and All Other in the 1998 first half includes the gain on
the sale of the Sherwood-Davis & Geck medical devices business of $592.1,
which was sold effective February 27, 1998. Excluding the gain on sale, IBT
for Corporate and All Other increased 13% for the 1999 first half.
(3) Excluding the special charge, total IBT for the 1999 second quarter
decreased 13% compared to the prior year. Excluding the special charge from
the 1999 results and the gain on sale from the 1998 results, total IBT for
the 1999 first half decreased 5% compared to the prior year.
Worldwide pharmaceutical IBT, excluding the special charge for ROTASHIELD
previously discussed, increased 11% for the 1999 second quarter and 4% for the
1999 first half due primarily to higher sales of worldwide pharmaceuticals
offset, in part, by lower sales of animal health products, increased research
and development expenses, and higher selling, general and administrative
expenses. Worldwide consumer health care IBT increased 12% for the 1999 second
quarter and 10% for the 1999 first half due primarily to increased sales of
worldwide consumer health care products offset, in part, by higher selling,
general and administrative expenses. Worldwide agricultural products IBT
decreased 50% for the 1999 second quarter and 37% for the 1999 first half due
primarily to lower U.S. sales of agricultural products offset, in part, by lower
selling expenses, primarily marketing, and general expenses as a result of cost
reduction efforts. Corporate and all other expenses increased for the 1999
second quarter due primarily to higher interest expense as previously discussed
and general and administrative expenses offset, in part, by higher gains on the
sales of non-strategic assets. Excluding the gain on the sale from the
divestiture of the medical devices business from the 1998 first half results,
corporate and all other expenses decreased for the 1999 first half due primarily
to higher gains on the sales of non-strategic assets and lower interest expense
as previously discussed, offset, in part, by the loss of the medical devices
business IBT resulting from the divestiture of the business effective February
27, 1998.
The effective tax rate decreased to 27.7% for the 1999 second quarter versus
28.1% for the 1998 second quarter. The effective tax rate decreased to 28.1% for
the 1999 first half versus 32.4% for the 1998 first half due primarily to the
tax impact of the gain on the sale of the medical devices business in 1998 as a
result of goodwill basis differences for tax and financial reporting purposes.
Net income and diluted earnings per share for the 1999 second quarter were
$398.7 million and $0.30 compared to $523.5 million and $0.39 for same period
last year. Net income and diluted earnings per share for the 1999 second quarter
included a special charge of $53.0 million and $0.04 for the estimated costs
associated with the temporary suspension of shipments and recommended
postponement of administration of ROTASHIELD, the Company's rotavirus vaccine.
Excluding the special charge from the 1999 results, net income and diluted
earnings per share for the 1999 second quarter decreased 14% and 13% compared to
the 1998 second quarter results. Net income and diluted earnings per share for
the 1999 first half were $1,053.6 million and $0.79 compared to $1,505.7 million
and $1.13 for the same period last year. Net income and diluted earnings per
share for the 1999 first half included the special charge previously discussed.
14
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months and Six Months Ended June 30, 1999
Net income and diluted earnings per share for the 1998 first half included a
gain on the sale of the Sherwood-Davis & Geck medical devices business of $330.8
million and $0.25. Excluding the special charge and the gain on the sale from
the 1999 and 1998 results, net income and diluted earnings per share for the
1999 first half both decreased 6% compared to 1998 first half results. The
decreases in net income and diluted earnings per share for the 1999 second
quarter, excluding the special charge, were due primarily to decreased gross
profit from lower sales of U.S. agricultural products and animal health products
which were partially replaced by increased sales of higher margin worldwide
pharmaceuticals and consumer health care products, and higher pharmaceutical
research and development expenses. The decreases in net income and diluted
earnings per share for the 1999 first half, excluding the special charge and the
gain on sale, were due primarily to decreased gross profit from the net
variations in sales previously discussed and the disposition of the medical
devices business as well as higher pharmaceutical research and development
expenses, which were offset, in part, by lower selling, general and
administrative expenses due primarily to cost reduction efforts in the
agricultural products segment and the divestiture of the medical devices
business.
Euro Currency
On January 1, 1999, 11 of the 15 member countries of the European Union adopted
the "Euro" as a new common legal currency. However, the legacy currencies of the
member countries are scheduled to remain legal tender as sub-denominations of
the Euro between January 1, 1999 and January 1, 2002 (the "transition period").
Critical areas impacted by the conversion to the Euro have been identified and
appropriate strategies developed, which are currently being implemented to
facilitate the adoption of the Euro and to facilitate business transactions
during the transition period. The costs related to the Euro conversion and
transition period will not have a material adverse effect on the Company's
financial position or results of operations. However, the Euro conversion may
have competitive implications on the Company's pricing and marketing strategies,
the total impact of which is not known at this time.
Competition
The Company operates in the highly competitive pharmaceutical, consumer health
care 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, which has
not had patent protection for many years, is the leader in its category and
contributes significantly to sales and results of operations. PREMARIN's
principal uses are to manage 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 also
have an approved indication for the treatment of osteoporosis. During the past
several years, other manufacturers have introduced products for the treatment
15
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months and Six Months Ended June 30, 1999
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 that it would not approve certain synthetic estrogen products as
generic equivalents of PREMARIN given known compositional differences between
the active ingredient of these products and PREMARIN. Although the FDA has not
approved any generic equivalent to PREMARIN to date, PREMARIN will continue to
be subject to competition from existing and new 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.
As described in the Company's Annual Report on Form 10-K for the year ended
December 31, 1998, the rapid acceptance of genetically modified seed has
generated competition from agricultural products not traditionally used on crops
grown from conventional seed, which has had an adverse effect on the results of
operations of the agricultural products business in 1999 and is expected to
continue to have an adverse effect in subsequent periods. In addition, depressed
agricultural commodity prices are expected to continue to have an adverse effect
on farmer demand for premium crop protection products. The Company is reviewing
strategic alternatives with respect to the agricultural products business.
Liquidity, Financial Condition and Capital Resources
Cash and cash equivalents increased $597.3 million in the 1999 first half to
$1,779.6 million. Cash flows from operating activities of $1,227.8 million, net
proceeds from debt issuances of $1,153.1 million, proceeds from the exercise of
stock options of $179.6 million and proceeds from sales of other assets of
$153.0 million were used principally for purchases of treasury stock of $778.7
million, dividend payments of $589.6 million, capital expenditures of $408.1
million and net purchases of marketable securities of $320.3 million. The
Company does not anticipate the seasonality of the U.S. agricultural products
segment to have a significant impact on cash flows from operating activities in
subsequent 1999 fiscal quarters or for the full year due to the sales declines
previously discussed and the timing of accounts receivable collections. Capital
expenditures included strategic investments in manufacturing and distribution
facilities worldwide and expansion of the Company's research and development
facilities.
The Company's $1.0 billion 7.7% notes, due February 2000, have been classified
as current at June 30, 1999. In addition, $398 million of outstanding commercial
paper at June 30, 1999 was also classified as current since this amount exceeded
the Company's $2.0 billion credit facility that supports the commercial paper
program. The significant increase in commercial paper is due primarily to
financing treasury stock acquisitions as part of the stock repurchase program
and funding the purchase of a $450 million convertible subordinated note issued
by Immunex Corporation, a majority-owned subsidiary of the Company. The increase
in marketable securities represents the investment by Immunex Corporation of the
proceeds from this note. The Company intends to refinance these current
liabilities before the end of the 2000 first quarter.
16
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months and Six Months Ended June 30, 1999
In December 1998, the Company recorded a charge for restructuring and related
asset impairments to recognize the reorganization of its worldwide supply chains
and distribution systems and the globalization of certain business units. Since
the end of 1998, the Company has begun its personnel reductions and
initiated/completed the closure/sale of certain manufacturing
facilities/distribution centers. Cash expenditures aggregated $43.0 million for
severance and exit costs in the 1999 first half, which were applied against the
restructuring accruals. At June 30, 1999, $183.9 million of these restructuring
accruals were outstanding.
At June 30, 1999, the fair value of the Company's long-term debt, including
loans payable, was $5,161.3 million. If interest rates were to increase or
decrease by one percentage point, the fair value of the long-term debt,
including loans payable, would decrease or increase by approximately $95.4
million.
At June 30, 1999, the fair value of the $746.0 million notional amount of
foreign exchange forward contracts was a net payable of $3.1 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 foreign currencies, the
net payable would increase or decrease by approximately $67.0 million.
Year 2000
As described in the Company's 1998 Annual Report on Form 10-K, the Company has
recognized the importance of addressing Year 2000 problems and has committed
certain resources to identify and correct potential problems in order to
minimize the impact on its business.
The Company's Year 2000 program is organized into three functional areas:
Information Technology (IT), which includes computer systems and related
application software; Embedded Chips (EC), which are hidden internal components
of many non-computer devices and machinery; and Business Partners (BP), which
include suppliers of materials, utilities and other services, customers and
governmental agencies. The program methodology is organized into three phases:
Phase I: Inventory, Assessment and Project Planning; Phase II: Remediation and
Testing; and Phase III: Certification, Implementation and Contingency Planning.
All Phase I activities for all three functional areas have been completed. All
Phase II activities for IT and EC have commenced, remediation has substantially
been concluded and testing is approximately 75% complete. Most Phase III
activities for IT and EC are currently under way with progress being made in
certification and implementation. Most Phase II activities for BP have begun and
remediation projects are more than 50% complete. Phase III for BP has made
significant progress in certification since the 1999 first quarter and the
implementation process is well under way. For all three functional areas, Phase
II and III activities are expected to be completed by the end of the 1999 third
quarter.
17
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months and Six Months Ended June 30, 1999
The estimated costs of remediation and appropriate replacement projects for Year
2000 activities have decreased since the 1999 first quarter to approximately
$155 million from $160 million. The costs include operating and capital costs of
approximately $110 million and $45 million, respectively, for all phases within
each functional area. These costs do not include any internal costs. Through
June 30, 1999, $59 million and $22 million have been incurred for operating and
capital costs, respectively, related to the Year 2000 program. The costs related
to Year 2000 are not expected to have a material adverse effect on the Company's
results of operations or financial position.
The Company currently believes that the most reasonably likely worst case
scenario concerning the Year 2000 issue involves potential BP business
disruption among the Company's key suppliers who may not be fully Year 2000
compliant. In order to address this possibility, the Company is formulating
contingency plans intended to mitigate the impact on the Company and its
critical business processes. Such plans will involve, but not be limited to,
increasing raw materials and packaging inventory, and identifying and securing,
where appropriate, alternate sources of raw materials, packaging inventory,
utilities, transportation, financial and other services.
Contingency plans are also being developed to address key business processes
including research and development and the supply of products to customers.
These plans may include increasing finished goods inventory levels, alternate
manual and offsite order processing, in addition to identifying and securing
alternate sources of supply.
Management's assessment of risks and uncertainties associated with the Year 2000
project remain unchanged from that described in the 1998 Annual Report on Form
10-K. The Company anticipates that the required modifications and replacements
of its critical systems and applications will be completed prior to the Year
2000. However, the Company may be unable to implement these modifications and
replacements on a timely basis, and, even if the Company does make these
modifications and replacements, they may not be effective in addressing the
problems identified. If the required modifications and replacements are not
completed in a timely manner or are not successful, there could be a material
adverse effect on the Company's results of operations.
The Company continues to have limited information on Year 2000 compliance by its
key business partners. There could be interruptions of the Company's business
partners' operations if they do not successfully and timely achieve Year 2000
compliance. If the Company's contingency planning is inadequate to mitigate such
interruptions, or if key business partners experience prolonged disruption,
there could be a material adverse effect on the Company's results of operations.
The Company cannot guarantee that its remediation efforts and contingency
planning will adequately address Year 2000 problems in a timely manner or that
it will be able to modify and replace any or all of the Company's critical
18
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months and Six Months Ended June 30, 1999
systems and applications in accordance with its plans. In addition, the Company
cannot assure that any modifications and replacements will effectively address
Year 2000 problems. If the Company does not complete the required conversions on
time, or if it is not successful in the implementation of its contingency plans,
there could be a material adverse effect on the Company's results of operations.
Furthermore, the Company cannot guarantee that other companies will make
necessary, timely and successful conversions to their systems on which the
Company's systems and business flows depend. Additional risk factors related to
Year 2000 problems are identified in the Company's 1998 Annual Report on Form
10-K and Exhibit 99 to such report.
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 results of operations, Euro currency, competition, liquidity,
financial condition and capital resources, and Year 2000. 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 1998 Annual
Report on Form 10-K and Exhibit 99 to such report, which exhibit is incorporated
herein by reference.
19
<PAGE>
Part II - Other Information
Item 1. Legal Proceedings
The Company and its subsidiaries are parties to numerous lawsuits and
claims arising out of the conduct of its business, including
product liability and other tort claims, the most significant of which
are described in the Company's Annual Report on Form 10-K for the year
ended December 31, 1998 and Quarterly Report on Form 10-Q for the
period ended March 31, 1999.
As of August 9, 1999, the Company has been served or is aware that it
has been named as a defendant in 4,164 suits as the manufacturer of
PONDIMIN and/or the distributor of REDUX. Of the 4,164 lawsuits naming
the Company as a defendant, 81 are actions that seek certification of
a class, some on a national and others on a statewide basis. Of these
81 lawsuits, 37 are pending in various federal district courts and 44
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: 984 individual lawsuits
are pending in various federal district courts and 3,099 individual
lawsuits are pending in various state courts. As described in the
Company's Annual Report on Form 10-K for the year ended December 31,
1998, statewide medical monitoring classes have been certified in six
states. In a seventh state, Kentucky, one court has certified a medical
monitoring class for all Kentucky residents who were patients of a
particular Kentucky weight loss clinic (Guard, et al. v. A.H. Robins
Co., Inc., et al., Boone Circuit Court, No. 98-CI-795) and another has
certified, on an ex parte basis, a statewide medical monitoring class
(Feltner, et al. v. AHPC, et al., Leslie Circuit Court, No.
99-CI-00127), notwithstanding a recent opinion by a third court that
a medical monitoring cause of action does not exist under Kentucky law
(Wood, et al. v. AHPC, et al., Jefferson Circuit Court, No. 97-CI-5873,
June 23, 1999). In Arkansas, where a trial court had found that
certification was precluded by the myriad individual medical and legal
issues presented by the plaintiffs' claims (Baker, et al. v. AHPC, et
al., Circuit Court, Washington Cty., No. CIV 97-1192), that decision
has now been affirmed by the Arkansas Supreme Court.
On August 6, 1999, the jury hearing the case of Lovett v. Wyeth-Ayerst
Laboratories Division of American Home Products Corp., et al. (294th
Jud. Dist. Ct., Van Zandt Cty., TX) returned a verdict in favor of the
plaintiff and against the Company for $3.3 million in compensatory
damages and $20 million in punitive damages. Judgment on the verdict
has not yet been entered by the court. The Company expects to pursue
post-trial motions to reduce the award or overturn the verdict and, if
necessary, to appeal. In New Jersey, trial of the statewide medical
monitoring class action began on August 11, 1999 (Vadino, et al. v.
AHPC, et al., Superior Court, Middlesex Cty., No. MID-L-425-98).
As of August 9, 1999, there were pending against the Company
approximately 3,683 lawsuits in federal or state courts on behalf of
approximately 37,331 plaintiffs alleging injuries as a result of use of
the NORPLANT SYSTEM, the Company's implantable contraceptive containing
levonorgestrel. On August 9, 1999, the New Jersey Supreme Court issued
an order reversing an intermediate appellate court opinion that had
upheld the dismissal of NORPLANT cases pending in state courts in New
Jersey (Perez, et. al. v. Wyeth Laboratories, Inc., et al. (N.J. Sup.
Ct., No. A-16)). In its opinion, the Supreme Court held that the
learned intermediary doctrine, by which manufacturers of prescription
drugs are obligated to provide warnings solely to physicians and
health care providers and not to consumers, does not apply when
manufacturers advertise products directly to consumers. Because the
record in the lower courts established that the plaintiffs whose claims
were at issue had not seen any such advertisements, the Company intends
to move again promptly for dismissal of the claims.
20
<PAGE>
In the DURACT litigation, an additional putative class action has
been filed on behalf of a class of Louisiana residents claiming
injury as a result of their use of the product (Martin, et al. v.
Wyeth-Ayerst Laboratories, et al., La. Dist. Ct., Orleans Par.,
No. 1999-02665).
In the brand name prescription drug antitrust litigation, the U.S.
Court of Appeals for the Seventh Circuit affirmed in part and
reversed in part the U.S. District Court's decision granting
judgment to the defendants in the trial of the various class actions
consolidated as a single class action under the caption In re Brand
Name Prescription Drug Antitrust Litigation (MDL 1997 N.D. Ill.).
The Court of Appeals held that there was insufficient evidence of a
conspiracy by manufacturers and wholesalers to deny discounts to
retailers. The Court also held there was a factual issue regarding a
voluntary initiative by manufacturers in response to government
requests to limit any price increases to no more than increases in
the Consumer Price Index. New cases on behalf of purported indirect
consumer purchasers were filed in state courts in New Mexico, South
Dakota and West Virginia. The complaints in these cases contain
allegations that are similar to the allegations in cases previously
filed in other states. In the California state class action, the
agreement to settle the litigation brought on behalf of consumers or
retail pharmacies in California against the Company and other
defendants has received final court approval. However, that decision
may be appealed. The settlements entered into by the Company and
other defendants to resolve the consumer actions in Arizona, the
District of Columbia, Florida, Kansas, Maine, Michigan, Minnesota,
New York, North Carolina, Tennessee and Wisconsin have become final.
The decision of the U.S. District Court dismissing a purported class
action in Alabama (Lowell v. American Cyanamid Company, No.97-581-BH-M,
U.S.D.C., S.D. Ala.) that alleged violation of federal antitrust laws
involving pricing practices relating to marketing programs for crop
protection products has been reversed by the U.S. Court of Appeals for
the Eleventh Circuit. The Company has petitioned for rehearing and has
also suggested that the ruling be vacated due to mootness.
In the needlestick litigation against the Company and its former
Sherwood Medical Company subsidiary, a putative class action has been
filed on behalf of New York state healthcare workers who suffered
accidental needlesticks in the course of their employment and who
subsequently tested negative for potentially transmitted diseases
(Benner, et al. v. Becton Dickinson & Co., et al., U.S.D.C., S.D.N.Y.,
No. 99 CIV 4785). The allegations of the complaint are substantially
21
<PAGE>
similar to those in the other needlestick cases described in the
Company's Annual Report on Form 10-K for the year ended December 31,
1998.
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 22, 1999
(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 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:
Nominee For Withheld
Clifford L. Alexander, Jr. 1,101,043,608 4,881,414
Frank A. Bennack, Jr. 1,101,088,987 4,836,035
Robert G. Blount 1,100,559,244 5,365,778
Robert Essner 1,100,482,065 5,442,957
John D. Feerick 1,100,934,667 4,990,355
John P. Mascotte 1,101,060,015 4,865,007
Mary Lake Polan,M.D.,Ph.D. 1,101,147,942 4,777,080
Ivan G. Seidenberg 1,100,486,388 5,438,634
John R. Stafford 1,100,920,382 5,004,640
John R. Torell III 1,101,279,286 4,645,736
(ii) Ratification of the appointment of Arthur Andersen LLP as
principal independent public accountants for 1999:
For Against Abstain
1,100,661,110 2,155,511 3,108,401
22
<PAGE>
(iii) Adoption of the 1999 Stock Incentive Plan:
For Against Abstain
948,426,306 137,565,123 10,038,509
There were 9,895,084 broker non-votes with reference to this
item.
(iv) Approval of the proposed amendments to the 1996 Stock
Incentive Plan and the 1993 Stock Incentive Plan:
For Against Abstain
1,004,408,488 81,064,344 10,582,307
There were 9,869,883 broker non-votes with reference to this
item.
(d)Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a)Exhibits
Exhibit No. Description
(12) Computation of Ratio of Earnings to Fixed Charges
(27) Financial Data Schedule - Period Ended June 30, 1999
(b)Reports on Form 8-K
On June 1, 1999, a Current Report on Form 8-K regarding the
Company's announcement that its earnings for the 1999 second
quarter and full year would be affected by weaker than expected
results in its agricultural products business and the livestock
sector of its animal health business was filed. The Company is
reviewing strategic alternatives with respect to the agricultural
products and livestock businesses.
23
<PAGE>
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICAN HOME PRODUCTS CORPORATION
(Registrant)
By /s/ Paul J. Jones
--------------------
Paul J. Jones
Vice President and Comptroller
(Duly Authorized Signatory
and Chief Accounting Officer)
Date: August 16, 1999
24
<PAGE>
Exhibit Index
Exhibit No. Description
(12) Computation of Ratio of Earnings to Fixed Charges
(27) Financial Data Schedule - Period Ended June 30, 1999
EX-1
<TABLE>
EXHIBIT 12
American Home Products Corporation
Computation of Ratio of Earnings To Fixed Charges
(Thousands of dollars, except ratio amounts)
<CAPTION>
Six Months Ended Years Ended December 31,
---------------- ---------------------------------------------------------
Earnings: June 30, 1999 1998 1997 1996 1995 1994 (1)
- --------- ---------------- ----------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Income from continuing operations
before federal and foreign taxes $1,465,778 $3,585,460 $2,814,707 $2,755,460 $2,438,698 $2,029,760
Add:
Fixed charges 187,303 376,253 518,661 605,011 705,047 155,187
Minority interests 9,963 2,177 721 18,084 717 (12,570)
Distributed equity income - 920 - - - -
Amortization of 902 1,487 1,057 5,621 768 497
capitalized interest
Less:
Equity income/(loss) 869 522 10,840 10,431 8,129 (1,691)
Capitalized interest 10,369 9,497 12,898 - 7,681 9,792
---------------- ---------- ---------- ---------- ---------- ----------
Total earnings as defined $1,652,708 $3,956,278 $3,311,408 $3,373,745 $3,129,420 $2,164,773
================ ========== ========== ========== ========== ==========
Fixed Charges:
Interest and amortization
of debt expense $154,889 $322,970 $461,370 $571,414 $665,021 $116,661
Capitalized interest 10,369 9,497 12,898 - 7,681 9,792
Interest factor of
rental expense (2) 22,045 43,786 44,393 33,597 32,345 28,734
---------------- ---------- ---------- ---------- ---------- ----------
Total fixed charges as defined $187,303 $376,253 $518,661 $605,011 $705,047 $155,187
================ ========== ========== ========== ========== ==========
Ratio of earnings to fixed
charges 8.8 10.5 6.4 5.6 4.4 13.9
</TABLE>
(1) The 1994 results include one month of results of American Cyanamid Company
which was acquired by American Home Products Corporation effective
December 1, 1994. Assuming the acquisition took place January 1, 1994,
the pro forma ratio of earnings to fixed charges would be 2.9 for the year
ended December 31, 1994.
(2) A 1/3 factor was utilized to compute the portion of rental expenses deemed
representative of the interest factor.
<TABLE> <S> <C>
<ARTICLE> 5
EXHIBIT 27
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE AMERICAN HOME PRODUCTS CORPORATION AND SUBSIDIARIES CONSOLIDATED
CONDENSED BALANCE SHEET AS OF JUNE 30, 1999 AND CONSOLIDATED CONDENSED
STATEMENT OF INCOME FOR THE SIX MONTHS ENDED JUNE 30, 1999, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 1,779,610
<SECURITIES> 438,160
<RECEIVABLES> 3,213,364
<ALLOWANCES> 0
<INVENTORY> 2,191,925
<CURRENT-ASSETS> 8,801,259
<PP&E> 6,734,265
<DEPRECIATION> 2,413,797
<TOTAL-ASSETS> 21,764,944
<CURRENT-LIABILITIES> 5,524,616
<BONDS> 3,624,694
<COMMON> 435,871
0
62
<OTHER-SE> 8,847,921
<TOTAL-LIABILITY-AND-EQUITY> 21,764,944
<SALES> 6,761,644
<TOTAL-REVENUES> 6,761,644
<CGS> 1,863,569
<TOTAL-COSTS> 1,863,569
<OTHER-EXPENSES> 859,133
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 111,280
<INCOME-PRETAX> 1,465,778
<INCOME-TAX> 412,187
<INCOME-CONTINUING> 1,053,591
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,053,591
<EPS-BASIC> 0.80 <F1>
<EPS-DILUTED> 0.79 <F2>
<FN>
<F1> This amount represents Basic Earnings per Share in accordance with the
requirements of Statement of Financial Accounting Standards No. 128 -
"Earnings per Share."
<F2> 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>
