UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
Commission file number 1-6571
SCHERING-PLOUGH CORPORATION
Incorporated in New Jersey 22-1918501
One Giralda Farms (I.R.S. Employer Identification No.)
Madison, N.J. 07940-1000 (973) 822-7000
(telephone number)
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, and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
Common Shares Outstanding as of September 30, 1998: 734,805,557
PART I. - FINANCIAL INFORMATION
Item 1. Financial Statements
SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
(UNAUDITED)
(Amounts in millions, except per share figures)
Three Months Nine Months
Ended Ended
September 30 September 30
1998 1997 1998 1997
Sales . . . . . . . . . . . . . $1,986 $1,709 $6,018 $4,997
Costs and expenses:
Cost of sales. . . . . . . . . 394 326 1,197 945
Selling, general
and administrative. . . . . . 762 681 2,302 1,954
Research and development . . . 257 220 742 608
Other, net . . . . . . . . . . 1 15 6 32
1,414 1,242 4,247 3,539
Income before income taxes. . . 572 467 1,771 1,458
Income taxes. . . . . . . . . . 140 114 434 357
Net Income. . . . . . . . . . . $ 432 $ 353 $1,337 $1,101
Basic earnings per common share $ .59 $ .48 $ 1.82 $ 1.50
Diluted earnings per common
share. . . . . . . . . . . . . $ .58 $ .48 $ 1.80 $ 1.49
Dividends per common share. . . $ .22 $ .19 $ .63 $ .545
<FN>
See notes to consolidated financial statements.
SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(Amounts in millions, except per share figures)
September 30, December 31,
1998 1997
Assets
Cash and cash equivalents . . . . . . . . $ 937 $ 714
Accounts receivable, net. . . . . . . . . 680 645
Inventories . . . . . . . . . . . . . . . 804 713
Prepaid expenses, deferred income taxes
and other current assets . . . . . . . . 1,021 848
Total current assets. . . . . . . . . 3,442 2,920
Property, plant and equipment . . . . . . 3,924 3,750
Less accumulated depreciation . . . . . . 1,343 1,224
Property, net . . . . . . . . . . . . 2,581 2,526
Intangible assets, net. . . . . . . . . . 563 481
Other assets. . . . . . . . . . . . . . . 630 580
$ 7,216 $ 6,507
Liabilities and Shareholders' Equity
Accounts payable. . . . . . . . . . . . . $ 861 $ 803
Short-term borrowings and current
portion of long-term debt. . . . . . . . 138 581
Other accrued liabilities . . . . . . . . 1,697 1,507
Total current liabilities . . . . . . 2,696 2,891
Long-term debt. . . . . . . . . . . . . . 46 46
Other long-term liabilities . . . . . . . 780 749
Shareholders' Equity:
Preferred shares - $1 par value;
issued - none. . . . . . . . . . . . . . - -
Common shares - $1 par value;
issued - 1,015 . . . . . . . . . . . . . 1,015 1,015
Paid-in capital . . . . . . . . . . . . . 255 96
Retained earnings . . . . . . . . . . . . 6,545 5,673
Accumulated other comprehensive income. . (269) (244)
Total . . . . . . . . . . . . . . . . 7,546 6,540
Less treasury shares, at cost -
1998, 280 shares; 1997, 282 shares . . . 3,852 3,719
Total shareholders' equity. . . . . . 3,694 2,821
$ 7,216 $ 6,507
<FN>
See notes to consolidated financial statements.
SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30
(UNAUDITED)
(Dollars in millions)
1998 1997
Operating Activities:
Net Income. . . . . . . . . . . . . . . . $1,337 $1,101
Depreciation and amortization . . . . . . 172 157
Accounts receivable . . . . . . . . . . . (61) 41
Inventories . . . . . . . . . . . . . . . (73) (55)
Prepaid expenses and other assets . . . . (205) (179)
Accounts payable and other liabilities . 358 297
Net cash provided by operating
activities . . . . . . . . . . . . . . . 1,528 1,362
Investing Activities:
Purchase of business, net of cash
acquired . . . . . . . . . . . . . . . . - (351)
Capital expenditures and purchased
software . . . . . . . . . . . . . . . . (227) (231)
Proceeds from sales of investments. . . . - 37
Purchases of investments. . . . . . . . . (103) (98)
Other, net. . . . . . . . . . . . . . . . (3) (10)
Net cash used for investing
activities . . . . . . . . . . . . . . . (333) (653)
Financing Activities:
Dividends paid to common shareholders . . (465) (400)
Common shares repurchased . . . . . . . . (109) (56)
Short-term borrowings, net. . . . . . . . (433) (100)
Repayment of long-term debt . . . . . . . - (3)
Other, net. . . . . . . . . . . . . . . . 37 54
Net cash used for financing
activities . . . . . . . . . . . . . . . (970) (505)
Effect of exchange rates on cash and
cash equivalents. . . . . . . . . . . . . (2) (7)
Net increase in cash and cash equivalents . 223 197
Cash and cash equivalents, beginning
of period . . . . . . . . . . . . . . . . 714 535
Cash and cash equivalents, end of period . $ 937 $ 732
<FN>
See notes to consolidated financial statements.
SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollars in millions, except per share figures)
Basis of Presentation
The unaudited financial statements included herein have been
prepared pursuant to the rules and regulations of the Securities
and Exchange Commission for reporting on Form 10-Q. 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. The statements should be
read in conjunction with the accounting policies and notes to
consolidated financial statements included in the Company's 1997
Annual Report on Form 10-K.
In the opinion of management, the financial statements reflect
all adjustments necessary for a fair statement of the operations
for the interim periods presented.
Earnings Per Common Share
The shares used for basic earnings per common share and diluted
earnings per common share are reconciled as follows (number of
shares in millions):
Three Months Nine Months
Ended Ended
September 30, September 30,
1998 1997 1998 1997
Average shares outstanding for
basic earnings per share . . . . . 734 732 734 732
Dilutive effect of options
and deferred stock units . . . . . 11 9 10 8
Average shares outstanding for
diluted earnings per share . . . . 745 741 744 740
On September 22, 1998, the Board of Directors voted to increase
the authorized common shares from 1.2 billion to 2.4 billion and
approved a 2-for-1 stock split. Distribution of the split shares
will be made on December 2, 1998 to shareholders of record at the
close of business on November 6, 1998. The number of shares and
the per share amounts included in these consolidated financial
statements are presented before giving effect to the stock split.
The pre-split par value of each common share is $1; the post-
split par value will be $.50.
Proforma earnings per common share on a post-split basis would be
as follows:
Three Months Nine Months
Ended Ended
September 30, September 30,
1998 1997 1998 1997
Basic earnings per common share . . . $.29 $.24 $.91 $.75
Diluted earnings per common share . . $.29 $.24 $.90 $.74
Comprehensive Income and Segments
In 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 130,
"Reporting Comprehensive Income". Comprehensive income is defined
as the total change in shareholders' equity during the period
other than from transactions with shareholders. For the Company,
comprehensive income is comprised of net income, the net change
in the accumulated foreign currency translation adjustment
account and the net change in unrealized gains and losses on
securities classified for SFAS No. 115 purposes as held available
for sale. Total comprehensive income for the three months ended
September 30, 1998 and 1997 was $436 and $330, respectively.
Total comprehensive income for the nine months ended September
30, 1998 and 1997 was $1,312 and $1,040, respectively.
Also in 1997, the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." As required
by the standard, the Company will begin reporting under SFAS No.
131 in its 1998 Annual Report.
Inventories
Inventories consisted of: September 30, December 31,
1998 1997
Finished products . . . . . . . $406 $334
Goods in process. . . . . . . . 207 191
Raw materials and supplies. . . 191 188
Total inventories . . . . . . $804 $713
Legal and Environmental Matters
The Company is involved in various claims and legal proceedings
of a nature considered normal to its business, including
environmental matters and product liability cases. The recorded
liabilities for these matters at September 30, 1998 were not
material. Management believes that, except for the matters
discussed in the following paragraphs, it is remote that any
material liability in excess of the amounts accrued will be
incurred.
The Company is a defendant in more than 160 antitrust actions
commenced (starting in 1993) in state and federal courts by
independent retail pharmacies, chain retail pharmacies and
consumers. The plaintiffs allege price discrimination and/or
conspiracy between the Company and other defendants to restrain
trade by jointly refusing to sell prescription drugs at
discounted prices to the plaintiffs.
One of the federal cases is a class action on behalf of
approximately two-thirds of all retail pharmacies in the United
States and alleges a price-fixing conspiracy. The Company has
agreed to settle the federal class action for a total of
approximately $22 payable over three years. The settlement
provides, among other things, that the Company shall not refuse
to grant discounts on brand-name prescription drugs to a retailer
based solely on its status as a retailer and that, to the extent
a retailer can demonstrate its ability to affect market share of
a Company brand-name prescription drug in the same manner as a
managed care organization with which the retailer competes, it
will be entitled to negotiate similar incentives subject to the
rights, obligations, exemptions and defenses of the Robinson-
Patman Act and other laws and regulations. The United States
District Court in Illinois approved the settlement of the federal
class action on June 21, 1996. In June 1997, the Seventh Circuit
Court of Appeals dismissed all appeals from that settlement, and
it is not subject to further review. In addition, in August
1997, the Seventh Circuit ruled that there was sufficient
evidence of participation in the alleged conspiracy by certain
wholesalers to require them to proceed to trial.
In May 1998, the Company settled six of the federal antitrust
cases brought by 26 food and drug chain retailers and several
independent retail stores. Plaintiffs in these cases comprise
collectively approximately one-fifth of the prescription drug
retail market. The settlement amounts were not material to the
Company.
Four of the state antitrust cases have been certified as class
actions. Two are class actions on behalf of certain retail
pharmacies in California and Wisconsin, and the other two are
class actions in California and the District of Columbia on
behalf of consumers of prescription medicine. In addition,
actions have been brought in Alabama and Tennessee purportedly on
behalf of consumers in Alabama, Tennessee and several other
states. Plaintiffs are seeking to maintain the actions as class
actions. The Court in the Tennessee case has conditionally
certified a class of consumers. The Company has settled the
retailer class action in Wisconsin and an alleged class action in
Minnesota and those settlements have been approved by their
respective courts; the settlement amounts were not significant.
The Company has also recently settled in principal the consumer
cases in all of the states except Alabama, California and the
purported multi-state class case in Tennessee. Court approval of
those settlements is currently being sought, and the Court in
Michigan has already approved the settlement of the action in
that state; the settlement amounts are not material.
Plaintiffs generally seek treble damages in an unspecified amount
and an injunction against the allegedly unlawful conduct. The
Company believes that all of the antitrust actions are without
merit and is defending itself vigorously.
In April 1997, certain of the plaintiffs in the federal class
action commenced another purported class action in United States
District Court in Illinois against the Company and the other
defendants who settled the previous federal class action. The
complaint alleges that the defendants conspired not to implement
the settlement commitments following the settlement discussed
above. The District Court has denied the plaintiffs' motion for
a preliminary injunction hearing. The Company believes the
action is without merit and is defending itself vigorously.
On March 13, 1996, the Company was notified that the United
States Federal Trade Commission (FTC) is investigating whether
the Company, along with other pharmaceutical companies, conspired
to fix prescription drug prices. The investigation is ongoing.
The Company vigorously denies that it has engaged in any price-
fixing conspiracy.
The Company is a defendant in a state court action in Texas
brought by Foxmeyer Health Corporation, the parent of a
pharmaceutical wholesaler that filed for bankruptcy in August
1996, which has now been removed to Federal Bankruptcy Court in
Dallas. The case is against another pharmaceutical wholesaler
and 11 pharmaceutical companies, and alleges that the defendants
conspired to drive the plaintiff's wholesaler subsidiary out of
business. The plaintiff is seeking damages in the amount of
$400. A motion for summary judgment is pending in the Delaware
bankruptcy of the bankrupt wholesaler.
New Accounting Pronouncement
In June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities". SFAS No. 133
must be adopted by the Company no later than January 1, 2000.
SFAS No. 133 requires that all derivative instruments be recorded
on the balance sheet at their fair value. Changes in the fair
value of derivatives that do not qualify as hedges shall be
recorded each period in the income statement. If specified
criteria are met, derivatives can qualify as a hedge of
forecasted cash flow transactions or a hedge of the fair value of
assets, liabilities or firm commitments.
Changes in the fair value of an effective cash flow hedge shall
be recorded in other comprehensive income. The amount recorded in
other comprehensive income shall be reclassified into the income
statement when the forecasted transaction is recorded in the
income statement.
The effect of all other changes in fair value of derivatives
shall be recorded in the income statement. If the derivative
qualifies as a fair value hedge, the hedged asset, liability or
firm commitment shall also be recorded at its fair value, with
the effect of changes in their fair value recorded in the income
statement. For effective fair value hedges, changes in the fair
value of the derivative instrument will be offset in the
income statement by changes in the hedged item's fair value.
As stated in the 1997 Annual Report to shareholders, management
has determined that it is not cost effective to engage in a
formula-based program using derivative instruments to hedge its
market risks. Accordingly, this statement is not expected to
impact the Company's financial statements.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations - three and nine months ended September 30,
1998 compared with the corresponding periods in 1997.
Sales
Consolidated sales for the third quarter advanced $277 million or
16 percent compared with the same period in 1997. For the nine
months, sales rose $1.0 billion or 20 percent over 1997.
Excluding the effect of foreign currency exchange rate
fluctuations, consolidated sales grew 18 percent in the quarter
and 23 percent for the nine-month period. Excluding the first six
months of 1998 revenues from the Mallinckrodt animal health
business (acquired as of June 30, 1997), sales for the nine-month
period would have increased 16 percent. This performance
reflects worldwide sales of the CLARITIN brand of $635 million
and $1,758 million for the quarter and nine-month period,
respectively, compared with $448 million and $1,337 million for
the corresponding periods in 1997.
Domestic prescription pharmaceutical sales increased 24 percent
for the 1998 third quarter and 26 percent for the nine-month
period. Sales of allergy/respiratory products advanced 30
percent in the quarter and 31 percent for the nine-month period,
due to continued strong growth of the CLARITIN brand of
nonsedating antihistamines. Franchise sales of nasal inhaled
steroid products, which includes VANCENASE allergy products and
NASONEX, a once-daily corticosteroid for allergic rhinitis,
increased in the quarter due to market expansion and for the
year-to-date period due to market expansion and market share
growth. Sales of VANCERIL asthma products advanced year-to-date
primarily reflecting market growth.
U.S. sales of cardiovascular products rose 1 percent in the
quarter and 20 percent for the nine months. The nine month
increase reflects market expansion and market share gains for
IMDUR, a once-daily oral nitrate for angina and K-Dur, a
sustained-release potassium supplement.
Domestic sales of anti-infective and anticancer products
increased 31 percent in the quarter and 20 percent for the nine-
month period, primarily due to Intron A and Rebetron Combination
Therapy for the treatment of chronic hepatitis C in relapse
patients.
U.S. sales of dermatological products decreased 25 percent for
the quarter, but increased 12 percent for the nine-month period.
This was due to varying trade buying patterns. Year-to-date
growth was primarily due to higher sales of LOTRISONE, an
antifungal/anti-inflammatory cream, and ELOCON, a mid-potency
topical corticosteroid.
International ethical pharmaceutical product sales increased 6
percent for the third quarter and 5 percent for the nine-month
period. Excluding the impact of foreign currency exchange rate
fluctuations, sales would have risen 12 percent in both periods.
Sales of allergy/respiratory products advanced 8 percent for the
quarter and 10 percent for the nine-month period, led by CLARITIN
in most world markets.
International dermatological product sales grew 12 percent in the
quarter and 13 percent for the nine-month period, led by ELOCON.
Cardiovascular product sales grew 14 percent for the third
quarter and 18 percent for the nine months, led by higher sales
of NITRO-DUR, a transdermal nitroglycerin patch for angina.
International sales of anti-infectives and anticancer products
increased 10 percent in the third quarter and 8 percent for the
nine months. The growth was attributable to higher sales of
INTRON A in the quarter and nine-month period.
Worldwide sales of animal health products increased 24 percent in
the quarter and 105 percent for the nine months. Excluding the
impact of first six months 1998 revenues of $212 million from
Mallinckrodt, sales for the first nine months of 1998 would have
increased 13 percent.
Sales of health care products increased 2 percent for the third
quarter and 9 percent for the first nine months of 1998. The
higher sales were recorded in foot care products for both
periods, while sales of sun care products increased for the nine-
month period. Sales of over-the-counter products decreased
slightly for both periods primarily due to declines in the GYNE-
LOTRIMIN vaginal antifungal line.
Income before income taxes increased 22 percent for the quarter
compared with 1997, and represented 28.8 percent of sales versus
27.3 percent last year. For the nine months, income before taxes
grew 21 percent over 1997, representing 29.4 percent of sales
compared with 29.2 percent last year.
Cost of sales as a percentage of sales increased to 19.9 percent
in the quarter from 19.1 percent in 1997, and for the first nine
months, the ratio increased to 19.9 percent from 18.9 percent in
1997 due to the inclusion of Mallinckrodt products, which have
lower margins, and due to the higher royalties paid on licensed
products.
Selling, general and administrative expenses represented 38.4
percent of sales in the third quarter compared with 39.8 percent
last year. For the nine-month period, the ratio was 38.3 percent
versus 39.1 percent in 1997. The decreases in the ratio are the
result of sales increases outpacing expense growth.
Research and development spending rose 17 percent in the quarter,
representing 12.9 percent of sales for both 1998 and 1997. For
the nine-month period, spending grew 22 percent, and represented
12.3 percent of sales versus 12.2 percent in 1997. The higher
spending reflects the Company's funding of both internal research
efforts and research collaborations with various partners to
develop a steady flow of innovative products and line extensions.
The effective tax rate was 24.5 percent in the three and nine-
month periods of both 1998 and 1997.
Basic earnings per common share advanced 23 percent in the third
quarter to $.59 from $.48 in 1997. Diluted earnings per common
share advanced 21 percent to $.58 from $.48 for the same period.
For the nine-month period, basic earnings per common share rose
21 percent to $1.82 from $1.50 in 1997, and diluted earnings per
common share rose 21 percent to $1.80 from $1.49 in 1997.
Excluding the impact of fluctuations in foreign currency exchange
rates, basic earnings per common share would have increased
approximately 23 percent for the quarter and 25 percent for the
nine-month period and diluted earnings per common share would
have increased approximately 21 percent for the quarter and
approximately 23 percent for the nine-month period.
Year 2000: Many computer systems ("IT systems") and equipment
and instruments with embedded microprocessors ("non-IT systems")
were designed to only recognize the last two digits of a calendar
year. With the arrival of the Year 2000, these systems and
microprocessors may encounter operating problems due to their
inability to distinguish years after 1999 from years preceding
1999. As a result, the Company is engaged in an extensive
project to remediate or replace its date-sensitive IT systems and
non-IT systems.
The project involves four phases: (1) compiling an inventory of
IT and non-IT systems; (2) distinguishing "critical" systems from
"non-critical" systems; (3) remediating or replacing IT and non-
IT systems; and (4) testing the remediated or replaced IT and
non-IT systems. "Critical" systems for this purpose include such
systems as those which may affect health/safety or product
manufacturing and those which may significantly affect product
distribution and customer service. Also, certain research
systems have been designated as critical.
The following chart indicates the estimated state of completion,
as well as the planned date of completion of each phase of the
project:
Planned Planned
September December December
1998 1998 1999
Inventory of IT and
non-IT Systems 100% 100%
Identify critical and
non-critical IT and
non-IT systems 100% 100%
Remediation or replacement
of critical systems 65% 95% 100%
Testing critical systems 60% 90% 100%
The estimated cost of the Year 2000 project is approximately $50
million, of which approximately $20 million will be for
replacements. As of September 30, 1998, $30 million of costs
have been incurred, of which $20 million has been expensed.
Estimated 1998 expense for this project is $10 million. The
annual expense of this project is approximately ten percent of
the Company's overall annual IT budget. No other significant
information systems projects have been deferred as a result of
the Company's Year 2000 project. The book value of computers,
software and equipment that will require write-off as a result of
not being Year 2000 compliant is immaterial.
The Company's internal auditors are reviewing progress on the
Year 2000 project and provide evaluations of the Company's
readiness to senior management on a regular basis.
The Company expects to complete its Year 2000 project by December
1999. Consequently, the Company believes that the Year 2000
issue will not have a material adverse effect on the Company's
internal operating systems. However, the Company's operations
may be impacted in the event that computer disruption is
encountered by third parties with whom the Company conducts
significant business. These third parties include wholesalers,
distributors, managed care organizations, hospitals, suppliers,
clinical researchers, research partners and government agencies.
The Company has initiated communications with these third parties
concerning their state of readiness, and intends to continue
these communications throughout 1999. To date, these third
parties have generally not identified significant risks of
business disruption due to Year 2000. However, the Company can
provide no assurance that these third parties will not experience
business disruption.
The Company currently believes that the most reasonably likely
worst case scenario concerning the Year 2000 involves potential
business disruption among the third parties with whom it conducts
significant business. If a number of these third parties
(including, in particular, wholesalers, managed care
organizations and clinical researchers) experience business
disruption due to a Year 2000 computer problem, the Company's
results of operations and cash flow could be materially adversely
affected.
During 1999, the Company intends to develop contingency plans to
address potential business disruptions at these third parties.
Contingency planning may include increasing inventory levels,
establishing secondary sources of supply and manufacturing, and
maintaining back-up lines of communications with our customers.
However, it is unlikely that any contingency plan can fully
mitigate the impact of significant business disruptions among
these third parties.
The estimates and conclusions in this description of the Year
2000 issue contain forward-looking statements and are based on
management's estimates of future events. Risks to completing the
Year 2000 project include the continued availability of resources
and qualified information systems personnel.
Euro: On January 1, 1999, certain member countries of the
European Union will establish a new common currency, the euro.
Also, on January 1, 1999 the participating countries will
irrevocably fix the rate of exchange between their existing
currencies (legacy currencies) and the euro. The new euro
currency is intended to eventually replace the legacy currencies
presently in use in each of the participating countries. Euro
bills and coins will not be issued until January 1, 2002.
Companies operating within the participating countries may, at
their discretion, choose to operate in either legacy currencies
or the euro until January 1, 2002. The Company expects its
affected subsidiaries to continue to operate in their respective
legacy currency for at least two years. The Company has prepared
a euro implementation plan which will allow it to accommodate
transactions for customers and suppliers operating in either
legacy currency or euros as of January 1, 1999. The cost to the
Company to develop and implement this plan is not material.
The Company believes that the creation of the euro will not
significantly change its market risk with respect to foreign
exchange. Having a common European currency may result in
certain changes to competitive techniques, product pricing and
marketing strategies. Although we are unable to quantify these
impacts, if any, at this time, management does not believe the
creation of the euro will have a material effect on the Company.
Additional Factors Influencing Operations
In the United States, many of the Company's pharmaceutical
products are subject to increasingly competitive pricing as
managed care groups, institutions, government agencies and other
buying groups seek price discounts. In most international
markets, the Company operates in an environment of government-
mandated cost containment programs. Several governments have
placed restrictions on physician prescription levels and patient
reimbursements, emphasized greater use of generic drugs and
enacted across-the-board price cuts as methods of cost control.
Since the Company is unable to predict the final form and timing
of any future domestic and international governmental or other
health care initiatives, their effect on operations and cash
flows cannot be reasonably estimated.
The market for pharmaceutical products is competitive. The
Company's operations may be affected by technological advances of
competitors, patents granted to competitors, new products of
competitors and generic competition as the Company's products
mature. In addition, patent positions can be highly uncertain
and an adverse result in a patent dispute can preclude
commercialization of products or negatively affect sales of
existing products. The effect on operations of competitive
factors and patent disputes cannot be predicted.
Uncertainties inherent in government regulatory approval
processes, including among other things delays in approval of new
products, may also affect the Company's operations. The effect
on operations of regulatory approval processes cannot be
predicted.
Liquidity and financial resources - nine months ended September
30, 1998
Cash generated from operations continues to be the Company's
major source of funds to finance working capital, additions to
property, shareholder dividends and common share repurchases.
Cash provided by operating activities was $1.5 billion for the
first nine months of 1998. Cash was used to pay shareholder
dividends of $465 million, reduce short-term borrowing by $433
million, fund capital expenditures of $227 million, repurchase
shares for $109 million and purchase investments for $103
million.
In October 1997, the Board of Directors authorized the repurchase
of $1 billion of the Company's common shares. As of September
30, 1998 this program was approximately eleven percent complete.
In April 1998, the Board of Directors increased the quarterly
dividend by 16 percent to $.22 from $.19 per common share.
In September 1998, the Board of Directors authorized a 2-for-1
stock split of the Company's common shares. The distribution of
the split shares will be made on December 2, 1998, to the
shareholders of record at the close of business on November 6,
1998.
The Company's liquidity and financial resources continue to be
sufficient to meet its operating needs.
Market Risk Disclosures
As discussed in the 1997 Annual Report to Shareholders, the
Company's exposure to market risk from changes in foreign
currency exchange rates and interest rates, in general, is not
material.
Cautionary Statements for Forward Looking Information
Management's discussion and analysis set forth above contains
certain forward looking statements, including statements
regarding the Company's financial position and results of
operations. These forward looking statements are based on
current expectations. Certain factors have been identified by
the Company in Exhibit 99 of the Company's December 31, 1997,
Form 10-K filed with the Securities and Exchange Commission,
which could cause the Company's actual results to differ
materially from expected and historical results. Exhibit 99 from
the Form 10-K is incorporated by reference herein
PART II OTHER INFORMATION
Item 1. Legal Proceedings
The fifth paragraph of Item 3, Legal Proceedings, of Part I of
the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1997, relating to state antitrust cases, is
incorporated herein by reference. In August, a class action was
brought in Tennessee purportedly on behalf of consumers in
Tennessee. The court has conditionally certified a class of
consumers.
Item 5. Other Information
Under rules recently adopted by the Securities and Exchange
Commission, if a shareholder notifies the Company after January
29, 1999 of an intent to present a proposal at the Company's 1999
Annual Meeting, the Company may have the right to exercise its
discretionary voting authority with respect to such proposal, if
presented at the meeting, without including information regarding
such proposal in its proxy materials. Shareholder proposals to
be presented at the 1999 Annual Meeting must be received by the
Company on or before November 27, 1998 for inclusion in the proxy
statement and proxy card relating to that meeting.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits - The following Exhibits are filed with this
document:
Exhibit
Number Description
4 - Amendment to Bylaws effective September 22,
1998.
10(a) - Amendment to Supplemental Executive
Retirement Plan.
10(b) - Amendment to Retirement Benefits Equalization
Plan.
27 - Financial Data Schedule
b) Reports on Form 8-K:
No report has been filed during the three months ended
September 30, 1998.
SIGNATURE(S)
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.
Schering-Plough Corporation
(Registrant)
Date November 9, 1998 /s/Thomas H. Kelly
Thomas H. Kelly
Vice President and Controller