-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UmzgXChQWybRzpHDMATZHqGErWJqSLFJ8UJ7dLHbwd08p/39WEnyx7a9UfJ+nOT7 21YH1I3Brem8NHGTtEko7w== 0000310158-99-000004.txt : 19990226 0000310158-99-000004.hdr.sgml : 19990226 ACCESSION NUMBER: 0000310158-99-000004 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990225 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SCHERING PLOUGH CORP CENTRAL INDEX KEY: 0000310158 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 221918501 STATE OF INCORPORATION: NJ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-06571 FILM NUMBER: 99549868 BUSINESS ADDRESS: STREET 1: ONE GIRALDA FARMS CITY: MADISON STATE: NJ ZIP: 07940-1000 BUSINESS PHONE: 9738227000 10-K405 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 Form 10-K Annual Report PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998 Commission file Number 1-6571 SCHERING-PLOUGH CORPORATION Incorporated in New Jersey 22-1918501 One Giralda Farms (I.R.S. Employer Madison, New Jersey 07940-1000 Identification No.) (973) 822-7000 (telephone number) Securities registered pursuant to section 12(b) of the Act: Name of each exchange Title of each class on which registered Common Shares, $.50 par value New York Stock Exchange Preferred Share Purchase Rights* New York Stock Exchange *At the time of filing, the Rights were not traded separately from the Common Shares. Indicate by check mark whether the registrant 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 has been subject to such filing requirements for the past 90 days. YES X NO Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. X Common shares outstanding as of January 29, 1999: 1,472,315,748 Aggregate market value of common shares at January 29, 1999 held by non-affiliates based on closing price: $80 billion. Part of Form 10-K Documents incorporated by reference incorporated into Schering-Plough Corporation 1998 Parts I, II and IV Annual Report to Shareholders Schering-Plough Corporation Proxy Part III Statement for the annual meeting of shareholders on April 27, 1999 Part I Item 1. Business General The terms "Schering-Plough" and the "Company," as used herein, refer to Schering-Plough Corporation and its subsidiaries, except as otherwise indicated by the context. Schering-Plough Corporation is a holding company which was incorporated in 1970. Subsidiaries of Schering-Plough Corporation are engaged in the discovery, development, manufacturing and marketing of pharmaceutical and health care products worldwide. Products include prescription drugs and consumer products. Business Segment and Other Financial Information The "Business Segment Data" as set forth in the Notes to Consolidated Financial Statements in the Company's 1998 Annual Report to Shareholders is incorporated herein by reference. Net sales by major product groups for each of the three years in the period ended December 31, 1998 were as follows (dollars in millions): 1998 1997 1996 Allergy/Respiratory $3,375 $2,708 $2,113 Anti-infective and Anticancer 1,263 1,156 1,135 Dermatologicals 619 571 560 Cardiovasculars 750 637 533 Other Pharmaceuticals 688 649 512 Animal Health 647 389 196 Foot Care 336 300 261 Sun Care 181 148 123 OTC 205 208 210 Other Health Care Products 13 12 13 Consolidated Net Sales $8,077 $6,778 $5,656 In June 1997, the Company purchased the worldwide animal health operations of Mallinckrodt Inc. The acquisition was recorded under the purchase method of accounting at a cost of approximately $490 million, which includes the assumption of debt and direct costs of the acquisition. Pharmaceutical Products The Company's pharmaceutical operations include prescription drugs and animal health products. Prescription products include: CLARITIN, CLARITIN-D, NASONEX, PROVENTIL, THEO-DUR, VANCENASE and VANCERIL, allergy/respiratory; CEDAX, INTRON A, REBETRON Combination Therapy containing REBETOL capsules and INTRON A injection, EULEXIN, GARAMYCIN, and NETROMYCIN, anti-infective and anticancer; DIPROLENE, DIPROSONE, ELOCON, and LOTRISONE, derma- tologicals; INTEGRILIN, IMDUR, K-DUR, NITRO-DUR and NORMODYNE, cardiovasculars; CELESTONE, and SUBUTEX, other pharmaceuticals. Animal health biological and pharmaceutical products include anthelmintics, GENTOCIN and NUFLOR, antibiotics; BANAMINE, a non-steroidal anti-inflammatory agent; TRIBRISSEN, an antimicrobial; RALGRO, a growth promotant; nutritionals; OTOMAX, a steroid ointment and OPTIMMUNE, an ophthalmic ointment and vaccines. Prescription drugs are introduced and made known to physicians, pharmacists, hospitals and managed care organizations by trained professional service representatives, and are sold to hospitals, managed care organizations and wholesale and retail druggists. Pharmaceutical products are also promoted through journal advertising, direct mail advertising, consumer advertising and by distributing samples to physicians. Animal health products are promoted and sold by a separate sales force to veterinarians, distributors and animal producers. The Company's subsidiaries own (or have licensed rights under) a number of patents and patent applications, both in the United States and abroad. Patents and patent applications relating to the Company's significant products, including without limitation the CLARITIN family of products and INTRON A, are of material importance to the operations of the pharmaceutical segment. Raw materials essential to this segment are available in adequate quantities from a number of potential suppliers. Energy is expected to be available to the Company in sufficient quantities to meet operating requirements. Worldwide, the Company's pharmaceutical products are sold under trademarks. Trademarks are considered in the aggregate to be of material importance to the pharmaceutical business and are protected by registration or common law in the United States and most other markets where the products are sold. Seasonal patterns do not have a pronounced effect on the combined activities of this industry segment. There is generally no significant backlog of orders since the Company's business is normally conducted on an immediate shipment basis. The pharmaceutical industry is highly competitive and includes other large companies with substantial resources for research, product development and promotion. There are numerous domestic and international competitors in this industry. Some of the principal competitive techniques used by the Company for its pharmaceutical products include research and development of new and improved products, high product quality, varied dosage forms and strengths and disease management programs. 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 and rebates. During 1998, 11 percent of consolidated net sales were made to McKesson Corporation, a major pharmaceutical and health care products distributor; substantially all of these sales were in the pharmaceutical segment in the United States. Health Care Products The product categories in the health care segment are foot care, sun care and OTC products primarily sold in the United States. Products include: CLEAR AWAY wart remover; DR. SCHOLL'S foot care products; LOTRIMIN AF and TINACTIN antifungals; COPPERTONE and SOLARCAINE sun care products; AFRIN nasal decongestant; CHLOR- TRIMETON antihistamine; CORICIDIN and DRIXORAL cold and decongestant products; CORRECTOL laxative; GYNE-LOTRIMIN for vaginal yeast infections; A & D ointment; and PAAS egg coloring products. Business in this segment is conducted through wholesale and retail drug, food chain and mass merchandiser outlets, and is promoted directly to the consumer through television, radio, print and other advertising media. Raw materials essential to this segment are available in adequate quantities from a number of potential suppliers. A substantial portion of the Company's sun care products are produced by third party suppliers. However, the Company does not believe that the loss of any one of these suppliers would have a material adverse effect on the health care segment. Energy is expected to be available to the Company in sufficient quantities to meet operating requirements. Trademarks for the major products included in this segment are registered in the United States and some overseas countries where these products are marketed. Trademarks are very important to the operations of this segment. Principally due to the seasonal sales of sun care products, operating profits in this segment are relatively higher in the first half of the year. There is generally no significant backlog of orders since the Company's business is normally conducted on an immediate shipment basis. The health care products' industry is highly competitive and includes other large companies with substantial resources for product development and promotion. There are several dozen significant competitors in this industry. The Company believes that in the United States it has a leading position in the foot care and sun care categories, with its DR. SCHOLL'S lines of foot insoles, cushions, wart removal and antifungals and its brands of sun care products. In addition, AFRIN is among the leaders in nasal sprays. The principal competitive techniques used by the Company in this industry segment include the development and introduction of new and improved products, switching prescription products to OTC medicines, and product promotion methods to gain and retain consumer acceptance. During 1998, approximately 38 percent of the health care segment's sales were to the segment's five largest customers as compared to 38 percent and 33 percent for the years ended December 31, 1997 and 1996, respectively. Foreign Operations Foreign activities are carried out primarily through wholly-owned subsidiaries wherever market potential is adequate and circum- stances permit. In addition, the Company is represented in some markets through joint ventures, licensees or other distribution arrangements. There are approximately 13,300 employees outside the United States. Foreign operations are subject to certain risks which are inherent in conducting business overseas. These risks include possible nationalization, expropriation, importation limitations and other restrictive governmental actions. Also, fluctuations in foreign currency exchange rates can impact the Company's consolidated financial results. For additional information on foreign operations, see "Management's Discussion and Analysis of Operations and Financial Condition", "Financial Instruments" and "Business Segment Data" in the Company's 1998 Annual Report to Shareholders which is incorporated herein by reference. Research and Development The Company's research activities are primarily aimed at discovering and developing new and enhanced pharmaceutical products of medical and commercial significance. Company sponsored research and development expenditures were $1,007 million, $847 million and $723 million in 1998, 1997, and 1996, respectively. Research expenditures represented approximately 13 percent of consolidated net sales in each of the three years. The Company's pharmaceutical research activities are concentrated in the therapeutic areas of allergic and inflammatory disorders, infectious and cardiovascular diseases, oncology and central nervous system disorders. The Company also has substantial efforts directed toward biotechnology, gene therapy and immunology. Research activities include expenditures for both internal research efforts and research collaborations with various partners. While several pharmaceutical compounds are in varying stages of development, it cannot be predicted when or if products will become available for commercial sale. Government Regulation Most products manufactured or sold by the Company are subject to varying degrees of governmental regulation in the countries in which operations are conducted. In the United States, the drug industry has long been subject to regulation by various federal, state and local agencies, primarily as to product safety, efficacy, advertising and labeling. Compliance with the broad regulatory powers of the Food and Drug Administration requires significant amounts of Company time, testing and documentation, and corresponding costs to obtain clearance of new drugs. Similar product regulations also apply in many international markets. 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 Company has complied and will continue to comply with the government regulations of the countries in which operations are conducted. Environment To date, compliance with federal, state and local environmental protection laws has not had a materially adverse effect on the Company. The Company has made and will continue to make necessary expenditures for environmental protection. Worldwide capital expenditures during 1998 included approximately $13 million for environmental control purposes. It is anticipated that continued compliance with such environmental regulations will not significantly affect the Company's financial statements or its competitive position. For additional information on environmental matters, see "Legal and Environmental Matters" in the Notes to the Consolidated Financial Statements in the Company's 1998 Annual Report to Shareholders which is incorporated herein by reference. Employees There were approximately 25,100 people employed by the Company at December 31, 1998. Item 2. Properties The Company's corporate headquarters is located in Madison, New Jersey. Principal manufacturing facilities for the pharmaceutical segment are located in Kenilworth, New Jersey, Miami, Florida, Omaha, Nebraska, Puerto Rico, Argentina, Australia, Belgium, Canada, Colombia, France, Ireland, Italy, Japan, Mexico, Singapore and Spain; health care segment: Kenilworth, New Jersey, Cleveland, Tennessee and Puerto Rico. The Company's principal research facilities are located in Kenilworth and Union, New Jersey and Palo Alto, California (DNAX) and San Diego, California (Canji and Syntro) and Elkhorn, Nebraska. The major portion of properties are owned by the Company. These properties are well maintained, adequately insured and in good operating condition. The Company's manufacturing facilities have capacities considered appropriate to meet the Company's needs. Item 3. Legal Proceedings Subsidiaries of the Company are defendants in 185 lawsuits involving approximately 730 plaintiffs arising out of the use of synthetic estrogens by the mothers of the plaintiffs. In virtually all of these lawsuits, many other pharmaceutical companies are also named defendants. The female plaintiffs claim various injuries, including cancerous or precancerous lesions of the vagina and cervix and a multiplicity of pregnancy problems. A number of suits involve infants with birth defects born to daughters whose mother took the drug. The total amount claimed against all defendants in all the suits amounts to more than $2 billion. While it is not possible to precisely predict the outcome of these proceedings, it is management's opinion that it is remote that any material liability in excess of the amount accrued will be incurred. The Company is a party to, or otherwise involved in, environmental clean-up actions or proceedings under the Comprehensive Environmental Response, Compensation and Liability Act (commonly known as Superfund) or equivalent state laws. These actions or proceedings seek to require the owners or operators of facilities that treated, stored or disposed of hazardous substances and transporters and generators of such substances to remediate contaminated facilities and/or reimburse the government or private parties for their clean-up costs. The Company, along with such owners, operators, transporters and generators, is alleged to be a potentially responsible party ("PRP") as an alleged generator of hazardous substances found at certain facilities. In each proceeding, the government or private litigants allege that any one PRP, including the Company, is jointly and severally liable for all clean-up requirements and costs. Although joint and several liability is alleged, a PRP's share of clean-up costs is frequently determined on the basis of several factors, including the type and quantity of hazardous substances; however, the allocation process varies greatly from facility to facility and may take years to complete. The Company's potential share of clean-up costs also depends on how many other PRPs are involved in the action or proceeding, insurance coverage, available indemnity contracts, and contribution rights against other PRPs. While it is not possible to predict with certainty the outcome of any action or proceeding, it is management's opinion that it is remote that any material liability in excess of 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 agreed to settle the federal class action for a total of $22 million, which has been paid in full as of January 31, 1999. 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. The defendants that did not settle the class action proceeded to trial in September 1998. The trial ended in November 1998 with a directed verdict in the defendants' favor. 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, an action has been brought in Alabama purportedly on behalf of consumers in Alabama and several other states. Plaintiffs are seeking to maintain the action as a class action. The Company has settled the retailer class action in Wisconsin and the alleged class action in Minnesota. The settlements of the state antitrust cases in Wisconsin and Minnesota have been approved by the respective courts. The settlement amounts were not significant. The Company has also recently settled in principle the state consumer cases in all of the states except Alabama and California. Court approval of those settlements has either already been obtained or is currently being sought. The settlement amounts were not material to the Company. In August 1998, a class action was brought in Tennessee purportedly on behalf of consumers in Tennessee and several other states. The court has conditionally certified a class of consumers, but has stayed the case pending the resolution of an earlier-filed Tennessee case, which the Company has settled in principle. Plaintiffs in these antitrust actions generally seek treble damages in an unspecified amount and an injunction against the allegedly unlawful conduct. 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. The Great Atlantic and Pacific Tea Company, Inc. (A&P) was among the settling plaintiffs. Mr. James Wood, a director of the Company, was an executive officer of A&P. Mr. Wood did not participate in any review or deliberations by the Board of Directors relating to this action. 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 all the antitrust actions are 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. 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 complaint also alleged that the defendants defamed the wholesaler and interfered with its business. There are related actions pending in the Delaware bankruptcy proceedings of the wholesaler; certain of the plaintiff's claims against the Company have been dismissed. Plaintiff is seeking damages in the amount of $400 million. The Company believes that this action is without merit and is defending itself vigorously against all claims. In February 1998, Geneva Pharmaceuticals, Inc. (Geneva) submitted an Abbreviated New Drug Application (ANDA) to the U.S. Food and Drug Administration seeking to market a generic form of CLARITIN in the United States several years before the expiration of the Company's patents. Geneva has alleged that certain of the Company's U.S. CLARITIN patents are invalid and unenforceable. The CLARITIN patents are material to the Company's business. In March 1998, the Company filed suit in federal court seeking a ruling that Geneva's ANDA submission constitutes willful infringement of the Company's patents and that its challenge to the Company's patents is without merit. The Company believes that it should prevail in the suit. However, as with any litigation, there can be no assurance that the Company will prevail. Item 4. Submission of Matters to a Vote of Security Holders Not applicable. Executive Officers of the Registrant The following information regarding executive officers is included herein in accordance with Part III, Item 10. Officers are elected to serve for one year and until their successors shall have been duly elected. Name and Current Position Business Experience Age Richard Jay Kogan Present position 1998; 57 Chairman of the Board President and Chief Executive and Chief Executive Officer Officer 1996-1998; President And Chief Operating Officer 1986-1995 Raul E. Cesan Present position 1998; 51 President and Chief Executive Vice President Operating Officer and President Schering- Plough Pharmaceuticals 1994-1998 Hugh A. D'Andrade Present position 1996; 60 Vice Chairman and Executive Vice President Chief Administrative Officer Administration 1984-1995 Joseph C. Connors Present position 1996; 50 Executive Vice President Senior Vice President and and General Counsel General Counsel 1992-1995 Jack L. Wyszomierski Present position 1996; 43 Executive Vice President Vice President and Treasurer and Chief Financial Officer 1991-1995 Geraldine U. Foster Present position 1994; 56 Senior Vice President Vice President - Investor Investor Relations and Relations 1988-1994 Corporate Communications Daniel A. Nichols Present position 1991 58 Senior Vice President Taxes John P. Ryan Present position 1998; 58 Senior Vice President Vice President-Human Resources Human Resources Schering-Plough Pharmaceuticals 1988-1998 Douglas J. Gingerella Present position 1999; 40 Vice President, Corporate Staff Vice President, Corporate Audits Audits 1995-1998; Director Corporate Audits 1991-1995 Name and Current Position Business Experience Age Thomas H. Kelly Present position 1991 49 Vice President and Controller Robert S. Lyons Present position 1991 58 Vice President Corporate Information Services E. Kevin Moore Present position 1996; 46 Vice President and Staff Vice President and Treasurer Assistant Treasurer 1993-1995; Treasurer-Europe, The Dun and Bradstreet Corporation 1990-1993 John E. Nine Present position 1996; 62 Vice President President - Technical Operations and President, Schering Schering Laboratories 1990-1995 Technical Operations William J. Silbey Present position 1996; 39 Staff Vice President, Corporate Counsel 1993-1995; Secretary and Associate Partner - Stearns, Weaver, Miller, General Counsel Weissler, Alhadeff & Sitterson, P.A. 1992-1993 Part II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters The common share dividends and share price data as set forth in the Company's 1998 Annual Report to Shareholders are incorporated herein by reference. Item 6. Selected Financial Data The Six-Year Selected Financial & Statistical Data as set forth in the Company's 1998 Annual Report to Shareholders is incorporated herein by reference. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Management's Discussion and Analysis of Operations and Financial Condition as set forth in the Company's 1998 Annual Report to Shareholders is incorporated herein by reference. Item 7(a). Quantitative and Qualitative Disclosures about Market Risk The Market Risk Disclosures as set forth in Management's Discussion and Analysis of Operations and Financial Condition in the Company's 1998 Annual Report to Shareholders is incorporated herein by reference. Item 8. Financial Statements and Supplementary Data The Consolidated Balance Sheets as of December 31, 1998 and 1997, and the related Statements of Consolidated Income, Consolidated Shareholders' Equity and Consolidated Cash Flows for each of the three years in the period ended December 31, 1998, Notes to Consolidated Financial Statements, the Independent Auditors' Report of Deloitte & Touche LLP dated February 12, 1999 and Quarterly Data, as set forth in the Company's 1998 Annual Report to Shareholders, are incorporated herein by reference. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Not applicable. Part III Item 10. Directors and Executive Officers of the Registrant The information concerning directors and nominees for directors as set forth in the Company's Proxy Statement for the annual meeting of shareholders on April 27, 1999 is incorporated herein by reference. Information required as to executive officers is included in Part I of this filing under the caption "Executive Officers of the Registrant." Item 11. Executive Compensation Executive compensation information as set forth in the Company's Proxy Statement for the annual meeting of shareholders on April 27, 1999 is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management Information concerning security ownership of certain beneficial owners and management as set forth in the Company's Proxy Statement for the annual meeting of shareholders on April 27, 1999 is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions Information concerning certain relationships and related transactions as set forth in the Company's Proxy Statement for the annual meeting of shareholders on April 27, 1999 is incorporated herein by reference. Part IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) 1. Financial Statements The following consolidated financial statements and independent auditors' report, included in the Company's 1998 Annual Report to Shareholders, are incorporated herein by reference. Statements of Consolidated Income For the Years Ended December 31, 1998, 1997 and 1996 Statements of Consolidated Shareholders' Equity For the Years Ended December 31, 1998, 1997 and 1996 Statements of Consolidated Cash Flows For the Years Ended December 31, 1998, 1997 and 1996 Consolidated Balance Sheets at December 31, 1998 and 1997 Notes to Consolidated Financial Statements Independent Auditors' Report (a) 2. Financial Statement Schedules Page in Form 10-K Independent Auditors' Report . . . . . . . . . . . 21 Schedule II - Valuation and Qualifying Accounts. . 22 Schedules not included have been omitted because they are not applicable or not required or because the required information is set forth in the financial statements or the notes thereto. Columns omitted from schedules filed have been omitted because the information is not applicable. Financial statements of fifty percent or less owned companies accounted for by the equity method have been omitted because, considered individually or in the aggregate, they do not constitute a significant subsidiary. (a) 3. Exhibits Exhibit Number Description 3(a) A complete copy of the Certificate of Incorporation as amended and currently in effect. Incorporated by reference to Exhibit 3 (i) to the Company's Quarterly Report for the period ended June 30, 1995 on Form 10- Q; Certificate of Amendment of Certificate of Incorporation incorporated by reference to Exhibit 3 to the Company's Quarterly Report for the period ended June 30, 1997 on Form 10-Q, File No. 1-6571. 3(b) A complete copy of the By-Laws as amended and currently in effect. Incorporated by reference to Exhibit 4(2) to the Company's Registration Statement on Form S-3, File No. 333-853; amendment to By-Laws effective September 22, 1998 incorporated by reference to Exhibit 4 to the Company's Quarterly Report for the period ended September 30, 1998 on Form 10-Q, File No. 1-6571. 4(a) Rights Agreement between the Company and The Bank of New York dated June 24, 1997. Incorporated by reference to Exhibit 1 to the Form 8-A filed by the Company on June 30, 1997, File No. 1-6571. 4(b) Indenture dated as of November 1, 1982 between the Company and The Chase Manhattan Bank, N.A. as Trustee. Incorporated by reference to Exhibit 4(a)to the Company's Registration Statement on Form S-3, File No. 2-80012. Exhibit Number Description 4(c) Form of Participation Rights Agreement between the Company and The Chase Manhattan Bank (National Association), as Trustee. Incorporated by reference to Exhibit 4.6 to the Company's Registration Statement on Form S-4, Amendment No. 1, File No. 33-65107. 10(a) The Company's Executive Incentive Plan (as amended) and Trust related thereto.* Plan incorporated by reference to Exhibit 10 to the Company's Quarterly Report for the period ended March 31, 1994 on Form 10-Q; Trust Agreement incorporated by reference to Exhibit 10(a) to the Company's Annual Report for 1988 on Form 10-K; amendment to Trust Agreement incorporated by reference to Exhibit 10(b) to the Company's Quarterly Report for the period ended March 31, 1997 on Form 10-Q, File No. 1-6571. 10(b) The Company's 1987 Stock Incentive Plan (as amended).* Incorporated by reference to Exhibit 10(d) to the Company's Annual Report for 1990 on Form 10-K, File No. 1-6571. 10(c) The Company's 1992 Stock Incentive Plan (as amended).* Incorporated by reference to Exhibit 10(d) to the Company's Annual Report for 1992 on Form 10-K, File No. 1-6571; amendment of December 11, 1995 incorporated by reference to Exhibit 10(d)to the Company's Annual Report for 1995 on Form 10-K, File No. 1-6571. 10(d) The Company's 1997 Stock Incentive Plan.* Incorporated by reference to Exhibit 10 to the Company's Quarterly Report for the period ended September 30, 1997 on Form 10-Q, File No. 1-6571. 10(e)(i) Employment agreement between the Company and Robert P. Luciano (as amended).* Incorporated by reference to Exhibit 10(e)(i) to the Company's Annual Report for 1989 on Form 10-K; first amendment incorporated by reference to Exhibit 10(a) to the Company's Quarterly Report for the period ended June 30, 1994 on Form 10-Q; second amendment incorporated by reference to Exhibit 10(e)(i) to the Company's Annual Report for 1994 on Form 10-K; third amendment incorporated by reference to Exhibit 10(a) to the Company's Quarterly Report for the period ended March 31, 1998 on Form 10-Q, File No. 1-6571. Exhibit Number Description 10(e)(ii) Employment agreement between the Company and Richard J. Kogan (as amended).* Incorporated by reference to Exhibit 10(e)(ii) to the Company's Annual Report for 1989 on Form 10-K; first amendment incorporated by reference to Exhibit 10(b) to the Company's Quarterly Report for the period ended June 30, 1994 on Form 10-Q; second amendment incorporated by reference to Exhibit 10(e)(ii) to the Company's Annual Report for 1994 on Form 10-K; third amendment incorporated by reference to Exhibit 10(a) to the Company's Quarterly Report for the period ended September 30, 1995 on Form 10-Q; fourth amendment incorporated by reference to Exhibit 10(b) to the Company's Quarterly Report for the period ended March 31, 1998 on Form 10-Q; fifth amendment (filed with this document), File No. 1-6571. 10(e)(iii) Employment agreement between the Company and Hugh A. D'Andrade (as amended).* Incorporated by reference to Exhibit 10(c) to the Company's Quarterly Report for the period ended June 30, 1994 on Form 10-Q; first amendment incorporated by reference to Exhibit 10(e)(iii) to the Company's Annual Report for 1994 on Form 10-K, File No. 1- 6571; second amendment incorporated by reference to Exhibit 10(e)(iii) to the Company's Annual Report for 1995 on Form 10-K; third amendment incorporated by reference to Exhibit 10(c) to the Company's Quarterly Report for the period ended March 31, 1998 on Form 10-Q; fourth amendment (filed with this document), File No. 1-6571. 10(e)(iv) Form of employment agreement between the Company and its executive officers effective upon a change of control.* Incorporated by reference to Exhibit 10(e)(iv) to the Company's Annual Report for 1994 on Form 10-K, File No. 1-6571. 10(e)(v) Agreement between the Company and Robert P. Luciano.* Incorporated by reference to Exhibit 10(d) to the Company's Quarterly Report for the period ended March 31, 1998 on Form 10-Q, File No. 1-6571. 10(e)(vi) Employment agreement between the Company and Raul E. Cesan (filed with this document), File No. 1-6571.* 10(e)(vii) Agreement between the Company and Rodolfo C. Bryce.* Incorporated by reference to Exhibit 10(a) to the Company's Quarterly Report for the period ended June 30, 1998 on Form 10-Q, File No. 1-6571. Exhibit Number Description 10(f) Directors Deferred Compensation Plan and Trust related thereto.* Incorporated by reference to Exhibit 10(f) to the Company's Annual Report for 1991 on Form 10-K; amendment of December 7, 1998 (filed with this document); Trust Agreement incorporated by reference to Exhibit 10(a) to the Company's Annual Report for 1988 on Form 10-K; amendment to Trust Agreement incorporated by reference to Exhibit 10(b) to the Company's Quarterly Report for the period ended March 31, 1997 on Form 10-Q, File No. 1-6571. 10(g) Supplemental Executive Retirement Plan and Trust related thereto.* Incorporated by reference to Exhibit 10(e) to the Company's Quarterly Report for the period ended March 31, 1998 on Form 10-Q;amendment incorporated by reference to Exhibit 10(a) to the Company's Quarterly Report for the period ended September 30, 1998 on Form 10-Q; Amended and Restated Trust Agreement (filed with this document), File No. 1-6571. 10(h) Directors' Stock Award Plan.* Incorporated by reference to Exhibit 10 to the Company's Quarterly Report for the period ended September 30, 1994 on Form 10-Q, File No. 1-6571; amendment of January 1, 1997 incorporated by reference to Exhibit 10(i) to the Company's Annual Report for 1996 on Form 10-K; amendment of April 1, 1998 incorporated by reference to Exhibit 10(h) of the Company's Quarterly Report for the period ended March 31, 1998 on Form 10-Q, File No. 1-6571. 10(i) The Company's Deferred Compensation Plan.* Incorporated by reference to Exhibit 10(b) to the Company's Quarterly Report for the period ended September 30, 1995 on Form 10-Q, File No. 1-6571. 10(k) The Company's Directors Deferred Stock Equivalency Program.* Incorporated by reference to Exhibit 10(k) to the Company's Annual Report for 1996 on Form 10-K, File No. 1-6571. 10(l) The Company's Form of Split Dollar Agreement and related Collateral Assignment between the Company and its Executive Officers.* Incorporated by reference to Exhibit 10(l) to the Company's Annual Report for 1997 on Form 10-K; amendments incorporated by reference to Exhibit 10(g) to the Company's Quarterly Report for the period ended March 31, 1998 on Form 10-Q, File No. 1-6571. Exhibit Number Description 10(m) The Company's Retirement Benefits Equalization Plan.* Incorporated by reference to Exhibit 10(f) to the Company's Quarterly Report for the period ended March 31, 1998 on Form 10-Q; amendment incorporated by reference to Exhibit 10(b) to the Company's Quarterly Report for the period ended September 30, 1998 on Form 10-Q, File No. 1- 6571. 12 Computation of Ratio of Earnings to Fixed Charges (filed with this document). 13 The Financial Section of the Company's 1998 Annual Report to Shareholders. With the exception of those portions of said Annual Report which are specifically incorporated by reference in this Form 10-K (filed with this document), such report shall not be deemed filed as part of this Form 10-K. 21 Subsidiaries of the registrant (filed with this document). 23 Consents of experts and counsel (filed with this document). 24 Power of attorney (filed with this document). 27 Financial Data Schedule (filed with this document). 99 Cautionary Statements regarding "Safe Harbor" provision of the Private Securities Litigation Reform Act of 1995 (filed with this document). All other exhibits are not applicable. Copies of above exhibits will be furnished upon request. * Compensatory plan, contract or arrangement. (b) Reports on Form 8-K. None SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) 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 February 25, 1999 By /s/ Thomas H. Kelly Thomas H. Kelly Vice President and Controller Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated. By * By * Richard Jay Kogan Robert P. Luciano Chairman of the Board and Chief Director Executive Officer and Director By * By * Raul E. Cesan Donald L. Miller President and Chief Operating Director Officer and Director By * By * Jack L. Wyszomierski H. Barclay Morley Executive Vice President and Director Chief Financial Officer By * By * Thomas H. Kelly Carl E. Mundy, Jr. Vice President and Controller Director and Principal Accounting Officer By * By * Hans W. Becherer Richard de J. Obsorne Director Director By * By * Hugh A. D'Andrade Patricia F. Russo Director Director By * By * David C. Garfield William A. Schreyer Director Director By * By * Regina E. Herzlinger Robert F. W. van Oordt Director Director *By /s/Thomas H. Kelly By * Thomas H. Kelly James Wood Attorney-in-fact Director Date: February 25,1999 INDEPENDENT AUDITORS' REPORT Schering-Plough Corporation: We have audited the consolidated balance sheets of Schering- Plough Corporation and subsidiaries as of December 31, 1998 and 1997 and the related statements of consolidated income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1998, and have issued our report thereon dated February 12, 1999; such financial statements and report are included in your 1998 Annual Report to Shareholders and are incorporated herein by reference. Our audits also included the financial statement schedule of Schering-Plough Corporation and subsidiaries, listed in Item 14. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express our opinion based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/DELOITTE & TOUCHE LLP Parsippany, New Jersey February 12, 1999 SCHEDULE II SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996 (Dollars in millions)
Valuation and qualifying accounts deducted from assets to which they apply: Allowances for accounts receivable: RESERVE RESERVE RESERVE FOR DOUBTFUL FOR CASH FOR CLAIMS ACCOUNTS DISCOUNTS AND OTHER TOTAL 1998 Balance at beginning of year $ 49 $ 14 $ 24 $ 87 Additions: Charged to costs and expenses 14 133 19 166 Deductions from reserves (12) (129) (14) (155) Balance at end of year $ 51 $ 18 $ 29 $ 98 1997 Balance at beginning of year $ 50 $ 12 $ 11 $ 73 Additions: Charged to costs and expenses 17 103 20 140 Deductions from reserves (18) (101) (7) (126) Balance at end of year $ 49 $ 14 $ 24 $ 87 1996 Balance at beginning of year $ 49 $ 8 $ 12 $ 69 Additions: Charged to costs and expenses 2 90 10 102 Deductions from reserves (1) (86) (11) (98) Balance at end of year $ 50 $ 12 $ 11 $ 73
EX-10 2 FIFTH AMENDMENT TO EMPLOYMENT AGREEMENT THIS FIFTH AMENDMENT to the Employment Agreement by and between SCHERING-PLOUGH CORPORATION, a New Jersey corporation (the "Company"), and RICHARD J. KOGAN (the "Employee") dated as of September 26, 1989, as amended as of June 28, 1994, and as further amended as of March 1, 1995, and as further amended as of October 24, 1995, and as further amended as of February 25, 1998 (as so amended, the "Employment Agreement"), is made and entered into as of this 1st day of November, 1998. WHEREAS, the Company and the Employee wish to amend the Employment Agreement as set forth below; NOW, THEREFORE, IN CONSIDERATION of the mutual promises, covenants and agreements set forth below, it is hereby agreed as follows: 1. The first sentence of Section 2(a) is hereby amended to read in its entirety as follows: During the Employment Period, the Employee shall be employed as Chairman of the Board and Chief Executive Officer of the Company. 2. Section 3(b) of the Employment Agreement is hereby amended by deleting the word "average" and replacing it with the word "highest" and by deleting the defined term "Recent Average Bonus" and replacing it with the defined term "Recent Bonus." 3. Section 3(c) of the Employment Agreement is hereby amended by deleting the word "average" and replacing it with the phrase "highest of the" and by deleting the defined term "Recent Average Bonus" and replacing it with the defined term "Recent Bonus." 4. Subparagraph (j)(i)(I)(A) of Section 3 is hereby amended to read in its entirety as follows: (A) is two percent (2%) of the Employee's "final average earnings" (with "final average earnings" being defined for this purpose as the Employee's average annual earnings during the sixty (60) consecutive months for which his earnings were highest during the last one hundred twenty (120) consecutive months of his employment with the Company and "earnings" being defined for this purpose as the base pay received by the Employee as salary, including any amounts deferred for any reason, and bonuses awarded under the Cash Bonus Plans) times his years of service with the Company up to twenty (20) years plus one percent (1%) of the same "final average earnings" times his years of service with the Company in excess of twenty (20) years; 5. Subparagraph (j)(iv) of Section 3 is hereby amended by striking the words "not to exceed Ten Thousand Dollars ($10,000) per year" and by substituting the words "up to the maximum allowable under the Company's welfare benefit plans as in effect on November 1, 1998." 6. There is added to, and made a part of, the Employment Agreement a new subparagraph (l) of Section 3 reading in its entirety as follows: (l) Without limiting the generality of the foregoing, during the Change of Control Period, the incentive, savings and retirement benefit opportunities and the other benefits provided to the Employee pursuant to Sections 3(d), (e), (f), (g), (h) and (i) above shall in no event be less than the most favorable such opportunities and benefits provided to the Employee by the Company and its affiliates at any time during the 120-day period immediately preceding the Effective Date. 7. There is added to, and made a part of, the Employment Agreement a new paragraph (h) of Section 5 reading in its entirety as follows: (h) Other Benefits Following Retirement: From and after the date of the Employee's retirement from the employment of the Company (including, without limitation, Early Retirement), he shall be entitled to be provided by the Company with (i) limited security services, including an automobile and driver and limited use of Company-owned aircraft (subject to reasonable availability of the corporate aircraft) and (ii) financial planning services on terms and conditions reasonably comparable to those provided to senior executives. 8. Section 9 of the Employment Agreement is hereby amended to read in its entirety as follows: 9. Confidential Information and Competitive Conduct. (a) The Employee shall hold in a fiduciary capacity for the benefit of the Company all secret or confidential information, knowledge or data relating to the Company or any of its affiliated companies (collectively the "Affiliated Companies"), and their respective businesses, which shall have been obtained by the Employee during the Employee's employment by the Company or any of its affiliated companies and which shall not be or become public knowledge (other than by acts by the Employee or representatives of the Employee in violation of this Agreement). After termination of the Employee's employment with the Company, the Employee shall not, without the prior written consent of the Company or as may otherwise be required by law or legal process, communicate or divulge any such information, knowledge or data to anyone other than the Company and those designated by it. (b) During the Noncompetition Period (as defined below), the Executive shall not, without the prior written consent of the Board (which consent shall not be unreasonably withheld), engage in or become associated with a Competitive Activity. For purposes of this Section 9(b): (i) the "Noncompetition Period" means (A) the period during which the Executive is employed by the Company, plus (B) two years following the termination of employment for any reason other than (w) termination by the Executive with Good Reason, (x) termination by the Company without Cause, (y) retirement at or after the Executive has attained age 62 or (z) disability; (ii) a "Competitive Activity" means any business or other endeavor that is engaged in research, development and/or sale of human and/or animal pharmaceutical products, in any county of any state of the United States or any other country; and (iii) the Executive shall be considered to have become "associated with a Competitive Activity" if the Executive becomes directly or indirectly involved as an owner, principal, employee, officer, director, independent contractor, representative, stockholder, financial backer, agent, partner, advisor, lender, or in any other individual or representative capacity with any individual, partnership, corporation or other organization that is engaged in a Competitive Activity. Notwithstanding the foregoing, (i) the Executive may make and retain investments during the Noncompetition Period which do not constitute a controlling interest of any entity engaged in a Competitive Activity, if such investment is made on a passive basis and the Executive does not act as an employee, officer, director, independent contractor, representative, agent or advisor with respect to such entity and so long as the making or retaining of such investment is not contrary to the best interests of the Company, (ii) if as a result of a reorganization, merger or consolidation the Executive is assigned a position (including status, offices, title, reporting requirements and prospects), authority, duties or responsibilities which diminish the Executive's position, authority, duties or responsibilities relative to the 120-day period immediately preceding such reorganization, merger or consolidation, then this Section 9(b) shall not apply, and (iii) this Section 9(b) shall not apply after the Effective Date. (c) The Executive acknowledges and agrees that: (i) the purpose of the foregoing covenants is to protect the goodwill, trade secrets and other confidential information of the Company; (ii) because of the nature of the business in which the Company and the Affiliated Companies are engaged and because of the nature of the confidential information to which the Executive has access, it would be impractical and excessively difficult to determine the actual damages of the Company and the Affiliated Companies in the event the Executive breached any of the covenants of this Section 9; and (iii) remedies at law (such as monetary damages) for any breach of the Executive's obligations under this Section 9 would be inadequate. The Executive therefore agrees and consents that if he commits any breach of a covenant under this Section 9 or threatens to commit any such breach, the Company shall have the right (in addition to, and not in lieu of, any other right or remedy that may be available to it) to temporary and permanent injunctive relief from a court of competent jurisdiction, without posting any bond or other security and without the necessity of proof of actual damage. With respect to any provision of this Section 9 finally determined by a court of competent jurisdiction to be unenforceable, the Executive and the Company hereby agree that such court shall have jurisdiction to reform this Agreement or any provision hereof so that it is enforceable to the maximum extent permitted by law, and the parties agree to abide by such court's determination. If any of the covenants of this Section 9 are determined to be wholly or partially unenforceable in any jurisdiction, such determination shall not be a bar to or in any way diminish the Company's right to enforce any such covenant in any other jurisdiction. (d) In no event shall an asserted violation of the provisions of this Section 9 constitute a basis for deferring or withholding any amounts otherwise payable to the Employee under this Agreement. 9. The second sentence of Section 11(a) is hereby amended by adding the words "Chairman of the Board and" before the words "Chief Executive Officer." 10. Except as provided above, the Employment Agreement shall continue in effect without alteration as in effect on the date hereof. The Employment Agreement, as amended by this Fifth Amendment, constitutes the entire agreement of the parties and supersedes all prior agreements and understandings with respect to the subject matter hereof and thereof. IN WITNESS WHEREOF, the Employee and, pursuant to due authorization from its Board of Directors, the Company have caused this Agreement to be executed as of the day and year first above written. /s/ Richard J. Kogan Richard J. Kogan SCHERING-PLOUGH CORPORATION /s/ Jack L. Wyszomierski Jack L. Wyszomierski Executive Vice President and Chief Financial Officer 50252v1 5 EX-10 3 FOURTH AMENDMENT TO EMPLOYMENT AGREEMENT THIS FOURTH AMENDMENT to the Employment Agreement by and between SCHERING-PLOUGH CORPORATION, a New Jersey corporation (the "Company"), and HUGH A. D'ANDRADE (the "Employee") dated as of June 28, 1994, as amended as of March 1, 1995, and as further amended as of December 11, 1995, and as further amended as of February 25, 1998 (as so amended, the "Employment Agreement"), is made and entered into as of this 1st day of November, 1998. WHEREAS, the Company and the Employee wish to amend the Employment Agreement as set forth below; NOW, THEREFORE, IN CONSIDERATION of the mutual promises, covenants and agreements set forth below, it is hereby agreed as follows: 1. Section 1 of the Employment Agreement is hereby amended by deleting the date "December 1" and replacing it with the date "July 1." 2. Section 3(b) of the Employment Agreement is hereby amended by deleting the word "average" and replacing it with the word "highest" and by deleting the defined term "Recent Average Bonus" and replacing it with the defined term "Recent Bonus." 3. Section 3(c) of the Employment Agreement is hereby amended by deleting the word "average" and replacing it with the phrase "highest of the" and by deleting the defined term "Recent Average Bonus" and replacing it with the defined term "Recent Bonus." 4. Subparagraph (j)(i)(I)(A) of Section 3 is hereby amended to read in its entirety as follows: (A) is two percent (2%) of the Employee's "final average earnings" (with "final average earnings" being defined for this purpose as the Employee's average annual earnings during the sixty (60) consecutive months for which his earnings were highest during the last one hundred twenty (120) consecutive months of his employment with the Company and "earnings" being defined for this purpose as the base pay received by the Employee as salary, including any amounts deferred for any reason, and bonuses awarded under the Cash Bonus Plans) times his years of service with the Company up to twenty (20) years plus one percent (1%) of the same "final average earnings" times his years of service with the Company in excess of twenty (20) years; 5. Subparagraph (j)(iv) of Section 3 is hereby amended by striking the words "not to exceed Ten Thousand Dollars ($10,000) per year" and by substituting the words "up to the maximum allowable under the Company's welfare benefit plans as in effect on November 1, 1998." 6. There is added to, and made a part of, the Employment Agreement a new subparagraph (k) of Section 3 reading in its entirety as follows: (k) Without limiting the generality of the foregoing, during the Change of Control Period, the incentive, savings and retirement benefit opportunities and the other benefits provided to the Employee pursuant to Sections 3(d), (e), (f), (g), (h) and (i) above shall in no event be less than the most favorable such opportunities and benefits provided to the Employee by the Company and its affiliates at any time during the 120-day period immediately preceding the Effective Date. 7. Section 9 of the Employment Agreement is hereby amended to read in its entirety as follows: 9. Confidential Information and Competitive Conduct. (a) The Employee shall hold in a fiduciary capacity for the benefit of the Company all secret or confidential information, knowledge or data relating to the Company or any of its affiliated companies (collectively the "Affiliated Companies"), and their respective businesses, which shall have been obtained by the Employee during the Employee's employment by the Company or any of its affiliated companies and which shall not be or become public knowledge (other than by acts by the Employee or representatives of the Employee in violation of this Agreement). After termination of the Employee's employment with the Company, the Employee shall not, without the prior written consent of the Company or as may otherwise be required by law or legal process, communicate or divulge any such information, knowledge or data to anyone other than the Company and those designated by it. (b) During the Noncompetition Period (as defined below), the Executive shall not, without the prior written consent of the Board (which consent shall not be unreasonably withheld), engage in or become associated with a Competitive Activity. For purposes of this Section 9(b): (i) the "Noncompetition Period" means (A) the period during which the Executive is employed by the Company, plus (B) two years following the termination of employment for any reason other than (w) termination by the Executive with Good Reason, (x) termination by the Company without Cause, (y) retirement at or after the Executive has attained age 62 or (z) disability; (ii) a "Competitive Activity" means any business or other endeavor that is engaged in research, development and/or sale of human and/or animal pharmaceutical products, in any county of any state of the United States or any other country; and (iii) the Executive shall be considered to have become "associated with a Competitive Activity" if the Executive becomes directly or indirectly involved as an owner, principal, employee, officer, director, independent contractor, representative, stockholder, financial backer, agent, partner, advisor, lender, or in any other individual or representative capacity with any individual, partnership, corporation or other organization that is engaged in a Competitive Activity. Notwithstanding the foregoing, (i) the Executive may make and retain investments during the Noncompetition Period which do not constitute a controlling interest of any entity engaged in a Competitive Activity, if such investment is made on a passive basis and the Executive does not act as an employee, officer, director, independent contractor, representative, agent or advisor with respect to such entity and so long as the making or retaining of such investment is not contrary to the best interests of the Company, (ii) if as a result of a reorganization, merger or consolidation the Executive is assigned a position (including status, offices, title, reporting requirements and prospects), authority, duties or responsibilities which diminish the Executive's position, authority, duties or responsibilities relative to the 120-day period immediately preceding such reorganization, merger or consolidation, then this Section 9(b) shall not apply, and (iii) this Section 9(b) shall not apply after the Effective Date. (c) The Executive acknowledges and agrees that: (i) the purpose of the foregoing covenants is to protect the goodwill, trade secrets and other confidential information of the Company; (ii) because of the nature of the business in which the Company and the Affiliated Companies are engaged and because of the nature of the confidential information to which the Executive has access, it would be impractical and excessively difficult to determine the actual damages of the Company and the Affiliated Companies in the event the Executive breached any of the covenants of this Section 9; and (iii) remedies at law (such as monetary damages) for any breach of the Executive's obligations under this Section 9 would be inadequate. The Executive therefore agrees and consents that if he commits any breach of a covenant under this Section 9 or threatens to commit any such breach, the Company shall have the right (in addition to, and not in lieu of, any other right or remedy that may be available to it) to temporary and permanent injunctive relief from a court of competent jurisdiction, without posting any bond or other security and without the necessity of proof of actual damage. With respect to any provision of this Section 9 finally determined by a court of competent jurisdiction to be unenforceable, the Executive and the Company hereby agree that such court shall have jurisdiction to reform this Agreement or any provision hereof so that it is enforceable to the maximum extent permitted by law, and the parties agree to abide by such court's determination. If any of the covenants of this Section 9 are determined to be wholly or partially unenforceable in any jurisdiction, such determination shall not be a bar to or in any way diminish the Company's right to enforce any such covenant in any other jurisdiction. (d) In no event shall an asserted violation of the provisions of this Section 9 constitute a basis for deferring or withholding any amounts otherwise payable to the Employee under this Agreement. 8. Except as provided above, the Employment Agreement shall continue in effect without alteration as in effect on the date hereof. The Employment Agreement, as amended by this Fourth Amendment, constitutes the entire agreement of the parties and supersedes all prior agreements and understandings with respect to the subject matter hereof and thereof. IN WITNESS WHEREOF, the Employee and, pursuant to due authorization from its Board of Directors, the Company have caused this Agreement to be executed as of the day and year first above written. /s/ Hugh A. D'Andrade Hugh A. D'Andrade SCHERING-PLOUGH CORPORATION /s/ Richard Jay Kogan Richard Jay Kogan Chairman of the Board and Chief Executive Officer 50251v1 4 EX-10 4 EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT made and entered into as of this 1st day of November, 1998, by and between SCHERING-PLOUGH COR- PORATION, a New Jersey corporation (the "Company"), and Raul E. Cesan (the "Employee"); WHEREAS, the Employee is currently serving as Execu- tive Vice President - Pharmaceuticals of the Company and the Com- pany desires to secure the continuing employment of the Employee in accordance herewith; NOW, THEREFORE, IN CONSIDERATION of the mutual prom- ises, covenants and agreements set forth below, it is hereby agreed as follows: 1. Employment and Term. The Company agrees to em- ploy the Employee and the Employee agrees to remain in the employ of the Company, in accordance with the terms and provisions of this Agreement, for the period beginning on November 1, 1998, and ending as of the close of business on October 31, 2003 (the "Em- ployment Period"); provided, however, that the Employment Period shall be extended for an additional five-year period commencing on the Effective Date (as defined in Section 11(d) below) and ending on the fifth anniversary of the Effective Date; and provided fur- ther that unless on or before the May 1 immediately preceding each October 31 on which the Employment Period would otherwise end, ei- ther party delivers to the other party a written notice of its election to terminate such employment on such October 31, the Em- ployment Period shall be extended for additional one-year periods commencing on the November 1 immediately succeeding such October 31 and ending on the following October 31; and provided further that, if not previously terminated, the Employment Period shall terminate on October 30, 2012. 2. Duties and Powers of Employee. (a) Position; Location. During the Employment Pe- riod, the Employee shall be employed as President and Chief Operating Officer of the Company, reporting to the Chief Ex- ecutive Officer of the Company, and with the duties and pow- ers held by him as of the date hereof and such other duties consistent therewith as the Chief Executive Officer may as- sign him from time to time. The Employee's services shall be performed at the location where the Employee is currently employed or any office which is the headquarters of the Com- pany and is less than 35 miles from such location. (b) Duties. During the Employment Period, and ex- cluding any periods of vacation and sick leave to which the Employee is entitled, the Employee agrees to devote reason- able attention and time during normal business hours to the business and affairs of the Company and, to the extent nec- essary to discharge the responsibilities assigned to the Em- ployee hereunder, to use the Employee's reasonable best ef- forts to perform faithfully and efficiently such responsi- bilities. During the Employment Period it shall not be a violation of this Agreement for the Employee to (i) serve on corporate, civic or charitable boards or committees, (ii) deliver lectures, fulfill speaking engagements or teach at educational institutions and (iii) manage personal invest- ments, so long as such activities do not significantly in- terfere with the performance of the Employee's responsibili- ties as an employee of the Company in accordance with this Agreement. It is expressly understood and agreed that to the extent that any such activities have been conducted by the Employee prior to the date of this Agreement or subse- quent thereto consistent with this Section 2(b), the contin- ued conduct of such activities (or the conduct of activities similar in nature and scope thereto) shall not thereafter be deemed to interfere with the performance of the Employee's responsibilities to the Company. 3. Compensation. The Employee shall receive the following compensation for his services: (a) Salary. So long as the Employee is employed by the Company, he shall be paid an annual base salary ("Annual Base Salary") at the rate of not less than $850,000 per year, in accordance with the Company's payroll practices as in effect from time to time, but in no event less often than monthly, and subject to any and all required withholdings and deductions for Social Security, income taxes and the like. The Board of Directors of the Company (the "Board") may from time to time direct such upward adjustments to An- nual Base Salary as the Board deems to be necessary or de- sirable; provided, however, that during the Change of Con- trol Period (as defined in Section 11(b)), the Annual Base Salary shall be reviewed at least annually and shall be in- creased at any time and from time to time as shall be sub- stantially consistent with increases in base salary gener- ally awarded in the ordinary course of business to other senior executives of the Company and its affiliated compa- nies (as defined in Section 11(e) below). Annual Base Sal- ary shall not be reduced after any increase thereof pursuant to this Section 3(a). Any increase in Annual Base Salary shall not serve to limit or reduce any other obligation of the Company under this Agreement. (b) Incentive Cash Compensation. So long as the Em- ployee is employed by the Company, he shall be eligible an- nually for awards (such aggregate awards for each year are hereinafter referred to as the "Annual Bonus") from the Com- pany's Executive Incentive Plan ("EIP"), and from any suc- cessor or replacement plan, and from any other plan of the Company or any of its affiliated companies providing for the payment of bonuses which are payable to the Employee in cash (the EIP and such successor, replacement or other plans be- ing referred to herein collectively as the "Cash Bonus Plans"), in accordance with the terms thereof; provided, however, that, during the Change of Control Period, the Em- ployee shall be awarded, for each fiscal year ending during the Change of Control Period, an Annual Bonus at least equal to the highest Annual Bonus (annualized for any fiscal year consisting of less than twelve full months) paid or payable, including by reason of any deferral, to the Employee by the Company and its affiliated companies in respect of the three most recent full fiscal years ending on or prior to the Change of Control Date (as defined in Section 11(a) below) (the "Recent Bonus"). Each Annual Bonus shall be paid no later than the end of the third month of the fiscal year next following the fiscal year for which the Annual Bonus is awarded, unless the Employee shall elect to defer the re- ceipt of such Annual Bonus. (c) Special Bonus. In addition to Annual Base Sal- ary and Annual Bonus payable as hereinabove provided, if a Change of Control (as defined in Section 11(c) below) occurs and the Employee remains employed with the Company and its affiliated companies through the first anniversary of the Change of Control Date, the Company shall pay to the Em- ployee no later than 30 days after the date of such first anniversary a special bonus (the "Special Bonus") in recog- nition of the Employee's services during the crucial one- year transition period following the Change of Control in cash equal to the sum of (A) the Annual Base Salary in ef- fect on such date, (B) the greater of (1) the Annual Bonus paid or payable, including by reason of any deferral, to the Employee (and annualized for any fiscal year consisting of less than twelve full months) for the most recently com- pleted fiscal year preceding such date, if any, and (2) the Recent Bonus (such greater amount shall be hereinafter re- ferred to as the "Highest Annual Bonus") and (C) the greater of (1) the amounts contributed on behalf of the Employee un- der the Company's Employees' Profit Sharing Incentive Plan or any successor or replacement plan thereto (the "PSIP") and the Company's Profit Sharing Benefits Equalization Plan or any successor or replacement plan thereto (the "PSIP Ex- cess Plan"), for the most recently completed fiscal year preceding such date and (2) the highest of the annual amounts contributed on behalf of the Employee under the PSIP and PSIP Excess Plan (and annualized for any fiscal year consisting of less than twelve full months) in respect of the three fiscal years immediately preceding the fiscal year in which the Effective Date occurs (such greater amount shall be hereinafter referred to as the "Highest Annual PSIP Contribution"). (d) Incentive and Savings and Retirement Plans. So long as the Employee is employed by the Company, he shall be entitled to participate in all incentive and savings (in ad- dition to the Cash Bonus Plans) and retirement plans, prac- tices, policies and programs applicable generally to other senior executives of the Company and its affiliated compa- nies. (e) Welfare Benefit Plans. The Employee and/or the Employee's family, as the case may be, shall be eligible for participation in and shall receive all benefits under wel- fare benefit plans, practices, policies and programs pro- vided by the Company and its affiliated companies (includ- ing, without limitation, medical, prescription, dental, disability, salary continuance, employee life, group life, accidental death and travel accident insurance plans and programs) to the extent applicable generally to other senior executives of the Company and its affiliated companies. (f) Expenses. So long as the Employee is employed by the Company, he shall be entitled to receive prompt reim- bursement for all reasonable expenses incurred by the Em- ployee in accordance with the policies, practices and proce- dures of the Company and its affiliated companies from time to time in effect, commensurate with his position and on a basis at least comparable to that of other senior executives of the Company. (g) Fringe Benefits. So long as the Employee is em- ployed by the Company, he shall be entitled to fringe bene- fits in accordance with the plans, practices, programs and policies of the Company and its affiliated companies from time to time in effect, commensurate with his position and at least comparable to those received by any other senior executive of the Company. (h) Office and Support Staff. So long as the Em- ployee is employed by the Company, he shall be entitled to an office or offices of a size and with furnishings and other appointments, and to exclusive personal secretarial and other assistance, commensurate with his position and at least comparable to those received by any other senior ex- ecutive of the Company. (i) Vacation and Other Absences. So long as the Em- ployee is employed by the Company, he shall be entitled to paid vacation and such other paid absences whether for holi- days, illness, personal time or any similar purposes, in ac- cordance with the plans, policies, programs and practices of the Company and its affiliated companies in effect from time to time, commensurate with his position and at least compa- rable to those received by any other senior executive of the Company. (j) Additional Benefits. In addition to, and not in limitation (except as provided in Section 3(j) (ii)) of, the foregoing, the Employee shall be entitled to the following: (i) Supplemental Retirement Plan ("SRP"). (I) An unfunded, non-tax-qualified annual pension supple- ment (the "Normal Supplement"), subject to the terms and conditions set forth below, in the amount by which the greatest of (A) or (B) or (C), exceeds (D) , where: (A) is two percent (2%) of the Em- ployee's "final average earnings" (with "final average earnings" being defined for this purpose as the Employee's average annual earnings during the sixty (60) consecutive months for which his earnings were highest during the last one hun- dred twenty (120) consecutive months of his em- ployment with the Company and "earnings" being defined for this purpose as the base pay re- ceived by the Employee as salary, including any amounts deferred for any reason, and bonuses awarded under the Cash Bonus Plans) times his years of service with the Company up to twenty (20) years plus one percent (1%) of the same "final average earnings" times his years of service with the Company in excess of twenty (20) years; (B) thirty-five percent (35%) of the Em- ployee's "final average earnings", as defined hereinabove; provided, however, that this sub- paragraph (B) shall apply only if the Employee is in the employ of the Company when he reaches age sixty (60) with at least ten (10) years of service with the Company; (C) is fifty-five percent (55%) of the Employee's "final average earnings", as defined hereinabove; provided, however, that this sub- paragraph (C) shall apply only if the Employee is in the employ of the Company on or after he reaches age sixty-two (62); and (D) is the sum of (I) the Employee's pension from the Company's qualified retirement plan and retirement benefits equalization plan applicable to him and (II) the amount of any benefits paid under the Company's Supplemental Executive Retirement Plan or any successor or replacement plan (collectively with the SRP, the "SERP"). (II) In the event the Employee elects to retire prior to age sixty-five (65) ("Early Retirement"), the Employee shall be entitled, in lieu of the Normal Sup- plement, to an unfunded, nontax-qualified annual pen- sion supplement (the "Early Retirement Supplement"), subject to the terms and conditions set forth below, equal to the amount by which (AA) exceeds (BB) below, where: (AA) is the amount computed in accordance with (A) of subsection (I) of this Section 3(j)(i) or, if applicable and greater, (B) or (C) of such subsection (I), reduced four percent (4%) for each year that the Employee's retire- ment precedes age sixty-two (62); provided, how- ever, that such amount shall not be less than thirty-five percent (35%) of the Employee's "fi- nal average earnings" if the Employee's early retirement occurs on or after he reaches age sixty (60) with at least ten (10) years of serv- ice; and (BB) is the sum of (I) the Employee's pension payable at early retirement from the Company's qualified retirement plan and retire- ment benefits equalization plan applicable to him and (II) the amount of any benefits paid un- der the Company's Supplemental Executive Retire- ment Plan or any successor or replacement plan. (III) Any SRP that becomes payable pursuant to subsection (I) or (II) of this Section 3(j)(i) shall be payable as follows. (AAA) If payable, the Normal Supple- ment or the Early Retirement Supplement, as the case may be, shall commence to be paid upon the date of the Employee's retirement. The Normal Supplement or the Early Retirement Supplement, as the case may be, shall be computed on a straight life annuity basis, with an option to the Employee to receive the actuarial equivalent of such supplement under a joint and survivor's annuity; provided, however, that in the event the Employee retires from the employ of the Com- pany on or after he reaches age sixty-two (62), the Employee shall be entitled to receive the Normal Supplement (without any reduction) on a straight life annuity basis and after the Em- ployee's death, his surviving spouse shall be entitled to receive annually for the duration of her life a survivor's benefit (the "Survivor's Benefit") equal to the amount by which (i) 45% of "final average earnings" (as defined in (A) of subsection (I) of this Section 3(j)(i)) (without any reduction) exceeds (ii) the amount payable to her set forth in clause (D) of sub- section (I) of this Section 3(j)(i). If the Em- ployee's benefits under the Company's qualified retirement plan are to continue after his death for the benefit of his surviving spouse or a designated beneficiary, then he shall have the right at any time to change the recipient of any survivorship benefit payable under the SRP; pro- vided, however, that any such change, if made after the applicable deadline set forth in the qualified retirement plan, shall not affect the amount of the benefit payable under the SRP as originally calculated or the term for which such benefit is payable, also as originally calcu- lated. (BBB) Notwithstanding the foregoing, the Employee shall be entitled to elect that the SRP shall be paid in accordance with any op- tional form of benefit available under the Com- pany's qualified retirement plan or as provided in subsection (CCC) below. (CCC) The Employee may elect (the "Employee's Lump Sum Election") to receive pay- ment of the actuarial equivalent of the aggre- gate of his Normal Supplement or Early Retire- ment Supplement, as the case may be (the "Employee's Benefit") and the Survivor's Benefit in a lump sum (x) in cash on the date of his re- tirement or on the first day of any month there- after not later than the first day of the month coincident with or next following the second an- niversary of the date of his retirement or on the fifth, tenth, fifteenth or twentieth anni- versary of the date of his retirement or (y) in two, three, four, five, ten, fifteen or twenty equal annual cash installments commencing on the date of his retirement or the first day of any month thereafter not later than the first day of the month coincident with or next following the second anniversary of the date of his retire- ment. If the Employee dies after retirement with an Employee's Lump Sum Election in effect but prior to the payment of the full amount of the lump sum or annual installments due thereun- der, payment of the unpaid amount thereof shall be made to his surviving spouse, designated beneficiary or estate in accordance with his election. Payment made in accordance with this subsection (CCC) to the Employee, his surviving spouse, designated beneficiary or estate shall constitute full and complete satisfaction of the Company's obligation in respect of the Em- ployee's Benefit and the Survivor's Benefit. (DDD) If the Employee does not make the Employee's Lump Sum Election, the Employee's surviving spouse may elect (the "Survivor's Lump Sum Election") to receive the actuarial equiva- lent of the Survivor's Benefit, if any, in a lump sum (x) in cash on the date of the Em- ployee's death or the first day of any month thereafter not later than the first day of the month coincident with or next following the sec- ond anniversary of the Employee's death or on the fifth, tenth, fifteenth or twentieth anni- versary of his death or (y) in two, three, four, five, ten, fifteen or twenty equal annual cash installments commencing on the date of the Em- ployee's death or the first day of any month thereafter not later than the first day of the month coincident with or next following the sec- ond anniversary of the Employee's death. (EEE) The Employee's Lump Sum Elec- tion and the Survivor's Lump Sum Election shall be made, and may be rescinded, in the same man- ner and at the same times as are prescribed for the analogous elections under the Company's Sup- plemental Executive Retirement Plan or any suc- cessor or replacement plan (the "Basic SERP") or, at any time when there is no Basic SERP in effect, in accordance with procedures specified by the Executive Compensation and Organization Committee of the Board of Directors of the Com- pany (the "Committee"). The amount of any lump sum or installment payments of the Employee's Benefit or Survivor's Benefit shall be computed in the same manner as is prescribed for the analogous computations under the Basic SERP or, at any time when there is no Basic SERP in ef- fect or there are no analogous computations pro- vided under the Basic SERP, as specified by the Committee. (FFF) Notwithstanding any timely Em- ployee's Lump Sum Election or Survivor's Lump Sum Election, neither the Employee nor the Em- ployee's surviving spouse shall have the right to receive the SRP in a form provided for in subsection (CCC) or subsection (DDD), as the case may be, if the Employee's employment is terminated for Cause (as defined below). In the event the Employee dies before retirement or deemed retirement, the Company shall have no ob- ligation in respect of the Employee's Benefit, and shall be obligated to pay the Survivor's Benefit to his spouse, if, but only if, the Em- ployee's spouse shall survive him. (GGG) The Committee may, in its sole discretion, defer the payment of any lump sum or annual installment of the Employee's Benefit to the Employee, if the Employee is, at the time such amount would otherwise be paid, a "covered employee" as defined in Section 162(m) of the Internal Revenue Code of 1986, as amended, if such payment would be subject to such Section's limitation on deductibility; provided, however, that such payment shall not be deferred to a date later than the earliest date in the year in which such payment would not be subject to such limitation; and further provided that the Com- pany shall, at the time of payment of any amount so deferred, pay interest thereon from the due date thereof at a rate equal to the actual yield on three-month U.S. Treasury bills as reported in the Wall Street Journal on the first business day of each calendar quarter, compounded quar- terly. (IV) In determining the SRP, the following rules shall apply: (AAAA) If, during the Employment Pe- riod, the Employee's employment terminates by reason of death, or the Company terminates the Employee's employment for Disability or other- wise than for Cause, or the Employee terminates his employment either for Good Reason or without any reason during the Window Period (as the terms Disability, Cause, Good Reason and Window Period are hereinafter defined), then, in any such event, the references to final average earnings, age and retirement in this subpara- graph (j) (i) of Section 3 shall be read in a manner that takes into account the provisions in paragraphs (a) (iv), (b) and (c) of Section 5 of this Agreement regarding deemed compensation, deemed age and deemed retirement, and the time of payment of the SRP shall be determined in ac- cordance with such provisions. (BBBB) Except as otherwise specifi- cally provided for in this Agreement, the provi- sions of the Company's qualified retirement plan and of the Basic SERP applicable to the Employee shall apply to the SRP provided hereunder. (ii) Executive Death Benefits. A program (co- ordinated with the Company's regular death benefit program for executives) which includes the following death benefits: (A) Executive life insurance no less fa- vorable than that available under the Company's executive life insurance program in effect as of May 1, 1993; (B) non-contributory, pre-retirement ac- cidental death and dismemberment insurance of Twenty-five Thousand Dollars ($25,000); and (C) pre-retirement coverage under a 24- hour accidental death and dismemberment program, on a non-contributory basis, in an amount equal to three times the Annual Base Salary. (iii) Executive Long-Term Disability Program. During the Employment Period, so long as the Employee is employed by the Company, an unfunded, uninsured program which provides a monthly supplement to the Company's salaried employees' regular long-term dis- ability plan applicable to the Employee, such supple- ment (payable monthly) to be the excess of (A) over (B) , where: (A) is equal to fifty percent (50%) of the sum of (i) one-twelfth of the Annual Base Salary and (ii) one-twelfth (1/12) of the Em- ployee's target EIP (or successor or replacement incentive plans) award for the calendar year in which disability commences, or if the foregoing is inapplicable, his actual EIP (or successor or replacement incentive plans) award for the cal- endar year preceding the year of disability; and (B) is equal to the Employee's benefit from the Company's regular long-term disability plan applicable to salaried employees, plus dis- ability income benefits from other government sources. (iv) Executive Medical Plan. During the Em- ployment Period, so long as the Employee is employed by the Company, a plan that reimburses the Employee for his and his dependents' medical expenses up to the maximum allowable under the Company's welfare benefit plans as in effect on November 1, 1998, which expenses are not reimbursed by the Company's medical plans ap- plicable to salaried employees. (k) Without limiting the generality of the forego- ing, during the Change of Control Period, the incentive, savings and retirement benefit opportunities and the other benefits provided to the Employee pursuant to Sections 3(d), (e), (f), (g), (h) and (i) above shall in no event be less than the most favorable such opportunities and benefits pro- vided to the Employee by the Company and its affiliates at any time during the 120-day period immediately preceding the Effective Date. 4. Termination of Employment. (a) Death or Disability. The Employee's employment shall terminate automatically upon the Employee's death during the Employment Period. If the Company determines in good faith that the Disability (as defined below) of the Employee has occurred during the Employment Period, it may give to the Employee written notice in accordance with Section 12(b) of this Agreement of its intention to terminate the Employee's employment. In such event, the Employee's employment with the Company shall terminate effective on the 30th day after receipt of such notice by the Employee (the "Disability Effective Date"), provided that, within the 30 days after such receipt, the Employee shall not have returned to full-time performance of the Employee's duties. For purposes of this Agreement, "Disability" shall mean the absence of the Employee from the Employee's duties with the Company on a full-time basis for 180 consecutive business days as a result of incapacity due to mental or physical illness which is determined to be total and permanent by a physician selected by the Company or its insurers and acceptable to the Employee or the Employee's legal representative (such agreement as to acceptability not to be withheld unreasonably). (b) Cause. The Company may terminate the Employee's employment during the Employment Period for Cause. For pur- poses of this Agreement, "Cause" shall mean (i) repeated violations by the Employee of the Employee's obligations un- der Section 2 of this Agreement (other than as a result of incapacity due to physical or mental illness) which viola- tions (A) are demonstrably willful and deliberate on the Em- ployee's part, (B) are committed in bad faith or without reasonable belief that such violations are in the best in- terests of the Company and (C) are not remedied in a reason- able period of time after receipt of written notice from the Company specifying such violations or (ii) the conviction of the Employee of a felony involving moral turpitude. (c) Good Reason; Window Period. The Employee may terminate his employment (x) during the Employment Period for Good Reason or (y) during the Window Period without any reason. For purposes of this Agreement, the "Window Period" shall mean the 30-day period immediately following the first anniversary of the Change of Control Date. For purposes of this Agreement, "Good Reason" shall mean: (i) the assignment to the Employee of any du- ties inconsistent in any respect with the Employee's position (including status, offices, titles and re- porting requirements), authority, duties or responsi- bilities as contemplated by Section 2(a) of this Agreement, or any other action by the Company which results in a diminution in such position, authority, duties or responsibilities, excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Com- pany promptly after receipt of notice thereof given by the Employee; (ii) the Company's requiring the Employee to be based at any office or location other than as de- scribed in Section 2(a) of this Agreement; (iii) any failure by the Company to comply with any of the provisions of Section 3 of this Agreement, other than an isolated, insubstantial and inadvertent failure not occurring in bad faith and which is reme- died by the Company promptly after receipt of notice thereof given by the Employee; (iv) any purported termination by the Company of the Employee's employment otherwise than as expressly permitted by this Agreement; or (v) any failure by the Company to comply with and satisfy Section 10(c) of this Agreement, provided that such successor has received at least ten days' prior written notice from the Company or the Employee of the requirements of Section 10(c) of this Agree- ment. For purposes of this Section 4 (c) , any good faith determi- nation of "Good Reason" made by the Employee shall be con- clusive and binding on the Company. (d) Notice of Termination. Any termination by the Company for Cause, or by the Employee without any reason during the Window Period or for Good Reason, shall be commu- nicated by Notice of Termination to the other party hereto given in accordance with Section 12(b) of this Agreement. For purposes of this Agreement, a "Notice of Termination" means a written notice which (i) indicates the specific ter- mination provision in this Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for ter- mination of the Employee's employment under the provision so indicated and (iii) if the Date of Termination (as defined in Section 4(e)) is other than the date of receipt of such notice, specifies the termination date (which date shall be not more than fifteen days after the giving of such notice). The failure by the Employee or the Company to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of the Employee or the Company hereunder or preclude the Employee or the Company from asserting such fact or circumstance in enforcing the Employee's or the Com- pany's rights hereunder. (e) Date of Termination. "Date of Termination" means (i) if the Employee's employment is terminated by the Company for Cause, or by the Employee during the Window Pe- riod or for Good Reason, the date of receipt of the Notice of Termination or any later date specified therein, as the case may be, (ii) if the Employee's employment is terminated by the Company other than for Cause or Disability, the Date of Termination shall be the date on which the Company noti- fies the Employee of such termination and (iii) if the Em- ployee's employment is terminated by reason of death or Dis- ability, the Date of Termination shall be the date of death of the Employee or the Disability Effective Date, as the case may be. 5. Obligations of the Company upon Termination. (a) Good Reason or during the Window Period; Other Than for Cause, Death or Disability. If, during the Employment Period, the Company shall terminate the Employee's employment other than for Cause or Disability or the Employee shall terminate his employment either for Good Reason or without any reason during the Window Period: (i) the Company shall pay to the Employee in a lump sum in cash within 30 days after the Date of Ter- mination the aggregate of the following amounts: (A) the sum of (1) the Employee's Annual Base Salary through the Date of Termination to the extent not theretofore paid, (2) the product of (x) the Highest Annual Bonus and (y) a frac- tion, the numerator of which is the number of days in the current fiscal year through the Date of Termination, and the denominator of which is 365, (3) the Special Bonus, if due to the Em- ployee pursuant to Section 3 (c) of this Agree- ment, to the extent not theretofore paid and (4) any compensation previously deferred by the Em- ployee (together with any accrued interest or earnings thereon) and any accrued vacation pay, in each case to the extent not theretofore paid (the sum of the amounts described in clauses (1), (2), (3) and (4) shall be hereinafter re- ferred to as the "Accrued Obligations"); and (B) the amount (such amount shall be hereinafter referred to as the "Severance Amount") equal to the product of (1) two and (2) the sum of (x) the Employee's Annual Base Salary, (y) the Highest Annual Bonus and (z) the Highest Annual PSIP Contribution; provided, however, that in the event the Special Bonus has not been paid or is not payable to the Employee, such amount shall be increased by the amount of the Special Bonus as if such Special Bonus were then due and payable to the Employee; and, provided further, that the Severance Amount shall be reduced by the present value (determined as provided in Section 280G(d) (4) of the Internal Revenue Code of 1986, as amended (the "Code")), of any other amount of severance relating to salary or bonus continuation to be received by the Employee upon termination of employment of the Employee under any severance plan, policy or arrangement of the Company; and (C) a separate lump-sum supplemental retirement benefit (which shall be payable in addition to the annual pension supplement required to be paid to the Employee under Section 3(j) above) equal to the difference between (1) the actuarial equivalent (utilizing for this purpose the actuarial assumptions utilized with respect to the Company's qualified retirement plan applicable to the Employee during the 90-day period immediately preceding the Date of Termination or, if more favorable to the Employee, as in effect at any time thereafter (the "Retirement Plan")) of the benefit payable under the Retirement Plan and any supplemental and/or excess retirement plan providing benefits for the Employee, including without limitation the SERP, which the Employee would receive if the Employee's employment continued at the compensation level provided for in Section 3 of this Agreement for a period of three years from and after the Date of Termination, assuming for this purpose that all accrued benefits are fully vested and that benefit accrual formulas are no less advantageous to the Employee than those in effect during the 90-day period immediately preceding the Date of Termination or, if more favorable to the Employee, as in effect at any time thereafter, and (2) the actuarial equivalent (utilizing for this purpose the actuarial assumptions utilized with respect to the Retirement Plan during the 90-day period immediately preceding the Date of Termination or, if more favorable to the Employee, as in effect at any time thereafter) of the Employee's actual benefit (paid or payable), if any, under the Retirement Plan and the SERP (as modified by subparagraph (a) (iv) of this Section 5) (the amount of such benefit shall be hereinafter referred to as the "Supplemental Retirement Amount"); and (ii) for a period of three years from and after the Date of Termination, or such longer period as any plan, program, practice or policy may provide, the Company shall continue benefits to the Employee and/or the Employee's family at least equal to those which would have been provided to them in accordance with the plans, programs, practices and policies described in Section 3(e) of this Agreement if the Employee's employment had not been terminated in accordance with the most favorable plans, practices, programs or poli- cies of the Company and its affiliated companies as in effect and applicable generally to other senior execu- tives of the Company and its affiliated companies and their families during the 90-day period immediately preceding the Date of Termination or, if more favor- able to the Employee, as in effect generally at any time thereafter with respect to other senior execu- tives of the Company and its affiliated companies and their families; provided, however, that if the Em- ployee becomes reemployed with another employer and is eligible to receive medical or other welfare benefits under another employer provided plan, the medical and other welfare benefits described herein shall be sec- ondary to those provided under such other plan during such applicable period of eligibility (such continua- tion of such benefits for the applicable period herein set forth shall be hereinafter referred to as "Welfare Benefit Continuation"). For purposes of determining eligibility of the Employee for retiree benefits pur- suant to such plans, practices, programs and policies, the Employee shall be considered to have remained em- ployed until the third anniversary of the Date of Ter- mination and to have retired on the date of such third anniversary; (iii) to the extent not theretofore paid or pro- vided, the Company shall timely pay or provide to the Employee and/or the Employee's family any other amounts or benefits required to be paid or provided or which the Employee and/or the Employee's family is eligible to receive pursuant to this Agreement and un- der any plan, program, policy or practice or contract or agreement of the Company and its affiliated compa- nies as in effect and applicable generally to other senior executives of the Company and its affiliated companies and their families during the 90-day period immediately preceding the Date of Termination or, if more favorable to the Employee, as in effect generally thereafter with respect to other senior executives of the Company and its affiliated companies and their families (such other amounts and benefits shall be hereinafter referred to as the "Other Benefits"); and (iv) for all purposes of subparagraph (j) (i) of Section 3 above (including without limitation both the computation and time of payment of the SRP), the Employee shall be deemed to have retired at age 62 on the Date of Termination with final average earnings computed as if the compensation for his final three years consisted of the compensation paid pursuant to subparagraph (a) (i) (B) of this Section 5 and the compensation for the two years preceding his final three years consisted of the compensation actually paid to him with respect to the year in which the Date of Termination occurs (including without limitation the compensation payable pursuant to subparagraph (a) (i) (A) of this Section 5) and the compensation actu- ally paid to him with respect to the year preceding the year in which the Date of Termination occurs. (b) Death. If the Employee's employment is terminated by reason of the Employee's death during the Employment Period, the Company shall have no further obligations to the Employee's legal representatives under this Agreement, other than for (i) payment of Accrued Obligations (which shall be paid to the Employee's estate or beneficiary, as applicable, in a lump sum in cash within 30 days of the Date of Termination) and the timely payment or provision of the Welfare Benefit Continuation and Other Benefits (excluding, in each case, Death Benefits (as defined below)) and (ii) payment to the Employee's estate or beneficiary, as applicable, in a lump sum in cash within 30 days of the Date of Termination of an amount equal to the greater of (A) the sum of the Severance Amount and the Supplemental Retirement Amount and (B) the present value (determined as provided in Section 280G(d) (4) of the Code) of any cash amount to be received by the Employee or the Employee's family as a death benefit pursuant to the terms of any plan, policy or arrangement of the Company and its affiliated companies, including but not limited to the death benefits described in Section 3(j) (ii), but not including any proceeds of life insurance covering the Employee paid for on a contributory basis by the Employee (which shall be paid in any event as an Other Benefit) (the benefits included in this clause (B) shall be hereinafter referred to as the "Death Benefits"). For all purposes of determining the Survivor's Benefit, if any, pursuant to subparagraph (j) (i) of Section 3 above (including without limitation both the computation and time of payment of the Survivor's Benefit), the Employee shall be deemed to have attained age 62 and retired immediately before his death. For purposes of determining the Supplemental Retirement Amount payable pursuant to this subparagraph (b), references in the definition of "Supplemental Retirement Amount" set forth in subparagraph (a) (i) (C) of this Section 5 to the Employee's retirement benefits shall be deemed to refer to the Survivor's Benefit and the other retirement benefits payable to the Employee's surviving spouse and/or beneficiaries and estate. (c) Disability. If the Employee's employment is terminated by reason of the Employee's Disability during the Employment Period, the Company shall have no further obligations to the Employee under this Agreement, other than for (i) payment of Accrued Obligations (which shall be paid to the Employee in a lump sum in cash within 30 days of the Date of Termination) and the timely payment or provision of the Welfare Benefit Continuation and Other Benefits (excluding, in each case, Disability Benefits (as defined below)) and (ii) payment to the Employee in a lump sum in cash within 30 days of the Date of Termination of an amount equal to the greater of (A) the sum of the Severance Amount and the Supplemental Retirement Amount and (B) the present value (determined as provided in Section 280G(d) (4) of the Code) of any cash amount to be received by the Employee as a disability benefit pursuant to the terms of any plan, policy or arrangement of the Company and its affiliated companies, but not including any proceeds of disability insurance covering the Employee paid for on a contributory basis by the Employee (which shall be paid in any event as an Other Benefit) (the benefits included in this clause (B) shall be hereinafter referred to as the "Disability Benefits"). For all purposes of determining the SRP pursuant to subparagraph (j) (i) of Section 3 above (including without limitation both the computation and the time of payment of the SRP), the Employee shall be deemed to have retired at age 62 on the Date of Termination. (d) Cause; Other than for Good Reason. If the Em- ployee's employment shall be terminated for Cause during the Employment Period, the Company shall have no further obliga- tions to the Employee under this Agreement other than the obligation to pay to the Employee Annual Base Salary through the Date of Termination plus the amount of any compensation previously deferred by the Employee, in each case to the ex- tent theretofore unpaid. If the Employee terminates employ- ment during the Employment Period, excluding a termination either for Good Reason or without any reason during the Win- dow Period, the Company shall have no further obligations to the Employee, other than for Accrued Obligations and the timely payment or provision of Other Benefits. In such case, all Accrued Obligations shall be paid to the Employee in a lump sum in cash within 30 days of the Date of Termina- tion. (e) Resolution of Disputes. If there shall be any dispute between the Company and the Employee about (i) in the event of any termination of the Employee's employment by the Company, whether such termination was for Cause, or (ii) in the event of any termination by the Employee of his em- ployment for Good Reason, whether the Employee determined in good faith that Good Reason existed, then, unless and until there is a final, nonappealable judgment by a court of com- petent jurisdiction declaring that such termination was for Cause or that such determination was not made in good faith, the Company shall pay all amounts, and provide all benefits, to the Employee and/or his family or other beneficiaries, as the case may be, that the Company would be required to pay or provide pursuant to Section 5(a) as though such termina- tion were by the Company without Cause or by the Employee with Good Reason; provided, however, that the Company shall not be required to pay any disputed amounts pursuant to this paragraph (e) except upon receipt of an undertaking by or on behalf of the Employee to repay all such amounts to which he is ultimately adjudged by such court not to be entitled. (f) If the Company shall deliver to the Employee a written notice of its election to terminate his employment, as provided in the second proviso to Section 1, then his em- ployment shall be deemed to have been terminated by the Com- pany without Cause, unless such notice states that it is a "Notice of Termination" and satisfies the requirements set forth in Section 4(d). If the Employee shall deliver to the Company such a notice, then his employment shall be deemed to have been terminated by him without Good Reason, unless such notice states that it is a "Notice of Termination" and satisfies the requirements set forth in Section 4(d). 6. Non-exclusivity of Rights. Except as provided in Sections 5(a)(ii), 5(b) and 5(c) of this Agreement, nothing in this Agreement shall prevent or limit the Employee's continuing or future participation in any plan, program, policy or practice pro- vided by the Company or any of its affiliated companies and for which the Employee may qualify, nor shall anything herein limit or otherwise affect such rights as the Employee may have under any contract or agreement entered into after the date hereof with the Company or any of its affiliated companies. Amounts which are vested benefits or which the Employee is otherwise entitled to re- ceive under any plan, policy, practice or program of, or any con- tract or agreement entered into after the date hereof with, the Company or any of its affiliated companies at or subsequent to the Date of Termination shall be payable in accordance with such plan, policy, practice or program or contract or agreement except as ex- plicitly modified by this Agreement. 7. Full Settlement. The Company's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against the Employee or oth- ers. In no event shall the Employee be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Employee under any of the provisions of this Agreement and, except as provided in Section 5(a)(ii) of this Agreement, such amounts shall not be reduced whether or not the Employee obtains other employment. The Company agrees to pay promptly as incurred, to the full extent permitted by law, all le- gal fees and expenses which the Employee may reasonably incur as a result of any contest (regardless of the outcome thereof) by the Company, the Employee or others of the validity or enforceability of, or liability under, any provision of this Agreement or any guarantee of performance thereof (including as a result of any contest by the Employee about the amount of any payment pursuant to this Agreement), plus in each case interest on any delayed pay- ment at the applicable Federal rate provided for in Section 7872(f)(2)(A) of the Code. 8. Certain Additional Payments by the Company. (a) Anything in this Agreement to the contrary not- withstanding, in the event it shall be determined that any payment or distribution by the Company to or for the benefit of the Employee (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Section 8) (a "Payment") would be subject to the excise tax imposed by Section 4999 of the Code (or any successor provision) or any interest or penal- ties are incurred by the Employee with respect to such ex- cise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax") , then the Employee shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Employee of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, the Employee retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. (b) Subject to the provisions of Section 8(c) of this Agreement, all determinations required to be made under this Section 8, including whether and when a Gross-Up Pay- ment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determi- nation, shall be made by Deloitte & Touche (or any successor thereto by merger or operation of law) (the "Accounting Firm") which shall provide detailed supporting calculations both to the Company and the Employee within 15 business days of the receipt of a request from the Employee, or such ear- lier time as is requested by the Company. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change of Con- trol, the Employee shall appoint another nationally recog- nized accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section 8, shall be paid by the Company to the Employee within five days of the receipt of the Accounting Firm's determination. If the Accounting Firm determines that no Excise Tax is pay- able by the Employee, it shall furnish the Employee with a written opinion that failure to report the Excise Tax on the Employee's applicable federal income tax return would not result in the imposition of a negligence or similar penalty. Any determination by the Accounting Firm shall be binding upon the Company and the Employee. As a result of the un- certainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company ex- hausts its remedies pursuant to Section 8(c) of this Agree- ment and the Employee thereafter is required to make a pay- ment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Employee. (c) The Employee shall notify the Company in writing of any claim by the Internal Revenue Service that, if suc- cessful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten business days after the Employee is informed in writing of such claim and shall ap- prise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Employee shall not pay such claim prior to the expiration of the 30- day period following the date on which he gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Employee in writing prior to the expiration of such period that it desires to contest such claim, the Employee shall: (i) give the Company any information reasona- bly requested by the Company relating to such claim, (ii) take such action in connection with con- testing such claim as the Company shall reasonably re- quest in writing from time to time, including, without limitation, accepting legal representation with re- spect to such claim by an attorney reasonably selected by the Company, (iii) cooperate with the Company in good faith in order effectively to contest such claim, and (iv) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay di- rectly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Employee harmless, on an after- tax basis, for any Excise Tax or income tax (including in- terest and penalties with respect thereto) imposed as a re- sult of such representation and payment of costs and ex- penses. Without limitation on the foregoing provisions of this Section 8(c), the Company shall control all proceedings taken in connection with such contest and, at its sole op- tion, may pursue or forgo any and all administrative ap- peals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole op- tion, either direct the Employee to pay the tax claimed and sue for a refund or to contest the claim in any permissible manner, and the Employee agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs the Employee to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Employee, on an interest-free basis and shall indemnify and hold the Employee harmless, on an after-tax basis, from any Excise Tax or income tax (includ- ing interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed in- come with respect to such advance; and provided, further that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Employee with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to is- sues with respect to which a Gross-Up Payment would be pay- able hereunder and the Employee shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (d) If, after the receipt by the Employee of an amount advanced by the Company pursuant to Section 8(c) of this Agreement, the Employee becomes entitled to receive any refund with respect to such claim, the Employee shall (sub- ject to the Company's complying with the requirements of Section 8(c) of this Agreement) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Employee of an amount advanced by the Company pursuant to Section 8(c) of this Agreement, a determination is made that the Employee shall not be enti- tled to any refund with respect to such claim and the Com- pany does not notify the Employee in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. 9. Confidential Information and Competitive Con- duct. (a) The Employee shall hold in a fiduciary capacity for the benefit of the Company all secret or confidential information, knowledge or data relating to the Company or any of its affiliated companies (collectively the "Affili- ated Companies"), and their respective businesses, which shall have been obtained by the Employee during the Em- ployee's employment by the Company or any of its affiliated companies and which shall not be or become public knowledge (other than by acts by the Employee or representatives of the Employee in violation of this Agreement). After termi- nation of the Employee's employment with the Company, the Employee shall not, without the prior written consent of the Company or as may otherwise be required by law or legal pro- cess, communicate or divulge any such information, knowledge or data to anyone other than the Company and those desig- nated by it. (b) During the Noncompetition Period (as defined be- low), the Executive shall not, without the prior written consent of the Board (which consent shall not be unreasona- bly withheld), engage in or become associated with a Com- petitive Activity. For purposes of this Section 9(b): (i) the "Noncompetition Period" means (A) the period during which the Executive is employed by the Company, plus (B) two years following the termination of employment for any reason other than (w) termination by the Executive with Good Rea- son, (x) termination by the Company without Cause, (y) re- tirement at or after the Executive has attained age 62 or (z) disability; (ii) a "Competitive Activity" means any business or other endeavor that is engaged in research, de- velopment and/or sale of human and/or animal pharmaceutical products, in any county of any state of the United States or any other country; and (iii) the Executive shall be consid- ered to have become "associated with a Competitive Activity" if the Executive becomes directly or indirectly involved as an owner, principal, employee, officer, director, independ- ent contractor, representative, stockholder, financial backer, agent, partner, advisor, lender, or in any other in- dividual or representative capacity with any individual, partnership, corporation or other organization that is en- gaged in a Competitive Activity. Notwithstanding the fore- going, (i) the Executive may make and retain investments during the Noncompetition Period which do not constitute a controlling interest of any entity engaged in a Competitive Activity, if such investment is made on a passive basis and the Executive does not act as an employee, officer, direc- tor, independent contractor, representative, agent or advi- sor with respect to such entity and so long as the making or retaining of such investment is not contrary to the best in- terests of the Company, (ii) if as a result of a reorganiza- tion, merger or consolidation the Executive is assigned a position (including status, offices, title, reporting re- quirements and prospects), authority, duties or responsi- bilities which diminish the Executive's position, authority, duties or responsibilities relative to the 120-day period immediately preceding such reorganization, merger or con- solidation, then this Section 9(b) shall not apply, and (iii) this Section 9(b) shall not apply after the Effective Date. (c) The Executive acknowledges and agrees that: (i) the purpose of the foregoing covenants is to protect the goodwill, trade secrets and other confidential information of the Company; (ii) because of the nature of the business in which the Company and the Affiliated Companies are en- gaged and because of the nature of the confidential informa- tion to which the Executive has access, it would be imprac- tical and excessively difficult to determine the actual damages of the Company and the Affiliated Companies in the event the Executive breached any of the covenants of this Section 9; and (iii) remedies at law (such as monetary dam- ages) for any breach of the Executive's obligations under this Section 9 would be inadequate. The Executive therefore agrees and consents that if he commits any breach of a cove- nant under this Section 9 or threatens to commit any such breach, the Company shall have the right (in addition to, and not in lieu of, any other right or remedy that may be available to it) to temporary and permanent injunctive re- lief from a court of competent jurisdiction, without posting any bond or other security and without the necessity of proof of actual damage. With respect to any provision of this Section 9 finally determined by a court of competent jurisdiction to be unenforceable, the Executive and the Com- pany hereby agree that such court shall have jurisdiction to reform this Agreement or any provision hereof so that it is enforceable to the maximum extent permitted by law, and the parties agree to abide by such court's determination. If any of the covenants of this Section 9 are determined to be wholly or partially unenforceable in any jurisdiction, such determination shall not be a bar to or in any way diminish the Company's right to enforce any such covenant in any other jurisdiction. (d) In no event shall an asserted violation of the provisions of this Section 9 constitute a basis for defer- ring or withholding any amounts otherwise payable to the Em- ployee under this Agreement. 10. Successors. (a) This Agreement is personal to the Employee and without the prior written consent of the Company shall not be assignable by the Employee otherwise than by will or the laws of descent and distribution. This Agreement shall in- ure to the benefit of and be enforceable by the Employee's legal representatives. (b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. (c) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agree- ment, "Company" shall mean the Company as hereinbefore de- fined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. 11. Certain Definitions. The following defined terms used in this Agreement shall have the meanings indicated: (a) The "Change of Control Date" shall mean the first date on which a Change of Control occurs. Anything in this Agreement to the contrary notwithstanding, if a Change of Control occurs and if the Employee's employment with the Company is terminated or the Employee ceases to have the po- sition of President and Chief Operating Officer of the Com- pany, as set forth in Section 2(a), prior to the date on which the Change of Control occurs, and if it is reasonably demonstrated by the Employee that such termination or cessa- tion (i) was at the request of a third party who has taken steps reasonably calculated to effect the Change of Control or (ii) otherwise arose in connection with or anticipation of the Change of Control, then for all purposes of this Agreement the "Change of Control Date" shall mean the date immediately prior to the date of such termination or cessa- tion. (b) The "Change of Control Period" shall mean the period commencing on the Change of Control Date and ending on the last day of the Employment Period. (c) "Change of Control" shall mean: (i) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person"), of benefi- cial ownership (within the meaning of Rule 13d-3 prom- ulgated under the Exchange Act) of 20% or more of ei- ther (A) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (B) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that the following acquisitions shall not constitute a Change of Control: (A) any acquisition directly from the Company (excluding an acquisition by virtue of the exercise of a conversion privilege), (B) any acquisition by the Company, (C) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any of its affiliated companies or (D) any acquisition by any corporation pursuant to a transaction described in clauses (A), (B) and (C) of subparagraph (iii) of this paragraph (c); and provided, further, that if any Person's bene- ficial ownership of the Outstanding Company Voting Stock or Outstanding Company Voting Securities reaches or exceeds 20% as a result of a transaction described in clause (A) or (B) of the foregoing proviso, and such Person subsequently acquires beneficial ownership of additional common stock or voting securities of the Company, such subsequent acquisition shall be treated as an acquisition that causes such Person to own 20% or more of the Outstanding Company Voting Stock or Outstanding Company Voting Securities; or (ii) Individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose elec- tion, or nomination for election by the Company's shareholders, was approved by a vote of at least a ma- jority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of either an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Incumbent Board; or (iii) Approval by the shareholders of the Com- pany of a reorganization, merger or consolidation, in each case, unless, following such reorganization, merger or consolidation, (A) all or substantially all of the individuals and entities who were the benefi- cial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such reorganization, merger or consolidation beneficially own, directly or indi- rectly, more than 60% of, respectively, the then out- standing shares of common stock and the combined vot- ing power of the then outstanding voting securities entitled to vote generally in the election of direc- tors, as the case may be, of the corporation resulting from such reorganization, merger or consolidation in substantially the same proportions as their ownership, immediately prior to such reorganization, merger or consolidation of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (B) no Person (excluding the Company and any employee benefit plan (or related trust) of the Com- pany or of the corporation resulting from such reor- ganization, merger or consolidation) beneficially owns, directly or indirectly, 20% or more of, respec- tively, the then outstanding shares of common stock of the corporation resulting from such reorganization, merger or consolidation or the combined voting power of the then outstanding voting securities of such cor- poration and (C) at least a majority of the members of the board of directors of the corporation resulting from such reorganization, merger or consolidation were members of the Incumbent Board at the time of the exe- cution of the initial agreement providing for such re- organization, merger or consolidation; or (iv) Approval by the shareholders of the Com- pany of (A) a complete liquidation or dissolution of the Company or (B) the sale or other disposition of all or substantially all of the assets of the Company, other than to a corporation, with respect to which, following such sale or other disposition, (I) more than 60% of, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, di- rectly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Com- mon Stock and Outstanding Company Voting Securities immediately prior to such sale or other disposition in substantially the same proportion as their ownership, immediately prior to such sale or other disposition, of the Outstanding Company Common Stock and Outstand- ing Company Voting Securities, as the case may be, (II) no Person (excluding the Company and any employee benefit plan (or related trust) of the Company or of such corporation) then beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors and (III) at least a majority of the members of the board of direc- tors of such corporation were members of the Incumbent Board at the time of the execution of the initial agreement or action of the Board providing for such sale or other disposition of assets of the Company. (d) The "Effective Date" shall mean the first date during the Employment Period on which a Change of Control occurs. Anything in this Agreement to the contrary notwith- standing, if a Change of Control occurs and if the Em- ployee's employment with the Company is terminated or the Employee ceases to hold the offices set forth in Section 2 above prior to the date on which the Change of Control oc- curs, and if it is reasonably demonstrated by the Employee that such termination of employment or cessation of status as an officer (i) was at the request of a third party who has taken steps reasonably calculated to effect the Change of Control or (ii) otherwise arose in connection with or an- ticipation of the Change of Control, then for all purposes of this Agreement the "Effective Date" shall mean the date immediately prior to the date of such termination of employ- ment or cessation of status as an officer. (e) The term "affiliated company" shall mean any company controlled by, controlling or under common control with the Company. 12. Miscellaneous. (a) This Agreement shall be governed by and con- strued in accordance with the laws of the State of New Jer- sey, without reference to principles of conflict of laws. The captions of this Agreement are not part of the provi- sions hereof and shall have no force or effect. This Agree- ment may not be amended, modified, repealed, waived, ex- tended or discharged except by an agreement in writing signed by the party against whom enforcement of such amend- ment, modification, repeal, waiver, extension or discharge is sought. No person, other than pursuant to a resolution of the Board or a committee thereof, shall have authority on behalf of the Company to agree to amend, modify, repeal, waive, extend or discharge any provision of this Agreement or anything in reference thereto. (b) All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Employee: c/o Schering-Plough Corporation 2000 Galloping Hill Road Kenilworth, New Jersey 07033 If to the Company: Schering-Plough Corporation One Giralda Farms Madison, New Jersey 07940-1000 Attention: General Counsel or to such other address as either party shall have fur- nished to the other in writing in accordance herewith. No- tice and communications shall be effective when actually re- ceived by the addressee. (c) The invalidity or unenforceability of any provi- sion of this Agreement shall not affect the validity or en- forceability of any other provision of this Agreement. (d) The Company may withhold from any amounts pay- able under this Agreement such Federal state or local taxes as shall be required to be withheld pursuant to any applica- ble law or regulation. (e) The Employee's or the Company's failure to in- sist upon strict compliance with any provision hereof or any other provision of this Agreement or the failure to assert any right the Employee or the Company may have hereunder in- cluding, without limitation, the right of the Employee to terminate employment for Good Reason pursuant to Section 4(c) of this Agreement, shall not be deemed to be a waiver of such provision or right or any other provision or right of this Agreement. (f) When used herein in connection with plans, pro- grams and policies relating to the Employee, employees, com- pensation, benefits, perquisites, executive benefits, serv- ices and similar words and phrases, the word "Company" shall be deemed to include Schering Corporation and Plough, Inc., wholly-owned subsidiaries of the Company. (g) This instrument contains the entire agreement of the parties, and all promises, representations, understand- ings, arrangements and prior agreements are merged herein and superseded hereby, including without limitation the Em- ployment Agreement between the Company and the Executive dated as of September 27, 1994. IN WITNESS WHEREOF, the Employee and, pursuant to due authorization from its Board of Directors, the Company have caused this Agreement to be executed as of the day and year first above written. Raul E. Cesan SCHERING-PLOUGH CORPORATION Richard J. Kogan Chairman of the Board and Chief Executive Officer 37854-1.DOC SCAN CLEANUP Corporate Long Agreement Template Attached Heading 1 - 1. Heading 2 - (a) Heading 3 = (i) Heading 4 = (A) - -29- EX-10 5 SCHERING-PLOUGH CORPORATION Amendment to Directors Deferred Compensation Plan The Schering-Plough Corporation Directors Deferred Compensation Plan is hereby amended, effective December 7, 1998, by deleting Paragraph III, Section B thereof and substituting therefore the following: III.B. At least one year prior to the date on which a Director will terminate service as a Director, he or she shall elect to receive payment in cash of his or her Deferred Account upon termination of service, either in (i) a lump sum or (ii) in approximately equal annual installments of up to ten (10) years, such payment or payments to be made or commence, as the case may be, within thirty (30) days following the termination of service. If no such election is timely made, then payment of his or her Deferred Account shall be made in a lump sum upon termination of service. Any election shall be delivered in writing to the Secretary of the Corporation and the latest election which is made at least one year prior to the date of termination of service shall be deemed final and irrevocable. ex-10f.doc EX-10 6 AMENDED AND RESTATED SERP RABBI TRUST THIS AGREEMENT, made as of the 1st day of November, 1998 (the "Trust Agreement"), among SCHERING-PLOUGH CORPORATION, a corporation organized and existing under the laws of New Jersey (the "Company"), THE NORTHERN TRUST COMPANY, having its principal offices in Chicago, Illinois (the "Trustee") and BUCK CONSULTANTS, INC. having its principal offices in New York, New York (the "Trustee's Agent"). W I T N E S S E T H WHEREAS, the Trust Agreement was originally entered into as of March 31, 1987 by and among the Company, The Chase Manhattan Bank (National Association) as trustee, and The Wyatt Company as trustee's agent (the "Original Trust Agreement"); WHEREAS, the Original Trust Agreement was amended and restated through October 1, 1993, further amended as of October 1, 1995, and amended and restated through January 22, 1997; WHEREAS, the Company wishes to amend and restate the Original Trust Agreement, as so amended and restated, to provide for mandatory contributions upon a potential change of control; WHEREAS, the Company has incurred and expects to continue to incur certain unfunded retirement income, deferred compensation liability and other obligations to or with respect to certain key management employees and directors pursuant to the terms of the following plans and employment agreements of the Company: (i) the Supplemental Executive Retirement Plan (the "SERP"); (ii) the Retirement Benefits Equalization Plan (the "BEP"); (iii) the Pension Plan for Directors (the "Directors Pension Plan"); (iv) the Employment Agreement with Hugh A. D'Andrade dated as of June 28, 1994, as amended by the First Amendment thereto dated as of March 1, 1995, the Second Amendment thereto dated as of December 11, 1995, the Third Amendment thereto dated as of February 25, 1998, the Fourth Amendment thereto dated as of November 1, 1998, and as subsequently amended from time to time the (the "D'Andrade Agreement"); (v) the Employment Agreement with Richard J. Kogan dated as of September 26, 1989, as amended by the First Amendment thereto dated as of June 28, 1994, the Second Amendment thereto dated as of March 1, 1995, the Third Amendment thereto dated as of October 24, 1995, the Fourth Amendment thereto dated as of February 25, 1998, the Fifth Amendment thereto dated as of November 1, 1998, and as subsequently amended from time to time (the "Kogan Agreement"); (vi) the Employment Agreement with Robert P. Luciano dated as of September 26, 1989, as amended by the First Amendment thereto dated as of June 28, 1994, the Second Amendment thereto dated as of March 1, 1995, the Third Amendment thereto dated as of February 25, 1998, and as subsequently amended from time to time (the "Luciano Agreement"); (vii) the Employment Agreement with Raul E. Cesan dated as of November 1, 1998 (the "Cesan Agreement"); (viii) the Deferred Compensation Plan (the "Deferred Compensation Plan") (the plans and employment agreements listed in clauses (i) through (viii) being hereinafter collectively referred to as the "A Plans"); (ix) the Directors Deferred Stock Equivalency Program (the "Directors Equivalency Program" or the "S Plan"); and (x) such other plans and employment agreements for the Corporation as the Executive Compensation and Organization Committee may designate from time to time as A Plans or S Plans (all such plans and employment agreements being hereinafter individually called a "Plan" or collectively the "Plans"); WHEREAS, the Company desires to provide additional assurance to some or all such key management employees and directors (the "Participants") and their surviving spouses, beneficiaries or estates under the Plans (collectively, the "Beneficiaries") that their unfunded retirement benefit and deferred compensation rights under the Plans will in the future be met or substantially met by application of the procedures set forth herein; WHEREAS, the Company wishes to establish separate accounts (hereinafter the "Accounts") with respect to some or all of the Participants in the Plans in order to provide a source of payments as such are required under the terms of such Plans; WHEREAS, the Company shall, in its discretion or as expressly required by the provisions of this Agreement, make contributions to the Trust on behalf of the Accounts; WHEREAS, amounts in each separate Account, and the earnings thereon, shall be used by the Trustee to satisfy the liabilities of the Company under the Plan or Plans with respect to the Participant for whom such separate Account has been established and such utilization shall be in accordance with the procedures set forth herein; WHEREAS, upon satisfaction of all liabilities of the Company under the Plan or Plans with respect to a Participant and Beneficiary in respect of whom a separate Account has been established, the balance, if any, remaining in such Account shall be allocated to the Accounts of other Participants and Beneficiaries for whom such Accounts have been established in accordance with the procedures set forth herein; and WHEREAS, upon satisfaction of all liabilities of the Company under the Plans with respect to all Participants in respect of whom separate Accounts have been established, the balance, if any, remaining in such Accounts shall revert to the Company, except that all amounts in all such Accounts shall at all times be subject under this Agreement to the claims of the Company's creditors as hereinafter provided; NOW, THEREFORE, in consideration of the premises and mutual and independent promises herein, the parties hereto covenant and agree as follows: ARTICLE I 1.1 The Company hereby establishes with the Trustee an irrevocable Trust consisting of such sums of money and such property acceptable to the Trustee as shall from time to time be paid or delivered to the Trustee and the earnings and profits thereon. All such money and property, all investments made therewith and proceeds thereof, less the payments or other distributions which, at the time of reference, shall have been made by the Trustee, as authorized herein, are referred to herein as the "Trust Property" and shall be held by the Trustee collectively in two separate funds (the "SERP A Fund" and the "SERP S Fund"; each individually a "Fund" and collectively, the "Funds"), IN TRUST, in accordance with the provisions of this Agreement. The Trust Property relating to each Fund may be held by the Trustee without distinction or separation by virtue of Plan Participants' interests in their Accounts maintained by the Trustee's Agent as hereinafter provided. The SERP A Fund shall be utilized to fund the retirement income, deferred compensation liability and other obligations to or with respect to certain key management employees and directors pursuant to the terms of the A Plans. The SERP S Fund shall be utilized to fund the deferred compensation liability to directors pursuant to the terms of the S Plans. 1.2 The Trustee shall hold, manage, invest and otherwise administer each Fund pursuant to the terms of this Agreement. The Trustee shall be responsible only for contributions actually received by it hereunder. The amount of each contribution by the Company to each Fund shall be determined in the sole discretion of the Company and the Trustee shall have no duty or responsibility with respect thereto. 1.3 The Trustee's Agent shall maintain in an equitable manner a separate Account record for each Participant for each applicable Plan. Each account record shall indicate the Participant's share of the relevant Fund under such Plan. The Company shall certify to the Trustee's Agent at the time of each contribution to a Fund the amount of such contribution being made in respect of each Participant under each Plan. Each such contribution shall be credited to the Participant's Account in SERP A Fund or SERP S Fund as of the last business day of the calendar quarter in which such contribution is made. Each Fund shall be revalued by the Trustee as of the last business day of each calendar quarter ("Valuation Date") at current market values, as determined by the Trustee, and the Trustee shall certify the value thereof to the Trustee's Agent. The Trustee's Agent shall apportion each Fund as revalued as of such Valuation Date less any contributions made by the Company during the preceding quarter among the Accounts of Participants in proportion to their respective interests in each Fund on the immediately preceding Valuation Date, except that for purposes of such apportionment the Accounts of Participants as of the Valuation Date shall not include any contributions or forfeitures credited to their Accounts as of such Valuation Date and any payments to the Participants made after the immediately preceding Valuation Date shall be charged to their Accounts as of the immediately preceding Valuation Date. Where a Participant's Account within a Fund may be applied to provide benefits to or in respect of such Participant under more than one Plan, the separate account record for such Participant under each such Plan shall be maintained by the Trustee's Agent in such manner as the Trustee's Agent, in its sole discretion, considers to be appropriate. ARTICLE II 2.1 Notwithstanding any provision in this Agreement to the contrary, if at any time while the Trust is still in existence the Company becomes insolvent (as defined herein), the Trustee shall upon written notice thereof suspend the payment of all benefits from each Fund and shall thereafter hold each Fund in suspense for the benefit of the Company's creditors until it receives a court order directing the disposition of each Fund; provided, however, the Trustee may deduct or continue to deduct its fees and expenses and other expenses of the Trust, including taxes, pending the receipt of such court order. The Company shall be considered to be insolvent if (a) it is unable to pay its debts as they fall due or (b) bankruptcy or insolvency proceedings are initiated by its creditors or the Company or any third party under the Bankruptcy Act of the United States or the bankruptcy laws of any State alleging that the Company is insolvent or bankrupt. By its approval and execution of this Agreement, the Company represents and agrees that its Board of Directors and Chief Executive Officer, as from time to time acting, shall have the fiduciary duty and responsibility on behalf of the Company's creditors to give to the Trustee prompt written notice of any event of the Company's insolvency and the Trustee shall be entitled to rely thereon to the exclusion of all directions or claims to pay benefits thereafter made. If the Trust Department of the Trustee receives written allegations of an event of insolvency from a third party, the Trustee shall request that the Company's independent auditors determine whether the Company is insolvent; the Trustee may conclusively rely on written certification of solvency or insolvency received from such auditors. If, after an event of insolvency, the Company later becomes solvent without the entry of a court order concerning the disposition of the Trust Property or any bankruptcy or insolvency proceedings referred to in (b) above are dismissed, the Company shall by written notice so inform the Trustee and the Trustee shall thereupon resume all its duties and responsibilities under this Agreement without regard for this Section 2.1 until and unless the Company again becomes insolvent as such term is defined herein. 2.2 The Company represents and agrees that the Trust established under this Agreement does not fund and is not intended to fund the Plans or any other employee benefit plan or program of the Company. Such Trust is and is intended to be a depository arrangement with the Trustee for the setting aside of cash and other assets of the Company as and when it so determines in its sole discretion for the meeting of part or all of its future retirement obligations and deferred compensation liability to or with respect to some or all of the Participants and their Beneficiaries under the Plans. Except as set forth in Article XI, contributions by the Company to the Trust shall be in amounts determined solely by the Company and shall be in respect of only those Plan Participants selected by the Company from time to time as it determines. The purpose of this Trust is to provide funds from which retirement benefits and deferred compensation may be payable under the Plans and as to which Plan Participants with Accounts hereunder and their Beneficiaries may, by exercising the procedures set forth herein, have access to some or all of their benefits as such become due without having the payment of such benefits subject to the administrative control of the Company unless the Company is adjudicated to be bankrupt or insolvent. The Company further represents that each of the SERP, the Deferred Compensation Plan and the BEP is an unfunded deferred compensation plan for a select group of management and highly compensated employees and as such is exempt from the application of the Employee Retirement Income Security Act of 1974 ("ERISA") except for the disclosure requirements applicable to such Plan for which the Company bears full responsibility as to compliance; and that each of the Directors Pension Plan, Directors Equivalency Program and the employment agreements with each of Messrs. Cesan, D'Andrade, Kogan and Luciano is not an employee benefit plan and is not subject to ERISA. The Company further represents that the Plans are not qualified under Section 401 of the United States Internal Revenue Code and therefore are not subject to any of the Code requirements applicable to tax-qualified plans. ARTICLE III 3.1 By their acceptance of this Trust the Trustee hereby agrees to the designation by the Company of Buck Consultants, Inc. as the Trustee's Agent and Buck Consultants, Inc. agrees to act as such Trustee's Agent under this Trust Agreement. It is herein recognized that said Trustee's Agent is also acting as the independent consulting actuary of the Company with respect to the Plans and that the Trustee shall have no responsibility hereunder for the continued retention of such Trustee's Agent and/or any responsibility assigned to said Agent or its performance thereof. In the event the Company replaces or no longer uses said firm as its independent consulting actuary, the Trustee in its sole discretion may, but need not, designate a new Trustee's Agent or may continue to use the same Trustee's Agent. Buck Consultants, Inc. and any successor Trustee's Agent appointed hereunder may resign at any time by delivering sixty (60) days advance written notice to the Company and to the Trustee, in which event the Trustee shall designate a new Trustee's Agent; provided, however, any Trustee's Agent appointed by the Trustee shall be independent of the Company. The Company shall pay or reimburse the Trustee for all fees and expenses of the Trustee's Agent and shall indemnify and hold the Trustee harmless for any liability, loss, suit or expense (including attorneys' fees) in connection with or arising out of actions or omissions of said Trustee's Agent (including any direction to or failure to direct the Trustee) and shall indemnify and hold the Trustee's Agent harmless for any actions or omissions of the Trustee. 3.2 Except for the records dealing solely with the Funds and their respective investments, which shall be maintained by the Trustee, the Trustee's Agent shall maintain all the Plan Participant records contemplated by this Agreement, including the maintenance of the separate Accounts of each Participant under this Agreement and the maintenance of the data necessary to determine, from time to time, the benefits of Participants under the Plans. The Trustee's Agent shall also prepare and distribute Participants' statements when requested by the Company or a Participant and shall be responsible for information with respect to payments to Participants and their Beneficiaries and shall perform such other duties and responsibilities as the Trustee determines is necessary or advisable to achieve the objectives of this Agreement and the Trustee shall have no responsibility therefor and shall be entitled to rely fully upon the information provided by the Trustee's Agent. 3.3 Upon the establishment of this Trust or as soon thereafter as practicable, the Company shall furnish to the Trustee's Agent all the information necessary to determine the benefits payable to or with respect to each Participant in the Plans, including any benefits payable after the Participant's death and the recipient of same. The Company shall regularly, at least annually, furnish revised up-dated information to the Trustee's Agent. Based on the foregoing information the Trustee's Agent shall prepare an annual benefits statement in respect of each Participant and shall furnish a copy of same to the Participant or his Beneficiary and to the Company. In the event the Company refuses or neglects to provide up-dated Participant information, as contemplated herein, the Trustee's Agent shall be entitled to rely upon the most recent information furnished to it by the Company. 3.4 Upon the direction of the Company or upon the proper application of a Participant or Beneficiary of a deceased Participant, the Trustee's Agent shall determine a Participant's or Beneficiary's eligibility for benefits and the amount thereof and, if benefits are payable, shall prepare a certification of same to the Trustee. Such certification shall include the amount of such benefits, the manner of payment and the name, last known address and social security number of the recipient and shall be updated annually and upon receipt by the Trustee's Agent of a notice of a benefit change under the Plan from the Company. Upon the receipt of such certified statement and appropriate federal, state and local tax withholding information, the Trustee shall commence cash distributions from the relevant Fund or Funds in accordance therewith to the person or persons so indicated and to the Company with respect to taxes required to be withheld and the Trustee's Agent shall charge the Participant's Account or Accounts established hereunder. The Trustee's Agent shall also furnish a copy of such certification to the Participant or to the Beneficiary of a deceased Participant. The Trustee's Agent shall also give written notice to the Trustee that a Participant's Account balance has been reduced to a certain minimum agreed to by the Trustee and the Trustee's Agent under procedures which will enable the Trustee to cease payment when such Account balance has been reduced to zero. The Company shall have full responsibility for the payment of all withholding taxes to the appropriate taxing authority and shall furnish each Participant or Beneficiary with the appropriate tax information form evidencing such payment and the amount thereof. 3.5 All benefits payable from either Fund to a Participant or his Beneficiary under a Plan or Plans shall be charged solely against the relevant Account of such Participant. When the Trustee's Agent determines that all Company liabilities under all Plans to a Participant and Beneficiary have been satisfied, the Trustee's Agent shall prepare a certification to the Trustee and to the Company showing the balance, if any, remaining in such Participant's Account or Accounts (the "Balance"). In making such determination the Trustee's Agent may rely upon written certification from the Company that the Participant or his Beneficiary has died or that such Company liabilities have been satisfied by cash payments made by the Company or otherwise; provided, however, the Trustee's Agent may require additional documentation of any such Company confirmation if the Trustee's Agent considers such to be appropriate under the circumstances. Any Balance remaining in such Participant's Account or Accounts shall be reallocated by the Trustee's Agent to the Accounts of the other Participants and Beneficiaries in the manner set forth below; provided, however, in no event shall any Balance be allocated to the Account of any Participant or Beneficiary established after the Company delivers a written notice to the Trustee and the Trustee's Agent that Accounts established after the date of such notice shall not be entitled to share in any reallocations under this Section 3.5. Any such notice shall be irrevocable by the Company notwithstanding any amendments to this Trust Agreement made thereafter and any attempt to revoke such notice shall be disregarded by the Trustee and the Trustee's Agent. Each Balance determined in accordance with the preceding paragraph shall be maintained as a separate Participant's Account subject to quarterly revaluation pursuant to Section 1.3 until the following or coinciding December 31st, as of which date the Trustee's Agent shall aggregate and revalue all such Balances and reallocate such amount ("Total Balances") to the eligible Accounts of the remaining Participants and Beneficiaries in both Funds, including Accounts which may have previously been reduced to a zero balance. Such reallocation shall be made: a) by determining the amount by which the value of each Participant's and Beneficiary's accrued benefits under the Plan or Plans exceed the value of his Account or Accounts as of such December 31st; b) by adding all the amounts determined under (a); and c) by allocating to each Participant's and Beneficiary's Account or Accounts the amount of the Total Balances (not in excess of the amount computed under (b)) in the ratio of the amount computed for each Account under (a) to the total amount computed under (b). If the amount of the Total Balances exceeds the amount computed under (b), the excess shall be maintained as a separate Account until the following December 31st or until any earlier termination of the Trust, at which date the value of such Account shall be treated as an additional Balance for purposes of this Section 3.5. For defined benefit type plans, the value of each Participant's and Beneficiary's accrued benefits under the Plan or Plans shall be calculated using the procedures and actuarial assumptions used in terminating a single employer plan under 29 CFR Part 4044, Subpart B of the Pension Benefit Guaranty Corporation regulations. For defined contribution type plans and employment agreements, the value of each Participant's and Beneficiary's accrued benefits shall be determined in accordance with the relevant Plan or Plans. Upon the satisfaction of all liabilities of the Company under the Plans to Participants and Beneficiaries for whom Accounts have been established hereunder, the Trustee's Agent shall prepare a certification to the Trustee and to the Company and the Trustee shall thereupon hold or distribute the Trust Property in accordance with the written instructions of the Company. At no time except (a) to the extent used to satisfy claims of the Company's creditors in the event of the Company's insolvency, as defined in Section 2.1, (b) after the satisfaction of all liabilities of the Company under the Plans in respect of Participants and Beneficiaries having Accounts hereunder, or (c) after a Potential Change of Control (as defined in Section 11.1) in accordance with Section 11.2 hereof, shall any part of the Trust Property revert to the Company. The Trustee and the Trustee's Agent shall have no responsibility for determining whether any Participant or Beneficiary has died and shall be entitled to rely upon information furnished by the Company. 3.6 Nothing provided in this Agreement shall relieve the Company of its liabilities to pay the retirement benefits and deferred compensation liabilities provided under the Plans except to the extent such liabilities have been satisfied. It is the intent of the Company to have each Account established hereunder treated as a separate trust designed to satisfy in whole or in part the Company's legal liability under the Plans in respect of the Participant for whom such Account has been established and to have the balance of each Fund revert to the Company only after its legal liability under the relevant Plan or Plans has been met. The Company, therefore, agrees that all income, deductions and credits of each such Account belong to it as owner for income tax purposes and will be included on the Company's income tax returns. ARTICLE IV 4.1 The Company shall provide the Trustee's Agent with a certified copy of the Plans and all amendments thereto and of the resolutions of the Board of Directors of the Company or the relevant subsidiary approving the Plans and all amendments thereto, promptly upon their adoption. Any action by the Company pursuant to the terms of this Trust Agreement shall, except as otherwise provided herein, be by written instrument signed by an officer of the Company authorized to act hereunder or any delegee authorized to act for the Company. After the execution of this Agreement, the Company shall promptly file with the Trustee and the Trustee's Agent a certified list of the names and specimen signatures of the officers of the Company and any delegee authorized to act for it. The Company shall promptly notify the Trustee and the Trustee's Agent of the addition or deletion of any person's name to or from such list, respectively. Until receipt by the Trustee and/or the Trustee's Agent of notice that any person is no longer authorized so to act, the Trustee or the Trustee's Agent may continue to rely on the authority of the person. All certifications, notices and directions by any such person or persons to the Trustee or the Trustee's Agent shall be in writing signed by such person or persons. The Trustee and the Trustee's Agent may rely on any such certification, notice or direction purporting to have been signed by or on behalf of such person or persons that the Trustee or the Trustee's Agent believes to have been signed thereby. The Trustee and the Trustee's Agent may rely on any certification, notice or direction of the Company that the Trustee or the Trustee's Agent believes to have been signed by a duly authorized officer or agent of the Company. The Trustee and the Trustee's Agent shall have no responsibility for acting or not acting in reliance upon any notification believed by the Trustee or the Trustee's Agent to have been so signed by a duly authorized officer or agent of the Company. The Company shall be responsible for keeping accurate books and records with respect to the employees and Directors of the Company, their compensation and their rights and interests in the Funds under the Plans. 4.2 The Company shall make its contributions to the Trust in accordance with appropriate corporate action and the Trustee shall have no responsibility with respect thereto, except to add such contributions to the appropriate Fund or Funds. 4.3 The Company shall indemnify and hold harmless the Trustee for any liability or expenses, including without limitation reasonable attorneys' fees, incurred by the Trustee with respect to holding, managing, investing or otherwise administering the Funds or carrying out its duties hereunder, except to the extent that such liabilities or expenses arise from actions constituting gross negligence or willful misconduct by the Trustee under this Agreement. 4.4 The Company shall indemnify and hold harmless the Trustee's Agent for any liability or expenses, including without limitation reasonable attorneys' fees, incurred by the Trustee's Agent with respect to keeping the records for Participants' Accounts, reporting thereon to Participants, certifying benefit information to the Trustee, determining the status of Accounts and benefits hereunder and otherwise carrying out its obligations under this Agreement, except to the extent that such liabilities or expenses arise from actions constituting negligence or willful misconduct by the Trustee's Agent. ARTICLE V 5.1 The Trustee shall not be liable in discharging its duties hereunder, including without limitation its duty to invest and reinvest the Trust Property relating to each Fund, if it acts in good faith and in accordance with the terms of this Agreement with respect to the Trustee's responsibilities under this Agreement. 5.2 Subject to investment guidelines agreed to in writing from time to time by the Company and the Trustee, the Trustee shall have the power in investing and reinvesting the Trust Property with respect to each Fund, in its sole discretion: (a) To invest and reinvest in any property, real, personal or mixed, wherever situated and whether or not productive of income or consisting of wasting assets, including without limitation, common and preferred stocks, bonds, notes, debentures (including convertible stocks and securities but not including any stock or security of the Trustee, the Company or any affiliate thereof), futures, option and forward contracts, leaseholds, mortgages, certificates of deposit or demand or time deposits (including any such deposits with the Trustee), shares of investment companies and mutual funds, interests in partnerships and trusts, insurance policies and annuity contracts, and oil, mineral or gas properties, royalties, interests or rights, without being limited to the classes of property in which trustees are authorized to invest by any law or any rule of court of any state and without regard to the proportion any such property may bear to the entire amount of each Fund; provided, however, the Trustee is authorized to receive and hold any stock or security of the Company which is contributed by the Company to either Fund and the Trustee shall not sell any such stock or security of the Company until the Company so directs; (b) To invest and reinvest all or any portion of the Trust Property held in the Funds collectively through the medium of any common, collective or commingled trust fund that may be established and maintained by the Trustee, subject to the instrument or instruments establishing such trust fund or funds and with the terms of such instrument or instruments, as from time to time amended, being incorporated into this Agreement to the extent of the equitable share of the Funds in any such common collective or commingled trust fund; (c) To retain any property at any time received by the Trustee; (d) Subject to subsection (a) above, to sell or exchange any property held by it at public or private sale, for cash or on credit, to grant and exercise options for the purchase or exchange thereof, to exercise all conversion or subscription rights pertaining to any such property and to enter into any covenant or agreement to purchase any property in the future; (e) To participate in any plan of reorganization, consolidation, merger, combination, liquidation or other similar plan relating to property held by it and to consent to or oppose any such plan or any action thereunder or any contract, lease, mortgage, purchase, sale or other action by any person; (f) To deposit any property held by it with any protective, reorganization or similar committee, to delegate discretionary power thereto, and to pay part of the expenses and compensation thereof and any assessments levied with respect to any such property so deposited; (g) To extend the time of payment of any obligation held by it; (h) To hold uninvested any moneys received by it, without liability for interest thereon, until such moneys shall be invested, reinvested or disbursed; (i) To exercise all voting or other rights with respect to any property held by it and to grant proxies, discretionary or otherwise; (j) For the purposes of the Trust, to borrow money from others, to issue its promissory note or notes therefor, and to secure the repayment thereof by pledging any property held by it; (k) To manage, administer, operate, insure, repair, improve, develop, preserve, mortgage, lease or otherwise deal with, for any period, any real property or any oil, mineral or gas properties, royalties, interests or rights held by it directly or through any corporation, either alone or by joining with others, using other Trust assets for any such purposes, to modify, extend, renew, waive or otherwise adjust any provision of any such mortgage or lease and to make provision for amortization of the investment in or depreciation of the value of such property; (l) To employ suitable agents and counsel, who may be counsel to the Company or the Trustee and to pay their reasonable expenses and compensation from the relevant Fund to the extent not paid by the Company; (m) To cause any property held by it to be registered and held in the name of one or more nominees, with or without the addition of words indicating that such securities are held in a fiduciary capacity, and to hold securities in bearer form; (n) To settle, compromise or submit to arbitration any claims, debts or damages due or owing to or from the Trust, respectively, to commence or defend suits or legal proceedings to protect any interest of the Trust, and to represent the Trust in all suits or legal proceedings in any court or before any other body or tribunal; provided, however, that the Trustee shall not be required to take any such action unless it shall have been indemnified by the Company to its reasonable satisfaction against liability or expenses it might incur therefrom; (o) To organize under the laws of any state a corporation or trust for the purpose of acquiring and holding title to any property which it is authorized to acquire hereunder and to exercise with respect thereto any or all of the powers set forth herein; and (p) Generally, to do all acts, whether or not expressly authorized, that the Trustee may deem necessary or desirable for the protection of the Trust Property. Notwithstanding the foregoing, the Trustee shall upon the written direction of the Company invest all or part of the amount to the credit of any Participant's Account in a commercial annuity or insurance contract selected by the Company and the Trustee shall have no responsibility for any such investment other than as owner and custodian thereof; provided, however, that following a Change of Control (a "Change of Control" for purposes of any one of the SERP, BEP, Cesan Agreement, D'Andrade Agreement or Kogan Agreement shall constitute a Change of Control for purposes of this Agreement), the Company may only direct the Trustee to invest in a commercial annuity or insurance contract of an insurance company that is rated at least AA (or its equivalent) by Standard & Poor's or Moody's. The Trustee shall have no duty or obligation to review or confirm such rating. The Company shall promptly notify Trustee of any Change of Control or Potential Change of Control (as defined in Section 11.1). Trustee may conclusively rely upon such notice and shall have no duty to determine whether a Change of Control or Potential Change of Control has occurred. 5.3 The Company may at any time direct the Trustee to segregate all or a portion of each Fund in a separate investment account or accounts and may appoint one or more investment managers to direct the investment and reinvestment of each such investment account or accounts. In such event, the Company shall notify the Trustee of the appointment of each such investment manager. Thereafter, the Trustee shall make every sale or investment with respect to such investment account as directed in writing by the investment manager. It shall be the duty of the Trustee to act strictly in accordance with each direction. The Trustee shall be under no duty to question any such direction of the investment manager, to review any securities or other property held in any such investment account or accounts acquired by it pursuant to such directions or to make any recommendations to the investment managers with respect to such securities or other property. Notwithstanding the foregoing, the Trustee, without obtaining prior approval or direction from an investment manager, shall invest cash balances held by it from time to time in short term cash equivalents including, but not limited to, through the medium of any short term common, collective or commingled trust fund established and maintained by the Trustee subject to the instrument establishing such trust fund, U.S. Treasury Bills, commercial paper (including such forms of commercial paper as may be available through the Trustee's Trust Department), certificates of deposit, and similar type securities, with a maturity not to exceed fifteen months; and, furthermore, sell such short term investments as may be necessary to carry out the instructions of an investment manager regarding more permanent type investment and directed distributions. The Trustee shall not be liable or responsible for any loss resulting to either Fund by reason of any sale or purchase of an investment directed by an investment manager nor by reason of the failure to take any action with respect to any investment which was acquired pursuant to any such direction in the absence of further directions of such investment manager, or solely as a result of the performance by the Trustee or its officers, employees or agents, of any custodial, reporting, recording or bookkeeping functions with respect to any such investment account, except to the extent that such performance constituted gross negligence or willful misconduct on the part of the Trustee. Notwithstanding anything in this Agreement to the contrary, the Trustee shall be indemnified and saved harmless by the Company from and against any and all personal liability to which the Trustee may be subjected by carrying out any directions of an investment manager issued pursuant hereto or for failure to act in the absence of directions of the investment manager including all expenses reasonably incurred in its defense in the event the Company fails to provide such defense; provided, however, the Trustee shall not be so indemnified if it participates knowingly in, or knowingly undertakes to conceal, an act or omission of an investment manager, having actual knowledge that such act or omission is a breach of a fiduciary duty; provided further, however, that the Trustee shall not be deemed to have knowingly participated in or knowingly undertaken to conceal an act or omission of an investment manager with knowledge that such act or omission was a breach of fiduciary duty by merely complying with directions of an investment manager or for failure to act in the absence of directions of an investment manager. The Trustee may rely upon any order, certificate, notice, direction or other documentary confirmation purporting to have been issued by the investment manager which the Trustee believes to be genuine and to have been issued by the investment manager. The Trustee shall not be charged with knowledge of the termination of the appointment of any investment manager until it receives written notice thereof from the Company. 5.4 No person dealing with the Trustee shall be under any obligation to see to the proper application of any money paid or property delivered to the Trustee or to inquire into the Trustee's authority as to any transaction. The Trustee's Agent's obligations are limited solely to those explicitly set forth herein and the Trustee's Agent shall have no responsibility, authority or control, direct or indirect, over the maintenance or investment of the Trust Property and shall have no obligation in respect of the Trustee or the Trustee's compliance with the Trustee's Agent's certifications to the Trustee. 5.5 The Trustee shall distribute cash or property from the Funds in accordance with Article III hereof. The Trustee may make any distribution required hereunder by mailing its check for the specified amount, or delivering the specified property, to the person to whom such distribution or payment is to be made, at such address as may have been last furnished to the Trustee, or if no such address shall have been so furnished, to such person in care of the Company, or (if so directed by the Company) by crediting the Account of such person or by transferring funds to such person's Account by bank or wire transfer. 5.6 If at any time there is no person authorized to act under this Agreement in behalf of the Company, the Board of Directors of the Company shall have the authority to act hereunder. ARTICLE VI 6.1 The Company shall pay any Federal, state or local taxes on the Trust Property, or any part thereof, and on the income therefrom. 6.2 The Company shall pay to the Trustee its reasonable expenses for the management and administration of the Funds, including without limitation reasonable expenses of counsel and other agents employed by the Trustee, and reasonable compensation for its services as Trustee hereunder in accordance with its Published Schedule of Compensation in effect from time to time. The Company shall also pay to the Trustee for transmission to the Trustee's Agent the fees and expenses of the Trustee's Agent, unless the Company pays such directly to the Trustee's Agent. Such expenses, fees and compensation shall be a charge on the Funds and shall constitute a lien in favor of the Trustee and Trustee's Agent until paid by the Company. ARTICLE VII 7.1 The Trustee shall maintain records with respect to each Fund that show all its receipts and disbursements hereunder. The records of the Trustee with respect to the Funds shall be open to inspection by the Company, or its representatives, at all reasonable times during normal business hours of the Trustee and may be audited not more frequently than once each fiscal year by an independent certified public accountant engaged by the Company; provided, however, the Trustee shall be entitled to additional compensation from the Company in respect of audits or auditors' requests which the Trustee determines to exceed the ordinary course of the usual scope of such examinations of its records. 7.2 Within a reasonable time after the close of each fiscal year of the Company (or as agreed to by the Company and Trustee), or upon termination of the duties of the Trustee hereunder, the Trustee shall prepare and deliver to the Company a statement of transactions reflecting its acts and transactions as Trustee during such fiscal year, portion thereof or during such period from the close of the last fiscal year or last statement period to the termination of the Trustee's duties, respectively, including a statement of the then current value of each Fund. The Trustee's Agent shall also prepare and furnish to the Company a statement of the then current value of each Account. Any such statement shall be deemed an Account stated and accepted and approved by the Company, and the Trustee shall be relieved and discharged, as if such Account had been settled and allowed by a judgment or decree of a court of competent jurisdiction, unless protested by written notice to the Trustee within sixty (60) days of receipt thereof by the Company. The Trustee shall have the right to apply at any time to a court of competent jurisdiction for judicial settlement of any Account of the Trustee not previously settled as herein provided or for the determination of any question of construction or for instructions. In any such action or proceeding it shall be necessary to join as parties only the Trustee and the Company (although the Trustee may also join such other parties as it may deem appropriate), and any judgment or decree entered therein shall be conclusive. ARTICLE VIII 8.1 The Trustee may resign at any time by delivering written notice thereof to the Company; provided, however, that no such resignation shall take effect until the earlier of (i) sixty (60) days from the date of delivery of such notice to the Company or (ii) the appointment of a successor trustee. 8.2 Subject to Section 11.3, the Trustee may be removed at any time by the Company, pursuant to a resolution of the Board of Directors of the Company, upon delivery to the Trustee of a certified copy of such resolution and sixty (60) days' written notice, unless such notice period is waived in whole or in part by the Trustee, of (i) such removal and (ii) the appointment of a successor trustee. 8.3 Except as otherwise provided in Section 11.3, upon the resignation or removal of the Trustee, a successor trustee shall be appointed by the Company. Such successor trustee shall be a bank or trust company which is established under the laws of the United States or a State within the United States and which is not related, directly or indirectly, to the Company. Such appointment shall take effect upon the delivery to the Trustee of (a) a written appointment of such successor trustee, duly executed by the Company, and (b) a written acceptance by such successor trustee, duly executed thereby. Any successor trustee shall have all the rights, powers and duties granted the Trustee hereunder. 8.4 If, within sixty (60) days of the delivery of the Trustee's written notice of resignation, a successor trustee shall not have been appointed, the Trustee may apply to any court of competent jurisdiction for the appointment of a successor trustee. 8.5 Upon the resignation or removal of the Trustee and the appointment of a successor trustee, and after the acceptance and approval of the Trustee's accounting of the Trust Property, the Trustee shall transfer and deliver the Trust Property to such successor. Under no circumstances shall the Trustee transfer or deliver the Trust Property to any successor which is not a bank or trust company as hereinabove defined. ARTICLE IX 9.1 The Trust established pursuant to this Agreement may not be terminated by the Company prior to the satisfaction of all liabilities with respect to all Participants in the Plans and their Beneficiaries. Upon receipt of a written certification from the Trustee's Agent that all liabilities have been satisfied with respect to all Participants in the Plans and their Beneficiaries, the Company pursuant to a resolution of its Board of Directors may terminate the Trust upon delivery to the Trustee of (a) a certified copy of such resolution, (b) an original certification of the Trustee's Agent that all such liabilities have been satisfied and (c) a written instrument of termination duly executed and acknowledged in the same form as this Agreement. 9.2 Upon the termination of the Trust in accordance with Section 9.1, the Trustee shall, after the acceptance and approval of its account, distribute the Trust Property to the Company. Upon completing such distribution, the Trustee shall be relieved and discharged. The powers of the Trustee shall continue as long as any part of either Fund remains in its possession. 9.3 The Company may at any time liquidate the Account of any Participant under this Agreement in the event the amount to the credit of such Account falls below $5,000. In such event, the Trustee, upon receipt of written instructions from the Company, shall distribute in cash the amount to the credit of any such terminated Account, as determined by the Trustee's Agent, to the Participant in respect of whom such Account was established or, if such Participant is dead or incompetent, to his Beneficiary. ARTICLE X 10.1 This Agreement may be amended, in whole or in part, at any time and from time to time, by the Company, pursuant to a resolution of the Board of Directors thereof by delivery to the Trustee and the Trustee's Agent of a certified copy of such resolution and a written instrument duly executed and acknowledged in the same form as this Agreement, except that the duties and responsibilities of the Trustee and the Trustee's Agent shall not be increased without the Trustee's or the Trustee's Agent's written consent; provided, however, any such amendment affecting any Account, the procedures for distribution thereof or the reallocation of Balances under Section 3.5 shall not become effective until sixty (60) days after a copy of such amendment has been delivered by registered mail by the Company or the Trustee's Agent to each Participant or his Beneficiary. In the event the Company, Trustee or Trustee's Agent receives written objections to such amendment from such person within such sixty (60) day period, the party receiving such objections shall provide a copy of same to the other parties and such amendment shall be ineffective and void in respect of the Participant or Beneficiary so objecting to the amendment. ARTICLE XI 11.1 Notwithstanding anything to the contrary herein, in the event of a Potential Change of Control (as defined below), the Company shall contribute to Fund A an amount (the "Change of Control Contribution") as determined by Trustee's Agent sufficient to fund one hundred percent (100%) of (a) each Participant's and Beneficiary's projected benefits under the SERP and the BEP, based on the assumptions that each of the Participants under those Plans is retiring immediately following the Change of Control and has elected a lump sum payout, and (b) any and all benefits (cash and non- cash) payable under the employment agreements of Messrs. Cesan, Kogan and D'Andrade, assuming termination immediately following the Change of Control, payable as a lump sum, whether or not such Participant then has an account in either of the Funds. For purposes of this Agreement, "Potential Change of Control" means (x) the public announcement by any person (including without limitation the Company) of an intention, commitment or agreement to take any actions that, if consummated, would result in a Change of Control, or (y) the adoption by the Board of Directors of the Company of a resolution to the effect that for purposes of this Trust a "Potential Change of Control" has occurred. 11.2 At any time after the earlier of (a) the second anniversary of a Potential Change of Control, so long as the Board has not determined that it is reasonably certain that a Change of Control will in fact be consummated as a result of the Potential Change of Control or any subsequent event, and (b) the date on which it first becomes reasonably certain that a Change of Control will not be consummated as a result of the Potential Change of Control or any subsequent event, as determined by the Board of Directors of the Company or its delegee, the Company, at its written request to the Trustee, shall be entitled to have the Change of Control Contribution, as adjusted for gains and losses, returned. Trustee shall have no duty or obligation to make such determination or review the Company's determination with regard to the occurrence or status of a Potential Change of Control. 11.3 Following a Change of Control, the Company shall not be permitted to remove the Trustee or the Trustee's Agent for three years. During this three- year period, in the event of the fraud, gross negligence or willful misconduct of the Trustee or the Trustee's Agent, the Company shall be permitted to apply to a court of competent jurisdiction for replacement of such Trustee or Trustee's Agent. All fees charged by the Trustee and the Trustee's Agent during this three-year period must be customary for similar accounts of Trustee or Trustee's Agent, as the case may be. If the Trustee or Trustee's Agent resigns during this three-year period, the appointment by the Company of a new Trustee or Trustee's Agent would be subject to approval by a majority in interest of all affected Participants. ARTICLE XII 12.1 This Agreement shall be construed and interpreted under, and the Trust hereby created shall be governed by, the laws of the State of Illinois insofar as such laws do not contravene any applicable Federal laws, rules or regulations. 12.2 Neither the gender nor the number (singular or plural) of any word shall be construed to exclude another gender or number when a different gender or number would be appropriate. 12.3 No right or interest of any Participant under a Plan in either Fund shall be transferable or assignable, except by will or the laws of descent and distribution, or shall be subject to alienation, anticipation or encumbrance, and no right or interest of any Participant or Beneficiary in any Plan or in either Fund shall be subject to any garnishment, attachment or execution. A Participant may designate in writing a Beneficiary of such Participant's right or interest in the event of his or her death in accordance with the terms of the relevant Plan. Notwithstanding the foregoing, the Trust Property shall at all times remain subject to claims of creditors of the Company in the event the Company is adjudicated to be bankrupt or insolvent as provided herein and Participants and Beneficiaries shall have no claims to either Fund superior to that of any other unsecured creditors in such event. 12.4 The Company agrees that by the establishment of this Trust it hereby forgoes any judicial review of certifications by the Trustee's Agent as to the benefit payable to any persons hereunder. If a dispute arises as to the amounts or timing of any such benefits or the persons entitled thereto under a Plan or this Agreement, the Company agrees that such dispute shall be resolved by binding arbitration proceedings initiated in accordance with the rules of the American Arbitration Association and that the results of such proceedings shall be conclusive and shall not be subject to judicial review. It is expressly understood that pending the resolution of any such dispute, payment of benefits shall be made and continued (except in the event of the Company's insolvency) by the Trustee in accordance with the certification of the Trustee's Agent and that the Trustee and the Trustee's Agent shall have no liability with respect to such payments. The Company also agrees to pay the entire cost of any arbitration or legal proceeding including the legal fees of the Trustee, the Trustee's Agent and the Plan Participant or the Beneficiary of any deceased Plan Participant regardless of the outcome of any such proceeding and until so paid the expenses thereof shall be a charge on and lien against the Funds. 12.5 This Agreement shall be binding upon and inure to the benefit of any successor to the Company or its business as the result of merger, consolidation, reorganization, transfer of assets or otherwise and any subsequent successor thereto. In the event of any such merger, consolidation, reorganization, transfer of assets or other similar transaction, the successor to the Company or its business or any subsequent successor thereto shall promptly notify the Trustee and Trustee's Agent in writing of its successorship and furnish the Trustee and the Trustee's Agent with the information specified in Section 4.1 of this Agreement. In no event shall any such transaction described herein suspend or delay the rights of Plan Participants or the Beneficiaries of deceased Participants to receive benefits hereunder. 12.6 This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, but all of which shall together constitute only one Agreement. 12.7 Communications to the Trustee shall be sent to The Northern Trust Company, 50 South LaSalle Street, Chicago, Illinois 60675 or to such other address as the Trustee may specify in writing. Communications to the Trustee's Agent shall be sent to Buck Consultants, Inc., One Pennsylvania Plaza, New York, New York 10119- 4798 or to such other address as the Trustee's Agent may specify in writing. No communication shall be binding upon the Trustee or Trustee's Agent until it is received by the Trustee or Trustee's Agent. Communications to the Company shall be sent to the Company's principal offices or to such other address as the Company may specify in writing. 12.8 In the event any Participant or his Beneficiary is determined to be subject to Federal income tax on any amount to the credit of his Account under this Agreement prior to the time of payment hereunder, the entire amount so taxable shall be distributed by the Trustee as of the next Valuation Date to such Participant or Beneficiary. Such distribution shall be at the direction of the Company or the Trustee's Agent upon receipt of documentation from the Company or the Trustee's Agent indicating that an amount to the credit of a Participant's account is subject to Federal income tax. An amount to the credit of a Participant's Account shall be determined to be subject to Federal income tax upon the earliest of: (a) a final determination by the United States Internal Revenue Service addressed to the Participant or his Beneficiary which is not appealed to the courts; (b) a final determination by the United States Tax Court or any other Federal Court affirming any such determination by the Internal Revenue Service; or (c) an opinion by counsel, satisfactory to the Company, addressed to the Company, the Trustee and the Trustee's Agent, that, by reason of Treasury Regulations, amendments to the Internal Revenue Code, published Internal Revenue Service rulings, court decisions or other substantial precedent, amounts to the credit of Participants' Accounts hereunder are subject to Federal income tax prior to payment. The Company shall undertake at its sole expense to defend any tax claims described herein which are asserted by the Internal Revenue Service against any Participant or Beneficiary, including attorney fees and costs of appeal, and shall have the sole authority to determine whether or not to appeal any determination made by the Service or by a lower court. The Company also agrees to reimburse any Participant or Beneficiary for any interest or penalties in respect of tax claims hereunder upon receipt of documentation of same. Any distributions from either Fund to a Participant or Beneficiary under this Section 12.8 shall be applied in accordance with the provisions of the relevant Plan or Plans to reduce Company liabilities to such Participant and/or Beneficiary under such Plan or Plans; provided, however, that in no event shall any Participant, Beneficiary or estate of any Participant or Beneficiary have any obligation to return all or any part of such distribution to the Company if such distribution exceeds benefits payable under the relevant Plan or Plans. IN WITNESS WHEREOF, the parties hereto have caused this Trust Agreement to be duly executed and their respective corporate seals to be hereto affixed this 1st day of November, 1998. Attest: THE NORTHERN TRUST COMPANY By_____________________________ Its Vice President Attest: SCHERING-PLOUGH CORPORATION By_____________________________ Its Vice President Attest: BUCK CONSULTANTS, INC. By____________________________ Its 50292v1 - - 56 - 37032-16 EX-12 7 Exhibit 12 SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (Dollars in millions)
Year Ended December 31, 1998 1997 1996 1995 1994 Income Before Income Taxes from Continuing Operations . . . . . . $2,326 $1,913 $1,606 $1,395 $1,227 Add : Fixed Charges Interest Expense . . . . . . . . . 19 40 45 57 56 1/3 Rentals. . . . . . . . . . . . 19 15 12 11 9 Capitalized Interest . . . . . . . 9 15 11 11 11 Total Fixed Charges. . . . . . . 47 70 68 79 76 Less: Capitalized Interest . . . . . 9 15 11 11 11 Add : Amortization of Capitalized Interest. . . . . . . . 7 5 5 5 4 Earnings Before Income Taxes and Fixed Charges (other than Capitalized Interest) . . . . . . . $2,371 $1,973 $1,668 $1,468 $1,296 Ratio of Earnings to Fixed Charges . 50 28 25 19 17 "Earnings" consist of income before income taxes and fixed charges (other than capitalized interest). "Fixed charges" consist of interest expense, capitalized interest and one-third of rentals which Schering-Plough believes to be a reasonable estimate of an interest factor on leases.
EX-13 8 Exhibit 13 Financial Section of the Company's 1998 Annual Report to Shareholders. Management's Discussion and Analysis of Operations and Financial Condition Net Sales Consolidated net sales in 1998 totaled $8.1 billion, an increase of 19 percent over 1997, due to volume growth of 19 percent and price increases of 2 percent, tempered by unfavorable foreign exchange of 2 percent. The acquisition of the Mallinckrodt animal health business in June 1997 favorably impacted sales growth by 3 percent. The sales of this business were included for only half the year in 1997 and for the full year in 1998. The consolidated net sales increase reflects significant gains for the CLARITIN brand of nonsedating antihistamines. Worldwide CLARITIN brand net sales totaled $2.3 billion in 1998 compared with $1.7 billion in 1997. Consolidated 1997 net sales of $6.8 billion advanced 20 percent over 1996, reflecting volume growth of 20 percent and price increases of 3 percent, tempered by unfavorable foreign exchange of 3 percent. The Mallinckrodt animal health acquisition favorably impacted sales growth by 3 percent. The consolidated net sales increase reflects worldwide CLARITIN brand sales growth of 50 percent in 1997. Worldwide 1998 pharmaceutical sales of $7.3 billion rose 20 percent over 1997, due to volume growth of 20 percent and price increases of 2 percent, moderated by unfavorable foreign exchange of 2 percent. Worldwide sales of pharmaceutical products in 1997 increased 21 percent over 1996, reflecting volume growth of 22 percent and price increases of 3 percent, moderated by unfavorable foreign exchange of 4 percent. Domestic prescription pharmaceutical product sales grew 25 percent in 1998. Sales of allergy/respiratory products increased 31 percent, due to continued strong growth of the CLARITIN brand; increases in the nasal inhaled steroid products, which include VANCENASE allergy products and NASONEX, a once-daily corticosteroid for allergic rhinitis; and VANCERIL asthma products. Domestic sales of anti-infective and anticancer products rose 26 percent compared with 1997, due to INTRON A and REBETRON Combination Therapy, containing REBETOL (ribavirin) Capsules and INTRON A (interferon alfa-2b, recombinant) Injection, for the treatment of chronic hepatitis C. These sales increases were moderated by lower sales of EULEXIN, a prostate cancer therapy, due to generic and branded competition, and CEDAX, a broad- spectrum oral cephalosporin antibiotic, due to lower market share and a decline in the cephalosporin market. U. S. sales of cardiovascular products advanced 18 percent, reflecting market expansion and market share growth for IMDUR, an oral nitrate for angina, and K-DUR, a potassium supplement. Late in 1998, a generic oral nitrate entered the market and the Company responded with its own generic product. Dermatological product sales increased 12 percent, due to higher sales of LOTRISONE, an antifungal/anti-inflammatory cream. Domestic prescription pharmaceutical sales in 1997 advanced 29 percent versus 1996, led by gains in allergy/respiratory products, primarily reflecting strong growth of the CLARITIN brand and increases for VANCERIL asthma and VANCENASE allergy products. Sales growth was recorded in all other product categories. In 1998, sales of international ethical pharmaceutical products increased 6 percent. Excluding the impact of foreign exchange, sales would have risen approximately 11 percent. The following international ethical pharmaceutical sales commentary excludes the impact of foreign exchange. International sales of allergy/respiratory products advanced 10 percent over 1997, led by growth for the CLARITIN brand and the launch of NASONEX in several markets. Cardiovascular product sales rose 19 percent and sales of dermatological products increased 11 percent. International sales of anti-infective and anticancer products rose 6 percent in 1998, reflecting higher sales of CEDAX and INTRON A, tempered by lower sales of EULEXIN. In 1997, international ethical pharmaceutical sales increased 13 percent over 1996, led by growth for the CLARITIN brand, while all other therapeutic areas also contributed to the increase. Worldwide sales of animal health products increased 66 percent in 1998. Adjusting for the 1997 acquisition of the Mallinckrodt animal health business, 1998 sales would have increased 12 percent. Sales growth was driven by BANAMINE, a non-steroidal anti-inflammatory agent, and NUFLOR, a broad-spectrum, multi- species antibiotic. Sales of animal health products in 1997 increased 16 percent over 1996 after adjusting for the 1997 acquisition and foreign exchange. Sales of health care products in 1998 increased 10 percent compared with 1997. Price increases accounted for 3 percent of the sales increase. Foot care product sales rose 12 percent, due primarily to DR. SCHOLL'S product line extensions and market share growth for antifungal products. Sun care sales were up 22 percent due to early 1999 season purchases. Over-the-counter (OTC) product sales decreased 2 percent. In 1997, health care product sales increased 10 percent reflecting volume increases of 9 percent and price increases of 1 percent. The sales increase largely reflects higher sales of sun care and foot care products, tempered by lower OTC product sales. Income Before Income Taxes Income before income taxes totaled $2.3 billion in 1998, an increase of 22 percent over 1997. In 1997, income before income taxes was $1.9 billion, up 19 percent over $1.6 billion in 1996. Summary of Costs and Expenses: (Dollars in millions)
% Increase 1998 1997 1996 1998/97 1997/96 Cost of sales . . . . . . $1,601 $1,308 $1,078 22 % 21 % % of net sales. . . . . . 19.8 % 19.3 % 19.1 % Selling, general and administrative. . . . . $3,141 $2,664 $2,209 18 % 21 % % of net sales . . . . . 38.9 % 39.3 % 39.1 % Research and development. $1,007 $ 847 $ 723 19 % 17 % % of net sales . . . . . 12.5 % 12.5 % 12.8 %
Cost of sales as a percentage of net sales in 1998 increased versus 1997, primarily due to higher royalties and the inclusion of Mallinckrodt animal health products, which generally have lower gross margins, partially offset by a favorable sales mix of other pharmaceutical products. The increase of 1997 cost of sales as a percentage of net sales versus 1996 reflects the inclusion of Mallinckrodt animal health products during the second half of 1997, partially offset by a favorable sales mix of other pharmaceutical products. Selling, general and administrative expenses in 1998 decreased as a percentage of sales compared with 1997, as sales growth outpaced expansion of the field force and increased promotional and selling-related spending, primarily for CLARITIN, NASONEX and new products such as INTEGRILIN and REBETRON Combination Therapy. The 1997 increase as a percentage of sales from 1996 reflects an expansion of the field force and increased promotional and selling-related spending, primarily for CLARITIN and INTRON A. Research and development expenses totaled $1.0 billion, or 19 percent above 1997, and represented 12.5 percent of sales in 1998. 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. Income Taxes The Company's effective tax rate was 24.5 percent in 1998, 1997 and 1996. The effective tax rate for each period was lower than the U.S. statutory income tax rate, principally due to tax incentives in certain jurisdictions where manufacturing facilities are located. For additional information, see "Income Taxes" in the Notes to Consolidated Financial Statements. Net Income Net income in 1998 increased 22 percent to $1.8 billion. Net income in 1997 increased 19 percent over 1996. Differences in year-to-year exchange rates reduced net income growth in 1998 and 1997. After eliminating these exchange differences, net income would have risen approximately 24 percent in 1998 and 22 percent in 1997. Earnings Per Common Share Basic earnings per common share rose 22 percent in 1998 to $1.20 and 20 percent in 1997 to $0.98. Diluted earnings per common share rose 22 percent in 1998 to $1.18 and 18 percent in 1997 to $0.97. The strengthening of the U.S. dollar against most foreign currencies decreased growth in earnings per common share in 1998 and 1997. Excluding the impact of exchange rate fluctuations, diluted earnings per common share would have increased approximately 24 percent in 1998 and 22 percent in 1997. Over the past three years, the Board of Directors has authorized several share repurchase programs. Under these programs, approximately 32 million common shares were repurchased during 1998, 1997 and 1996. A $1 billion program was authorized in September 1997 and commenced in January 1998. At December 31, 1998, approximately 3.4 million shares had been acquired under the 1997 authorization and the program was approximately 14 percent complete. Year 2000 Many computer systems ("IT systems") and equipment and instruments with embedded microprocessors ("non-IT systems") were designed to recognize only 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 systems that may affect health and safety, product manufacturing, product distribution, customer service and certain research systems. The following chart indicates the estimated state of completion of each phase of this project as of December 31, 1998: IT Systems Non-IT Systems Inventory systems 100% 70% Identify critical and non-critical systems 100% 70% Remediate or replace systems 95% 40% Testing systems 95% 35% The Company expects to be 100 percent complete with all phases of this project by December 31, 1999. The estimated cost of the Year 2000 project is approximately $95 million. The increase in this estimate from the Company's previously reported amount is due to an increase in the number of non-IT systems within the Company's research operation that the Company believes will require remediation or replacement. Approximately 55 percent of the $95 million will be of an expense nature and 45 percent will be for capitalizable replacements. As of December 31, 1998, $43 million of the $95 million has been incurred; $14 million has been capitalized and $29 million has been expensed. The expense for 1998 was $16 million, which is approximately 10 percent of the Company's overall annual information systems 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 need to be written-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. Since the Company expects to complete its Year 2000 project by December 1999, management 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. 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 flows 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 backup 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. Certain third parties, such as retail pharmacies and wholesalers, may order extra inventory as part of their contingency planning. The impact to the Company of such contingency planning by third parties cannot be predicted. 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 established a new common currency, the euro. Also on January 1, 1999, the participating countries fixed the rate of exchange between their existing legacy currencies and the euro. The new euro currency will eventually replace the legacy currencies currently 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 currencies for at least two years. The Company can, however, accommodate transactions for customers and suppliers operating in either legacy currency or euros. 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 practices, product pricing and marketing strategies. Although we are unable to quantify these effects, if any, management at this time does not believe the creation of the euro will have a material effect on the Company. Acquisition In June 1997, the Company acquired the worldwide animal health operations of Mallinckrodt Inc. for approximately $490 million, which includes the assumption of debt and direct costs of the acquisition. The addition of Mallinckrodt has created broader product lines and expanded geographic distribution capabilities for our animal health products. For additional information, see "Acquisition" in the Notes to Consolidated Financial Statements. Environmental Matters The Company has obligations for environmental clean-up under various state, local and federal laws, including the Comprehensive Environmental Response, Compensation and Liability Act, commonly known as Superfund. Environmental expenditures have not had and, based on information currently available, are not anticipated to have a material impact on the Company. For additional information, see "Legal and Environmental Matters" in the Notes to Consolidated Financial Statements. 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. Similarly, the effect on operations and cash flows of decisions of managed care groups and other buying groups concerning formularies, pharmaceutical reimbursement policies and availability of the Company's pharmaceutical products 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 are increasingly being challenged by competitors and the outcome can be highly uncertain. 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 Cash generated from operations continues to be the Company's major source of funds to finance working capital, capital expenditures, acquisitions, shareholder dividends and common share repurchases. Cash provided by operating activities totaled $2,026 million in 1998, $1,845 million in 1997 and $1,459 million in 1996. Capital expenditures amounted to $389 million in 1998, $405 million in 1997 and $336 million in 1996. It is anticipated that capital expenditures will exceed $550 million in 1999. Commitments for future capital expenditures totaled $153 million at December 31, 1998. Common shares repurchased in 1998 totaled 3.4 million shares at a cost of $141 million. In 1997, 4.8 million shares were repurchased for $132 million and, in 1996, 23.3 million shares were repurchased at a cost of $388 million. Dividend payments of $627 million were made in 1998, compared with $542 million in 1997 and $474 million in 1996. Dividends per common share were $0.425 in 1998, up from $0.368 in 1997 and $0.32 in 1996. Cash and cash equivalents totaled $1,259 million, $714 million and $535 million at December 31, 1998, 1997 and 1996, respectively. Short-term borrowings and current portion of long- term debt totaled $558 million at year-end 1998, $581 million in 1997 and $855 million in 1996. In 1996, the Company funded the repayment of current maturities of long-term debt through increased short-term borrowings. The Company's ratio of debt to total capital decreased to 12 percent in 1998 from 18 percent in 1997, resulting from both an increase in shareholders' equity and a decrease in borrowings. The Company's liquidity and financial resources continue to be sufficient to meet its operating needs. As of December 31, 1998, the Company had $1.1 billion in unused lines of credit, including $851 million available under the $1 billion multi-currency unsecured revolving credit facility expiring in 2001. The Company had A-1+ and P-1 ratings for its commercial paper, and AA and Aa3 general bond ratings from Standard & Poor's and Moody's, respectively, as of December 31, 1998. Market Risk Disclosures The Company is exposed to market risk primarily from changes in foreign currency exchange rates and, to a lesser extent, from interest rates. The following describes the nature of the risks and demonstrates that, in general, such market risk is not material to the Company. Foreign Currency Exchange Risk The Company operates in more than 40 countries worldwide. In 1998, sales outside the United States accounted for approximately 37 percent of worldwide sales. Virtually all these sales were denominated in currencies of the local country. As such, the Company's reported profits and cash flows are exposed to changing exchange rates. In 1998, the general strengthening of the U.S. dollar vis-a-vis foreign currencies reduced sales by approximately 2 percent. The effect of foreign exchange reduced 1998 diluted earnings per common share by 2 percent. To date, management has not deemed it cost-effective to engage in a formula-based program of hedging the profits and cash flows of foreign operations using derivative financial instruments. Because the Company's foreign subsidiaries purchase significant quantities of inventory payable in U.S. dollars, managing the level of inventory and related payables and the rate of inventory turnover provides a level of protection against adverse changes in exchange rates. In addition, the risk of adverse exchange rate change is mitigated by the fact that the foreign operations are widespread, with no single foreign country accounting for more than 5 percent of consolidated net sales in 1998. The widespread nature of the Company's foreign operations is the primary reason that the overall economic weakness in certain Asian and Latin American countries is not expected to significantly impact future operations of the Company. In addition, at any point in time, the Company's foreign subsidiaries hold financial assets and liabilities that are denominated in currencies other than U.S. dollars. These financial assets and liabilities consist primarily of short-term, third-party and intercompany receivables and payables. Changes in exchange rates affect these financial assets and liabilities. For the most part, however, gains or losses arise from translation and, as such, do not significantly affect net income. On occasion, the Company has used derivatives to hedge specific short-term risk situations involving foreign currency exposures. However, these derivative transactions have not been material. See "Accounting Policies" in the Notes to Consolidated Financial Statements for information regarding Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities." Interest Rate and Equity Price Risk The financial assets of the Company that are exposed to changes in interest rates and equity prices are primarily limited to debt and equity securities held in non-qualified trusts for employee benefits. These trust investments totaled approximately $168 million at December 31, 1998. Due to the long-term nature of the liabilities that these assets fund, the Company's exposure to market risk is low. A decline in market value of these investments would not necessitate any near-term funding of the trusts. The other financial assets of the Company do not give rise to significant interest rate risk due to their short duration. The financial liabilities of the Company that are exposed to changes in interest rates are limited primarily to short-term borrowings (long-term borrowings are not significant). Although all the short-term borrowings are floating rate debt, the interest rate risk posed by these borrowings is low because the amount of debt historically has been small in relation to annual cash flow. The Company has the ability to pay off this debt relatively quickly if interest rates were to increase significantly. The other financial liabilities of the Company do not give rise to significant interest rate risk due to their short duration. For the reasons discussed above, the Company has not engaged in managing interest rate and equity price risk using derivative financial instruments. International Cash Management In the early 1990s, the Company utilized a series of interest rate swaps as part of its international cash management strategy. For additional information, see "Financial Instruments" in the Notes to Consolidated Financial Statements. These swaps subject the Company to a moderate degree of market risk. The Company accounts for these swaps using fair value accounting with changes in the fair value recorded in earnings. The fair value of these swaps was less than $100 thousand at December 31, 1998. The fair value of these swaps at December 31, 1997, was a liability of $1 million. It is estimated that a 10 percent change in interest rate structure could change the fair value of the swaps by approximately $4 million. Securities Litigation Reform Act Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995: Certain matters discussed in this Annual Report are forward-looking statements that involve risks and uncertainties, including but not limited to economic, litigation, competitive, regulatory, governmental and technological factors affecting the Company's operations, markets, products, services and prices, and other factors discussed in Exhibit 99 of the Company's December 31, 1998, Form 10-K filed with the Securities and Exchange Commission. Schering-Plough Corporation and Subsidiaries Statements of Consolidated Income (Amounts in millions, except per share figures)
For The Years Ended December 31, 1998 1997 1996 Net sales . . . . . . . . . . . . . . . . . . . $8,077 $6,778 $5,656 Costs and expenses: Cost of sales . . . . . . . . . . . . . . . . 1,601 1,308 1,078 Selling, general and administrative . . . . . 3,141 2,664 2,209 Research and development. . . . . . . . . . . 1,007 847 723 Other expense, net. . . . . . . . . . . . . . 2 46 40 Total costs and expenses . . . . . . . . . . 5,751 4,865 4,050 Income before income taxes. . . . . . . . . . . 2,326 1,913 1,606 Income taxes. . . . . . . . . . . . . . . . . 570 469 393 Net income. . . . . . . . . . . . . . . . . . . $1,756 $1,444 $1,213 Basic earnings per common share . . . . . . . . $ 1.20 $ .98 $ .82 Diluted earnings per common share . . . . . . . $ 1.18 $ .97 $ .82 See Notes to Consolidated Financial Statements.
Schering-Plough Corporation and Subsidiaries Statements of Consolidated Cash Flows (Amounts in millions)
For The Years Ended December 31, 1998 1997 1996 Operating Activities: Net income . . . . . . . . . . . . . . . . . . . . . $1,756 $1,444 $1,213 Depreciation and amortization. . . . . . . . . . . . 238 200 173 Accounts receivable. . . . . . . . . . . . . . . . . (67) (40) 2 Inventories. . . . . . . . . . . . . . . . . . . . . (102) (43) (112) Prepaid expenses and other assets. . . . . . . . . . (116) (127) (144) Accounts payable and other liabilities . . . . . . . 317 411 327 Net cash provided by operating activities. . . . . . 2,026 1,845 1,459 Investing Activities: Purchase of business, net of cash acquired . . . . . - (354) - Capital expenditures . . . . . . . . . . . . . . . . (389) (405) (336) Reduction of investments . . . . . . . . . . . . . . - 36 1 Purchases of investments . . . . . . . . . . . . . . (319) (77) (78) Other, net . . . . . . . . . . . . . . . . . . . . . - (8) 5 Net cash used for investing activities . . . . . . . (708) (808) (408) Financing Activities: Cash dividends paid to common shareholders . . . . . (627) (542) (474) Common shares repurchased. . . . . . . . . . . . . . (141) (132) (388) Net change in short-term borrowings. . . . . . . . . (19) (290) 113 Repayment of long-term debt. . . . . . . . . . . . . (42) (1) (140) Other, net . . . . . . . . . . . . . . . . . . . . . 57 116 53 Net cash used for financing activities . . . . . . . (772) (849) (836) Effect of exchange rates on cash and cash equivalents. (1) (9) (1) Net Increase in Cash and Cash Equivalents . . . . . . 545 179 214 Cash and Cash Equivalents, Beginning of Year . . . . . 714 535 321 Cash and Cash Equivalents, End of Year . . . . . . . . $1,259 $ 714 $ 535 See Notes to Consolidated Financial Statements.
Schering-Plough Corporation and Subsidiaries Consolidated Balance Sheets (Amounts in millions, except per share figures)
At December 31, 1998 1997 ASSETS __________________________________________________________________________ Current Assets: Cash and cash equivalents. . . . . . . . . . . $1,259 $ 714 Accounts receivable, less allowances: 1998, $98; 1997, $87 . . . . . . . . . . . . 704 645 Inventories. . . . . . . . . . . . . . . . . . 841 713 Prepaid expenses, deferred income taxes and other current assets. . . . . . . . . . . 1,154 848 Total current assets . . . . . . . . . . . . . 3,958 2,920 Property, at cost: Land . . . . . . . . . . . . . . . . . . . . . 48 47 Buildings and improvements . . . . . . . . . . 1,836 1,716 Equipment. . . . . . . . . . . . . . . . . . . 1,677 1,585 Construction in progress . . . . . . . . . . . 507 402 Total. . . . . . . . . . . . . . . . . . . . . 4,068 3,750 Less accumulated depreciation. . . . . . . . . 1,393 1,224 Property, net. . . . . . . . . . . . . . . . . 2,675 2,526 Intangible Assets, net. . . . . . . . . . . . . . . 565 481 Other Assets. . . . . . . . . . . . . . . . . . . . 642 580 $7,840 $6,507 1998 1997 LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable . . . . . . . . . . . . . . . $1,003 $ 803 Short-term borrowings and current portion of long-term debt . . . . . . . . . . . . . . . 558 581 U.S., foreign and state income taxes . . . . . 505 474 Accrued compensation . . . . . . . . . . . . . 279 274 Other accrued liabilities. . . . . . . . . . . 687 759 Total current liabilities. . . . . . . . . . . 3,032 2,891 Long-Term Liabilities: Long-term debt . . . . . . . . . . . . . . . . 4 46 Deferred income taxes. . . . . . . . . . . . . 291 278 Other long-term liabilities. . . . . . . . . . 511 471 Total long-term liabilities. . . . . . . . . . 806 795 Shareholders' Equity: Preferred shares - authorized shares: 50, $1 par value; issued: none . . . . . . . . . - - Common shares - authorized shares: 1998, 2,400, $.50 par value; 1997, 1,200, $1 par value; issued: 1998, 2,030; 1997, 1,015. . . . . . 1,015 1,015 Paid-in capital. . . . . . . . . . . . . . . . 365 96 Retained earnings. . . . . . . . . . . . . . . 6,802 5,673 Accumulated other comprehensive income . . . . (238) (244) Total. . . . . . . . . . . . . . . . . . . . . 7,944 6,540 Less treasury shares, at cost - 1998, 558; 1997, 282 . . . . . . . . . . . . . . . . . 3,942 3,719 Total shareholders' equity . . . . . . . . . . 4,002 2,821 $7,840 $6,507 See Notes to Consolidated Financial Statements.
Schering-Plough Corporation and Subsidiaries Statements of Consolidated Shareholders' Equity (Amounts in millions)
Accumulated Other Total Compre- Share- Common Paid-in Retained Treasury hensive holders' Shares Capital Earnings Shares Income Equity Balance December 31, 1995 $503 $50 $4,342 $(3,168) $(104) $1,623 Comprehensive income: Net income 1,213 1,213 Foreign currency translation, net of tax (28) (28) Unrealized gain (loss) on investments held available for sale, net (8) (8) Total comprehensive income 1,177 Cash dividends on common shares (474) (474) Stock incentive plans 92 (4) 88 Common shares repurchased (388) (388) Settlement of warrants 3 (23) (20) Shares issued for acquisition 1 53 54 __________________________________________________________ Balance December 31, 1996 507 172 5,081 (3,560) (140) 2,060 Comprehensive income: Net income 1,444 1,444 Foreign currency translation, net of tax (101) (101) Unrealized gain (loss) on investments held available for sale, net (3) (3) Total comprehensive income 1,340 Cash dividends on common shares (542) (542) Stock incentive plans 122 (27) 95 Common shares repurchased (132) (132) Effect of 2-for-1 stock split 508 (198) (310) _ ___________________ _________________________ Balance December 31, 1997 1,015 96 5,673 (3,719) (244) 2,821 Comprehensive income: Net income 1,756 1,756 Foreign currency translation, net of tax 5 5 Unrealized gain (loss) on investments held available for sale, net 1 1 Total comprehensive income 1,762 Cash dividends on common shares (627) (627) Stock incentive plans 269 (82) 187 Common shares repurchased (141) (141) _ _____________________ _________________ Balance December 31, 1998 $1,015 $365 $6,802 $(3,942) $(238) $4,002 See Notes to Consolidated Financial Statements.
Notes to Consolidated Financial Statements (Dollars in millions, except per share figures) Accounting Policies Principles of Consolidation - The consolidated financial statements include Schering-Plough Corporation and its subsidiaries. Intercompany balances and transactions are eliminated. Certain prior year amounts have been reclassified to conform to the current year presentation. Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and use assumptions that affect certain reported amounts and disclosures; actual amounts may differ. Cash and Cash Equivalents - Cash and cash equivalents include operating cash and highly liquid investments, generally with maturities of three months or less. Debt and Equity Investments - Investments, included in other non- current assets, primarily consist of debt and equity securities held in non-qualified trusts to fund benefit obligations. Inventories - Inventories are valued at the lower of cost or market. Cost is determined by using the last-in, first-out method for a substantial portion of inventories located in the United States. The cost of all other inventories is determined by the first-in, first-out method. Other Current Assets - An advance of $200 is included in other current assets at December 31, 1998. This advance, made in connection with a licensing arrangement, was collected in January 1999. Carrying value approximates fair value. Depreciation - Depreciation is provided over the estimated useful lives of the properties, generally by use of the straight-line method. Average useful lives are 50 years for buildings, 25 years for building improvements and 12 years for equipment. Depreciation expense was $191, $166 and $149 in 1998, 1997 and 1996, respectively. Intangible Assets - Intangible assets principally include goodwill, patents, trademarks and licenses. Intangible assets are recorded at cost and amortized on the straight-line method over periods not exceeding 40 years. Accumulated amortization of intangible assets was $138 and $99 at December 31, 1998 and 1997, respectively. Intangible assets are periodically reviewed to determine recoverability by comparing their carrying values to expected future cash flows. Foreign Currency Translation - The net assets of most of the Company's foreign subsidiaries are translated into U.S. dollars using current exchange rates. The U.S. dollar effects that arise from translating the net assets of these subsidiaries at changing rates are recorded in the foreign currency translation adjustment account which is included in other comprehensive income. For the remaining foreign subsidiaries, non-monetary assets and liabilities are translated using historical rates, while monetary assets and liabilities are translated at current rates, with the U.S. dollar effects of rate changes included in income. Exchange gains and losses arising from translating intercompany balances of a long-term investment nature are recorded in the foreign currency translation adjustment account. Other exchange gains and losses are included in income. Net foreign exchange losses included in income were $2, $6 and $11 in 1998, 1997 and 1996, respectively. Earnings Per Common Share - Basic earnings per common share are computed by dividing income by the weighted-average number of common shares outstanding. Diluted earnings per common share are computed by dividing income by the sum of the weighted-average number of common shares outstanding plus the dilutive effect of shares issuable through deferred stock units and the exercise of stock options and warrants. The shares used for basic earnings per common share and diluted earnings per common share are reconciled as follows:
(shares in millions) 1998 1997 1996 Average shares outstanding for basic earnings per share. . . . . . 1,468 1,464 1,471 Dilutive effect of warrants, options and deferred stock units. . . . . . . . 20 16 16 Average shares outstanding for diluted earnings per share. . . . . 1,488 1,480 1,487
Derivatives - The Company has outstanding certain long-term interest rate swap contracts that were used for international cash management purposes during the early 1990s. These interest rate swaps are recorded at fair value, with changes in fair value recorded in earnings. Annual net cash flows for payments and receipts under these interest rate swap contracts are not material. The net asset or liability under these interest rate swaps is recorded in other current assets or other accrued liabilities, as applicable. See "Financial Instruments" footnote for more details. In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (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. The Company is currently evaluating when to adopt SFAS No. 133. Management does not deem it cost- effective to engage in a formula-based program using derivative instruments to hedge its market risks. Accordingly, this statement is not expected to materially impact the Company's financial statements. Comprehensive Income - During 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income." Comprehensive income, which is reported in the Statements of Consolidated Shareholders' Equity, is defined as the total change in shareholders' equity during the period other than from transactions with shareholders. For the Company, comprehensive income consists 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. Accumulated other comprehensive income consists of the accumulated foreign currency translation adjustment account and accumulated unrealized gains and losses. At December 31, 1998 and 1997, the accumulated foreign currency translation adjustment account, net of tax, totaled $247 and $252, respectively. Acquisition On June 30, 1997, the Company acquired the worldwide animal health business of Mallinckrodt Inc. for approximately $490, which includes the assumption of debt and direct costs of the acquisition. The acquisition was recorded under the purchase method of accounting. The excess of the purchase price over the fair value of identifiable net assets acquired is included in intangible assets, net. The results of operations of the purchased animal health business have been included in the Company's Statements of Consolidated Income from the date of acquisition. Pro forma results of the Company, assuming the acquisition had been made at the beginning of each period presented, would not be materially different from the results reported. Financial Instruments The table below presents the carrying values and estimated fair values for the Company's financial instruments, including derivative financial instruments. Estimated fair values were determined based on market prices, where available, or dealer quotes.
December 31, 1998 December 31, 1997 Carrying Estimated Carrying Estimated Value Fair Value Value Fair Value ASSETS: Cash and cash equivalents $1,259 $1,259 $714 $714 Debt and equity investments 213 213 180 180 LIABILITIES: Short-term borrowings and current portion of long- term debt 558 558 581 581 Long-term debt 4 4 46 46 Derivative Financial Instruments: Interest rate swap contracts - - 1 1
Credit and Market Risk Most financial instruments expose the holder to credit risk for non-performance and to market risk for changes in interest and currency rates. The Company mitigates credit risk on derivative instruments by dealing only with financially sound counterparties. Accordingly, the Company does not anticipate loss for non-performance. The Company does not enter into derivative instruments to generate trading profits. Refer to "Market Risk Disclosures" in Management's Discussion and Analysis of Operations and Financial Condition for a discussion regarding the market risk of the Company's financial instruments. International Cash Management In 1991 and 1992, the Company utilized interest rate swaps as part of its international cash management strategy. The notional principal of the 1991 arrangement is $650 and the notional principal of the 1992 arrangement is $950. Both the $650 and $950 arrangements have 20-year terms. At December 31, 1998, the $650 and $950 arrangements provide for the payment of interest based upon LIBOR and the receipt of interest based upon an annual election of various floating rates. As a result, the Company remains subject to a moderate degree of market risk through maturity of the swaps. Commitments Total rent expense amounted to $58 in 1998, $44 in 1997 and $37 in 1996. Future minimum rental commitments on non-cancelable operating leases as of December 31, 1998, range from $29 in 1999 to $5 in 2003, with aggregate minimum lease obligations of $16 due thereafter. The Company has commitments related to future capital expenditures totaling $153 as of December 31, 1998. Borrowings The Company has a $1 billion committed, multi-currency unsecured revolving credit facility expiring in 2001 from a syndicate of financial institutions. This facility is available for general corporate purposes and is considered as support for the Company's commercial paper borrowings. This line of credit does not require compensating balances; however, a nominal commitment fee is paid. At December 31, 1998, $149 had been drawn down under this facility. In addition, the Company's foreign subsidiaries had available $267 in unused lines of credit from various financial institutions at December 31, 1998. Generally, these foreign credit lines do not require commitment fees or compensating balances and are cancelable at the option of the Company or the financial institutions. Short-term borrowings consist of commercial paper issued in the United States, bank loans, notes payable and amounts drawn down under the revolving credit facility. Commercial paper outstanding at December 31, 1998 and 1997 was $339 and $389, respectively. The weighted-average interest rate for short-term borrowings at December 31, 1998 and 1997 was 5.7 percent and 5.6 percent, respectively. The Company has a shelf registration statement on file with the Securities and Exchange Commission covering the issuance of up to $200 of debt securities. The terms of these securities will be determined at the time of sale. As of December 31, 1998, no debt securities have been issued pursuant to this registration. Interest Costs and Income Interest costs were as follows:
1998 1997 1996 Interest cost incurred . . . . . . . . . . . . $28 $55 $56 Less: amount capitalized on construction. . . . . . . . . . . . . . 9 15 11 Interest expense . . . . . . . . . . . . . . . $19 $40 $45 Cash paid for interest, net of amount capitalized . . . . . . . . . . . . . $19 $37 $52
Interest income for 1998, 1997 and 1996 was $59, $56 and $33, respectively. Interest income and interest expense are included in other expense, net. Shareholders' Equity On September 22, 1998, the Board of Directors voted to increase the number of authorized common shares from 1.2 billion to 2.4 billion and approved a 2-for-1 stock split. Distribution of the September 22, 1998, split shares was made on December 2, 1998. On April 22, 1997, the Board of Directors voted to increase the number of authorized common shares from 600 million to 1.2 billion and approved a 2-for-1 stock split. Distribution of the April 22, 1997, split shares was made on June 3, 1997. All per share amounts herein have been adjusted to reflect both stock splits. A summary of treasury share transactions follows (shares in millions):
1998 1997 1996 Share balance at January 1 282 142 139 Shares issued under stock incentive plans (9) (4) (3) Purchase of treasury shares 3 2 6 Effect of 2-for-1 stock split 282 142 - Share balance at December 31 558 282 142
The Company has Preferred Share Purchase Rights outstanding that are attached to, and presently only trade with, the Company's common shares and are not exercisable. The rights will become exercisable only if a person or group acquires 20 percent or more of the Company's common stock or announces a tender offer which, if completed, would result in ownership by a person or group of 20 percent or more of the Company's common stock. Should a person acquire 20 percent or more of the Company's outstanding common stock through a merger or other business combination transaction, each right will entitle its holder (other than such acquirer) to purchase common shares of Schering-Plough having a market value of twice the exercise price of the right. The exercise price of the rights is $100. Following the acquisition by a person or group of beneficial ownership of 20 percent or more but less than 50 percent of the Company's common stock, the Board of Directors may call for the exchange of the rights (other than rights owned by such acquirer), in whole or in part, at an exchange ratio of one common share or one two-hundredth of a share of Series A Junior Participating Preferred Stock, per right. Also, prior to the acquisition by a person or group of beneficial ownership of 20 percent or more of the Company's common stock, the rights are redeemable for $.005 per right at the option of the Board of Directors. The rights will expire on July 10, 2007, unless earlier redeemed or exchanged. The Board of Directors is also authorized to reduce the 20 percent thresholds referred to above to not less than the greater of (i) the sum of .001% and the largest percentage of the outstanding shares of common stock then known to the Company to be beneficially owned by any person or group of affiliated or associated persons and (ii) 10 percent, except that following the acquisition by a person or group of beneficial ownership of 20 percent or more of the Company's common stock no such reduction may adversely affect the interests of the holders of the rights. Stock Incentive Plans Under the terms of the Company's 1997 Stock Incentive Plan, 72 million of the Company's common shares may be granted as stock options or awarded as deferred stock units to officers and certain employees of the Company through December 2002. Option exercise prices equal the market price of the common shares at their grant dates. Options expire not later than 10 years after the date of grant. Standard options granted generally have a one-year vesting term. Other options granted vest 20 percent per year for five years starting five years after the date of grant. Deferred stock units are payable in an equivalent number of common shares; the shares are distributable in a single installment or in five equal annual installments generally commencing one year from the date of the award. The following table summarizes stock option activity over the past three years under the current and prior plans (number of options in millions):
1998 1997 1996 Weighted- Weighted- Weighted- Number Average Number Average Number Average of Exercise of Exercise of Exercise Options Price Options Price Options Price Outstanding at January 1. . . . 42 $12.20 41 $ 9.57 39 $ 7.11 Granted . . . . 11 39.06 9 20.57 12 14.36 Exercised . . . (10) 10.47 (8) 7.76 (9) 5.71 Canceled or expired . . (1) 30.87 - - (1) 10.39 Outstanding at December 31. . . 42 $19.31 42 $12.20 41 $ 9.57 Options exercisable at December 31. . 25 $12.02 26 $ 9.28 22 $ 6.96
The Company accounts for its stock compensation arrangements using the intrinsic value method. If the fair value method of accounting was applied as defined in SFAS No. 123, "Accounting for Stock-Based Compensation," the Company's pro forma net income would have been $1,704, $1,421 and $1,197 for 1998, 1997 and 1996, respectively. Pro forma basic earnings per share would have been $1.16, $.97 and $.82 for 1998, 1997 and 1996, respectively, and pro forma diluted earnings per share would have been $1.15, $.96 and $.81 for 1998, 1997 and 1996, respectively. The weighted-average fair value per option granted in 1998, 1997 and 1996 was $9.24, $4.60 and $3.11, respectively. The fair value was estimated using the Black-Scholes option pricing model based on the following assumptions:
1998 1997 1996 Dividend yield 2.4% 2.6% 2.8% Volatility 24% 20% 20% Risk-free interest rate 5.5% 6.1% 5.7% Expected term of options (in years) 5 5 5
In 1998, 1997 and 1996, the Company awarded deferred stock units totaling 2.5 million, 3.0 million and 3.6 million, respectively. The expense recorded in 1998, 1997 and 1996 for deferred stock units was $45, $32 and $27, respectively. Inventories Year-end inventories consisted of the following:
1998 1997 Finished products . . . . . . . . . . . . . . $483 $334 Goods in process. . . . . . . . . . . . . . . 174 191 Raw materials and supplies. . . . . . . . . . 184 188 Total inventories . . . . . . . . . . . . . . $841 $713
Inventories valued on a last-in, first-out basis comprised approximately 28 percent and 34 percent of total inventories at December 31, 1998 and 1997, respectively. The estimated replacement cost of total inventories at December 31, 1998 and 1997 was $864 and $745, respectively. Retirement Plans and Other Post-retirement Benefits The Company has defined benefit pension plans covering eligible employees in the United States and certain foreign countries, and the Company provides post-retirement health care benefits to its eligible U.S. retirees and their dependents. The components of net pension and other post-retirement benefit expense (income) were as follows:
Post-retirement Health Care Retirement Plans Benefits 1998 1997 1996 1998 1997 1996 Service cost $41 $37 $37 $ 5 $ 4 $ 5 Interest cost 59 54 50 11 11 11 Expected return on plan assets (89) (81) (76) (17) (15) (15) Amortization of transition (assets) liabilities, net (9) (8) (8) - - - Amortization of prior service cost 2 2 2 (1) (1) - Amortization of actuarial gains and losses 1 1 1 - - - Net expense (income) $5 $5 $6 $(2) $(1) $1
The components of the changes in the benefit obligations were as follows:
Post-retirement Health Care Retirement Plans Benefits 1998 1997 1998 1997 Benefit obligations at January 1. . . . $867 $755 $162 $156 Service cost . . . . . . . . . . . . . 41 37 5 4 Interest cost . . . . . . . . . . . . . 59 54 11 11 Assumption changes. . . . . . . . . . . 51 44 10 9 Effects of exchange rate changes. . . . 5 (13) - - Benefits paid . . . . . . . . . . . . . (62) (43) (8) (8) Actuarial (gains) and losses . . . . . 22 7 (3) (10) Business combinations/divestitures . . - 26 - - Plan amendments. . . . . . . . . . . . 4 - - - Benefit obligations at December 31. . . $987 $867 $177 $162 Benefit obligations of overfunded plans $790 $704 $177 $162 Benefit obligations of underfunded plans $197 $163
The components of the changes in plan assets were as follows:
Post-retirement Health Care Retirement Plans Benefits 1998 1997 1998 1997 Fair value of plan assets, primarily stocks and bonds, at January 1. . . . . $1,039 $913 $210 $192 Actual return on plan assets . . . . . . 135 130 26 26 Contributions. . . . . . . . . . . . . . 13 9 - - Effects of exchange rate changes . . . . - (10) - - Benefits paid . . . . . . . . . . . . . (42) (35) (8) (8) Business combinations/divestitures . . . - 32 - - Fair value of plan assets at December 31 $1,145 $1,039 $228 $210 Plan assets of overfunded plans $1,086 $ 994 $228 $210 Plan assets of underfunded plans $ 59 $ 45
In addition to the plan assets indicated above, at December 31, 1998 and 1997, securities of $70 and $79, respectively, were held in non-qualified trusts designated to provide pension benefits for certain underfunded plans. The following is a reconciliation of the funded status of the plans to the Company's balance sheet at December 31:
Post-retirement Health Care Retirement Plans Benefits 1998 1997 1998 1997 Plan assets in excess of benefit obligations . . . . . . . . . . . . . . $158 $172 $51 $ 48 Unrecognized net transition asset . . . . (45) (54) - - Unrecognized prior service cost . . . . . 12 10 (6) (6) Unrecognized net actuarial (gain) loss. . (14) (43) (51) (49) Net asset (liability) . . . . . . . . . . $111 $ 85 $(6) $ (7)
The weighted-average assumptions employed at December 31, 1998 and 1997 were:
Post-retirement Health Care Retirement Plans Benefits 1998 1997 1998 1997 Discount rate 6.6% 6.9% 6.5% 7.0% Long-term expected rate of return on plan assets 9.9% 9.6% 9.0% 9.0% Rate of increase in future compensation 4.1% 4.1%
The weighted-average assumed health care cost trend rates used for post-retirement measurement purposes were 7.4 percent for 1999, trending down to 5.0 percent by 2003. A 1 percent increase or decrease in the assumed health care cost trend rate would increase or decrease combined post-retirement service and interest cost by $3 and the post-retirement benefit obligation by $24. The Company has a defined contribution profit-sharing plan covering substantially all its full-time domestic employees who have completed one year of service. The annual contribution is determined by a formula based on the Company's income, shareholders' equity and participants' compensation. Profit- sharing expense totaled $66, $58 and $60 in 1998, 1997 and 1996, respectively. Income Taxes U.S. and foreign operations contributed to income before income taxes as follows:
1998 1997 1996 United States. . . . . . . . . . . . . $1,609 $1,349 $1,090 Foreign. . . . . . . . . . . . . . . . 717 564 516 Total income before income taxes . . . $2,326 $1,913 $1,606
The components of income tax expense were as follows:
1998 1997 1996 Current: Federal. . . . . . . . . . . . . . . $442 $306 $296 Foreign. . . . . . . . . . . . . . . 184 160 122 State. . . . . . . . . . . . . . . . 14 10 14 Total current. . . . . . . . . . . . 640 476 432 Deferred: Federal and state. . . . . . . . . . (19) 30 (25) Foreign. . . . . . . . . . . . . . . (51) (37) (14) Total deferred . . . . . . . . . . . (70) (7) (39) Total income tax expense . . . . . . . $570 $469 $393
The difference between the U.S. statutory tax rate and the Company's effective tax rate was due to the following:
1998 1997 1996 U.S. statutory tax rate. . . . . . . . . 35.0% 35.0% 35.0% Increase (decrease) in taxes resulting from: Lower rates in other jurisdictions, net . . . . . . . . . . . . . . . . . (10.6) (10.0) (10.3) Research tax credit. . . . . . . . . . (.8) (.6) (.4) All other, net . . . . . . . . . . . . .9 .1 .2 Effective tax rate . . . . . . . . . . . 24.5% 24.5% 24.5%
The lower rates in other jurisdictions, net, are primarily attributable to certain employment and capital investment actions taken by the Company. As a result, income from manufacturing activities in these jurisdictions is subject to lower tax rates through 2010. As of December 31, 1998 and 1997, the Company had total deferred tax assets of $741 and $632, respectively, and deferred tax liabilities of $506 and $475, respectively. Valuation allowances are not significant. Significant deferred tax assets at December 31, 1998 and 1997 were for operating costs not currently deductible for tax purposes and totaled $425 and $390, respectively. Significant deferred tax liabilities at December 31, 1998 and 1997 were for depreciation differences, $233 and $234, respectively, and retirement plans, $61 and $54, respectively. Other current assets include deferred income taxes of $521 and $438 at December 31, 1998 and 1997, respectively. Deferred taxes are not provided on undistributed earnings of foreign subsidiaries (considered to be permanent investments), which at December 31, 1998, approximated $3,475. Determining the tax liability that would arise if these earnings were remitted is not practicable. As of December 31, 1998, the U.S. Internal Revenue Service has completed its examination of the Company's tax returns for all years through 1988 and there are no unresolved issues outstanding for those years. Total income tax payments during 1998, 1997 and 1996 were $458, $368 and $306, respectively. Legal and Environmental Matters The Company has responsibilities for environmental clean-up under various state, local and federal laws, including the Comprehensive Environmental Response, Compensation and Liability Act, commonly known as Superfund. At several Superfund sites (or equivalent sites under state law), the Company is alleged to be a potentially responsible party (PRP). The Company estimates its obligations for clean-up costs for Superfund sites based on information obtained from the federal Environmental Protection Agency, an equivalent state agency, and/or studies prepared by independent engineers, and on the probable costs to be paid by other PRPs. The Company records a liability for environmental assessments and/or clean-up when it is probable a loss has been incurred and the amount can reasonably be estimated. The Company is also involved in various other claims and legal proceedings of a nature considered normal to its business, including product liability cases. The estimated costs the Company expects to pay in these cases are accrued when the liability is considered probable and the amount can reasonably be estimated. Consistent with trends in the pharmaceutical industry, the Company is self-insured for certain events. The recorded liabilities for the above matters at December 31, 1998 and 1997 and the related expenses incurred during the three years ended December 31, 1998, were not material. Expected insurance recoveries have not been considered in determining the costs for environmental-related liabilities. 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 agreed to settle the federal class action for a total of $22, which has been paid in full as of January 31, 1999. 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. The defendants that did not settle the class action proceeded to trial in September 1998. The trial ended in November 1998 with a directed verdict in the defendants' favor. 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, an action has been brought in Alabama purportedly on behalf of consumers in Alabama and several other states. Plaintiffs are seeking to maintain the action as a class action. The Company has settled the retailer class action in Wisconsin and the alleged class action in Minnesota. The settlements of the state antitrust cases in Wisconsin and Minnesota have been approved by the respective courts. The settlement amounts were not significant. The Company has also recently settled in principle the state consumer cases in all of the states except Alabama and California. Court approval of those settlements has either already been obtained or is currently being sought. The settlement amounts were not material to the Company. In August 1998, a class action was brought in Tennessee purportedly on behalf of consumers in Tennessee and several other states. The court has conditionally certified a class of consumers, but has stayed the case pending the resolution of an earlier-filed Tennessee case, which the Company has settled in principle. Plaintiffs in these antitrust actions generally seek treble damages in an unspecified amount and an injunction against the allegedly unlawful conduct. 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. 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 all the antitrust actions are 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. 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 complaint also alleged that the defendants defamed the wholesaler and interfered with its business. There are related actions pending in the Delaware bankruptcy proceedings of the wholesaler and certain of the plaintiff's claims against the Company have been dismissed. The Company believes that this action is without merit and is defending itself vigorously against all claims. In February 1998, Geneva Pharmaceuticals, Inc. (Geneva) submitted an Abbreviated New Drug Application (ANDA) to the U.S. Food and Drug Administration seeking to market a generic form of CLARITIN in the United States several years before the expiration of the Company's patents. Geneva has alleged that certain of the Company's U.S. CLARITIN patents are invalid and unenforceable. The CLARITIN patents are material to the Company's business. In March 1998, the Company filed suit in federal court seeking a ruling that Geneva's ANDA submission constitutes willful infringement of the Company's patents and that its challenge to the Company's patents is without merit. The Company believes that it should prevail in the suit. However, as with any litigation, there can be no assurance that the Company will prevail. Quarterly Data(Unaudited)
Three Months Ended March 31, June 30, September 30, December 31, 1998 1997 1998 1997 1998 1997 1998 1997 Net sales. . . . $1,908 $1,568 $2,124 $1,720 $1,986 $1,709 $2,059 $1,781 Cost of sales. . 380 289 423 330 394 326 404 363 Gross profit . . 1,528 1,279 1,701 1,390 1,592 1,383 1,655 1,418 Selling, general and administrative. 712 594 828 679 762 681 839 710 Research and development . . 224 179 261 209 257 220 265 239 Other, net . . . (4) 9 9 8 1 15 (4) 14 Income before income taxes. . 596 497 603 494 572 467 555 455 Income taxes . . 146 122 148 121 140 114 136 112 Net income . . . $ 450 $375 $ 455 $ 373 $ 432 $ 353 $419 $ 343 Basic earnings per common share. . $ .31 $.26 $ .31 $ .25 $ .29 $ .24 $.29 $ .23 Diluted earnings per common share .30 .25 .31 .25 .29 .24 .28 .23 Dividends per common share. . .095 .083 .11 .095 .11 .095 .11 .095 Common share prices: High. . . . . . 42 3/4 20 13/32 46 11/16 24 11/16 53 17/32 27 9/32 57 1/2 31 23/32 Low . . . . . . 30 27/32 16 9/32 39 1/16 17 5/8 43 23 1/2 45 13/16 25 27/32 Average shares outstanding for basic EPS (in millions). 1,466 1,463 1,467 1,464 1,469 1,465 1,470 1,465 Average shares outstanding for diluted EPS (in millions). 1,485 1,476 1,488 1,480 1,490 1,482 1,489 1,482 Certain 1997 amounts have been restated to reflect the 1998 2-for-1 stock split. The Company's common shares are listed and principally traded on the New York Stock Exchange. The approximate number of holders of record of common shares as of December 31, 1998, was 47,000.
Business Segment Data Schering-Plough Corporation is a holding company whose subsidiaries are engaged in the discovery, development, manufacturing and marketing of pharmaceutical and health care products worldwide. The Company is organized and operates in the pharmaceutical and health care businesses. Pharmaceutical products include prescription drugs and animal health products. Health care products include foot care, sun care and over-the-counter products sold primarily in the United States. The following information is presented in accordance with the requirements of SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." Net Sales and Operating Profit by Segment
Net Sales Operating Profit 1998 1997 1996 1998 1997 1996 Pharmaceutical products. . . $7,342 $6,110 $5,049 $2,261 $1,885 $1,592 Health care products . . . . 735 668 607 160 151 138 Total net sales and operating profit. . . . . . . . . . . 8,077 6,778 5,656 2,421 2,036 1,730 General corporate revenue and expense . . . . (76) (83) (79) Interest expense . . . . . . (19) (40) (45) Consolidated net sales and pre-tax profit. . . . . $8,077 $6,778 $5,656 $2,326 $1,913 $1,606
Assets, Capital Expenditures and Depreciation and Amortization by Segment
Capital Depreciation and Assets Expenditures Amortization 1998 1997 1996 1998 1997 1996 1998 1997 1996 Pharmaceutical products. . . . . . $5,981 $5,114 $4,099 $357 $380 $316 $218 $180 $152 Health care products. 424 398 375 31 24 17 15 15 16 Operating segment totals. . . . . . . 6,405 5,512 4,474 388 404 333 233 195 168 Corporate . . . . . . 1,435 995 924 1 1 3 5 5 5 Consolidated assets, capital expenditures, depreciation and amortization. . . . $7,840 $6,507 $5,398 $389 $405 $336 $238 $200 $173
Net Sales by Geographic Area
1998 1997 1996 United States. . . . . . . . . . . . . $5,113 $4,151 $3,283 Europe and Canada. . . . . . . . . . . 1,889 1,620 1,460 Latin America. . . . . . . . . . . . . 578 453 385 Pacific Area and Asia. . . . . . . . . 497 554 528 Consolidated net sales . . . . . . . . $8,077 $6,778 $5,656
Net sales are presented in the geographic area in which the Company's customers are located. During 1998, 11 percent of consolidated net sales was made to McKesson Corporation, a major pharmaceutical and health care products distributor; substantially all these sales were in the Company's pharmaceutical segment. During 1997 and 1996, no single customer accounted for more than 10 percent of consolidated net sales. Long-lived Assets by Geographic Location
1998 1997 1996 United States. . . . . . . . . . . . . $1,516 $1,348 $1,317 Ireland. . . . . . . . . . . . . . . . 338 340 310 Singapore. . . . . . . . . . . . . . . 268 271 166 Puerto Rico. . . . . . . . . . . . . . 160 161 164 Other foreign countries. . . . . . . . 598 606 432 Total. . . . . . . . . . . . . . . . . $2,880 $2,726 $2,389
Long-lived assets shown by geographic location are primarily property. Substantially all intangible assets are attributable to the pharmaceutical segment and, by their nature, do not have a physical or geographic location; accordingly, intangible assets are not included above. Report by Management Management is responsible for the preparation and the integrity of the accompanying financial statements. These statements are prepared in accordance with generally accepted accounting principles and require the use of estimates and assumptions that affect the reported amounts of assets, liabilities, sales and expenses. In management's opinion, the consolidated financial statements present fairly the Company's results of operations, financial position and cash flows. All financial information in this Annual Report is consistent with the financial statements. The Company maintains, and management relies on, a system of internal accounting controls and related policies and procedures that provide reasonable assurance of the integrity and reliability of the financial statements. The system provides, at appropriate cost and within the inherent limitations of all internal control systems, that transactions are executed in accordance with management's authorization, are properly recorded and reported in the financial statements and that assets are safeguarded. The Company's internal accounting control system provides for careful selection and training of supervisory and management personnel and requires appropriate segregation of responsibilities and delegation of authority. In addition, the Company maintains a corporate code of conduct for purposes of determining possible conflicts of interest, compliance with laws and confidentiality of proprietary information. The Company's independent auditors, Deloitte & Touche LLP, audit the annual consolidated financial statements. They evaluate the Company's internal accounting controls and perform tests of procedures and accounting records to enable them to express their opinion on the fairness of these statements. In addition, the Company has an internal audit function that regularly performs audits using programs designed to test compliance with Company policies and procedures, and to verify the adequacy of internal accounting controls and other financial policies. The internal auditors' and independent auditors' recommendations concerning the Company's system of internal accounting controls have been considered and appropriate action has been taken with respect to those recommendations. The Finance, Compliance and Audit Committee of the Board of Directors consists solely of non-employee directors. The Committee meets periodically with management, the internal auditors and the independent auditors to review audit results, financial reporting, internal accounting controls and other financial matters. Both the independent auditors and internal auditors have full and free access to the Committee. /S/Richard Jay Kogan /S/Jack L. Wyszomierski /S/Thomas H. Kelly Chairman of the Board and Executive Vice President Vice President Chief Executive and Chief Financial and Controller Officer Officer INDEPENDENT AUDITORS' REPORT DELOITTE & TOUCHE Schering-Plough Corporation, its Directors and Shareholders: We have audited the accompanying consolidated balance sheets of Schering-Plough Corporation and subsidiaries as of December 31, 1998 and 1997 and the related statements of consolidated income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial state- ments based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Schering-Plough Corporation and subsidiaries at December 31, 1998 and 1997 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. /S/DELOITTE & TOUCHE LLP Parsippany, New Jersey February 12, 1999 Schering-Plough Corporation and Subsidiaries Six-Year Selected Financial & Statistical Data(Dollars in millions, except per share figures) 1998 1997 1996 1995 1994 1993 Operating Results Net sales . . . . . . . . . . . . . $8,077 $6,778 $5,656 $5,104 $4,537 $4,229 Income before income taxes. . . . . 2,326 1,913 1,606 1,395 1,227 1,073 Income from continuing operations before cumulative effect of accounting change. . . . . . . . . 1,756 1,444 1,213 1,053 926 816 Discontinued operations . . . . . . - - - (166) (4) 9 Cumulative effect of accounting change . . . . . . . . . . . . . . - - - - - (94) Net income. . . . . . . . . . . . . 1,756 1,444 1,213 887 922 731 Basic EPS from continuing operations before cumulative effect of accounting change. . . . 1.20 .98 .82 .71 .61 .52 Discontinued operations . . . . . . - - - (.11) (.01) .01 Cumulative effect of accounting change . . . . . . . . . . . . . . - - - - - (.06) Basic earnings per common share . . 1.20 .98 .82 .60 .60 .47 Diluted EPS from continuing operations before cumulative effect of accounting change. . . . 1.18 .97 .82 .70 .60 .51 Diluted earnings per common share . 1.18 .97 .82 .59 .60 .46 Investments Research and development . . . . . $1,007 $ 847 $ 723 $ 657 $ 610 $ 567 Capital expenditures . . . . . . . 389 405 336 304 286 345 Financial Condition Property, net . . . . . . . . . . . $2,675 $2,526 $2,246 $2,099 $2,082 $1,968 Total assets. . . . . . . . . . . . 7,840 6,507 5,398 4,665 4,326 4,317 Long-term debt. . . . . . . . . . . 4 46 46 87 186 182 Shareholders' equity. . . . . . . . 4,002 2,821 2,060 1,623 1,574 1,582 Net book value per common share . . 2.72 1.93 1.41 1.11 1.06 1.02 Financial Statistics Income from continuing operations before cumulative effect of accounting change as a percent of sales . . . . . . . . . 21.7% 21.3% 21.4% 20.6% 20.4% 19.3% Net income as a percent of sales. . 21.7% 21.3% 21.4% 17.4% 20.3% 17.3% Return on average shareholders' equity . . . . . . . . . . . . . . 51.5% 59.2% 65.9% 55.5% 58.4% 46.0% Effective tax rate . . . . . . . . 24.5% 24.5% 24.5% 24.5% 24.5% 24.0% Other Data Cash dividends per common share . . $ .425 $ .368 $.32 $ .281 $ .248 $ .218 Cash dividends on common shares . . 627 542 474 416 379 340 Depreciation and amortization . . . 238 200 173 157 145 131 Number of employees . . . . . . . . 25,100 22,700 20,600 20,100 20,000 20,300 Average shares outstanding for basic EPS(in millions) . . . . 1,468 1,464 1,471 1,479 1,530 1,561 Average shares outstanding for diluted EPS(in millions) . . . 1,488 1,480 1,487 1,498 1,547 1,580 Common shares outstanding at year-end (in millions). . . . . 1,472 1,465 1,461 1,457 1,488 1,548 Certain amounts for years prior to 1998 have been restated for the effect of the 1998 2-for-1 stock split.
EX-21 9 Schering-Plough Corporation and Subsidiaries Subsidiaries of Registrant As of December 31, 1998 Exhibit 21 State or Country of Incorporation Subsidiaries of Registrant or Organization AESCA Chemisch Pharmazeutische Fabrik GmbH Austria American Image Productions, Inc. Tennessee American Scientific Laboratories, Inc. Delaware Ark Products Limited United Kingdom Avondale Chemical Co., Ltd. Ireland Beneficiadora e Industrializadora S.A. de C.V. Mexico Canji, Inc. Delaware Chemibiotic (Ireland) Limited Ireland Colombia Veterinary Holdings, Inc. Panama Coopers Animal Health Limited United Kingdom Coopers Brasil Ltda. Brazil Coopers Uruguay S.A. Uruguay Dashtag United Kingdom Desarrollos Farmaceuticos Y Cosmeticos S.A. Spain DNAX Research Institute of Molecular & Cellular Biology, Inc. California Douglas Industries, Inc. Delaware Dr. Scholl's Foot Comfort Shops, Inc. Delaware Essex (Taiwan) Ltd. Taiwan Essex Chemie A.G. Switzerland Essex Farmaceutica S. A. Colombia Essex Farmaceutica Portuguesa, Lda Portugal Essex Italia S.p.A. Italy Essex Pharma GmbH Germany Essex Pharmaceuticals, Inc. Philippines Essexfarm, S. A. Ecuador Farmaceutica Essex, S. A. Spain Garden Insurance Co., Ltd. Bermuda Integrated Therapeutics Group, Inc. Delaware Key Pharma S.A. Argentina Key Pharma S.A. Ecuador Key Pharma, A. G. Switzerland Key Pharma, S.A. Spain Key Pharmaceuticals Export Co., Inc. U.S. Virgin Islands Key Pharmaceuticals, Inc. Florida Kirby Medical Products Cia Ltda Chile Kirby-Warrick Pharmaceuticals Limited United Kingdom Laboratorio Essex, C.A. Venezuela Laboratorio S.P. White's, C.A. Venezuela Laboratorios Essex S.A. Argentina Loftus Bryan Chemicals Limited Ireland Macol, S.A. Colombia Mallinckrodt Veterinary Limited Ireland Medexa, S.A. de C.V. Mexico Med-Nim (Proprietary) Limited South Africa MedAdvisor, Inc. Delaware P.T. Schering-Plough Indonesia Indonesia Pharmaceutical Supply Corporation Delaware Pharmaco(Canada) Ltd. Canada Pharmaco, Inc. Delaware Pitman-Moore Animal Health Limited New Zealand Plough (Australia) Pty. Limited Australia Plough (UK) Limited United Kingdom Plough Benelux S.A. Belgium Plough Broadcasting Co., Inc. Delaware Plough Consumer Products (Asia) Ltd. Hong Kong Plough Consumer Products (Philippines) Inc. Philippines Plough de Venezuela, C.A. Venezuela Plough Export, Inc. Tennessee Plough Farma, Lda. Portugal Plough France S.A. France Plough Hellas Limited Greece Plough Laboratories, Inc. Tennessee Plough S.p.A. Italy Plough Services AG Switzerland PPL, Inc. Tennessee Pro Medica AB Sweden Professional Pharmaceutical Corporation Delaware Professional Vaccine Corporation Delaware S-P RIL Limited United Kingdom S-P Veterinary (UK) Limited United Kingdom S-P Veterinary Holdings Limited United Kingdom S-P Veterinary Limited United Kingdom Scheramex S.A. de C.V. Mexico Scherico, Ltd. Switzerland Schering Canada Inc. Canada Schering Corporation New Jersey Schering Institutional Sales Corporation Delaware Schering Laboratories Advertising Inc. Delaware Schering Sales Corporation Delaware Schering Sales Management, Inc. Nevada Schering Transamerica Corporation New Jersey Schering-Plough Korea South Korea Schering-Plough (Bray) Limited Ireland Schering-Plough France Schering-Plough Grenada Limited Grenada Schering-Plough (Proprietary) Limited South Africa Schering-Plough A/S Denmark Schering-Plough A/S Norway Schering-Plough AB Sweden Schering-Plough Animal Health Limited Australia Schering-Plough Animal Health Limited Hong Kong Schering-Plough Animal Health Limited New Zealand Schering-Plough Animal Health Limited Thailand Schering-Plough Animal Health Operations Sdn Bhd Malaysia Schering-Plough Animal Health Sdn Bhd Malaysia Schering-Plough Animal Health Corporation Delaware Schering-Plough Animal Health, Inc. Philippines Schering-Plough Animal Health Corporation Delaware Schering-Plough Animal Health Pte. Ltd. Singapore Schering-Plough B.V. Netherlands Schering-Plough C.A. Venezuela Schering-Plough Central East A.G. Switzerland Schering-Plough (China) Ltd. Bermuda Schering-Plough Compania Limitada Chile Schering-Plough Coordination Center N.V./S.A. Belgium Schering-Plough Corp., U.S.A. Delaware Schering-Plough Corporation Philippines Schering-Plough del Caribe, Inc. New Jersey Schering-Plough del Ecuador, S.A. Ecuador Schering-Plough del Peru S.A. Peru Schering-Plough External Affairs, Inc. Delaware Schering-Plough Farma Lda. Portugal Schering-Plough Farmaceutica Ltda. Brazil Schering-Plough HealthCare Holding Co. Delaware Schering-Plough HealthCare Products Advertising Corp. Tennessee Schering-Plough HealthCare Products Canada, Inc. Canada Schering-Plough HealthCare Products Sales Corporation California Schering-Plough HealthCare Products, Inc. Delaware Schering-Plough Holdings France, SAS France Schering-Plough Holdings Ltd. United Kingdom Schering-Plough II - Veterinaria, Lda. Portugal Schering-Plough INT Limited United Kingdom Schering-Plough International, Inc. Delaware Schering-Plough Investment Co., Inc. Delaware Schering-Plough Investments Limited Delaware Schering-Plough Kabushiki Kaisha Japan Schering-Plough Labo N.V. Belgium Schering-Plough Legislative Resources, L.L.C. Delaware Schering-Plough Limited Iran Schering-Plough Limited Taiwan Schering-Plough Limited Thailand Schering-Plough Limited United Kingdom Schering-Plough Ltd. Switzerland Schering-Plough N.V./S.A. Belgium Schering-Plough Overseas Limited Delaware Schering-Plough OY Finland Schering-Plough Pharmaceutical Industrial and Commercial S.A. Greece Schering-Plough Pensions Ireland Limited Ireland Schering-Plough Products, Inc. Delaware Schering-Plough Pty. Limited Australia Schering-Plough Real Estate Company, Inc. Delaware Schering-Plough Real Property Holdings, Inc. Delaware Schering-Plough Research Institute Delaware Schering-Plough S.A. Paraguay Schering-Plough S.A. Argentina Schering-Plough S.A. Colombia Schering-Plough S.A. Panama Schering-Plough S.A. Spain Schering-Plough S.A. Uruguay Schering-Plough S.A. de C.V. Mexico Schering-Plough S.p.A. Italy Schering-Plough Sante Animale France Schering-Plough Sdn. Bhd. Malaysia Schering-Plough Tibbi Urunler Ticaret, A.S. Turkey Schering-Plough Veterinaire France Schering-Plough Veterinaria, S.A. de C.V. Mexico Schering-Plough Veterinary BV Netherlands Schering-Plough Veterinary Corporation Nevada Schering-Plough Veterinary NV/SA Belgium Schering-Plough Veterinary Ltd. Thailand Schering-Plough Veterinary Operations, Inc. Delaware Schering-Plough Veterinary S.A. Greece Sentipharm A.G. Switzerland Shanghai Schering-Plough Pharmaceutical Company, Ltd. China SOL Limited Bermuda SP Biotech, S.A. Spain SP HealthCare Products Corporation Delaware SP Neurotech, S.A. Spain Suntan Sensations, Inc. California Syntro Corporation Delaware Syntro Zeon, LC Kansas SyntroVenture Corporation Kansas SyntroVet Incorporated Kansas Tasman Vaccine Laboratory (UK) Limited United Kingdom Technobiotic Ltd. Australia The Coppertone Corporation Florida Undra S.A. de C.V. Mexico UNICET, SAS France Warrick Pharmaceuticals Corporation Delaware Warrick Pharmaceuticals Limited United Kingdom Wellnex Pharmaceuticals India Werthenstein Chemie A.G. Switzerland White Laboratories Ltd. United Kingdom White Laboratories of Canada Ltd. Canada White Laboratories, Inc. New Jersey EX-23 10 EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statements No. 2-83963, No. 33-19013, No. 33- 50606 and No. 333-30331 on Form S-8, Registration Statement No. 333-853 on Form S-3, Post Effective Amendment No. 1 to Registration Statement No. 2-84723 on Form S-8, Post- Effective Amendment No. 1 to Registration Statement No. 2- 80012 on Form S-3, Post-Effective Amendment No. 1 to Registration Statement No. 2-77740 on Form S-3 and Registration Statements No. 333-12909, No. 333-30355 on Form S-3 of our reports dated February 12, 1999, appearing in and incorporated by reference in this Annual Report on Form 10-K of Schering- Plough Corporation for the year ended December 31, 1998. /s/ DELOITTE & TOUCHE, LLP Parsippany, New Jersey February 25, 1999 EX-24 11 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned officers and/or directors of Schering-Plough Corporation, a New Jersey corporation (herein called the "Corporation"), does hereby constitute and appoint William J. Silbey, Thomas H. Kelly and Benjamin Croce, or any of them, his or her true and lawful attorney or attorneys and agent or agents, to do any and all acts and things and to execute any and all instruments which said attorney or attorneys and agent or agents may deem necessary or advisable to enable the Corporation to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations, requirements or requests of the Securities and Exchange Commission thereunder or in respect thereof in connection with the filing under said Act of the Annual Report of the Corporation on Form 10- K for the fiscal year ended December 31, 1998 (herein called the "Form 10-K"); including specifically, but without limiting the generality of the foregoing, the power and authority to sign the respective names of the undersigned officers and/or directors as indicated below to the Form 10-K and/or to any amendment of the Form 10-K and each of the undersigned does hereby ratify and confirm all that said attorney or attorneys and agent or agents, or any of them, shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, each of the undersigned has subscribed these presents this 23rd day of February, 1999. /s/ Richard Jay Kogan_____________ /s/ Jack L. Wyszomierski Richard Jay Kogan, Chairman and Jack L. Wyszomierski, Executive Chief Executive Officer; Director Vice President and Chief Financial Officer /s/ Thomas H. Kelly______________ /s/ H. Barclay Morley___________ Thomas H. Kelly, Vice President H. Barclay Morley and Controller; Principal Director Accounting Officer /s/ Hans W. Becherer_________ /s/ Carl E. Mundy, Jr. Hans W. Becherer Carl E. Mundy, Jr. Director Director /s/ Raul E. Cesan____________ /s/ Richard de J. Osborne_______ Raul E. Cesan Richard de J. Osborne Director Director /s/ Hugh A. D'Andrade_____________/s/ Patricia F. Russo___________ Hugh A. D'Andrade Patricia F. Russo Director Director /s/ David C. Garfield___________ /s/ William A. Schreyer_________ David C. Garfield William A. Schreyer Director Director /s/ Regina E. Herzlinger________ /s/ Robert F. W. van Oordt______ Regina E. Herzlinger Robert F. W. van Oordt Director Director /s/ Robert P. Luciano_____________/s/ James Wood__________________ Robert P. Luciano James Wood Director Director /s/ Donald L. Miller Donald L. Miller Director EX-27 12
5 This schedule contains financial data extracted from Schering-Plough Corporation Consolidated Financial Statements and 10-K schedules for the year ended December 31, 1998, and is qualified in its entirety by reference to such financial statements. 1,000,000 YEAR DEC-31-1998 JAN-1-1998 DEC-31-1998 1259 0 704 98 841 3958 4068 1393 7840 3032 4 0 0 1015 2987 7840 8077 8077 1601 1601 1007 14 19 2326 570 1756 0 0 0 1756 1.20 1.18
EX-99 13 EXHIBIT 99 CAUTIONARY STATEMENTS REGARDING SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 The Company is filing this cautionary statement identifying important factors that could cause the Company's actual results to differ materially from those projected in forward looking statements of the Company made by, or on behalf of, the Company. Those factors include: - - Competitive factors including technological advances attained by competitors; patents granted to competitors; new products of competitors coming to the market; generic competition as the Company's products mature. - - Increased pricing pressure both in the United States and abroad from managed care buyers, institutions and government agencies. In the United States, among other developments, consolidation among managed care organizations may increase price pressures and may result in managed care organizations having greater influence over prescription decisions through formulary decisions and other policies. - - Government laws and regulations affecting domestic and international operations including, among other laws and regulations, those resulting from healthcare reform initiatives in the United States at the state and federal level and in other countries, as well as laws and regulations relating to trade, monetary and fiscal policies, taxes, price controls, and possible nationalization. - - Patent positions can be highly uncertain and patent disputes are not unusual. An adverse result in a patent dispute can preclude commercialization of products or negatively impact sales of existing products. - - Uncertainties of the FDA approval process and the regulatory approval processes of non-U.S. countries, including, without limitation, delays in approval of new products. - - Difficulties in product development. Pharmaceutical product development is highly uncertain. Products that appear promising in the early phases of development may fail to reach market for numerous reasons. They may be found to be ineffective or to have harmful side effects in clinical or pre-clinical testing, they may fail to receive the necessary regulatory approvals, they may turn out not to be economically feasible because of manufacturing costs or other factors or they may be precluded from commercialization by the proprietary rights of others. - - Recalls of pharmaceutical products as a consequence of previously unknown side-effects or for other reasons may occur. - - Major products such as CLARITIN and INTRON A/REBETRON Combination Therapy accounted for a material portion of the Company's 1998 revenues. If any major product, such as CLARITIN and INTRON A/REBETRON Combination Therapy, were to become subject to a problem such as loss of patent protection, previously unknown side-effects or if a new, more effective treatment should be introduced, the impact on revenues could be significant. - - Operating problems in the Company's computer systems and equipment and instruments with embedded microprocessors due to their inability to distinguish years after 1999 from years preceding 1999 and the failure of the Company to identify or fix all such "Year 2000" problems. - - Inability of a major supplier or major clinical research organization or major customer (such as a large drug wholesaler, distributor or managed care organization) to continue operations due to "Year 2000" problems. - - Failure of the Company to foresee and correct systems and commercial arrangements to address the new European currency (euro) introduced in January 1999. - - Significant litigation adverse to the Company. - - Fluctuations in interest rates and foreign currency exchange rates. -----END PRIVACY-ENHANCED MESSAGE-----