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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000 Commission file number 1-1225
AMERICAN HOME PRODUCTS CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-2526821
-------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
Five Giralda Farms, Madison, N.J. 07940
--------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (973) 660-5000
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15
(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No
------ --
The number of shares of Common Stock outstanding as of the close of business on
October 31, 2000:
Number of
Class Shares Outstanding
--------------------------------- ------------------
Common Stock, $0.33-1/3 par value 1,310,545,193
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AMERICAN HOME PRODUCTS CORPORATION AND SUBSIDIARIES
INDEX
Page No.
--------
Part I - Financial Information 2
Item 1. Financial Statements:
Consolidated Condensed Balance Sheets -
September 30, 2000 and December 31, 1999 3
Consolidated Condensed Statements of Operations -
Three and Nine Months Ended September 30, 2000 and 1999 4
Consolidated Condensed Statements of Changes in Stockholders'
Equity - Nine Months Ended September 30, 2000 and 1999 5
Consolidated Condensed Statements of Cash Flows -
Nine Months Ended September 30, 2000 and 1999 6
Notes to Consolidated Condensed Financial Statements 7-13
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 14-22
Item 3. Quantitative and Qualitative Disclosures
about Market Risk 22
Part II - Other Information 23
Item 1. Legal Proceedings 23-25
Item 6. Exhibits and Reports on Form 8-K 26
Signature 27
Exhibit Index EX-1
1
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
(SEC). Certain information and footnote disclosures normally included in
financial statements prepared in accordance with U.S. generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations; however, the Company believes that the disclosures are adequate to
make the information presented not misleading. In the opinion of management, the
financial statements include all adjustments necessary to present fairly the
financial position of the Company as of September 30, 2000 and December 31,
1999, and the results of its operations for the three months and nine months
ended September 30, 2000 and 1999, and its cash flows and changes in
stockholders' equity for the nine months ended September 30, 2000 and 1999. 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
1999 Annual Report on Form 10-K and Quarterly Reports on Form 10-Q for the
quarters ended March 31, 2000 and June 30, 2000.
2
AMERICAN HOME PRODUCTS CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(In Thousands Except Per Share Amounts)
September 30, December 31,
2000 1999
------------ ------------
ASSETS
Cash and cash equivalents $3,179,112 $1,892,715
Marketable securities 947,310 520,587
Accounts receivable less allowances 2,647,844 2,389,863
Inventories:
Finished goods 738,084 753,831
Work in progress 603,745 471,327
Materials and supplies 391,256 382,802
------------ ------------
1,733,085 1,607,960
Other current assets including deferred taxes 1,763,593 1,781,307
Net Assets - Discontinued business held for sale - 4,192,346
------------ ------------
Total Current Assets 10,270,944 12,384,778
Property, plant and equipment 7,199,444 6,392,948
Less accumulated depreciation 2,454,698 2,274,771
------------ ------------
4,744,746 4,118,177
Goodwill and other intangibles, net of accumulated
amortization 4,697,744 4,823,309
Other assets including deferred taxes 1,139,782 1,797,492
------------ ------------
Total Assets $20,853,216 $23,123,756
============ ============
LIABILITIES
Loans payable $31,769 $1,880,816
Trade accounts payable 834,237 562,679
Accrued expenses 4,560,748 3,809,525
Accrued federal and foreign taxes 838,168 227,363
------------ ------------
Total Current Liabilities 6,264,922 6,480,383
Long-term debt 3,483,080 3,606,423
Other noncurrent liabilities 3,867,668 5,925,313
Postretirement benefit obligations other than pensions 904,434 896,890
STOCKHOLDERS' EQUITY
$2 convertible preferred stock, par value $2.50 per share 56 61
Common stock, par value $0.33-1/3 per share 435,898 434,639
Additional paid-in capital 3,701,705 3,392,705
Retained earnings 2,871,832 3,000,827
Accumulated other comprehensive loss (676,379) (613,485)
------------ ------------
Total Stockholders' Equity 6,333,112 6,214,747
------------ ------------
Total Liabilities and Stockholders' Equity $20,853,216 $23,123,756
============ ============
The accompanying notes are an integral part of these consolidated condensed financial statements.
3
AMERICAN HOME PRODUCTS CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(In Thousands Except Per Share Amounts)
Three Months Nine Months
Ended September 30, Ended September 30,
-------------------------- ---------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
Net sales $3,677,303 $3,191,040 $10,207,641 $8,792,253
----------- ----------- ----------- -----------
Cost of goods sold 908,876 806,878 2,561,185 2,243,243
Selling, general and administrative expenses 1,322,949 1,142,495 3,834,788 3,270,707
Research and development expenses 458,522 393,745 1,355,409 1,177,252
Interest expense (income), net (22,679) 59,612 63,694 170,892
Other income, net (14,550) (96,616) (56,899) (190,815)
Special charge - - - 82,000
Litigation settlement - 4,750,000 - 4,750,000
Termination fee - - (1,709,380) -
----------- ----------- ----------- -----------
Income (loss) from continuing operations before
federal and foreign taxes 1,024,185 (3,865,074) 4,158,844 (2,711,026)
Provision (benefit) for federal and foreign taxes 262,085 (1,222,639) 1,238,001 (901,065)
----------- ----------- ----------- -----------
Income (loss) from continuing operations 762,100 (2,642,435) 2,920,843 (1,809,961)
----------- ----------- ----------- -----------
Discontinued Operations:
Income (loss) from operations of discontinued agricultural
products business (net of federal and foreign taxes of
$57,289 for the 2000 first nine months, and a tax benefit
of $93,824 and $3,211 for 1999 third quarter and first
nine months, respectively) - (231,509) 103,346 (10,392)
Loss on disposal of agricultural products business
(including federal and foreign tax charges of $855,248) - - (1,572,993) -
----------- ----------- ----------- -----------
Total loss from discontinued operations - (231,509) (1,469,647) (10,392)
----------- ----------- ----------- -----------
Net income (loss) $762,100 ($2,873,944) $1,451,196 ($1,820,353)
=========== =========== =========== ===========
Basic earnings (loss) per share from continuing operations $0.58 ($2.02) $2.24 ($1.38)
Basic loss per share from discontinued operations - (0.18) (1.13) (0.01)
----------- ----------- ----------- -----------
Basic earnings (loss) per share $0.58 ($2.20) $1.11 ($1.39)
=========== =========== =========== ===========
Diluted earnings (loss) per share from continuing operations $0.58 ($2.02) $2.21 ($1.38)
Diluted loss per share from discontinued operations - (0.18) (1.11) (0.01)
----------- ----------- ----------- -----------
Diluted earnings (loss) per share $0.58 ($2.20) $1.10 ($1.39)
=========== =========== =========== ===========
Dividends per share of common stock $0.230 $0.225 $0.690 $0.675
=========== =========== =========== ===========
The accompanying notes are an integral part of these consolidated condensed financial statements.
4
AMERICAN HOME PRODUCTS CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In Thousands Except Per Share Amounts)
Nine Months Ended September 30, 2000:
Accumulated
$2 Convertible Additional Other Total
Preferred Common Paid-in Retained Comprehensive Stockholders'
Stock Stock Capital Earnings Loss Equity
-------------- ---------- ---------- ---------- ------------- -------------
Balance at January 1, 2000 $61 $434,639 $3,392,705 $3,000,827 ($613,485) $6,214,747
Net income 1,451,196 1,451,196
Currency translation adjustments (76,413) (76,413)
Unrealized gain on marketable
securities 13,519 13,519
-------------
Comprehensive income 1,388,302
-------------
Cash dividends declared (a) (1,200,723) (1,200,723)
Common stock acquired for treasury (2,472) (16,316) (374,289) (393,077)
Common stock issued 3,610 298,624 302,234
Conversion of preferred stock
and other exchanges (5) 121 26,692 (5,179) 21,629
----------- ---------- ---------- ---------- ---------- -------------
Balance at September 30, 2000 $56 $435,898 $3,701,705 $2,871,832 ($676,379) $6,333,112
=========== ========== ========== ========== ========== =============
Nine Months Ended September 30, 1999:
Accumulated
$2 Convertible Additional Other Total
Preferred Common Paid-in Retained Comprehensive Stockholders'
Stock Stock Capital Earnings Loss Equity
-------------- ---------- ---------- ---------- ------------- -------------
Balance at January 1, 1999 $64 $437,466 $3,072,874 $6,432,729 ($328,337) $9,614,796
Net loss (1,820,353) (1,820,353)
Currency translation adjustments (254,565) (254,565)
Unrealized loss on marketable
securities (1,444) (1,444)
-------------
Comprehensive loss (2,076,362)
-------------
Cash dividends declared (b) (1,183,450) (1,183,450)
Common stock acquired for treasury (5,562) (34,364) (912,189) (952,115)
Common stock issued 3,011 203,166 206,177
Conversion of preferred stock
and other exchanges (2) 186 23,915 (7,894) 16,205
-------------- ---------- ---------- ---------- ----------- -------------
Balance at September 30, 1999 $62 $435,101 $3,265,591 $2,508,843 ($584,346) $5,625,251
============== ========== ========== ========== =========== =============
(a) Includes the 2000 fourth quarter common stock cash dividend of $0.23 per
share ($303,885 in the aggregate) declared on September 21, 2000 and payable
on December 1, 2000.
(b) Includes the 1999 fourth quarter common stock cash dividend of $0.23 per
share ($300,232 in the aggregate) declared on September 23, 1999 and payable
on December 1, 1999.
The accompanying notes are an integral part of these consolidated condensed financial statements.
5
AMERICAN HOME PRODUCTS CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In Thousands)
Nine Months Ended September 30,
2000 1999
------------- -------------
Operating Activities
- --------------------
Income (loss) from continuing operations $2,920,843 ($1,809,961)
Adjustments to reconcile income (loss) from continuing
operations to net cash provided from operating activities
of continuing operations:
Litigation settlement - 4,750,000
Special charge - 82,000
Gains on sales of assets (137,638) (135,057)
Depreciation and amortization 399,744 409,325
Deferred income taxes 704,575 (1,522,019)
Changes in working capital, net 5,664 24,334
Diet drug litigation payments (2,242,816) -
Other items, net (16,900) (85,695)
----------- ----------
Net cash provided from continuing operations 1,633,472 1,712,927
Net cash provided from discontinued operations 82,196 14,031
----------- ----------
Net cash provided from operating activities 1,715,668 1,726,958
----------- ----------
Investing Activities
- --------------------
Purchases of property, plant and equipment (978,680) (656,646)
Proceeds from sale of agricultural products business 3,800,000 -
Proceeds from sales of assets 198,894 225,848
Proceeds from sales and maturities of marketable securities 1,123,059 299,193
Purchases of marketable securities (1,542,971) (619,793)
----------- ----------
Net cash provided from (used for) investing activities 2,600,302 (751,398)
----------- ----------
Financing Activities
- --------------------
Net proceeds from (repayments of) debt (2,017,501) 1,640,743
Dividends paid (896,838) (883,218)
Exercises of stock options 302,234 206,177
Purchases of common stock for treasury (393,077) (952,115)
----------- ----------
Net cash provided from (used for) financing activities (3,005,182) 11,587
----------- ----------
Effects of exchange rates on cash balances (24,391) (23,119)
----------- ----------
Increase in cash and cash equivalents 1,286,397 964,028
Cash and cash equivalents, beginning of period 1,892,715 1,182,319
----------- ----------
Cash and cash equivalents, end of period $3,179,112 $2,146,347
=========== ==========
Supplemental Information
- ------------------------
Interest payments $312,009 $269,070
Income tax payments, net of refunds 693,275 510,278
The accompanying notes are an integral part of these consolidated condensed financial statements.
6
AMERICAN HOME PRODUCTS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Note 1. Discontinued Operations
-----------------------
On June 30, 2000, the Company announced that it had completed the sale
of the Cyanamid Agricultural Products business to BASF
Aktiengesellschaft (BASF). The Cyanamid Agricultural Products business
manufactures, distributes and sells crop protection and pest control
products worldwide, such as herbicides, insecticides and fungicides.
Under the terms of the definitive agreement dated as of March 20, 2000
and subsequently approved by the Federal Trade Commission and certain
international regulatory agencies, BASF paid the Company
$3,800,000,000 in cash and assumed certain debt. As a result, the
Company recorded an after-tax loss on the sale of this business of
$1,572,993,000 or $1.19 per share-diluted and reflected this business
as a discontinued operation beginning in the 2000 first quarter. The
loss on the sale included closing costs from the transaction and
operating income of the discontinued business from April 1, 2000
through June 30, 2000 (the disposal date). The loss on the sale was
due primarily to a difference in the basis of the net assets sold for
financial reporting purposes compared to the Company's basis in such
net assets for tax purposes. This difference related, for the most
part, to goodwill which is not recognized for tax purposes. As a
result, the transaction generated a taxable gain requiring the
recording of a tax provision, in addition to a write-off of net assets
in excess of the selling price. The Consolidated Condensed Financial
Statements at December 31, 1999 and September 30, 1999 have been
restated to reflect the Cyanamid Agricultural Products business as a
discontinued operation. Operating results of discontinued operations
were as follows:
Nine Months
(In thousands except per share amounts) Ended September 30,
-------------------------
2000 1999
---------- ----------
Net sales $546,790 $1,290,645
---------- ----------
Income (loss) before federal and foreign taxes 160,635 (13,603)
Provision (benefit) for federal and foreign taxes 57,289 (3,211)
---------- ----------
Income (loss) from operations of discontinued
agricultural products business 103,346 (10,392)
Loss on disposal of agricultural
products business (including federal and
foreign tax charges of $855,248) (1,572,993) -
---------- ----------
Loss from discontinued operations ($1,469,647) ($10,392)
=========== ==========
Diluted loss per share from discontinued operations ($1.11) ($0.01)
=========== ==========
7
AMERICAN HOME PRODUCTS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Note 2. Warner-Lambert Termination Fee
------------------------------
During the 2000 first quarter, the Company and Warner-Lambert Company
terminated their merger agreement. The Company recorded income of
$1,709,380,000 ($1,111,097,000 after-tax or $0.84 per share - diluted)
in income from continuing operations resulting from the receipt of a
$1,800,000,000 termination fee provided for under the merger agreement
offset, in part, by certain related expenses.
Note 3. Contingencies and Litigation Settlement
---------------------------------------
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 1999 third quarter, the Company recorded a litigation charge of
$4,750,000,000 (net of $400,000,000 of insurance) regarding the use of
the antiobesity products REDUX (dexfenfluramine) or PONDIMIN
(fenfluramine), to provide for expected payments to the settlement
funds contemplated by the comprehensive nationwide, class action
settlement, other judgments and settlements (including claims for
primary pulmonary hypertension (PPH) and any opt outs from the
settlement) and future legal costs. During the 2000 first nine months,
payments to the comprehensive nationwide, class action settlement
fund, individual settlement payments, legal fees and other items
totaling $2,242,816,000 were paid and applied against the litigation
accrual. At September 30, 2000, $2,389,603,000 of the litigation
accrual remained. On April 13, 2000, the Company announced that it
would proceed with the comprehensive, nationwide settlement to resolve
litigation brought against the Company related to the diet drug
matters. Of the estimated 5.8 million diet drug users, approximately
300,000 individuals have registered for the settlement and
approximately 45,000 opted out during the four-month initial opt-out
period ended March 30, 2000. A majority of those who registered have
elected the settlement's Accelerated Implementation Option, which
provides for prompt benefits and resolves the claims of those class
members. An amendment to the settlement agreement, dated July 20,
2000, related to the timing of payments by the Company into the
proposed settlement fund, administration of the settlement trust and
opt-out credits available to the Company. On August 28, 2000, Senior
District Judge Louis C. Bechtle of the United States District Court
for the Eastern District of Pennsylvania approved the comprehensive
nationwide, class action settlement, for which approval has been
appealed to the United States Court of Appeals for the Third Circuit.
A decision on that appeal is not expected until next year.
The Company anticipates that additional reserves will be required
related to the diet drug matters and, while it is not possible to
determine at this time the extent of such additional reserves, the
Company believes, based on currently available information, that the
additional reserves that will be recorded shall, in the aggregate, be
lower than the $4,750,000,000 recorded in the 1999 third quarter. The
Company currently expects to record a portion of the additional
reserve during the 2000 fourth quarter. The Company will record
additional reserves when information is available to estimate the
liability.
8
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. Restructuring Program
---------------------
In December 1998, the Company recorded a special charge for
restructuring and related asset impairments of $343,600,000 to
recognize costs of the reorganization of its worldwide supply chains
and U.S. distribution systems, and the globalization of certain
business units. The restructuring will result in the reduction of
4,100 positions worldwide offset, in part, by 1,000 newly created
positions in the same functions at other locations. During the 2000
first nine months, the Company has continued its personnel reductions
and has completed the closure of the third and final distribution
center. The manufacturing plants are continuing their phase-out
period. One plant was closed in the 2000 third quarter and four
additional closures are expected in the 2000 fourth quarter. The costs
associated with these plant closures are included in other
closure/exit costs below and are anticipated to be realized after the
facilities cease production and prior to disposal. As of September 30,
2000, approximately 3,100 positions had been eliminated. The activity
in the restructuring accruals was as follows:
Personnel Other Closure/
(In thousands) Costs Exit Costs Total
- ------------------------------------------- --------- -------------- --------
Restructuring accruals at December 31, 1999 $54,753 $79,261 $134,014
Cash expenditures (30,988) (9,213) (40,201)
------- ------- --------
Restructuring accruals at September 30, 2000 $23,765 $70,048 $93,813
======= ======= ========
Note 5. Consolidation of Certain Subsidiaries
-------------------------------------
Effective January 1, 2000, the financial results of certain
pharmaceutical subsidiaries in Japan and India, which were previously
included on an equity basis, were consolidated in the results of the
Company due to changes which gave the Company ability to exercise
control over the operations of these affiliates. The consolidation of
the subsidiaries resulted in higher net sales of 2% for the 2000 third
quarter and first nine months; however, it had no impact on income
from continuing operations in 2000.
9
AMERICAN HOME PRODUCTS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Note 6. Company Data by Operating Segment
---------------------------------
The Company has three reportable segments: Pharmaceuticals, Consumer
Health Care and Corporate.
Net Sales
----------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
($ in millions) --------------------- ---------------------
Operating Segment 2000 1999 2000 1999
- -------------------- -------- -------- --------- --------
Pharmaceuticals $3,030.2 $2,584.3 $8,453.8 $7,119.7
Consumer Health Care 647.1 606.7 1,753.8 1,672.6
-------- -------- --------- --------
Total $3,677.3 $3,191.0 $10,207.6 $8,792.3
======== ======== ========= ========
Income (Loss) from Continuing Operations
Before Federal and Foreign Taxes (1)
----------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
($ in millions) --------------------- --------------------
Operating Segment 2000 1999 2000 1999
- -------------------- -------- -------- -------- --------
Pharmaceuticals $871.0 $795.1 $2,184.3 $1,973.2
Consumer Health Care 195.8 178.7 416.7 405.8
-------- -------- -------- --------
1,066.8 973.8 2,601.0 2,379.0
Corporate (2) (42.6) (4,838.9) 1,557.8 (5,090.0)
-------- -------- -------- --------
Total $1,024.2 ($3,865.1) $4,158.8 ($2,711.0)
======== ======== ======== ========
(1) The third quarter results included goodwill amortization for 2000
and 1999 as follows: Pharmaceuticals - $37.9 and $39.1, and
Consumer Health Care - $8.0 and $8.4, respectively.
The first nine months results included goodwill amortization for
2000 and 1999 as follows: Pharmaceuticals - $116.1 and $115.9,
and Consumer Health Care - $24.0 and $24.5, respectively.
(2) Corporate expenses for the 2000 first nine months included income
of $1,709.4 resulting from the receipt of a $1,800.0 termination
fee provided for under the merger agreement with Warner-Lambert
Company offset, in part, by certain related expenses.
Corporate expenses for the 1999 third quarter and first nine
months included a litigation charge of $4,750.0 (net of $400.0 of
insurance) in connection with litigation brought against the
Company regarding the use of the antiobesity products REDUX or
PONDIMIN. The charge provided for expected payments to settlement
funds contemplated by the nationwide, class action settlement,
other judgments and settlements (including claims for PPH and any
opt outs from the settlement), and future legal costs.
Corporate expenses for the 1999 first nine months included a
special charge of $82.0 related to the suspension of shipments
and voluntary market withdrawal of ROTASHIELD, the Company's
rotavirus vaccine.
10
AMERICAN HOME PRODUCTS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Note 7. Earnings per Share
------------------
The following table sets forth the computations of basic earnings
(loss) per share and diluted earnings (loss) per share:
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- -----------------------------
(In thousands except per share amounts) 2000 1999 2000 1999
- ------------------------------------------------ --------- ---------- ---------- ----------
Income (loss) from continuing operations less
preferred dividends $762,088 ($2,642,448) $2,920,808 ($1,809,999)
Loss from discontinued operations - (231,509) (1,469,647) (10,392)
--------- ---------- ---------- ----------
Net income (loss) less preferred dividends $762,088 ($2,873,957) $1,451,161 ($1,820,391)
Denominator:
Average number of common shares outstanding 1,305,478 1,306,853 1,304,915 1,309,652
--------- ---------- --------- ----------
Basic earnings (loss) per share from
continuing operations $0.58 ($2.02) $2.24 ($1.38)
Basic loss per share from
discontinued operations - (0.18) (1.13) (0.01)
--------- ---------- ---------- ----------
Basic earnings (loss) per share $0.58 ($2.20) $1.11 ($1.39)
========= ========== ========== ==========
Income (loss) from continuing operations $762,100 ($2,642,435) $2,920,843 ($1,809,961)
Loss from discontinued operations - (231,509) (1,469,647) (10,392)
--------- ---------- ---------- ----------
Net income (loss) $762,100 ($2,873,944) $1,451,196 ($1,820,353)
Denominator:
Average number of common shares outstanding 1,305,478 1,306,853 1,304,915 1,309,652
Common share equivalents of outstanding stock
options and deferred contingent common stock
awards (*) 15,523 - 15,786 -
--------- ---------- ---------- ----------
Total shares (*) 1,321,001 1,306,853 1,320,701 1,309,652
--------- ---------- ---------- ----------
Diluted earnings (loss) per share from
continuing operations (*) $0.58 ($2.02) $2.21 ($1.38)
Diluted loss per share from
discontinued operations (*) - (0.18) (1.11) (0.01)
--------- ---------- ---------- ----------
Diluted earnings (loss) per share (*) $0.58 ($2.20) $1.10 ($1.39)
========= ========== ========== ==========
(*) The average number of common shares outstanding for diluted loss per share
for the 1999 third quarter and first nine months do not include common
stock equivalents as the effect on the net loss would be antidilutive.
Therefore, the average number of common shares outstanding for diluted loss
per share is the same as for basic loss per share.
Note 8. Immunex Stock Offering
----------------------
In August 2000, the Company's majority-owned subsidiary, Immunex
Corporation (Immunex) whose financial results are consolidated into
the results of the Company, filed a shelf registration statement which
allows Immunex to sell up to 20 million shares of newly-issued Immunex
common stock in a primary offering and the Company to sell up to 40
million shares of Immunex common stock in a secondary offering. On
October 19, 2000, Immunex filed a preliminary prospectus supplement
with the SEC and on November 9, 2000, Immunex filed a registration
statement with the SEC pursuant to rule 462(b) of the Securities Act
of 1993, as amended, allowing the Company to increase the amount of
11
AMERICAN HOME PRODUCTS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
shares it will sell to 50 million shares. In addition, the Company
granted the underwriters of this offering the right to purchase up to
an additional 10.5 million shares of Immunex common stock that the
Company owns, to cover underwriters' over-allotments. On November 10,
2000, the underwriters exercised their over-allotment option for an
additional 10.5 million shares, resulting in a total sale by the
Company in the public offering of 60.5 million shares. The offering is
expected to close on November 15, 2000. Including the exercise of the
over-allotments, anticipated net proceeds to the Company approximate
$2,340,000,000.
On October 31, 2000, the Company converted a $450,000,000 subordinated
note into 15,544,041 newly issued shares of Immunex, increasing the
Company's ownership in Immunex to approximately 55%.
The net effect of the subordinated note conversion and the equity
offering will reduce the Company's ownership in Immunex from
approximately 55% to approximately 41%. Upon the reduction in
ownership and based on amendments to the related governance agreement
with Immunex which reduce the Company's control over the operations of
Immunex, the Company will include the financial results of Immunex on
an equity basis instead of consolidating such results.
Key elements of the new business arrangements between the Company and
Immunex include the future sale by the Company of its recently
acquired biotech facility in Rhode Island to Immunex and the Company
agreeing to supply up to $550,000,000 in financing guarantees relating
to Immunex's financing of its proposed new research and technology
center in Seattle, Washington. All existing licensing and marketing
rights to ENBREL remain unchanged. The Company plans to use the net
proceeds from the sale of its Immunex common stock for general
corporate purposes.
Note 9. Recently Issued Accounting Standards
------------------------------------
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 133, "Accounting
for Derivative Instruments and Hedging Activities." In June 2000, the
FASB issued SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities, an Amendment of FASB
Statement No. 133." SFAS No. 138 was issued to address a limited
number of issues causing implementation difficulties for entities that
apply SFAS No. 133. SFAS Nos. 133 and 138 require that all derivatives
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 (loss) or other comprehensive income
(loss), depending on the designated purpose of the derivative. The
Company is required to and will adopt SFAS No. 133 and SFAS No. 138 in
the first quarter of fiscal 2001. Based on the Company's current
activities, the Company does not believe that adoption of these
pronouncements will have a material impact on the Company's results of
operations, cash flows or financial position.
In December 1999, the SEC issued Staff Accounting Bulletin (SAB) No.
101, "Revenue Recognition in Financial Statements." SAB No. 101
reemphasizes existing guidance related to revenue recognition,
including criteria specified in the FASB's conceptual framework on
timing of revenue recognition, and presentation and disclosure of
revenue in the financial statements. SAB No. 101 must be implemented
12
AMERICAN HOME PRODUCTS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
by the fourth quarter of fiscal years beginning after December 15,
1999. The Company will implement SAB No. 101 in the 2000 fourth
quarter. The Company does not believe that the implementation of SAB
No. 101 will have a material impact on the Company's results of
operations, cash flows or financial position.
In May 2000, the Emerging Issues Task Force (EITF) reached a consensus
on EITF No. 00-14, "Accounting for Certain Sales Incentives." Existing
U.S. generally accepted accounting principles do not provide specific
guidance on the accounting for sales incentives that companies offer
to their customers. EITF No. 00-14 addresses the recognition,
measurement and income statement classification for sales incentives
offered voluntarily to customers. This guidance is required to be
implemented by the Company in the 2000 fourth quarter. The Company is
currently in compliance with the recognition and measurement aspects
of EITF No. 00-14. The Company does not believe that the income
statement classification requirement will have a material impact on
net sales.
In October 2000, the FASB issued SFAS No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities - a replacement of FASB Statement No. 125." SFAS No. 140
reviews criteria for accounting securitizations, other financial asset
transfers and collateral, and introduces new disclosures. The new
disclosure requirements must be implemented for fiscal years ending
after December 15, 2000. The other provisions of SFAS No. 140 apply
prospectively to the transfer of financial assets and extinguishments
of liabilities occurring after March 31, 2001. SFAS No. 140 carries
forward most of the provisions of SFAS No. 125 without amendment. The
Company does not believe that this pronouncement will have a material
impact on the Company's results of operations, cash flows or financial
position.
Note 10. Subsequent Event
----------------
On November 6, 2000, the U.S. Food and Drug Administration (FDA)
issued an advisory concerning all products that contain
phenylpropanolamine (PPA) requesting that the industry voluntarily
stop marketing all products that contain PPA. In direct response to
this request, effective November 6, 2000, the Company ceased shipping
only cough/cold products containing PPA and initiated a process to
remove its PPA-containing cough/cold products from customer warehouses
and retail store shelves.
Also on November 6, 2000, the Company announced that it would begin to
ship new formulations of DIMETAPP cough/cold products, which do not
contain PPA, as early as the week of November 13, 2000. The Company
had previously reformulated its ROBITUSSIN CF formula, the only
product in the ROBITUSSIN line that contained PPA. The Company, which
already markets a large number of non-PPA containing cough/cold
products, is currently evaluating the impact that its actions
resulting from the FDA advisory will have on the results of
operations. In the opinion of the Company, these actions will not have
a material adverse effect on its financial position or cash flows.
13
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months and Nine Months Ended September 30, 2000
Results of Operations
- ---------------------
Management's discussion and analysis of results of operations for the 2000 third
quarter and first nine months are presented on an as-reported basis, except for
sales variation explanations which are presented on an as-reported and pro forma
basis. Effective January 1, 2000, the financial results of certain
pharmaceutical subsidiaries in Japan and India, which were previously included
on an equity basis, were consolidated in the results of the Company. Pro forma
sales results reflect the consolidation of these subsidiaries as of January 1,
1999. The consolidation of the subsidiaries had no impact on income from
continuing operations in 2000.
On an as-reported basis, worldwide net sales for the 2000 third quarter and
first nine months were 15% and 16% higher, respectively, compared with prior
year levels. On a pro forma basis, worldwide net sales increased by 13% for the
2000 third quarter and 14% for the 2000 first nine months compared with prior
year levels. The increase in pro forma worldwide net sales for the 2000 third
quarter and first nine months was due primarily to higher worldwide sales of
pharmaceuticals and, to a lesser extent, consumer health care products.
Excluding the negative impact of foreign exchange, pro forma worldwide net sales
increased 15% for the 2000 third quarter and 16% for the 2000 first nine months.
The following tables set forth worldwide net sales results by operating segment
together with the percentage changes in "As-Reported" and "Pro Forma" worldwide
net sales from the comparable periods in the prior year:
Net Sales
----------------------
Three Months Ended
September 30,
($ in millions) ---------------------- As-Reported Pro Forma
Operating Segment 2000 1999 % Increase % Increase
- -------------------- --------- -------- ----------- ----------
Pharmaceuticals $3,030.2 $2,584.3 17% 14%
Consumer Health Care 647.1 606.7 7% 7%
-------- -------- ----------- ----------
Total $3,677.3 $3,191.0 15% 13%
======== ======== =========== ==========
Net Sales
----------------------
Nine Months Ended
September 30,
($ in millions) ---------------------- As-Reported Pro Forma
Operating Segment 2000 1999 % Increase % Increase
- -------------------- --------- -------- ----------- ----------
Pharmaceuticals $8,453.8 $7,119.7 19% 16%
Consumer Health Care 1,753.8 1,672.6 5% 5%
--------- -------- ----------- ----------
Total $10,207.6 $8,792.3 16% 14%
========= ======== =========== ==========
14
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months and Nine Months Ended September 30, 2000
On an as-reported basis, worldwide pharmaceutical sales increased 17% for the
2000 third quarter and 19% for the 2000 first nine months. On a pro forma basis,
worldwide pharmaceutical sales increased 14% for the 2000 third quarter and 16%
for the 2000 first nine months due primarily to higher sales of EFFEXOR XR (as a
result of higher volume and expanded indications), PREVNAR (introduced in the
2000 first quarter and subsequently included in a government entitlement program
for children), MENINGITEC (introduced in the United Kingdom in the 1999 fourth
quarter), ENBREL and PROTONIX (introduced in the 2000 second quarter). Worldwide
pharmaceutical sales for the 2000 first nine months also reflect higher sales of
PREMARIN products offset, in part, by lower sales of LODINE (due to generic
competition) and FACTOR VIII. Excluding the negative impact of foreign exchange,
worldwide pharmaceutical sales increased 17% for the 2000 third quarter and 18%
for the 2000 first nine months.
Worldwide consumer health care sales increased 7% for the 2000 third quarter and
5% for the 2000 first nine months led by higher sales of CENTRUM products
(including CENTRUM PERFORMANCE which was launched in the U.S. in the 1999 fourth
quarter), CALTRATE, FLEXAGEN (introduced in the U.S. in the 2000 second
quarter), ADVIL and CHAPSTICK. Worldwide consumer health care sales for the 2000
first nine months also reflect lower sales of cough/cold/allergy products and
ANACIN. Excluding the negative impact of foreign exchange, worldwide consumer
health care sales increased 8% for the 2000 third quarter and 6% for the 2000
first nine months.
The following table sets forth, on a pro forma basis, the percentage changes in
worldwide net sales by operating and geographic segment compared to the prior
year, including the effect volume, price and foreign exchange had on these
percentage changes:
% Increase (Decrease) % Increase (Decrease)
Three Months Ended September 30, 2000 Nine Months Ended September 30, 2000
-------------------------------------- --------------------------------------
Foreign Total Foreign Total
Volume Price Exchange Net Sales Volume Price Exchange Net Sales
------ ----- -------- --------- ------ ----- -------- ---------
Pharmaceuticals
- --------------------
U.S. 13% 6% - 19% 12% 8% - 20%
International 13% (1%) (6%) 6% 15% - (6%) 9%
------ ----- -------- --------- ------ ----- -------- ---------
Total 13% 4% (3%) 14% 14% 4% (2%) 16%
====== ===== ======= ========= ====== ===== ======== =========
Consumer Health Care
- --------------------
U.S. 4% - - 4% 2% 1% - 3%
International 13% 5% (5%) 13% 11% 3% (5%) 9%
------ ----- ------- --------- ------ ----- -------- ---------
Total 7% 1% (1%) 7% 5% 1% (1%) 5%
====== ===== ======= ========= ====== ===== ======== =========
Total
- --------------------
U.S. 11% 5% - 16% 10% 6% - 16%
International 13% - (6%) 7% 15% - (6%) 9%
------ ----- ------- --------- ------ ----- -------- ---------
Total 12% 3% (2%) 13% 12% 4% (2%) 14%
====== ===== ======= ========= ====== ===== ======== =========
15
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months and Nine Months Ended September 30, 2000
Cost of goods sold, as a percentage of net sales, decreased to 24.7% for the
2000 third quarter compared to 25.3% for the 1999 third quarter and decreased
slightly to 25.1% for the 2000 first nine months compared to 25.5% for the 1999
first nine months, due primarily to a favorable product mix in the
pharmaceuticals segment. The lower cost of goods sold, as a percentage of net
sales, for both the 2000 third quarter and first nine months were offset, in
part, by increased royalty expenses, and costs associated with production and
supply chain improvements at certain international sites.
Selling, general and administrative expenses increased 16% for the 2000 third
quarter and 17% for the 2000 first nine months. Higher selling, general and
administrative expenses were due primarily to higher selling and marketing
expenses, including increased headcount related to recent pharmaceutical product
launches, direct-to-consumer programs, promotional costs for significant
established pharmaceutical products and additional sales force for rapid growth
products. Since the beginning of 2000, the financial results of certain
pharmaceutical subsidiaries in Japan and India were consolidated in the results
of the Company as opposed to the inclusion of their earnings on an equity basis
(classified as other income, net) in prior years. The selling and promotional
expenses associated with Japan and India also contributed to the higher selling,
general and administrative expenses for both periods.
Research and development expenses increased 16% for the 2000 third quarter and
15% for the 2000 first nine months due primarily to certain advancements and
ongoing clinical trials of pharmaceuticals in several therapeutic categories.
Also contributing to the increase in the 2000 first nine months were payments
for existing licensing agreements.
The Company had interest income, net, of $22.7 million during the 2000 third
quarter compared to interest expense, net, of $59.6 million in the 1999 third
quarter. Interest expense (income), net, decreased 63% for the 2000 first nine
months. These fluctuations were due primarily to an increase in interest income
as a result of higher cash, cash equivalents and marketable securities, as well
as lower debt resulting from the pay off of the $1.0 billion of 7.70% notes on
February 15, 2000 with a portion of the proceeds from the Warner-Lambert Company
termination fee. In addition, on June 30, 2000, the Company used a portion of
the proceeds from the sale of the Cyanamid Agricultural Products business to pay
down some of the outstanding commercial paper borrowings. Weighted average debt
outstanding during the 2000 and 1999 third quarter was $2,803.2 million and
$5,262.7 million, respectively. Weighted average debtoutstanding during the 2000
and 1999 first nine months was $4,186.4 million and $4,704.1 million,
respectively.
Other income, net, decreased for the 2000 third quarter and first nine months
due primarily to costs associated with a Consent Decree, payments for access to
various pharmaceutical collaborations and costs related to a product
discontinuation offset, in part, by insurance recoveries of environmental costs
and lower Year 2000 conversion costs. In addition, during the 2000 first nine
months the Company realized higher unfavorable foreign exchange. In conjunction
with the Consent Decree identified above, the Company recorded a charge of $56.1
million ($36.5 million after-tax or $0.02 per share-diluted) which included
payments to the U.S. Government and charges associated with actions required by
16
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months and Nine Months Ended September 30, 2000
the FDA. In June 2000, the FDA performed an inspection of the Marietta,
Pennsylvania and Pearl River, New York facilities and concluded that products
manufactured in those facilities were not manufactured in conformity with
current Good Manufacturing Practices (cGMP). The FDA documented its findings to
the Company via a Form 483 written report. In October 2000, the Company
announced that it had reached agreement with the FDA to enter into a Consent
Decree to settle all issues involving the Marietta and Pearl River facilities.
Pursuant to the Consent Decree, the Company will have a comprehensive cGMP
inspection performed by expert consultants to determine compliance with cGMP.
The Company continues to manufacture the products affected by the Consent
Decree, as there were no provisions requiring the ceasing of manufacturing.
During the 2000 first quarter, the Company and Warner-Lambert Company terminated
their merger agreement. The Company recorded income of $1,709.4 million
($1,111.1 million after-tax or $0.84 per share-diluted) in income from
continuing operations resulting from the receipt of a $1,800.0 million
termination fee provided for under the merger agreement offset, in part, by
certain related expenses.
The following table sets forth worldwide income from continuing operations
before federal and foreign taxes, by operating segment together with the
percentage changes from the comparable periods in the prior year:
Income from Continuing Operations
Before Federal and Foreign Taxes (1)
---------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------------- --------------------------------------
($ in millions)
Operating Segment 2000 1999 % Increase 2000 1999 % Increase
- -------------------- -------- --------- ----------- -------- --------- ----------
Pharmaceuticals $871.0 $795.1 10% $2,184.3 $1,973.2 11%
Consumer Health Care 195.8 178.7 10% 416.7 405.8 3%
-------- --------- ----------- -------- --------- ----------
1,066.8 973.8 10% 2,601.0 2,379.0 9%
Corporate (2) (42.6) (4,838.9) - 1,557.8 (5,090.0) -
-------- --------- ----------- -------- --------- ----------
Total (3) $1,024.2 ($3,865.1) - $4,158.8 ($2,711.0) -
======== ========= =========== ======== ========= ==========
(1) The third quarter results included goodwill amortization for 2000 and 1999
as follows: Pharmaceuticals - $37.9 and $39.1, and Consumer Health Care -
$8.0 and $8.4, respectively.
The first nine months results included goodwill amortization for 2000 and
1999 as follows: Pharmaceuticals - $116.1 and $115.9, and Consumer Health
Care - $24.0 and $24.5, respectively.
(2) Corporate expenses for the 2000 first nine months included income of
$1,709.4 resulting from the receipt of a $1,800.0 termination fee provided
for under the merger agreement with Warner-Lambert Company offset, in part,
by certain related expenses.
Corporate expenses for the 1999 third quarter and first nine months
included a litigation charge of $4,750.0 (net of $400.0 of insurance) in
connection with litigation brought against the Company regarding the use of
the antiobesity products REDUX or PONDIMIN. The charge provided for
expected payments to settlement funds contemplated by the nationwide, class
action settlement, other judgments and settlements (including claims for
PPH and any opt outs from the settlement) and future legal costs.
17
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months and Nine Months Ended September 30, 2000
Corporate expenses for the 1999 first nine months included a special charge
of $82.0 related to the suspension of shipments and the voluntary market
withdrawal of ROTASHIELD, the Company's rotavirus vaccine.
Excluding the termination fee, litigation charge and ROTASHIELD special
charge from 2000 and 1999 results, Corporate expenses decreased by 52% for
the 2000 third quarter and 41% for the 2000 first nine months.
(3) Excluding the termination fee, litigation charge and ROTASHIELD special
charge from the 2000 and 1999 results, total income from continuing
operations before federal and foreign taxes increased by 16% for the 2000
third quarter and 15% for the 2000 first nine months.
Worldwide pharmaceutical income from continuing operations before federal
and foreign taxes increased 10% for the 2000 third quarter and 11% for the
2000 first nine months due primarily to increased worldwide sales offset,
in part, by higher selling, general and administrative expenses, higher
research and development expenses and lower other income, net. Payments for
access to various pharmaceutical collaborations, a charge for the Consent
Decree previously discussed and unfavorable foreign exchange contributed to
lower other income, net.
Worldwide consumer health care income from continuing operations before
federal and foreign taxes increased 10% for the 2000 third quarter and 3%
for the 2000 first nine months due primarily to increased worldwide sales
offset, in part, by higher selling, general and administrative expenses.
Worldwide consumer health care income from continuing operations before
federal and foreign taxes increased 10% in the 2000 third quarter compared
to a 7% increase in worldwide consumer health care sales due primarily to
lower marketing costs.
Excluding the Warner-Lambert Company termination fee, litigation charge,
and ROTASHIELD special charge from the 2000 and the 1999 results, corporate
expenses decreased 52% for the 2000 third quarter and 41% for the 2000
first nine months due primarily to insurance recoveries of environmental
costs and lower interest expense, offset, in part, by costs related to a
product discontinuance.
Excluding the effect of the Warner-Lambert Company termination fee and
litigation charge from the 2000 and 1999 results, the effective tax rate of
continuing operations for the 2000 third quarter decreased to 25.6% compared to
27.1% for the 1999 third quarter, and decreased to 26.1% for the 2000 first nine
months from 27.5% for the 1999 first nine months. The decreases in these
effective tax rates of continuing operations for the 2000 third quarter and
first nine months were attributable to increased research tax credits and tax
benefits from higher earnings in lower tax jurisdictions.
On June 30, 2000, the Company announced that it had completed the sale of
the Cyanamid Agricultural Products business to BASF. Under the terms of the
definitive agreement, BASF paid the Company $3,800.0 million in cash and
assumed certain debt. As a result, the Company recorded an after-tax loss
on the sale of this business of $1,573.0 million or $1.19 per share-diluted
and reflected this business as a discontinued operation beginning in the
2000 first quarter. The loss on the sale included closing costs from the
transaction and operating income of the discontinued business from April 1,
2000 through June 30, 2000 (the disposal date). (See Note 1 to the
Consolidated Condensed Financial Statements).
18
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months and Nine Months Ended September 30, 2000
Income and diluted earnings per share from continuing operations for the 2000
third quarter were $762.1 million and $0.58 compared to a loss and diluted loss
per share from continuing operations of $2,642.4 million and $2.02 for the 1999
third quarter, respectively. The loss and diluted loss per share from continuing
operations for the 1999 third quarter included the litigation charge of $3,287.5
million and $2.51, respectively. Excluding the litigation charge from the 1999
third quarter results, both income and diluted earnings per share from
continuing operations for the 2000 third quarter increased 18% compared to 1999
third quarter results.
Income and diluted earnings per share from continuing operations for the
2000 first nine months were $2,920.8 million and $2.21 compared to a loss
and diluted loss per share from continuing operations of $1,810.0 and $1.38
for the same period last year, respectively. Income and diluted earnings
per share from continuing operations for the 2000 first nine months
included income of $1,111.1 million and $0.84, respectively, resulting from
the Warner-Lambert Company termination fee. The loss and diluted loss per
share from continuing operations for the 1999 first nine months included
the litigation charge discussed above, and a special charge of $53.0
million and $0.04, respectively, for the costs associated with the
suspension of shipments and voluntary market withdrawal of ROTASHIELD, the
Company's rotavirus vaccine. Excluding the aforementioned items from the
2000 and 1999 first nine months results, income and diluted earnings per
share from continuing operations were $1,809.7 million and $1.37 for the
2000 first nine months compared to $1,530.5 million and $1.17 for the 1999
first nine months, increases of 18% and 17%, respectively. The increases in
income and diluted earnings per share from continuing operations for the
2000 third quarter and first nine months were due primarily to additional
worldwide sales of pharmaceuticals and to a lesser extent, consumer health
care products, as well as lower interest expense, offset, in part, by
higher selling, general and administrative expenses, research and
development expenses, and lower other income, net.
Total net income and diluted earnings per share were $762.1 million and
$0.58 for the 2000 third quarter compared to total net loss and diluted
loss per share of $2,873.9 million and $2.20, respectively, for the same
period last year. Total net income and diluted earnings per share were
$1,451.2 million and $1.10 for the 2000 first nine months compared to total
net loss and diluted loss per share of $1,820.4 million and $1.39 for the
same period last year, respectively.
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 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.
19
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months and Nine Months Ended September 30, 2000
Competition
- -----------
The Company operates in the highly competitive pharmaceutical and consumer
health care 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. PREMARIN, the Company's principal conjugated estrogens product
manufactured from pregnant mare's urine, and related products PREMPRO and
PREMPHASE (which are single tablet combinations of the conjugated estrogens in
PREMARIN and the progestin medroxyprogesterone acetate), are the leaders in
their categories and contribute significantly to sales and results of
operations. PREMARIN'S natural composition is not subject to patent protection
(although PREMPRO and PREMPHASE are subject to various patents). The principal
uses of PREMARIN, PREMPRO and PREMPHASE are to manage the symptoms of menopause
and to prevent 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 several of these products also have an approved indication for the
prevention of osteoporosis. During the past several years, other manufacturers
have introduced alternative products for the treatment and/or prevention of
osteoporosis. New products containing different estrogens than those found in
PREMPRO and PREMPHASE and having many of the same indications have also been
introduced. Some companies have attempted to obtain approval for generic
versions of PREMARIN. These products, if approved, would be routinely
substitutable for PREMARIN and related products under many state laws and
third-party insurance payer plans. In May 1997, the 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 generic competition from either
synthetic or natural conjugated estrogens products in the future. At least one
other company has announced that it is in the process of developing a generic
version of PREMARIN from the same natural source, and the Company currently
cannot predict the timing or outcome of these or any other efforts.
Liquidity, Financial Condition and Capital Resources
- ----------------------------------------------------
Cash and cash equivalents increased $1,286.4 million in the 2000 first nine
months to $3,179.1 million. Proceeds from the sale of the Cyanamid Agricultural
Products business of $3,800.0 million, cash flows from operating activities of
$1,715.7 million (which included a termination fee, net of certain related
expenses, received from Warner-Lambert Company of $1,709.4 million, and payments
related to the REDUX and PONDIMIN litigation of $2,242.8 million), proceeds from
sales and maturities of marketable securities of $1,123.1 million and proceeds
from the exercises of stock options of $302.2 million were used principally for
net repayments of debt of $2,017.5 million, purchases of marketable securities
of $1,543.0 million, capital expenditures of $978.7 million, dividend payments
of $896.8 million and purchases of common stock for treasury of $393.1 million.
20
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months and Nine Months Ended September 30, 2000
The litigation payments in the 2000 first nine months may not be indicative of
payments expected in future periods. 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 of 7.70% notes, which matured on February 15, 2000,
were classified as current at December 31, 1999. In addition, $841.6 million of
outstanding commercial paper at December 31, 1999 was classified as current,
representing the amount of the outstanding commercial paper borrowings in excess
of the Company's $2.0 billion credit facility that supports the commercial paper
program. The Company used a portion of the proceeds from the $1,800.0 million
Warner-Lambert Company termination fee to pay off the $1.0 billion of 7.70%
notes on February 15, 2000.
On June 30, 2000, upon completing the sale of the Cyanamid Agricultural Products
business, the Company received $3,800.0 million in cash from BASF. The Company
used a substantial portion of the proceeds to pay down outstanding commercial
paper borrowings. The balance was invested in marketable securities and used for
working capital needs.
At September 30, 2000, the fair value of the Company's outstanding debt was
$3,532.2 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 $71.8 million.
The Company has established programs to protect against adverse changes in
exchange rates due to foreign currency volatility. At September 30, 2000, the
fair value of the $997.1 million notional amount of foreign currency contracts
was a net receivable of $3.2 million. The foreign currency contracts consisted
of purchased foreign exchange forward contracts and put options. 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 $13.0 million.
The notional amount related to the purchase of forward contracts designed to
protect balance sheet exposures totaled $961.1 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. The notional amount related to the
purchase of local currency put options designed to protect future translation
exposure totaled $36.0 million, all of which were considered speculative and
were marked to market and recorded at fair value.
Management is confident that cash flows will be adequate to repay both the
principal and interest on its outstanding obligations without requiring the
disposition of any significant strategic core businesses and, further, to allow
the Company to continue to fund its operations, the comprehensive nationwide,
class action settlement fund and individual settlement payments, pay dividends,
and maintain its ongoing programs of capital expenditures which are expected and
currently tracking to be significantly higher in 2000 than in recent years.
Proceeds received as a result of the termination of its merger agreement with
Warner-Lambert Company and the disposition of its Cyanamid Agricultural Products
business enhanced the Company's financial position and cash flows.
21
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months and Nine Months Ended September 30, 2000
ENBREL Supply
- -------------
The market demand for ENBREL is growing and cannot be predicted with certainty.
If demand for ENBREL continues to grow, it is expected that within the next year
the sole source third party supplier will be unable to support growing market
demand. This near term potential shortfall would continue unless and until the
retrofitting of a Rhode Island facility is completed and approved, which is not
expected to occur until the first half of 2002. If this facility is not
completed and approved before supply constraints are encountered, future ENBREL
sales could be restricted. The current plan for the longer term includes a new
manufacturing facility that will be built in Ireland.
Cautionary Statements for Forward Looking Information
- -----------------------------------------------------
This Form 10-Q, including 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, ENBREL
supply, the selling of a portion of Immunex common stock and the comprehensive,
nationwide settlement relating to REDUX and PONDIMIN. 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 SEC including the Company's 1999 Annual Report on Form 10-K and Exhibit
99 to such report, which exhibit is incorporated herein by reference.
Quantitative and Qualitative Disclosures About Market Risk
- ----------------------------------------------------------
The Market Risk Disclosures appear on page 21, as set forth in Management's
Discussion and Analysis of Financial Condition and Results of Operations.
22
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, 1999 and Quarterly Reports on Form 10-Q for the
periods ended March 31, 2000 and June 30, 2000.
On August 28, 2000, the United States District Court for the Eastern
District of Pennsylvania issued an order approving the Company's
comprehensive nationwide, class action settlement with individuals who
used REDUX or PONDIMIN. (In Re Diet Drugs Products Liability
Litigation, MDL No. 1203; Brown, et al. v. AHPC, No. 99-20593).
Several appeals have been taken from that order to the United States
Court of Appeals for the Third Circuit, which is expected to hear and
decide the appeals sometime during 2001. Of the estimated 5.8 million
diet drug users, approximately 300,000 individuals have registered for
the settlement and approximately 45,000 opted out during the
four-month initial opt-out period ended March 30, 2000. A majority of
those who registered have elected the settlement's Accelerated
Implementation Option, which provides for prompt benefits and resolves
the claims of those class members. An amendment to the settlement
agreement, dated July 20, 2000, related to the timing of payments by
the Company into the proposed settlement fund, administration of the
settlement trust and opt-out credits available to the Company.
On September 21, 2000, the United States Court of Appeals for the
Third Circuit affirmed the dismissal of Oran, et al. v. Stafford, et
al. (No. 97-CV-4513 (NHP), U.S.D.C., D.N.J., a securities fraud
putative shareholder class action arising out of the REDUX and
PONDIMIN market withdrawal and related product liability litigation.
The Oran plaintiffs have petitioned the court for reconsideration.
In the litigation involving DURACT, the Company's non-narcotic
analgesic pain reliever that was voluntarily withdrawn from the
market, one additional putative personal injury class action has been
filed. Walent v. Wyeth-Ayerst Laboratories Division of American Home
Products Corporation, et al., No. 00CH 12660, Circ. Ct., Cook Cty.,
IL, seeks the certification of a class of individuals who were
allegedly exposed to and who suffered injury from DURACT.
The seizure in June 2000 from the Company's distribution centers in
Tennessee and Puerto Rico of a small quantity of certain of the
Company's products manufactured at the Company's Marietta,
Pennsylvania facility has been resolved by a Consent Decree entered
into in October 2000 with the Company's Wyeth-Ayerst Laboratories
division, a related subsidiary and three employees. The seizure is
more fully described in the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 2000. The Consent Decree, which has
been approved by the U.S. District Court for the Eastern District of
Tennessee, among other things, requires the Company to make a payment
23
of $30 million to the U.S. Government. The Consent Decree does not
represent an admission by the Company or the employees of any
violation of the Federal Food, Drug and Cosmetic Act or its
regulations. The Consent Decree allows the continued manufacture of
all of the products that the Company intends to manufacture at its
Marietta, Pennsylvania facility, as well as the Company's Pearl River,
New York facility, subject to review by independent consultants of
manufacturing records prior to distribution of individual lots. In
addition, the Consent Decree requires the following: a comprehensive
inspection of the Marietta and Pearl River facilities by an expert
consultant, actions by the Company to address any observations made by
the consultant, and verification of the Company's actions by the
expert consultant followed by an FDA inspection.
A putative class action was filed against the Company on October 23,
2000 on behalf of a class of California citizens who have used and
paid for any product containing PPA in the preceding four years,
including certain products in the ROBITUSSIN and DIMETAPP lines sold
by the Company's Whitehall-Robins Healthcare division. Webster v.
Whitehall-Robins Healthcare, et al. (No. BC238953, Super. Ct., Los
Angeles Cty., CA.). Plaintiffs claim that PPA is associated with an
increased risk of hemorrhagic stroke and that the Company's marketing
and advertising of PPA-containing products was false, deceptive and
misleading, in violation of the California Business & Professions
Code, in not disclosing that risk. Plaintiffs seek disgorgement or
restitution of any moneys acquired by means of the alleged violation,
as well as attorneys' fees. The Company intends to vigorously defend
this case.
Duramed Pharmaceuticals, Inc., which markets a hormone replacement
therapy drug called Cenestin(R), filed a complaint against the Company
(Duramed Pharmaceuticals, Inc. v. Wyeth-Ayerst Laboratories, Inc.,
No.-C-1-00-735, U.S.D.C., W.D. Ohio), alleging that the Company
violated the antitrust laws through the use of exclusive contracts and
"disguised" exclusive contracts in the sale of PREMARIN to managed
care organizations, and misled the FDA in order to exclude competition
to PREMARIN, but does not allege any violation of law with respect to
such alleged practices. The Company believes that its conduct was
lawful and that its pricing practices do not violate antitrust laws.
The Company intends to vigorously defend this case.
In the brand name prescription litigation, the Company and other
defendants have entered into settlement agreements, which are subject
to court approval in each state, to resolve the indirect purchaser
cases in New Mexico, North Dakota, South Dakota and West Virginia. The
Company's payments under these settlements amounted to approximately
$420,000. While the Company believes that it had no liability in these
cases, the settlements were made to resolve expensive and burdensome
complex litigation. The settlements state that they shall not be
deemed to be an admission or evidence of any wrongdoing by the Company
or the truth of any of the claims alleged.
24
The Company has also settled a case brought by Mississippi retailers
(Montgomery Drug Company, et al. v. Upjohn Company, et al., No.
97-0103, Ch. Ct. Miss) that opted out of the Consolidated Class Action
(In Re Brand Name Prescription Drugs Antitrust Litigation, MDL 997
N.D.Ill.). The terms of the settlement, which are not material to the
Company, provide that it shall not be deemed to be an admission of or
evidence of any violation of any statute or law or of any liability or
wrongdoing by the Company.
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.
25
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
--------
Exhibit No. Description
----------- -----------
(3.2) The Company's By-Laws, as amended to date
(12) Computation of Ratio of Earnings to Fixed Charges
(27.1) Financial Data Schedule - Period Ended September 30,
2000
(27.2) Restated Financial Data Schedule - Period Ended
September 30, 1999
(99.1) Final Nationwide Class Action Settlement Agreement,
dated November 18, 1999, as amended to date
(99.2) Consent Decree, dated October 3, 2000
(b) Reports on Form 8-K
-------------------
On July 17, 2000, the Company filed a Current Report on Form 8-K
(including disclosure under Items 2 and 7) relating to the sale
of the Cyanamid Agricultural Products business.
26
Signature
---------
Pursuant to the requirements of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly
authorized.
AMERICAN HOME PRODUCTS CORPORATION
----------------------------------
(Registrant)
By /s/ Paul J. Jones
-------------------------------
Paul J. Jones
Vice President and Comptroller
(Duly Authorized Signatory
and Chief Accounting Officer)
Date: November 14, 2000
27
Exhibit Index
-------------
Exhibit No. Description
----------- -----------
(3.2) The Company's By-Laws, as amended to date
(12) Computation of Ratio of Earnings to Fixed Charges
(27.1) Financial Data Schedule - Period Ended September 30, 2000
(27.2) Restated Financial Data Schedule - Period Ended September
30, 1999
(99.1) Final Nationwide Class Action Settlement Agreement, dated
November 18, 1999, as amended to date
(99.2) Consent Decree, dated October 3, 2000
EX-1