-----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, RroWSnytrPNaZ0vyb3BsT4HlD4GQ22CkXKBDWEeoluvfmIcxmY9SV+p+Y2DidWxR p9oBCUeGbVSprkncc0sLsA== 0000310158-98-000004.txt : 19980323 0000310158-98-000004.hdr.sgml : 19980323 ACCESSION NUMBER: 0000310158-98-000004 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980319 SROS: BSE SROS: CSE SROS: CSX SROS: NYSE SROS: PHLX 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-K SEC ACT: SEC FILE NUMBER: 001-06571 FILM NUMBER: 98568746 BUSINESS ADDRESS: STREET 1: ONE GIRALDA FARMS CITY: MADISON STATE: NJ ZIP: 07940-1000 BUSINESS PHONE: 9738227000 10-K 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, 1997 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, $1 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 30, 1998: 732,902,378 Aggregate market value of common shares at January 30, 1998 held by non-affiliates based on closing price: $53 billion. Part of Form 10-K Documents incorporated by reference incorporated into Schering-Plough Corporation 1997 Parts I, II and IV Annual Report to Shareholders Schering-Plough Corporation Proxy Part III Statement for the annual meeting of shareholders on April 28, 1998 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, animal health, foot care, sun care and over-the-counter (OTC) 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 1997 Annual Report to Shareholders is incorporated herein by reference. Sales by major product groups for continuing operations for each of the three years in the period ended December 31, 1997 were as follows (dollars in millions): 1997 1996 1995 Allergy/Respiratory $2,708 $2,113 $1,834 Anti-infective and Anticancer 1,156 1,135 1,031 Dermatologicals 571 560 515 Cardiovasculars 637 533 408 Other Pharmaceuticals 649 512 493 Animal Health 389 196 190 Foot Care 300 261 240 Sun Care 148 123 127 OTC 208 210 250 Other Health Care Products 12 13 16 Consolidated Sales $6,778 $5,656 $5,104 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, PROVENTIL, THEO-DUR, VANCENASE and VANCERIL, allergy/respiratory; CEDAX, EULEXIN, GARAMYCIN, INTRON A, and NETROMYCIN, anti-infective and anticancer; DIPROLENE, DIPROSONE, ELOCON, and LOTRISONE, dermatologicals; IMDUR, K-DUR, NITRO-DUR and NORMODYNE, cardiovasculars; CELESTONE, LOSEC, and SUBUTEX, other pharmaceuticals. Animal health biological and pharmaceutical products include anthelmintics, antibiotics, vaccines, anti-arthritics, steroids and nutritionals. Animal health products include: GENTOCIN and NUFLOR, antibiotics; BANAMINE, an anti-arthritic; RALGRO, a growth promotant; TRIBRISSEN, an antimicrobial; OTOMAX, a steroid ointment and OPTIMMUNE, an ophthalmic ointment. 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. In the aggregate, patents and patent applications are believed to be 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 was and 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 or likely to be 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. 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 variety 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. Energy was and 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 considered to be 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 industries, with its DR. SCHOLL'S lines of foot insoles, cushions, wart removal and other treatments and its brands of sun care products. In addition, the Company's brands are among the leaders in nasal sprays and antifungals sold OTC. 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. 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 12,300 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 1997 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 $847 million, $723 million and $657 million in 1997, 1996, and 1995, respectively. Research expenditures represented approximately 13 percent of consolidated 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 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 1997 included approximately $7 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 1997 Annual Report to Shareholders which is incorporated herein by reference. Employees There were approximately 22,700 people employed by the Company at December 31, 1997. Item 2. Properties The Company's corporate headquarters is located in Madison, New Jersey. Principal manufacturing facilities are located in Kenilworth, New Jersey, Miami, Florida, Omaha, Nebraska, the Commonwealth of Puerto Rico, Argentina, Australia, Belgium, Canada, Colombia, France, Ireland, Italy, Japan, Mexico, Singapore and Spain (pharmaceutical products); and Cleveland, Tennessee (health care products). 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, one being an alleged class action, 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-ups or proceedings under the Comprehensive Environmental Response, Compensation and Liability Act, commonly known as Superfund, or under equivalent state laws. These 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 clean-up contaminated facilities or reimburse the government or private parties for their clean-up costs. The Company 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 clean-up costs. Although joint and several liability is alleged, a company's share of clean-up costs is frequently determined on the basis of the type and quantity of hazardous substances sent to a facility by the generator. However, this allocation process varies greatly from facility to facility and can take years to complete. The Company's potential share of clean-up costs also depends on how many other PRP's are involved in the proceedings, insurance coverage, available indemnity contracts and contribution rights against other PRP's or parties. 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 amounts accrued will be incurred. The Company is a defendant in more than 160 antitrust actions commenced (starting in 1993) in state and federal courts by independent retail pharmacies, chain retail pharmacies and consumers. The plaintiffs allege price discrimination and/or conspiracy between the Company and other defendants to restrain trade by jointly refusing to sell prescription drugs at discounted prices to the plaintiffs. One of the federal cases is a class action on behalf of approximately two-thirds of all retail pharmacies in the United States and alleges a price-fixing conspiracy. The Company has agreed to settle the federal class action for a total of $22.1 million payable over three years. The settlement provides, among other things, that the Company shall not refuse to grant discounts on brand-name prescription drugs to a retailer based solely on its status as a retailer and that, to the extent a retailer can demonstrate its ability to affect market share of a Company brand-name prescription drug in the same manner as a managed care organization with which the retailer competes, it will be entitled to negotiate similar incentives subject to the rights, obligations, exemptions and defenses of the Robinson- Patman Act and other laws and regulations. The United States District Court in Illinois approved the settlement of the federal class action on June 21, 1996. In June 1997, the Seventh Circuit Court of Appeals dismissed all appeals from that settlement, and it is not subject to further review. In addition, in August, 1997, the Seventh Circuit ruled that there was sufficient evidence of participation in the alleged conspiracy by certain wholesalers to require them to proceed to trial. 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, subject to Court approval; the settlement amounts were not significant. Plaintiffs generally seek treble damages in an unspecified amount and an injunction against the allegedly unlawful conduct. Another of the actions, which was commenced in June 1994 by a group of nine chain food stores, including The Great Atlantic and Pacific Tea Company, Inc. ("A&P"), against three mail order pharmacies and 16 drug manufacturers, is pending in the United States District Court for the Northern District of Illinois. Mr. James Wood, a director of the Company, is an executive officer of A&P. Mr. Wood does not participate in any review or deliberations by the Board of Directors relating to this action. Plaintiffs in all cases seek treble damages and/or penalties in an unspecified amount and an injunction against the allegedly unlawful conduct. The Company believes that all the antitrust actions are without merit and is defending itself vigorously against all such claims. 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 plaintiff's motion for a preliminary injunction hearing. The Company believes the action is without merit and is defending itself vigorously. On March 13, 1996, the Company was notified that the United States Federal Trade Commission (FTC) is investigating whether the Company, along with other pharmaceutical companies, conspired to fix prescription drug prices. The investigation is ongoing. The Company vigorously denies that it has engaged in any price- fixing conspiracy. The Company is a defendant in a state court action in Texas brought by Foxmeyer Health Corporation, the parent of a pharmaceutical wholesaler that filed for bankruptcy in August 1996. 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. 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 Robert P. Luciano Present position 1996; Chairman 64 Chairman of the Board and Chief Executive Officer 1986-1995 Richard Jay Kogan Present position 1996; 56 President and President and Chief Chief Executive Officer Operating Officer 1986-1995 Hugh A. D'Andrade Present position 1996; 59 Vice Chairman and Executive Vice President Chief Administrative Officer Administration 1984-1995 Rodolfo C. Bryce Present position 1997; President 51 Executive Vice President Schering-Plough HealthCare and President Schering-Plough Products 1996; President HealthCare Products Schering-Plough International 1993-1996 Raul E. Cesan Present position 1994; 50 Executive Vice President President Schering and President Laboratories 1992-1994 Schering-Plough Pharmaceuticals Joseph C. Connors Present position 1996; 49 Executive Vice President Senior Vice President and and General Counsel General Counsel 1992-1995 Jack L. Wyszomierski Present position 1996; 42 Executive Vice President Vice President and Treasurer and Chief Financial Officer 1991-1995 Name and Current Position Business Experience Age Geraldine U. Foster Present position 1994; 55 Senior Vice President Vice President - Investor Investor Relations and Relations 1988-1994 Corporate Communications Daniel A. Nichols Present position 1991 57 Senior Vice President Taxes Gordon C. O'Brien Present position 1988 57 Senior Vice President Human Resources Thomas H. Kelly Present position 1991 48 Vice President and Controller Robert S. Lyons Present position 1991 57 Vice President Corporate Information Services E. Kevin Moore Present position 1996; 45 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; 61 Vice President President - Technical Operations and President, Schering Schering Laboratories 1990-1995 Technical Operations William J. Silbey Present position 1996; 38 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 1997 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 1997 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 1997 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 1997 Annual Report to Shareholders is incorporated herein by reference. Item 8. Financial Statements and Supplementary Data The Consolidated Balance Sheets as of December 31, 1997 and 1996, and the related Statements of Consolidated Income, Consolidated Retained Earnings and Consolidated Cash Flows for each of the three years in the period ended December 31, 1997, Notes to Consolidated Financial Statements, the Independent Auditors' Report of Deloitte & Touche LLP dated February 12, 1998 and Quarterly Data, as set forth in the Company's 1997 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 28, 1998 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 28, 1998 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 28, 1998 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 28, 1998 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 1997 Annual Report to Shareholders, are incorporated herein by reference. Statements of Consolidated Income for the Years Ended December 31, 1997, 1996 and 1995 Statements of Consolidated Retained Earnings for the Years Ended December 31, 1997, 1996 and 1995 Statements of Consolidated Cash Flows for the Years Ended December 31, 1997, 1996 and 1995 Consolidated Balance Sheets at December 31, 1997 and 1996 Notes to Consolidated Financial Statements Independent Auditors' Report (a) 2. Financial Statement Schedules Page in Form 10-K Independent Auditors' Report . . . . . . . . . . . . 19 Schedule II - Valuation and Qualifying Accounts. . . 20 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. 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, 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, 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, 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(f) Directors Deferred Compensation Plan and Trust related thereto*. Plan incorporated by reference to Exhibit 10(f) to the Company's Annual Report for 1991 on Form 10-K; Trust Agreement incorporated by reference to Exhibit 10(a) to the Company's Annual Report for 1988 on Form 10-K, File No. 1-6571. 10(g) Supplemental Executive Retirement Plan and Trust related thereto*. Plan incorporated by reference to Exhibit 10(h) to the Company's Annual Report for 1987 on Form 10-K; amendments to Plan incorporated by reference to Exhibit 10(h) to the Company's Annual Report for 1994 on Form 10-K; Amended and Restated Trust Agreement incorporated by reference to Exhibit 10(a) to the Company's Quarterly Report for the period ended March 31, 1997 on Form 10-Q, File No. 1-6571. Exhibit Number Description 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, File No. 1-6571. 10(i) The Company's Deferred Compensation Plan*. 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) ** Form of Split Dollar Agreement and related Collateral Assignment between the Company and its executive officers.* 12 ** Computation of Ratio of Earnings to Fixed Charges. 13 ** The Financial Section of the Company's 1997 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, such report shall not be deemed filed as part of this Form 10-K. 21 ** Subsidiaries of the registrant. 23 ** Consents of experts and counsel. 24 ** Power of attorney. 27 ** Financial Data Schedule. 99 ** Cautionary Statements regarding "Safe Harbor" provision of the Private Securities Litigation Reform Act of 1995. All other exhibits are not applicable. Copies of above exhibits will be furnished upon request. * Compensatory plan, contract or arrangement. ** Filed with this document. (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 March 19, 1998 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 * Robert P. Luciano Donald L. Miller Chairman and Director Director By * By * Richard Jay Kogan H. Barclay Morley President and Chief Executive Director Officer and Director By * By * Jack L. Wyszomierski Carl E. Mundy, Jr. Executive Vice President and Director Chief Financial Officer By * By * Thomas H. Kelly Richard de J. Osborne Vice President and Controller Director and Principal Accounting Officer By * By * Hans W. Becherer Patricia F. Russo Director Director By * By * Hugh A. D'Andrade William A. Schreyer Director Director By * By * David C. Garfield Robert F. W. van Oordt Director Director By * By * Regina E. Herzlinger James Wood Director Director *By /s/ Thomas H. Kelly Date March 19, 1998 Thomas H. Kelly Attorney-in-fact INDEPENDENT AUDITORS' REPORT Schering-Plough Corporation: We have audited the consolidated balance sheets of Schering- Plough Corporation and subsidiaries as of December 31, 1997 and 1996 and the related statements of consolidated income, retained earnings and cash flows for each of the three years in the period ended December 31, 1997, and have issued our report thereon dated February 12, 1998; such financial statements and report are included in your 1997 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, 1998 SCHEDULE II SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995 (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 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 1995 Balance at beginning of year $ 44 $ 8 $ 6 $ 58 Additions: Charged to costs and expenses 15 74 12 101 Deductions from reserves (10) (74) (6) (90) Balance at end of year $ 49 $ 8 $ 12 $ 69
EX-10 2 Exhibit 10 (l) SCHERING-PLOUGH CORPORATION EXECUTIVE LIFE INSURANCE PLAN SPLIT DOLLAR AGREEMENT 1. Purposes of Agreement THIS AGREEMENT is made, effective , between Schering-Plough Corporation (the "Corporation") and __________________________ , an employee of a directly or indirectly wholly-owned subsidiary of the Corporation (the "Employee"). WHEREAS, the Employee is insured under Policy Number _______ (the "Policy") issued by Metropolitan Life Insurance Company ("Metropolitan"); and WHEREAS, the owner of the Policy (the "Owner") shall be the Employee or the person or other entity to whom the Employee assigns the Policy pursuant to Section 5; and WHEREAS, the Corporation is willing to assist in the payment of premiums under the Policy by making advances to the Employee as provided in this Agreement; and WHEREAS, The Employee has agreed to assign an interest in the Policy to the Corporation as collateral security for such advances, at the time of the first premium advance, on a form of agreement approved by Metropolitan (the "Collateral Assignment Agreement"); NOW, THEREFORE, in consideration of the mutual covenants and agreements described below, the Corporation and the Employee hereby agree as follows: 2. Payment of Premiums By the Employee: The Employee's share of the annual premium for the Policy while this agreement is in effect will be an amount equal to the imputed income attributable to the employee death benefit. The imputed income amount will be determined in accordance with Federal income tax law, regulations or rulings applicable to split dollar plans. By the Corporation: The Corporation shall pay the balance of premiums on the Policy until the termination of this Agreement under Section 6. The Corporation may increase or decrease the scheduled premium for any year after the first year. Each premium for the Policy following execution of this Agreement will be transferred by the Corporation to the appropriate Metropolitan account within 31 days following the anniversary date of the Policy. The premium payment period and the Program Maturity Age, as defined hereinbelow in Section 6(b), may also be changed by the Corporation to the extent necessary to maintain compliance of the Policy with the applicable sections of the Internal Revenue Code (currently Sections 7702 and 7702A) and the regulations thereunder. 3. Policy Beneficiary Designation The right to designate and change the beneficiary of the Policy and to elect an optional mode of settlement is reserved to the person who would be the Owner of the Policy in the absence of the Collateral Assignment Agreement. Such Policy Owner shall have the right to designate and change the beneficiaries and contingent beneficiaries and to elect an optional mode of settlement subject to the interest of the Corporation as Assignee under the Collateral Assignment Agreement. The Corporation will make the Policy available to the Owner if required for endorsement of a change of beneficiary. 4. Payment of Policy Proceeds in Event of Death of Employee If the Employee (and the second insured if the Policy is a Second-to-Die Policy) dies while the Policy and this Agreement are in force, the proceeds of the Policy will be payable as follows: (a) An amount shall be payable to the Corporation equal to the aggregate amount of the advances made by the Corporation pursuant to this Agreement. The Corporation may request and/or Metropolitan may be required to provide a Policy death benefit in excess of specified benefit requirements in order to maintain compliance of the Policy with the applicable sections of the Internal Revenue Code (currently Sections 7702 and 7702A) and the regulations thereunder. In such event, any excess death benefits shall be payable to the Corporation less any outstanding Policy loans received by the Corporation prior to the Employee's death. (b) The balance of the proceeds in excess of the amount payable to the Corporation under (a) above shall be payable to the beneficiary of the Policy. 5. Corporation's Exercise of Rights as Assignee The Corporation, during the lifetime of the Employee and prior to the termination of this Agreement, may exercise any of its rights as Assignee of the Policy without the consent of the Employee. If a Policy loan is taken by the Corporation, it shall be responsible for the interest thereon and shall pay such interest as it becomes due. Subject to the Corporation's rights as Assignee, the Owner retains all rights as Owner of the Policy, including the right of assignment. The Owner agrees not to withdraw, surrender, borrow against, or pledge as security for a loan any portion of the Policy cash value while this Agreement is in effect. 6. Termination of Agreement This Agreement shall terminate if any of the following takes place: (a) Termination of the Employee's employment prior to the Employee's becoming eligible for disability benefits or an early or normal retirement benefit under any respective disability plan or qualified pension plan maintained by the Corporation or its subsidiaries; (b) The later of the Employee's attainment of (i) age 65, or (ii) the fifteenth anniversary of the Policy issue date (the "Program Maturity Age"); (c) Demotion of the Employee to a position which is not part of the group of employees eligible to participate in the Corporation's Executive Life Insurance Plan as such eligibility is determined by the Corporation; (d) The bankruptcy of the Corporation; (e) The failure of the Corporation to pay the premium under Section 2 of this Agreement; (f) Payment to the Corporation by the Employee of the aggregate amount of the advances made by the Corporation pursuant to this Agreement; (g) Termination of this Agreement pursuant to Section 8(c); or (h) The death of the Employee (and the second insured if the Policy is a Second-to-Die policy). In the event of the termination of this Agreement, the aggregate of the advances made by the Corporation pursuant to this Agreement less any outstanding Policy loans received by the Corporation prior to such termination (or, if less, the net cash value in the Policy), shall become due and payable to the Corporation. Upon payment of such amount, whether from the Policy, the Employee, or whatever other source, the Corporation shall execute a release of the Collateral Assignment Agreement and deliver such release and the Policy to the Owner. 7. Insurer Not a Party Metropolitan shall not be deemed to be a party to this Agreement for any purpose nor shall it be deemed in any way to be responsible for its validity. Metropolitan shall not be obligated to inquire as to the distribution or application of any monies payable or paid by it under the Policy, and payments or other performance of its contract obligations in accordance with the terms of the Policy shall fully discharge Metropolitan from any and all liability under the Policy. 8. Amendment and Assignment of Agreement (a) This Agreement shall not be modified or amended except in writing signed by the parties hereto. (b) This Agreement is binding upon the heirs, administrators or assigns of each party. (c) This Agreement may be terminated by either party by 30 day's written notice to the other. 9. State Law This Agreement shall be subject to and construed in accordance with the laws of the State of New Jersey. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. SCHERING-PLOUGH CORPORATION Employee By:__________________________ _________________________ Witness: _________________________ COLLATERAL ASSIGNMENT AGREEMENT A. For value received, the undersigned (the "Policyowner"), as owner of Policy Number _________ (the "Policy") issued by Metropolitan Life Insurance Company (the "Insurer"), hereby assigns, sets over and transfers the Policy to Schering- Plough Corporation, a corporation organized under the laws of the State of New Jersey (the "Assignee"), as collateral security for those liabilities as may arise under the terms of the Split Dollar Agreement between the Policyowner (or its assignor) and the Assignee dated as of April 28, 1993 (the "Split Dollar Agreement"), subject to the terms and conditions in the Policy and to all superior liens, if any, which the Insurer has or may have against the Policy. B. The collateral assignment being made pursuant to this Agreement is solely for the purpose of assuring the Assignee of payment of the liabilities under the terms of the Split Dollar Agreement. C. The Policyowner and the Assignee expressly agree, without detracting from the generality of the foregoing, that the following rights are included in this assignment and pass to the Assignee by virtue hereof: 1. The sole right to collect the net proceeds of the Policy from the Insurer when the Policy becomes a claim by death or maturity. 2. The sole right to surrender the Policy and receive the cash surrender value thereof pursuant to the policy provisions. 3. The sole right to obtain one or more loans or advances on the Policy, and to pledge or assign the Policy as security for such loans or advance. 4. The sole right to assign, sell or convey the Policy, subject to the interest of the Assignee. D. The Policy owner and the Assignee expressly agree that as long as the Policy has not been surrendered, the following rights are reserved by the Policyowner and excluded from this assignment, and do not pass by virtue hereof: 1. The sole right to designate and change the beneficiary. 2. The sole right to elect any Optional Mode of Settlement permitted by the Policy or permitted by the Insurer. E. The Assignee covenants and agrees with the Policyowner: 1. That amounts which are paid to the Assignee by the Insurer pursuant to the terms of the Policy and this Agreement and which are remaining after payment of the then existing liabilities of the Policyowner under the Split Dollar Agreement shall be paid by the Assignee to the persons entitled thereto under the Policy had this Agreement not been executed. 2. That the Assignee will not exercise either the right to surrender or withdraw from the Policy or the right to obtain Policy loans from the Insurer unless and until there has been a default in any of the liabilities under the Split Dollar Agreement, failure to pay a premium when due, or the occurrence of any event under the Split Dollar Agreement which calls for the Assignee to recover amounts to which the Assignee is entitled under the Policy. In any event, the Assignee shall not exercise any of its rights under the Policy until 20 days after the Assignee shall have mailed, by first class mail, to the Policyowner at the address last supplied to the Assignee specifically referring to this assignment, notice of intention to exercise such right. Upon the full payment of all liabilities under the Split Dollar Agreement by the Policyowner to the Assignee, the Assignee shall execute an appropriate instrument of release of this assignment. The Insurer shall be fully protected and discharged from further obligation by paying in reliance upon the terms of the Policy and/or the terms of this assignment. The Insurer shall not be bound by the terms of the Split Dollar Agreement and may rely on any written assurance concerning such Agreement provided to the Insurer by the Policyowner or the Assignee. Any conflicts between this assignment and any other agreement, with respect to the rights of the Assignee under the Policy, shall be solved in accordance with the terms of this assignment. Date:__________ _________________________ Policyowner _________________________ Name (typed or printed) _________________________ Address _________________________ EX-12 3 Exhibit 12 SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (Dollars in millions)
Year Ended December 31, 1997 1996 1995 1994 1993 Income Before Income Taxes from Continuing Operations . . . . . . $1,913 $1,606 $1,395 $1,227 $1,073 Add : Fixed Charges Interest Expense . . . . . . . . . 40 45 57 56 48 1/3 Rentals. . . . . . . . . . . . 15 12 11 9 8 Capitalized Interest . . . . . . . 15 11 11 11 13 Total Fixed Charges. . . . . . . 70 68 79 76 69 Less: Capitalized Interest . . . . . 15 11 11 11 13 Add : Amortization of Capitalized Interest. . . . . . . . 5 5 5 4 4 Earnings Before Income Taxes and Fixed Charges (other than Capitalized Interest) . . . . . . . $1,973 $1,668 $1,468 $1,296 $1,133 Ratio of Earnings to Fixed Charges . 28 25 19 17 16 "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 4 Exhibit 13 Financial Section of the Company's 1997 Annual Report to Shareholders Management's Discussion and Analysis of Operations and Financial Condition Sales Consolidated sales in 1997 totaled $6.8 billion, an increase of 20 percent over 1996, due to volume growth of 20 percent and price increases of 3 percent, tempered by unfavorable foreign exchange rate fluctuations of 3 percent. In June 1997, the Company purchased the worldwide animal health operations of Mallinckrodt Inc. Excluding the acquisition of Mallinckrodt, consolidated sales amounted to $6.6 billion. The consolidated sales increase reflects significant gains for the CLARITIN brand of nonsedating antihistamines. Worldwide CLARITIN brand sales totaled $1.7 billion in 1997 compared with $1.2 billion in 1996. Consolidated 1996 sales of $5.7 billion advanced 11 percent over 1995, reflecting volume growth of 13 percent moderated by price decreases of 1 percent and unfavorable foreign exchange rate fluctuations of 1 percent. This increase reflects worldwide CLARITIN brand sales growth of 46 percent in 1996. Worldwide 1997 pharmaceutical sales of $6.1 billion rose 21 percent over 1996, due to volume growth of 22 percent and price increases of 3 percent, moderated by unfavorable foreign exchange rate fluctuations of 4 percent. Worldwide sales of pharmaceutical products in 1996 increased 13 percent over 1995, reflecting volume growth of 15 percent, price decreases of 1 percent and unfavorable foreign exchange rate fluctuations of 1 percent. Domestic prescription pharmaceutical product sales grew 29 percent in 1997. Sales of allergy/respiratory products increased 33 percent, due to continued strong growth of the CLARITIN brand and increases for VANCERIL asthma and VANCENASE allergy products. The allergy/respiratory sales gain reflects a 10 percent decline in sales of the PROVENTIL (albuterol) line of asthma products, due to increased generic competition. Domestic sales of anti-infective and anticancer products rose 20 percent compared with 1996, due to increased utilization of INTRON A, the Company's alpha interferon anticancer and antiviral agent, for malignant melanoma and hepatitis C. Also contributing to the sales increase was CEDAX, a broad-spectrum oral cephalosporin antibiotic launched in the 1996 first quarter. These sales increases were moderated by lower sales of EULEXIN, a prostate cancer therapy, due to branded competition. Sales of cardiovascular products advanced 22 percent, reflecting market share increases for IMDUR, an oral nitrate for angina, and K-DUR, a potassium supplement. Dermatological product sales increased 6 percent, due to higher sales of LOTRISONE, an antifungal/anti- inflammatory cream, and ELOCON, a mid-potency topical corticosteroid. Domestic prescription pharmaceutical sales in 1996 advanced 23 percent versus 1995, led by gains in allergy/respiratory products, primarily reflecting strong growth of the CLARITIN brand. Sales growth was recorded in all product categories. In 1997, sales of international ethical pharmaceutical products increased 5 percent. Excluding the impact of foreign exchange rate fluctuations, sales would have risen approximately 13 percent. International sales of allergy/respiratory products advanced 20 percent over 1996, led by growth for the CLARITIN brand. Cardiovascular product sales rose 9 percent and sales of dermatological products increased 5 percent. International sales of anti-infective and anticancer products rose 3 percent in 1997, reflecting higher sales of INTRON A tempered by lower sales of EULEXIN due to generic and branded competition. LOSEC, an anti- ulcer treatment licensed from AB Astra, also contributed to higher overall international sales. In 1996, international ethical pharmaceutical sales, excluding foreign exchange, increased 6 percent over 1995, reflecting gains in all therapy areas. Worldwide sales of animal health products increased 103 percent in 1997. Unfavorable foreign exchange rate fluctuations had a negative effect of 4 percentage points on this sales growth. Excluding Mallinckrodt sales of approximately $171 million, animal health sales increased 16 percent. The sales growth was driven by NUFLOR, a broad-spectrum, multi-species antibiotic. Sales of animal health products in 1996 increased 4 percent over 1995, excluding foreign exchange. Sales of health care products in 1997 increased 10 percent compared with 1996, reflecting volume increases of 9 percent and price increases of 1 percent. Foot care product sales rose 15 percent, due primarily to new product introductions such as DR. SCHOLL'S DYNASTEP Inserts and Gel Insoles. Sun care sales were up 21 percent while over-the-counter (OTC) product sales decreased 1 percent, primarily due to private-label competition for allergy/cold products. In 1996, health care product sales declined 4 percent as volume declines of 6 percent were partially offset by price increases of 2 percent. The sales decline largely reflected lower sales of OTC products, primarily due to competition for allergy/cold products, partially tempered by higher foot care sales. Income Before Income Taxes Income before income taxes totaled $1.9 billion in 1997, an increase of 19 percent over 1996. In 1996, income before income taxes of $1.6 billion grew 15 percent over $1.4 billion in 1995. Summary of Costs and Expenses: (Dollars in millions)
% Increase 1997 1996 1995 1997/96 1996/95 Cost of sales . . . . . . $1,308 $1,078 $1,005 21 % 7 % % of sales. . . . . . . . 19.3 % 19.1 % 19.7 % Selling, general and administrative. . . . . $2,664 $2,209 $1,990 21 % 11 % % of sales . . . . . . . 39.3 % 39.1 % 39.0 % Research and development. $ 847 $ 723 $ 657 17 % 10 % % of sales . . . . . . . 12.5 % 12.8 % 12.9 %
Cost of sales as a percentage of sales in 1997 increased versus 1996 primarily due to the inclusion of Mallinckrodt products during the second half of the year, partially offset by a favorable sales mix of other pharmaceutical products. The decrease of 1996 cost of sales as a percentage of sales versus 1995 reflects a favorable sales mix of pharmaceutical products coupled with continued cost-containment efforts across worldwide operations. Selling, general and administrative expenses in 1997 increased as a percentage of sales compared with 1996, mainly due to an expanded field force and increased promotional and selling- related spending, primarily for the CLARITIN brand and INTRON A. The 1996 increase as a percentage of sales from 1995 reflects higher promotional and selling-related spending for the CLARITIN brand, INTRON A and the domestic launch of CEDAX. Research and development expenses increased $124 million, or 17 percent, in 1997 and represented 12.5 percent of sales. 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 1997, 1996 and 1995. 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. Income From Continuing Operations Income in 1997 increased 19 percent to $1.4 billion. Income in 1996 increased 15 percent over 1995. Differences in year-to-year exchange rates reduced comparative income growth in 1997 and 1996. After eliminating these exchange differences, income would have risen approximately 22 percent in 1997 and 18 percent in 1996. Accounting Pronouncements In 1997, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share." For additional information, see "Earnings Per Common Share" in the Notes to Consolidated Financial Statements. Also, see "New Accounting Pronouncements" in the Notes to Consolidated Financial Statements for information regarding accounting pronouncements that will be adopted in 1998. Earnings Per Common Share Basic earnings per common share from continuing operations rose 19 percent in 1997 to $1.97 and 16 percent in 1996 to $1.65. Diluted earnings per common share from continuing operations rose 20 percent in 1997 to $1.95 and 16 percent in 1996 to $1.63. In 1996, basic and diluted earnings per common share increased at a higher rate than income due to the Company's share repurchase programs. The strengthening of the U.S. dollar versus most foreign currencies decreased comparative growth in earnings per common share in 1997 and 1996. Excluding the impact of these exchange rate fluctuations, basic and diluted earnings per common share from continuing operations would have increased approximately 23 percent in 1997 and 19 percent in 1996. Over the past three years, the Board of Directors has authorized several share repurchase programs. Under these programs, approximately 34 million common shares were repurchased during 1997, 1996 and 1995. A new $1 billion program was announced in October 1997 and commenced in January 1998. Acquisition In June 1997, the Company acquired the worldwide animal health operations of Mallinckrodt Inc. for approximately $354 million in cash. The addition of Mallinckrodt has created a world-class animal health business, with broader product lines and expanded geographic distribution capabilities. 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. The market for pharmaceutical products is competitive. The Company's operations may be affected by technological advances of competitors, patents granted to competitors, new products of competitors and generic competition as the Company's products mature. In addition, patent positions can be highly uncertain and an adverse result in a patent dispute can preclude commercialization of products or negatively affect sales of existing products. The effect on operations of competitive factors and patent disputes cannot be predicted. Uncertainties inherent in government regulatory approval processes, including among other things, delays in approval of new products, may also affect the Company's operations. The effect on operations of regulatory approval processes cannot be predicted. The Company has developed plans and began implementation several years ago to modify its computer systems to enable the proper processing of transactions relating to the year 2000. The plan includes replacing and/or updating existing systems in order to avoid business interruption. The Company expects this project to be substantially completed by the end of 1998. The estimated cost of these modifications, incurred over the life of the project, is expected to be approximately $50 million. 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 continuing operating activities totaled $1,845 million in 1997, $1,459 million in 1996 and $1,383 million in 1995. Capital expenditures amounted to $373 million in 1997, $325 million in 1996 and $294 million in 1995. It is anticipated that capital expenditures will approximate $490 million in 1998. Commitments for future capital expenditures totaled $60 million at December 31, 1997. Common shares repurchased in 1997 totaled 2.4 million shares at a cost of $132 million. In 1996, 11.7 million shares were repurchased for $388 million and, in 1995, 19.9 million shares were repurchased at a cost of $494 million. Dividend payments of $542 million were made in 1997, compared with $474 million in 1996 and $416 million in 1995. Dividends per common share were $0.735 in 1997, up from $0.64 in 1996 and $0.5625 in 1995. Short-term borrowings and current portion of long-term debt totaled $581 million at year-end 1997, $855 million in 1996 and $841 million in 1995. 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 18 percent in 1997 from 30 percent in 1996, resulting from both an increase in shareholders' equity and a decrease in short-term borrowings. The Company's liquidity and financial resources continue to be sufficient to meet its operating needs. As of December 31, 1997, the Company had $1.1 billion in unused lines of credit, including $888 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, 1997. Market Risk Disclosures The Company is exposed to market risk primarily from changes in foreign currency exchange rates and to a lesser extent 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 over 40 countries worldwide. In 1997, sales outside the United States accounted for approximately 40 percent of worldwide sales. Virtually all of 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 1997, the general strengthening of the U.S. dollar vis-a-vis foreign currencies reduced sales by approximately 3 percent. The effect of foreign exchange reduced 1997 basic earnings per common share by 4 percent and 1997 diluted earnings per common share by 3 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 one foreign country accounting for more than 5 percent of consolidated sales. The widespread nature of the Company's foreign operations is the primary reason why the recent financial crisis in certain Asian 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, these 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 risk situations involving foreign currency exposures. However, these derivative transactions have not been material and no such derivatives were held at December 31, 1997. 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 $150 million at December 31, 1997. 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 has historically 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 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 a liability of $1 million at December 31, 1997. The fair value of these swaps at December 31, 1996, was less than $100 thousand. It is estimated that a 10 percent change in interest rate structure could change the fair value of the swaps by approximately $5 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, 1997, 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, 1997 1996 1995 Sales . . . . . . . . . . . . . . . . . . . . . $ 6,778 $5,656 $5,104 Costs and expenses: Cost of sales . . . . . . . . . . . . . . . . 1,308 1,078 1,005 Selling, general and administrative . . . . . 2,664 2,209 1,990 Research and development. . . . . . . . . . . 847 723 657 Other expense, net. . . . . . . . . . . . . . 46 40 57 Total costs and expenses . . . . . . . . . . 4,865 4,050 3,709 Income before income taxes. . . . . . . . . . . 1,913 1,606 1,395 Income taxes. . . . . . . . . . . . . . . . . 469 393 342 Income from continuing operations . . . . . . . 1,444 1,213 1,053 Discontinued operations: Loss from operations . . . . . . . . . . . . . - - (10) Loss on disposal . . . . . . . . . . . . . . . - - (156) ___________________________________________________________________________________ Net income. . . . . . . . . . . . . . . . . . . $ 1,444 $1,213 $ 887 Basic earnings per common share: Continuing operations. . . . . . . . . . . . . $ 1.97 $ 1.65 $ 1.42 Discontinued operations. . . . . . . . . . . . - - (.22) ___________________________________________________________________________________ Basic earnings per common share . . . . . . . . $ 1.97 $ 1.65 $ 1.20 Diluted earnings per common share: Continuing operations. . . . . . . . . . . . . $ 1.95 $ 1.63 $ 1.40 Discontinued operations. . . . . . . . . . . . $ - - (.22) ___________________________________________________________________________________ Diluted earnings per common share . . . . . . . $ 1.95 $ 1.63 $ 1.18
Statements of Consolidated Retained Earnings (Amounts in millions, except per share figures) For The Years Ended December 31, 1997 1996 1995 Retained Earnings, Beginning of Year. . . . . . $5,081 $4,342 $3,978 Net income. . . . . . . . . . . . . . . . . . 1,444 1,213 887 Cash dividends on common shares (per share: 1997, $.735; 1996, $.64; and 1995, $.5625) . (542) (474) (416) Effect of 2-for-1 stock split . . . . . . . . (310) - (107) ___________________________________________________________________________________ Retained Earnings, End of Year. . . . . . . . . $5,673 $5,081 $4,342 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, 1997 1996 1995 Operating Activities: Income from continuing operations. . . . . . . . . . $ 1,444 $1,213 $1,053 Depreciation and amortization. . . . . . . . . . . . 200 173 157 Accounts receivable. . . . . . . . . . . . . . . . . (40) 2 11 Inventories. . . . . . . . . . . . . . . . . . . . . (43) (112) (64) Prepaid expenses and other assets. . . . . . . . . . (127) (144) (108) Accounts payable and other liabilities . . . . . . . 411 327 334 Net cash provided by operating activities. . . . . . 1,845 1,459 1,383 Investing Activities: Purchase of business, net of cash acquired . . . . . (354) - - Capital expenditures and purchased software. . . . . (405) (336) (304) Reduction of investments . . . . . . . . . . . . . . 36 1 45 Purchases of investments . . . . . . . . . . . . . . (77) (78) (93) Other, net . . . . . . . . . . . . . . . . . . . . . (8) 5 8 Net cash used for investing activities (808) (408) (344) Financing Activities: Cash dividends paid to common shareholders . . . . . (542) (474) (416) Common shares repurchased. . . . . . . . . . . . . . (132) (388) (494) Net change in short-term borrowings. . . . . . . . . (290) 113 (46) Repayment of long-term debt. . . . . . . . . . . . . (1) (140) (1) Other, net . . . . . . . . . . . . . . . . . . . . . 116 53 47 Net cash used for financing activities . . . . . . . (849) (836) (910) Effect of exchange rates on cash and cash equivalents. (9) (1) (3) Net Cash Flow from Continuing Operations . . . . . . . 179 214 126 Net Cash Flow from Discontinued Operations . . . . . . - - 80 Net Increase in Cash and Cash Equivalents . . . . . . 179 214 206 Cash and Cash Equivalents, Beginning of Year . . . . . 535 321 115 Cash and Cash Equivalents, End of Year . . . . . . . . $ 714 $ 535 $ 321 See Notes to Consolidated Financial Statements.
Schering-Plough Corporation and Subsidiaries Consolidated Balance Sheets (Amounts in millions, except per share figures) At December 31, 1997 1996 ASSETS __________________________________________________________________________ Current Assets: Cash and cash equivalents. . . . . . . . . . . $ 714 $ 535 Accounts receivable, less allowances: 1997, $87; 1996, $73 . . . . . . . . . . . . 645 542 Inventories. . . . . . . . . . . . . . . . . . 713 594 Prepaid expenses, deferred income taxes and other current assets. . . . . . . . . . . 848 694 Total current assets . . . . . . . . . . . . . 2,920 2,365 Property, at cost: Land . . . . . . . . . . . . . . . . . . . . . 47 41 Buildings and improvements . . . . . . . . . . 1,716 1,563 Equipment. . . . . . . . . . . . . . . . . . . 1,585 1,296 Construction in progress . . . . . . . . . . . 402 462 Total. . . . . . . . . . . . . . . . . . . . . 3,750 3,362 Less accumulated depreciation. . . . . . . . . 1,224 1,116 Property, net. . . . . . . . . . . . . . . . . 2,526 2,246 Intangible Assets, net. . . . . . . . . . . . . . . 481 297 Other Assets. . . . . . . . . . . . . . . . . . . . 580 490 $6,507 $5,398 1997 1996 LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable . . . . . . . . . . . . . . . $ 803 $ 592 Short-term borrowings and current portion of long-term debt . . . . . . . . . . . . . . . 581 855 U.S., foreign and state income taxes . . . . . 474 459 Accrued compensation . . . . . . . . . . . . . 274 205 Other accrued liabilities. . . . . . . . . . . 759 489 Total current liabilities. . . . . . . . . . . 2,891 2,600 Long-Term Liabilities: Long-term debt . . . . . . . . . . . . . . . . 46 46 Deferred income taxes. . . . . . . . . . . . . 278 267 Other long-term liabilities. . . . . . . . . . 471 425 Total long-term liabilities. . . . . . . . . . 795 738 Shareholders' Equity: Preferred shares - authorized shares - 50; $1 par value; issued - none . . . . . . . . . - - Common shares - authorized shares - 1997, 1,200; 1996, 600, $1 par value; issued - 1997, 1,015; 1996, 507. . . . . . . . . . . . 1,015 507 Paid-in capital. . . . . . . . . . . . . . . . 96 172 Retained earnings. . . . . . . . . . . . . . . 5,673 5,081 Foreign currency translation adjustment and other . . . . . . . . . . . . . . . . . . . . (244) (140) Total. . . . . . . . . . . . . . . . . . . . . 6,540 5,620 Less treasury shares, at cost - 1997, 282; 1996, 142 . . . . . . . . . . . . . . . . 3,719 3,560 Total shareholders' equity . . . . . . . . . . 2,821 2,060 $ 6,507 $5,398 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. For purposes of Statement of Financial Accounting Standards (SFAS) No. 115, all of the Company's investment securities are classified as available for sale and, accordingly, are carried at fair value. Gains and losses during 1997, 1996 and 1995, based on the specific identification method, were not material. Unrealized gains and losses are included in shareholders' equity until realized. 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 domestic inventories. The cost of all other inventories is determined by the first-in, first-out method. 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 $166, $149 and $143 in 1997, 1996 and 1995, 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 $99 and $77 at December 31, 1997 and 1996, 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 in shareholders' equity. 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 $6, $11 and $4 in 1997, 1996 and 1995, respectively. The accumulated foreign currency translation account balances were $252 and $151 at December 31, 1997 and 1996, respectively. Earnings Per Common Share - In February 1997, the Financial Accounting Standards Board issued SFAS No. 128, "Earnings per Share." This standard revises certain methodology for computing earnings per common share (EPS) and requires the reporting of two earnings per share figures: basic earnings per share and diluted earnings per share. Basic earnings per common share are computed by dividing net income by the weighted-average number of common shares outstanding. Diluted earnings per share are computed by dividing net 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. All prior period earnings per share figures presented herein have been restated in accordance with the adoption of SFAS No. 128. For the Company, basic earnings per common share equal previously reported primary earnings per common share and diluted earnings per common share equal previously reported fully diluted earnings per common share. The shares used for basic earnings per common share and diluted earnings per common share are reconciled as follows:
(shares in millions) 1997 1996 1995 Basic earnings per common share: Average shares outstanding for basic earnings per share. . . . 732 735 739 Diluted earnings per common share: Average shares outstanding for basic earnings per share. . . . 732 735 739 Dilutive effect of warrants, options and deferred stock units. . . . . . 8 9 10 Average shares outstanding for diluted earnings per share. . . . . 740 744 749
Derivatives - The Company has used foreign currency swap contracts to hedge the Company's foreign net investment and has used interest rate swap contracts for international cash management purposes. Hedges of foreign net investments are deemed effective when the related translation gain or loss equals or exceeds the after-tax gain or loss on the contracts. In this case, changes in the contracts' value due to changes in spot rates are recorded in the foreign currency translation adjustment account. If all or any portion of the contracts are not effective as a hedge, the related changes in the fair value are recorded in income. Interest rate swaps used for cash management purposes are recorded at fair value. Changes in fair value during the period are 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. 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 December 3l, 1997, balance sheet reflects a preliminary allocation of the purchase price pending the completion of fair value studies of individual assets acquired. 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 statement 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, 1997 December 31, 1996 Carrying Estimated Carrying Estimated Value Fair Value Value Fair Value ASSETS: Cash and cash equivalents $714 $714 $535 $535 Debt and equity investments 180 180 148 148 LIABILITIES: Short-term borrowings 581 581 855 855 Long-term debt 46 46 46 46 Derivative Financial Instruments: Interest rate swap contracts 1 1 - - Foreign currency swap contracts - - 48 65
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. Net Investment in Foreign Subsidiaries The Company has used interest-bearing, long-term foreign currency swaps to hedge its net investment in Japan. At December 31, 1996, the Company had three such swaps. All three swaps were settled in 1997. As part of the settlement, the Company paid 14.9 billion yen and received $80. As of December 31, 1996, the Company's obligations under these contracts were included in other accrued liabilities and other long-term liabilities. 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, 1997, 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 $44 in 1997, $37 in 1996 and $31 in 1995. Future minimum rental commitments on non-cancelable operating leases as of December 31, 1997, range from $24 in 1998 to $5 in 2002, with aggregate minimum lease obligations of $18 due thereafter. The Company has commitments related to future capital expenditures totaling $60 as of December 31, 1997. 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, 1997, $112 has been drawn down under this facility. In addition, the Company's foreign subsidiaries had available $239 in unused lines of credit from various financial institutions at December 31, 1997. 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, 1997 and 1996 was $389 and $784, respectively. The weighted-average interest rate for short-term borrowings at December 31, 1997 and 1996 was 5.6 percent and 5.8 percent, respectively. Long-term debt, including current maturities, at December 31 consisted of the following:
1997 1996 Industrial revenue bonds, callable annually, due 2013: 3.8%. . . . . . . . . . . . . . . . . . . $ 40 $ 40 Other . . . . . . . . . . . . . . . . . . . . . . . . 27 11 67 51 Current maturities. . . . . . . . . . . . . . . . . . (21) (5) Total long-term debt. . . . . . . . . . . . . . . . . $ 46 $ 46
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. These securities may be offered from time to time on terms to be determined at the time of sale. As of December 31, 1997, no debt securities have been issued pursuant to this registration. Interest Costs and Income Interest costs were as follows:
1997 1996 1995 Interest cost incurred . . . . . . . . . . . . $55 $56 $68 Less: amount capitalized on construction. . . . . . . . . . . . . . 15 11 11 Interest expense . . . . . . . . . . . . . . . $40 $45 $57 Cash paid for interest, net of amount capitalized . . . . . . . . . . . . . $37 $52 $56
Interest income for 1997, 1996 and 1995 was $56, $33 and $23, respectively. Interest income and interest expense are included in other expense, net. Shareholders' Equity 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 split shares was made on June 3, 1997. All per share amounts herein have been adjusted to reflect the split. In June 1997, the Board of Directors of the Company approved the redemption of the Company's outstanding Preferred Share Purchase Rights at the redemption price of $.00125 per right, effective July 10, 1997. The Board also declared a dividend distribution of one new Preferred Share Purchase Right on each outstanding share of Schering-Plough common stock to replace the rights being redeemed. The 1997 rights are attached to, and presently only trade with, the Company's common shares and are not exercisable. The 1997 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 $200. 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, for the common stock at an exchange ratio of one for one, or one one-hundredth of a share of 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 1 cent per right at the option of the Board of Directors. The new rights will expire in July 2007 unless earlier redeemed. The Board of Directors is also authorized to reduce the 20 percent thresholds referred to above to not less than 10 percent. A summary of activity in common shares, paid-in capital and treasury shares follows (number of shares in millions):
Common Paid-in Treasury Shares Shares Capital Number Amount Balance at January 1, 1995 . . . . . . $252 $133 66 $2,672 Effect of 1995 2-for-1 stock split . 251 (145) 65 - Stock incentive plans. . . . . . . . - 62 (2) 2 Purchase of treasury shares. . . . . - - 10 494 Balance at December 31, 1995. . . . . 503 50 139 3,168 Stock incentive plans. . . . . . . . - 92 (3) 4 Settlement of warrants . . . . . . . 3 (23) - - Purchase of treasury shares. . . . . - - 6 388 Shares issued for acquisition. . . . 1 53 - - Balance at December 31, 1996. . . . . 507 172 142 3,560 Effect of 1997 2-for-1 stock split . 508 (198) 142 - Stock incentive plans. . . . . . . . - 122 (4) 27 Purchase of treasury shares. . . . . - - 2 132 Balance at December 31, 1997. . . . . $1,015 $ 96 282 $3,719
Stock Incentive Plans Under the terms of the Company's 1997 Stock Incentive Plan, 36 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):
1997 1996 1995 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. . . . 20 $19.14 20 $14.22 19 $11.92 Granted . . . . 5 41.14 6 28.72 4 22.95 Exercised . . . (4) 15.53 (5) 11.42 (3) 12.54 Canceled or expired . . - - (1) 20.78 - - Outstanding at December 31. . . 21 $24.41 20 $19.14 20 $14.22 Options exercisable at December 31. . 13 $18.57 11 $13.92 13 $12.32
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 $1,421, $1,197 and $883 for 1997, 1996 and 1995, respectively. Pro forma basic earnings per share would have been $1.94, $1.63 and $1.20 for 1997, 1996 and 1995, respectively, and pro forma diluted earnings per share would have been $1.92, $1.61 and $1.18 for 1997, 1996 and 1995 respectively. The weighted-average fair value per option granted in 1997, 1996 and 1995 was $9.20, $6.22 and $5.64, respectively. The fair value was estimated using the Black-Scholes option pricing model based on the following assumptions:
1997 1996 1995 Dividend yield 2.6% 2.8% 2.8% Volatility 20% 20% 20% Risk-free interest rate 6.1% 5.7% 6.6% Expected term of options (in years) 5 5 5
In 1997, 1996 and 1995, the Company awarded deferred stock units totaling 1.5 million, 1.8 million and 1.6 million, respectively. The expense recorded in 1997, 1996 and 1995 for deferred stock units was $32, $27 and $23, respectively. Inventories Year-end inventories consisted of the following:
1997 1996 Finished products . . . . . . . . . . . . . . $334 $297 Goods in process. . . . . . . . . . . . . . . 191 173 Raw materials and supplies. . . . . . . . . . 188 124 Total inventories . . . . . . . . . . . . . . $713 $594
Inventories valued on a last-in, first-out basis comprised approximately 34 percent and 45 percent of total inventories at December 31, 1997 and 1996, respectively. The estimated replacement cost of total inventories at December 31, 1997 and 1996 was $745 and $645, respectively. Retirement Plans The Company and certain of its subsidiaries have defined benefit pension plans covering eligible employees in the United States and certain foreign countries. Benefits under these plans are generally based upon the participants' average final earnings and years of credited service, and take into account governmental retirement benefits. The Company's funding policy is to contribute actuarially determined amounts, after taking into consideration the funded status of each plan and regulatory limitations. The components of the net pension expense for all Company-sponsored plans were as follows:
1997 1996 1995 Service cost - benefits earned during the year. . . . . . . . . . . . . . . $ 37 $ 37 $ 29 Interest cost on projected benefit obligation. . . . . . . . . . . . . . 54 50 47 Actual return on plan assets . . . . . (130) (99) (153) Net amortization and deferral . . . . . 44 18 79 Net pension expense . . . . . . . . . . $ 5 $ 6 $ 2
The year-to-year changes in the net amortization and deferral component of pension expense are principally attributable to differences between actual and expected returns on plan assets. The actuarial present value of benefit obligations and qualified assets of the plans at December 31 was as follows:
Over-funded Under-funded plans plans 1997 1996 1997 1996 Projected benefit obligation: Accumulated benefit obligation, including vested benefits of $667 in 1997 and $605 in 1996. . . . . $570 $520 $132 $117 Effect of future salary increases. . . 103 88 31 30 Total projected benefit obligation. . . . 673 608 163 147 Plan assets at fair value, primarily stocks and bonds. . . . . . . 957 877 45 36 Plan assets over (under) projected benefit obligation. . . . . . . . . . . 284 269 (118) (111) Unrecognized net transition (asset) liability . . . . . . . . . . . . . . . (57) (67) 3 4 Unrecognized prior service cost . . . . . 5 6 5 5 Unrecognized net (gain) loss. . . . . . . (76) (70) 39 35 Net pension asset (liability) . . . . . . $156 $138 $(71) $(67)
In addition to the plan assets indicated above, at December 31, 1997 and 1996, securities of $79 and $71, respectively, were held in non-qualified trusts designated to provide pension benefits for certain plans presented as under-funded. The discount rate used in determining the projected benefit obligation for the Company's U.S. plans was 7.0 percent at December 31, 1997, and 7.5 percent at December 31, 1996. The weighted-average discount rate for the Company's non-U.S. plans was 6.4 percent at December 31, 1997, and 6.7 percent at December 31, 1996. The weighted-average rate of increase in future compensation levels for all plans was 4.1 percent at December 31, 1997, and 4.2 percent at December 31, 1996. The weighted-average expected long-term rate of return on plan assets was approximately 10 percent for both years. The 1997 discount rate change increased the total projected benefit obligation by approximately $42. The remaining change reflects 1997 service and interest costs. The Company has a defined contribution profit-sharing plan covering substantially all of 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 $58, $60 and $58 in 1997, 1996 and 1995, respectively. Other Post-retirement Benefits The Company provides post-retirement health care and other benefits to its eligible U.S. retirees and their dependents. Eligibility for benefits depends upon age and years of service. Retirees share in the cost of the health care benefits. Health care benefits for retirees in most countries other than the United States are provided through local government-sponsored plans. The direct cost of Company-sponsored, non-U.S. plans is not significant. Accordingly, these plans are excluded from the following disclosures. Post-retirement benefit expense in 1997, 1996 and 1995 was immaterial. The accumulated post-retirement benefit obligation and funded status at December 31 were as follows:
1997 1996 Accumulated post-retirement benefit obligation attributable to: Retirees. . . . . . . . . . . . . . . . . . . . . . $ 82 $85 Fully eligible active plan participants . . . . . . 28 24 Other active plan participants. . . . . . . . . . . 52 47 Accumulated post-retirement benefit obligation. . . . . 162 156 Plan assets at fair value, primarily stocks and bonds . 210 192 Plan assets in excess of accumulated post-retirement benefit obligation. . . . . . . . . . . . . . . . . . 48 36 Unrecognized net gain . . . . . . . . . . . . . . . . . (55) (44) Accrued post-retirement benefit liability . . . . . . . $ (7) $(8)
The assumed health care cost trend rates used for measurement purposes were 8.2 percent for 1998, trending down to 5.0 percent by 2003. The weighted-average discount rate used was 7.0 percent at December 31, 1997, and 7.5 percent at December 31, 1996. The weighted-average expected long-term rate of return on plan assets was 9 percent at December 31, 1997 and 1996. Earnings on plan assets that have been segregated for tax purposes and funded through a Voluntary Employee Benefit Association (VEBA) trust are subject to a tax rate of 39.6 percent. In 1993, the Company fully funded its initial accumulated benefit obligation. Future funding is at the discretion of the Company. The discount rate change increased the accumulated benefit obligation by approximately $9. At December 31, 1997, a 1 percent increase in the assumed health care cost trend rate would increase the combined service and interest cost by approximately $2 and the accumulated post-retirement benefit obligation by approximately $20. Income Taxes U.S. and foreign operations contributed to income before income taxes as follows:
1997 1996 1995 United States. . . . . . . . . . . . . $1,349 $1,090 $ 917 Foreign. . . . . . . . . . . . . . . . 564 516 478 Total income before income taxes . . . $1,913 $1,606 $1,395
The components of income tax expense were as follows:
1997 1996 1995 Current: Federal. . . . . . . . . . . . . . . $306 $296 $262 Foreign. . . . . . . . . . . . . . . 160 122 94 State. . . . . . . . . . . . . . . . 10 14 29 Total current. . . . . . . . . . . . 476 432 385 Deferred: Federal and state. . . . . . . . . . 30 (25) (23) Foreign. . . . . . . . . . . . . . . (37) (14) (20) Total deferred . . . . . . . . . . . (7) (39) (43) Total income tax expense . . . . . . . $469 $393 $342
The difference between the U.S. statutory tax rate and the Company's effective tax rate was due to the following:
1997 1996 1995 U.S. statutory tax rate. . . . . . . . . 35.0% 35.0% 35.0% Increase (decrease) in taxes resulting from: Lower rates in other jurisdictions, net . . . . . . . . . . . . . . . . . (10.0) (10.3) (10.7) Research tax credit. . . . . . . . . . (.6) (.4) (.3) All other, net . . . . . . . . . . . . .1 .2 .5 Effective tax rate . . . . . . . . . . . 24.5% 24.5% 24.5%
The lower rates in other jurisdictions 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 for years through 2010. As of December 31, 1997 and 1996, the Company had total deferred tax assets of $632 and $485, respectively, and deferred tax liabilities of $475 and $407, respectively. Valuation allowances are not significant. Significant deferred tax assets at December 31, 1997 and 1996 were for operating costs not currently deductible for tax purposes and totaled $390 and $374, respectively. Significant deferred tax liabilities at December 31, 1997 and 1996 were for depreciation differences, $234 and $219, respectively, and retirement plans, $54 and $47, respectively. Other current assets include deferred income taxes of $438 and $345 at December 31, 1997 and 1996, respectively. Deferred taxes are not provided on undistributed earnings of foreign subsidiaries (considered to be permanent investments), which at December 31, 1997, approximated $2,850. Determining the tax liability that would arise if these earnings were remitted is not practicable. As of December 31, 1997, 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 1997, 1996 and 1995 were $368, $306 and $319, 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. The recorded liabilities for the above matters at December 31, 1997 and 1996, and the related expenses incurred during the three years ended December 31, 1997, 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 has agreed to settle the federal class action for a total of $22 payable over three years. The settlement provides, among other things, that the Company shall not refuse to grant discounts on brand-name prescription drugs to a retailer based solely on its status as a retailer and that, to the extent a retailer can demonstrate its ability to affect market share of a Company brand-name prescription drug in the same manner as a managed care organization with which the retailer competes, it will be entitled to negotiate similar incentives subject to the rights, obligations, exemptions and defenses of the Robinson-Patman Act and other laws and regulations. The United States District Court in Illinois approved the settlement of the federal class action on June 21, 1996. In June 1997, the Seventh Circuit Court of Appeals dismissed all appeals from that settlement, and it is not subject to further review. In addition, in August 1997, the Seventh Circuit ruled that there was sufficient evidence of participation in the alleged conspiracy by certain wholesalers to require them to proceed to trial. 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, subject to Court approval; the settlement amounts were not significant. Plaintiffs generally seek treble damages in an unspecified amount and an injunction against the allegedly unlawful conduct. The Company believes that all of the antitrust actions are without merit and is defending itself vigorously. In April 1997, certain of the plaintiffs in the federal class action commenced another purported class action in United States District Court in Illinois against the Company and the other defendants who settled the previous federal class action. The complaint alleges that the defendants conspired not to implement the settlement commitments following the settlement discussed above. The District Court has denied the plaintiffs' motion for a preliminary injunction hearing. The Company believes the action is without merit and is defending itself vigorously. On March 13, 1996, the Company was notified that the United States Federal Trade Commission (FTC) is investigating whether the Company, along with other pharmaceutical companies, conspired to fix prescription drug prices. The investigation is ongoing. The Company vigorously denies that it has engaged in any price- fixing conspiracy. The Company is a defendant in a state court action in Texas brought by Foxmeyer Health Corporation, the parent of a pharmaceutical wholesaler that filed for bankruptcy in August 1996. 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. Plaintiff is seeking damages in the amount of $400. The Company believes that this action is without merit and is defending itself vigorously against all claims. Consistent with trends in the pharmaceutical industry, the Company is self-insured for certain events. Discontinued Operations On June 28, 1995, the Company sold its contact lens business. In connection therewith, the Company recorded a loss on disposal of $156, net of a tax benefit of $75. Proceeds from the sale were $48. Contact lens sales during 1995 through the date of disposition were $46. Loss from discontinued operations for the year ended December 31, 1995, is net of tax benefits of $7. New Accounting Pronouncements In June 1997, the Financial Accounting Standards Board issued SFAS No. 130, "Reporting Comprehensive Income", and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." Both standards for the Company are effective beginning in 1998. SFAS No. 130 will require the Company to add the reporting of Comprehensive Income to its financial statements. The Company is currently evaluating the impact of SFAS No. 131 on its segment disclosures. Quarterly Data(Unaudited) Three Months Ended March 31, June 30, September 30, December 31, 1997 1996 1997 1996 1997 1996 1997 1996 Sales. . . . . . $1,568 $1,383 $1,720 $1,476 $1,709 $1,383 $1,781 $1,414 Cost of sales. . 289 263 330 287 326 257 363 271 Gross profit . . 1,279 1,120 1,390 1,189 1,383 1,126 1,418 1,143 Selling, general and administrative . 594 503 679 579 681 563 710 564 Research and development . . 179 163 209 178 220 182 239 200 Other, net . . . 9 21 8 12 15 (5) 14 12 Income before income taxes. . 497 433 494 420 467 386 455 367 Income taxes . . 122 106 121 103 114 95 112 89 Net income . . . $375 $ 327 $ 373 $ 317 $ 353 $ 291 $ 343 $ 278 Basic earnings per common share. . $.51 $ .45 $ .51 $ .43 $ .48 $ .39 $ .47 $ .38 Diluted earnings per common share .51 .44 .50 .43 .48 .39 .46 .37 Dividends per common share. . .165 .145 .19 .165 .19 .165 .19 .165 Common share prices: High. . . . . . 40 13/16 30 11/16 49 3/8 31 3/8 54 9/16 31 9/16 63 7/16 36 1/8 Low . . . . . . 32 9/16 25 3/4 35 1/4 26 3/4 47 27 1/2 51 11/16 31 Average shares outstanding for basic EPS (in millions). 731 731 732 738 732 739 732 735 Average shares outstanding for diluted EPS (in millions). 738 743 740 746 741 746 741 741 Certain 1996 amounts have been restated to reflect the 1997 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, 1997 was 42,600. 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. 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. Sales and Operating Profit by Industry Segment
Sales Operating Profit 1997 1996 1995 1997 1996 1995 Pharmaceutical products. . . $6,110 $5,049 $4,471 $1,885 $1,592 $1,381 Health care products . . . . 668 607 633 151 138 153 Total sales and operating profit. . . . . . . . . . . 6,778 5,656 5,104 2,036 1,730 1,534 General corporate revenue and expense . . . . (83) (79) (82) Interest expense . . . . . . (40) (45) (57) Consolidated sales and pre-tax profit. . . . . $6,778 $5,656 $5,104 $1,913 $1,606 $1,395
Identifiable Assets, Capital Expenditures, Depreciation and Amortization by Industry Segment
Capital Depreciation and Assets Expenditures Amortization 1997 1996 1995 1997 1996 1995 1997 1996 1995 Pharmaceutical products. . . $5,114 $4,099 $3,609 $ 366 $ 308 $ 276 $ 180 $ 152 $ 135 Health care products. . . 398 375 373 6 14 17 15 16 17 Industry segment totals. . . . 5,512 4,474 3,982 372 322 293 $ 195 168 152 Corporate. . . 995 924 683 1 3 1 5 5 5 Consolidated assets, capital expenditures, depreciation and amortization. $6,507 $5,398 $4,665 $ 373 $ 325 $ 294 $ 200 $ 173 $ 157
Sales, Operating Profit and Identifiable Assets by Geographic Area
Sales Operating Profit Assets 1997 1996 1995 1997 1996 1995 1997 1996 1995 United States. $4,151 $3,283 $2,805 $1,484 $1,203 $1,037 $3,017 $2,472 $2,235 Europe, Middle East & Africa 1,520 1,376 1,277 334 288 264 1,286 1,159 1,059 Latin America. 453 385 374 85 107 104 371 304 278 Canada, Pacific Area & Asia . 654 612 648 133 132 129 838 539 410 Total sales, operating profit & identifiable assets. . . . $6,778 $5,656 $5,104 $2,036 $1,730 $1,534 $5,512 $4,474 $3,982
The Company maintains manufacturing facilities in certain countries for the production of several significant finished and semi-finished products for distribution to domestic and foreign subsidiaries. Sales, operating profit and identifiable assets as presented are associated with each geographic area, based on the location of the ultimate customers. 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 provides 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 the 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 Richard Jay Kogan Jack L. Wyszomierski Thomas H. Kelly President and Executive Vice President Vice President Chief Executive and Chief Financial and Controller Officer Officer INDEPENDENT AUDITORS' REPORT DELOITTE & TOUCHE LLP 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, 1997 and 1996 and the related statements of consolidated income, retained earnings and cash flows for each of the three years in the period ended December 31, 1997. 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, 1997 and 1996 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. /S/DELOITTE & TOUCHE LLP Parsippany, New Jersey February 12, 1998 Schering-Plough Corporation and Subsidiaries Six-Year Selected Financial & Statistical Data(Dollars in millions, except per share figures) 1997 1996 1995 1994 1993 1992 Operating Results Sales . . . . . . . . . . . . . . $6,778 $5,656 $5,104 $4,537 $4,229 $3,945 Income before income taxes. . . . 1,913 1,606 1,395 1,227 1,073 963 Income from continuing operations before extraordinary item and cumulative effect of accounting changes . . . . . . . 1,444 1,213 1,053 926 816 722 Discontinued operations. . . . - - (166) (4) 9 (2) Extraordinary item. . . . . . . - - - - - (27) Cumulative effect of accounting changes. . . . . . . . . . . . . - - - - (94) 27 Net income. . . . . . . . . . . . 1,444 1,213 887 922 731 720 Basic EPS from continuing operations before extraordinary item and cumulative effect of accounting changes . . . . . . . 1.97 1.65 1.42 1.21 1.05 .90 Discontinued operations . . . . . - - (.22) - .01 - Extraordinary item. . . . . . . . - - - - - (.03) Cumulative effect of accounting changes. . . . . . . . . . . . . - - - - (.12) .03 Basic earnings per common share . 1.97 1.65 1.20 1.21 .94 .90 Diluted EPS from continuing operations before extraordinary item and cumulative effect of accounting changes . . . . . . . 1.95 1.63 1.40 1.20 1.03 .89 Diluted earnings per common share 1.95 1.63 1.18 1.19 .93 .89 Investments Research and development . . . . $ 847 $ 723 $ 657 $ 610 $ 567 $ 511 Capital expenditures . . . . . . 373 325 294 268 340 373 Financial Condition Property, net . . . . . . . . . . $2,526 $2,246 $2,099 $2,082 $1,968 $1,749 Total assets. . . . . . . . . . . 6,507 5,398 4,665 4,326 4,317 4,157 Long-term debt. . . . . . . . . . 46 46 87 186 182 184 Shareholders' equity. . . . . . . 2,821 2,060 1,623 1,574 1,582 1,597 Net book value per common share . 3.85 2.82 2.23 2.12 2.04 2.00 Financial Statistics Income from continuing operations before extraordinary item and cumulative effect of accounting changes as a percent of sales. . 21.3% 21.4% 20.6% 20.4% 19.3% 18.3% Net income as a percent of sales 21.3% 21.4% 17.4% 20.3% 17.3% 18.3% Return on average shareholders' equity . . . . . . . . . . . . 59.2% 65.9% 55.5% 58.4% 46.0% 49.0% Effective tax rate . . . . . . 24.5% 24.5% 24.5% 24.5% 24.0% 25.0% Other Data. . . . . . . . . . . . Cash dividends per common share . $ .735 $.64 $ .5625 $ .495 $ .435 $ .375 Cash dividends on common shares . 542 474 416 379 340 300 Depreciation and amortization . . 200 173 157 145 131 125 Number of employees . . . . . . . 22,700 20,600 20,100 20,000 20,300 19,800 Average shares outstanding for basic EPS(in millions) . . . 732 735 739 765 780 801 Average shares outstanding for diluted EPS(in millions) . . 740 744 749 773 790 810 Common shares outstanding at year-end (in millions) . . . . 733 731 728 744 774 798 Certain amounts for years prior to 1997 have been restated for the effect of the 1997 2- for-1 stock split. All prior period earnings per share (EPS) figures have been restated in accordance with SFAS No. 128.
APPENDIX TO EXHIBIT #13 The page preceding the Management's Discussion and Analysis of Operations and Financial Condition in the 1997 annual report to shareholders presents three bar graphs. The following three sections provide the information portrayed in the graphs: _______________________________________________________________ Title: Sales The horizontal axis is in years starting with 1993, ending with 1997. The vertical bars indicate the sales amounts for each year as follows (dollars in millions): 1993 $4,229 1994 $4,537 1995 $5,104 1996 $5,656 1997 $6,778 - --------------------------------------------------------------- Title: Research and Development The horizontal axis is in years starting with 1993, ending with 1997. The vertical bars indicate the research and development amounts for each year as follows (dollars in millions): 1993 $567 1994 $610 1995 $657 1996 $723 1997 $847 - --------------------------------------------------------------- Title: Capital Expenditures The horizontal axis is in years starting with 1993, ending with 1997. The vertical bars indicate the capital expenditure amounts for each year as follows (dollars in millions): 1993 $340 1994 $268 1995 $294 1996 $325 1997 $373 EX-21 5 Schering-Plough Corporation and Subsidiaries Subsidiaries of Registrant As of December 31, 1997 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 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 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 Disease Management, Inc. Delaware Integrated Therapeutics Group, Inc. Delaware Key Pharma S.A. Equador 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 BV Netherlands Mallinckrodt Veterinary Colombia Holdings, Inc. Panama Mallinckrodt Veterinary International Colombia Holdings, Inc. Panama Mallinckrodt Veterinary Limited Ireland Mallinckrodt Veterinary Limited Thailand Mallinckrodt Veterinary Ltd. Hong Kong Mallinckrodt Veterinary NV/SA Belgium Mallinckrodt Veterinary Operations Sdn Bhd Malaysia Mallinckrodt Veterinary Pte. Ltd. Singapore Mallinckrodt Veterinary Sdn Bhd Malaysia Mallinckrodt Veterinary, Inc. Canada Med-Nim (Proprietary) Limited South Africa MedAdvisor, Inc. Delaware P.T. Schering-Plough Indonesia Indonesia Pharmaceutical Supply Corporation Delaware Pharmaco(Canada) Inc. 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 Plough Korea South Korea Schering Sales Corporation Delaware Schering Sales Management, Inc. Nevada Schering Transamerica Corporation New Jersey 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 New Zealand Schering-Plough Animal Health Sales Corporation Delaware Schering-Plough Animal Health, Inc. Philippines Schering-Plough Animal-Health Corporation Delaware Schering-Plough B.V. Netherlands Schering-Plough, C.A. Venezuela Schering-Plough Central East A.G. Switzerland Schering-Plough (China) Limited 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 New Jersey 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 Company 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 Limited 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 Products, Inc. Delaware Schering-Plough Pty. Limited Australia Schering-Plough Real Estate Co., 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 Veterinaire, S.A. de C.V. Mexico Schering-Plough Veterinary Asia, Inc. Delaware Schering-Plough Veterinary Corporation Nevada 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 Limited Australia The Coppertone Corporation Florida W-J Liquidating Corp. Delaware Warrick Pharmaceuticals Corporation Delaware Warrick Pharmaceuticals Limited United Kingdom Werthenstein Chemie A.G. Switzerland White Laboratories Ltd. United Kingdom White Laboratories of Canada Limited Canada White Laboratories, Inc. New Jersey
EX-23 6 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, 1998, appearing in and incorporated by reference in this Annual Report on Form 10-K of Schering- Plough Corporation for the year ended December 31, 1997. /s/ DELOITTE & TOUCHE, LLP Parsippany, New Jersey March 19, 1998 EX-24 7 EXHIBIT 24 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, 1997 (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 24th day of February, 1998. /s/ Robert P. Luciano /s/ Richard Jay Kogan Robert P. Luciano, Chairman; Richard Jay Kogan, President Director and Chief Executive Officer; Director /s/ Jack L. Wyszomierski /s/ Thomas H. Kelly Jack L. Wyszomierski, Executive Thomas H. Kelly, Vice President Vice President and Chief and Controller; Principal Financial Officer Accounting Officer /s/ Hans W. Becherer /s/ Carl E. Mundy, Jr. Hans W. Becherer Carl E. Mundy, Jr. Director Director /s/ Hugh A. D'Andrade /s/ Richard de J. Osborne Hugh A. D'Andrade Richard de J. Osborne Director Director /s/ David C. Garfield /s/ Patricia F. Russo David C. Garfield Patricia F. Russo Director Director /s/ Regina E. Herzlinger /s/ William A. Schreyer Regina E. Herzlinger William A. Schreyer Director Director /s/ Donald L. Miller /s/ Robert F. W. van Oordt Donald L. Miller Robert F. W. van Oordt Director Director /s/ H. Barclay Morley /s/ James Wood H. Barclay Morley James Wood Director Director EX-27 8
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL DATA EXTRACTED FROM SCHERING-PLOUGH CORPORATION CONSOLIDATED FINANCIAL STATEMENTS AND 10-K SCHEDULES FOR THE YEAR ENDED DECEMBER 31, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1000000 YEAR DEC-31-1997 DEC-31-1997 714 0 645 87 713 2920 3750 1224 6507 2891 46 0 0 1015 1806 6507 6778 6778 1308 1308 847 17 40 1913 469 1444 0 0 0 1444 1.97 1.95
EX-99 9 EXHIBIT 99 CAUTIONARY STATEMENTS REGARDING "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 The Company is hereby filing a 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. 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. Government laws and regulations affecting domestic and international operations including, among other laws and regulations, those resulting from healthcare reform initiatives at the state and federal level, as well as those 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 foreign 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. Significant litigation adverse to the Company. Fluctuations in interest rates and foreign currency exchange rates. -----END PRIVACY-ENHANCED MESSAGE-----