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, 1995 Commission File Number 1-6351
ELI LILLY AND COMPANY
An Indiana Corporation I.R.S. Employer Number 35-0470950
Address: Lilly Corporate Center, Indianapolis, Indiana 46285
Telephone number, including area code: (317) 276-2000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Name Of Each Exchange
Title Of Each Class On Which Registered
------------------- -------------------
Common Stock New York and Pacific Stock Exchanges
Preferred Stock Purchase Rights New York and Pacific Stock Exchanges
8-1/8% Notes Due December 1, 2001 New York Stock Exchange
8-3/8% Notes Due December 1, 2006 New York Stock Exchange
6.57% Notes Due January 1, 2016 New York Stock Exchange
6.77% Notes Due January 1, 2036 New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
---- --
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 the definitive proxy statement incorporated
by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
[ ]
Aggregate market value of voting stock of the Registrant held by non-affiliates
as of February 9, 1996 (Common Stock): $28,175,758,490
Number of shares of common stock outstanding as of February 9, 1996:
552,471,515
Portions of the following documents have been incorporated by reference into
this report:
Document Parts Into Which Incorporated
-------- -----------------------------
Registrant's Annual Report to Shareholders Parts I, II, and IV
for fiscal year ended December 31, 1995
Registrant's Proxy Statement dated March 4, 1996 Part III
PART I
Item 1. BUSINESS
Eli Lilly and Company was incorporated in 1901 under the laws of Indiana to
succeed to the drug manufacturing business founded in Indianapolis, Indiana,
in 1876 by Colonel Eli Lilly. The Company*, including its subsidiaries, is
engaged in the discovery, development, manufacture, and sale of products and
the provision of services in one industry segment--Life Sciences. Products
are manufactured or distributed through owned or leased facilities in the
United States, Puerto Rico, and 29 other countries, in 19 of which the Company
owns or has an interest in manufacturing facilities. Its products are sold in
approximately 150 countries. Through its PCS Health Systems subsidiary, the
Company provides health care management services in the United States.
Most of the Company's products were discovered or developed through the
Company's research and development activities, and the success of the
Company's business depends to a great extent on the continued introduction of
new products resulting from these research and development activities.
Research efforts are primarily directed toward the discovery of products to
diagnose and treat diseases in human beings and animals and to increase the
efficiency of animal food production.
RECENT DEVELOPMENTS
Divestiture of Medical Device and Diagnostics Businesses
In 1995 and early 1996, the Company completed the divestiture of its
Medical Device and Diagnostics ("MDD") businesses. On September 25, 1995,
the Company distributed its approximately 80% ownership interest in Guidant
Corporation (a holding company comprising five of the MDD companies) to
holders of Lilly common stock through a splitoff ---an exchange offer whereby
Lilly shareholders were given the opportunity to exchange Lilly shares for
Guidant shares. In January 1996, the Company completed the disposition of the
last remaining MDD company, Hybritech Incorporated, to Beckman Instruments,
Inc.
Acquisition of Integrated Medical Systems, Inc.
In December 1995, the Company acquired Integrated Medical Systems, Inc.,
which develops and operates physician-focused medical communication networks.
For further information regarding the business of Integrated Medical Systems,
see "Health Care Management Services" below.
FINANCIAL INFORMATION RELATING TO INDUSTRY
SEGMENTS AND CLASSES OF PRODUCTS
Financial information relating to industry segments and classes of
products, set forth in the Company's 1995 Annual Report at pages 26-27 under
"Review of Operations--Segment Information" (pages 13-14 of Exhibit 13 to
this Form 10-K), is incorporated herein by reference.
- ------
*The terms "Company" and "Registrant" are used interchangeably herein to
refer to Eli Lilly and Company or to Eli Lilly and Company and its
consolidated subsidiaries, as the context requires.
1
Due to several factors, including the introduction of new products by the
Company and other manufacturers, the relative contribution of any particular
Company product to consolidated net sales is not necessarily constant from
year to year, and its contribution to net income is not necessarily the same
as its contribution to consolidated net sales.
PRODUCTS AND SERVICES
Pharmaceutical Products
Pharmaceutical products include
Central-nervous-system agents, including the antidepressant agent
ProzacR, a selective serotonin reuptake inhibitor, indicated for the treatment
of depression and, in many countries, for bulimia and obsessive-compulsive
disorder; the analgesic Darvocet-NR 100, which is indicated for the relief of
mild-to-moderate pain; and PermaxR, a treatment for Parkinson's disease;
Anti-infectives, including the oral cephalosporin antibiotics CeclorR
(cefaclor), KeflexR, and KeftabR, used in the treatment of a wide range of
bacterial infections; the oral carbacephem antibiotic LorabidR, used to treat
a variety of infections; the oral macrolide antibiotic DynabacR; the
injectable cephalosporin antibiotics MandolR, TazidimeR, KefuroxR, and
KefzolR, used to treat a wide range of infections in the hospital setting;
NebcinR, an injectable aminoglycoside antibiotic used in hospitals to treat
various infections caused by staphylococci and Gram-negative bacteria; and
VancocinR HCl, an injectable antibiotic used primarily to treat staphylococcal
infections;
Endocrine products, including HumulinR, human insulin produced through
recombinant DNA technology; IletinR, animal-source insulin in its various
pharmaceutical forms; HumatropeR, human growth hormone produced by recombinant
DNA technology; and Humalog(TM), a rapid-acting injectable human insulin
analog of recombinant DNA origin, cleared for marketing in certain overseas
countries;
An antiulcer agent, AxidR, an H2 antagonist, indicated for the treatment
of active duodenal ulcer, for maintenance therapy for duodenal ulcer patients
after healing of an active duodenal ulcer, and for reflux esophagitis;
Oncolytic agents, including OncovinR, indicated for treatment of acute
leukemia and, in combination with other oncolytic agents, for treatment of
several different types of advanced cancers; VelbanR, used in a variety of
malignant neoplastic conditions; GemzarR, cleared for marketing in several
overseas countries for treatment of non-small cell lung cancer and pancreatic
cancer; and EldisineR, indicated for treatment of acute childhood leukemia
resistant to other drugs; and
Additional pharmaceuticals, including cardiovascular therapy products,
principally ReoPro(TM) and DobutrexR; hematinics; sedatives; and vitamins.
Animal Health Products
Animal health products include TylanR, an antibiotic used to control
certain diseases in cattle, swine, and poultry and to improve feed efficiency
2
and growth; RumensinR, a cattle feed additive that improves feed efficiency
and growth; CompudoseR, a controlled-release implant that improves feed
efficiency and growth in cattle; CobanR, MontebanR and MaxibanR, anticoccidial
agents for use in poultry; ApralanR, an antibiotic used to control enteric
infections in calves and swine; MicotilR, an antibiotic used to treat bovine
respiratory disease; and other products for livestock and poultry.
Health Care Management Services
PCS provides computer-based prescription drug claims processing, pharmacy
benefit design, administration and management services, and disease-management
services to health plan sponsors, including insurance companies, third-party
administrators, self-insured employers, health maintenance organizations, and
Blue Cross/Blue Shield organizations that underwrite or administer
prescription benefit plans. PCS helps these customers manage prescription
benefit costs by providing drug utilization reviews, clinically-based
formularies, generic substitution programs, and disease-management programs.
RECAPR, PCS's on-line prescription claims management system, is linked with
over 95% of retail pharmacies in the U.S. Integrated Medical Systems operates
physician-based on-line electronic communication networks, called IMS MEDACOMR
networks, that deliver clinical, administrative, and financial information to
hospitals, payers/managed-care plans, laboratories, pharmacies, and
physicians. Outside the United States the Company is developing pharmacy
benefits management and disease-management programs in several countries,
including Canada, the Netherlands, South Africa, and the United Kingdom.
MARKETING
Most of the Company's major products are marketed worldwide. Health care
management services are marketed primarily in the United States, although in
1995 the Company launched pharmacy benefits management and disease-management
initiatives in several other markets.
In the United States, the Company's Pharmaceutical Division distributes
pharmaceutical products principally through approximately 229 wholesale
distributing outlets. Marketing policy is designed to assure immediate
availability of these products to physicians, pharmacies, hospitals, and
appropriate health care professionals throughout the country. Five wholesale
distributing companies in the United States accounted for approximately 11%,
9%, 9%, 7%, and 5% respectively, of consolidated net sales in 1995. No other
distributor accounted for as much as 5% of consolidated net sales. The
Company also makes direct sales of its pharmaceutical products to the United
States government and to other manufacturers, but those direct sales do not
constitute a material portion of consolidated net sales.
The Company's pharmaceutical products are promoted in the United States
under the Lilly and Dista trade names by one hospital and three retail sales
forces employing salaried sales representatives. These sales representatives,
approximately half of whom are registered pharmacists, call upon physicians,
wholesalers, hospitals, managed-care organizations, retail pharmacists, and
other health care professionals. Their efforts are supported by the Company
through advertising in medical and drug journals, distribution of literature
and samples of certain products to physicians, and exhibits for use at medical
meetings. In 1994, the Company created a new sales force dedicated to
diabetes care.
3
In the past few years, large purchasers of pharmaceuticals, such as
managed-care groups and government and long-term care institutions, have begun
to account for an increasing portion of total pharmaceutical purchases in the
United States. The Company has created special sales groups to service
government and long-term care institutions, and expanded its managed-care
sales organization. In response to competitive pressures, the Company has
entered into arrangements with a number of these organizations providing for
discounts or rebates on one or more Company products or other cost-sharing
arrangements. The Company has also entered into agreements with generic
pharmaceutical companies for the promotion, distribution and/or supply of
generic forms of certain brand name products of both Lilly and other
companies.
Outside the United States, pharmaceutical products are promoted primarily
by salaried sales representatives. While the products marketed vary from
country to country, anti-infectives constitute the largest single group in
total sales. Distribution patterns vary from country to country. In recent
years, the Company has significantly expanded its marketing efforts in a
number of overseas markets, including emerging markets in Central and Eastern
Europe, Latin America, Asia and Africa.
Elanco Animal Health, a division of the Company, employs field
salespeople throughout the United States to market animal health products.
Sales are made to wholesale distributors, retailers, feed manufacturers, or
producers in conformance with varying distribution patterns applicable to the
various types of products. The Company also has an extensive sales force
outside the United States to market its animal health products.
RAW MATERIALS
Most of the principal materials used by the Company in manufacturing
operations are chemical, plant, and animal products that are available from
more than one source. Certain raw materials are available or are purchased
principally from only one source. Unavailability of certain materials from
present sources could cause an interruption in production pending
establishment of new sources or, in some cases, implementation of alternative
processes.
Although the major portion of the Company's sales abroad are of products
manufactured wholly or in part abroad, a principal source of active
ingredients for these manufactured products continues to be the Company's
facilities in the United States.
PATENTS AND LICENSES
The Company owns, has applications pending for, or is licensed under, a
substantial number of patents, both in the United States and in other
countries, relating to products, product uses, and manufacturing processes.
There can be no assurance that patents will result from the Company's pending
applications. Moreover, patents relating to particular products, uses, or
processes do not preclude other manufacturers from employing alternative
processes or from successfully marketing substitute products to compete with
the patented products or uses. Patent protection of certain products,
processes, and uses--particularly that relating to Prozac, Axid, and Lorabid-
is considered to be important to the operations of the Company. The United
States compound patent covering Prozac expires in 2001, the Axid compound
patent expires in 2002, and the Lorabid compound patent expires in 2006.
4
The Company also grants licenses under patents and know-how developed by
the Company and manufactures and sells products and uses technology and know-
how under licenses from others. Royalties received by the Company in relation
to licensed pharmaceuticals amounted to approximately $4 million in 1995, and
royalties paid by it in relation to pharmaceuticals amounted to approximately
$109 million in 1995.
COMPETITION
The Company's pharmaceutical products compete with products manufactured
by numerous other companies in highly competitive markets in the United States
and throughout the world. The Company's animal health products compete on a
worldwide basis with products of pharmaceutical, chemical, and other companies
that operate animal health divisions or subsidiaries. PCS faces strong
competition from other pharmacy benefit management companies and claims
processors in the United States. For certain accounts, PCS competes with some
retail pharmacy chains, mail order programs and organized groups of
independent pharmacists.
Important competitive factors include price and demonstrated cost-
effectiveness, product characteristics and dependability, service, and
research and development of new products and processes. The introduction of
new products and processes by competitors with therapeutic or cost advantages
can result in progressive price reductions or decreased volume of sales of
competing products, or both. New products introduced with patent protection
usually must compete with other products already on the market at the time of
introduction or products developed by competitors after introduction.
Manufacturers of generic products typically invest far less in research and
development than research-based pharmaceutical companies and accordingly are
able to price their products significantly lower than branded products.
Therefore, upon patent expiration, branded products often face intense price
competition from generic forms of the product. In many countries patent
protection is weak or nonexistent. The Company believes its long-term
competitive position is dependent upon the success of its research and
development endeavors in discovering and developing innovative, cost-effective
products, together with increased productivity resulting from improved
manufacturing methods, marketing efforts, and the provision of value-added
services to its customers. There can be no assurance that the Company's
research and development efforts will result in commercially successful
products or that products manufactured or processes used by the Company will
not become outmoded from time to time as a result of products or processes
developed by its competitors.
GOVERNMENTAL REGULATION
The Company's operations have for many years been subject to extensive
regulation by the federal government, to some extent by state governments, and
in varying degrees by foreign governments. The Federal Food, Drug, and
Cosmetic Act, other federal statutes and regulations, various state statutes
and regulations, and laws and regulations of foreign governments govern
testing, approval, production, labeling, distribution, post-market
surveillance, advertising, promotion, and in some instances, pricing, of most
of the Company's products. The lengthy process of laboratory testing,
clinical testing, data analysis and regulatory review necessary for required
governmental approvals is extremely costly and can significantly delay product
introductions in a given market. In addition, the Company's operations are
subject to complex federal, state, local, and foreign environmental and
occupational safety laws and regulations. It is anticipated that compliance
with regulations affecting the manufacture and sale of current products and
5
the introduction of new products will continue to require substantial
scientific and technical effort, time, and expense and significant capital
investment.
In the United States, health care reform was not debated extensively at
the federal level in 1995 and the Company does not expect major federal health
care reform legislation to be adopted in the near future. However, various
health care reform and pharmaceutical reimbursement measures are being
considered in a number of states. Outside the United States, changes in
health care delivery and pharmaceutical reimbursement are occurring to varying
degrees which in some cases may adversely affect pharmaceutical industry
revenues. The Company is unable to predict the extent to which its business
may be affected by these or other future legislative and regulatory
developments.
RESEARCH AND DEVELOPMENT
The Company's research and development activities are responsible for the
discovery or development of most of the products offered by the Company today.
Its commitment to research and development dates back more than 100 years.
The Company invests heavily in research and development, which management
believes is critical to long-term competitiveness in the pharmaceutical
industry. The growth in research and development expenditures and personnel
over the past several years demonstrates both the continued vitality of the
Company's commitment and the increasing costs and complexity of bringing new
products to the market. At the end of 1995, approximately 4,800 people,
including a substantial number who are physicians or scientists holding
graduate or postgraduate degrees or highly skilled technical personnel, were
engaged in pharmaceutical and animal health research and development
activities. The Company expended $755.0 million on these research and
development activities in 1993, $838.7 million in 1994, and $1,042.3 million
in 1995.
The Company's research is concerned primarily with the effects of
synthetic chemicals and natural products on biological systems. The results
of that research are applied to the development of products for use by or on
humans and animals, and for other uses. Major effort is devoted to
pharmaceutical products. The Company concentrates its pharmaceutical research
and development efforts in five therapeutic categories: central nervous
system and related diseases; endocrine diseases, including diabetes and
osteoporosis; infectious diseases; cancer; and cardiovascular diseases. The
Company is engaged in biotechnology research programs involving recombinant
DNA, protein research, and genomics (the development of therapeutics through
identification of disease-causing genes and their cellular function).
In addition to the research activities carried on in the Company's own
laboratories, the Company sponsors and underwrites the cost of research and
development by independent organizations, including educational institutions
and research-based human health care companies, and contracts with others for
the performance of research in their facilities. It utilizes the services of
physicians, hospitals, medical schools, and other research organizations in
the United States and numerous other countries to establish through clinical
evidence the safety and effectiveness of new products. The Company's
business-development groups actively seek out opportunities to invest in
external research and technologies that hold the promise to complement and
strengthen the Company's own research efforts in the five chosen therapeutic
categories. Such investments can take many forms, including licensing
arrangements, co-development and co-marketing agreements, and outright
acquisitions.
6
Extensive work is also conducted in the animal sciences, including animal
nutrition and physiology and veterinary medicine. Certain of the Company's
research and development activities relating to pharmaceutical products may be
applicable to animal health products. An example is the search for agents
that will cure infectious disease.
QUALITY ASSURANCE
The Company's success depends in great measure upon customer confidence
in the quality of the Company's products and in the integrity of the data that
support their safety and effectiveness. The quality of the Company's products
arises from the total commitment to quality in all parts of the Company,
including research and development, purchasing, facilities planning,
manufacturing, and distribution. Quality-assurance procedures have been
developed relating to the quality and integrity of the Company's scientific
information and production processes.
Control of production processes involves rigid specifications for
ingredients, equipment, facilities, manufacturing methods, packaging
materials, and labeling. Control tests are made at various stages of
production processes and on the final product to assure that the product meets
all regulatory requirements and the Company's standards. These tests may
involve chemical and physical chemical analyses, microbiological testing,
testing in animals, or a combination of these tests. Additional assurance of
quality is provided by a corporate quality-assurance group that monitors
existing pharmaceutical and animal health manufacturing procedures and systems
in the parent company, subsidiaries, and affiliates.
EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth certain information regarding the
executive officers of the Company. All but three of the executive officers
have been employed by the Company in executive or managerial positions during
the last five years. Randall L. Tobias became Chairman of the Board and Chief
Executive Officer in June 1993. He had served as Vice Chairman of the Board
of AT&T from 1986 until he assumed his present position. He has been a member
of the Board of Directors of the Company since 1986. Charles E. Golden joined
the Company as Executive Vice President and Chief Financial Officer and was
elected to the Board of Directors on March 4, 1996. He previously had held a
number of executive positions with General Motors Corporation ("GM")
including Vice President of GM and Chairman and Managing Director of Vauxhall
Motors Limited, a GM subsidiary in the United Kingdom, from 1993 to 1996, Vice
President and Treasurer from 1992 to 1993, and Treasurer from 1989 to 1992.
Thomas Trainer joined the Company in January 1995. Since 1991 he had served
as Vice President and Chief Information Officer of Reebok International Ltd.
Prior to joining Reebok, he was Senior Vice President of Operations of A.C.
Nielson Co.
Except as indicated in the following table, the term of office for each
executive officer indicated herein expires on the date of the annual meeting
of the Board of Directors, to be held on April 15, 1996, or on the date his or
her successor is chosen and qualified. No director or executive officer of
the Company has a "Family relationship" with any other director or executive
officer of the Company, as that term is defined for purposes of this
disclosure requirement. There is no understanding between any executive
officer of the Company and any other person pursuant to which the executive
officer was selected.
7
NAME AGE OFFICES
----------------------------------------------------------------------
Randall L. Tobias 54 Chairman of the Board and Chief Executive
Officer (since June 1993) and a Director
Sidney Taurel 47 President and Chief Operating Officer (since
February 1996) and a Director
Charles E. Golden 49 Executive Vice President and Chief Financial
Officer (since March 1996) and a Director
August M. Watanabe, M.D. 54 Executive Vice President, Science and
Technology (since February 1996) and
a Director
Mitchell E. Daniels, Jr. 46 President, North American Pharmaceutical
Operations (since April 1993)1
Michael L. Eagle 48 Vice President, Manufacturing (since January
1994)
Brendan P. Fox 52 President, Elanco Animal Health Business Unit
(since January 1991)1
Rebecca O. Goss 48 Vice President and General Counsel (since March
1995)
Michael E. Hanson 48 President, Internal Medicine Business Unit
(since August 1994)1
James A. Harper 48 President, Endocrine Business Unit (since August
1994)1
Pedro P. Granadillo 48 Vice President, Human Resources (since
April 1993)
Gerhard N. Mayr 49 President, European Pharmaceutical Operations
(European, Middle East and African Operations)
(since January 1993)1
Robert N. Postlethwait 47 President, Central Nervous System Business Unit
(since August 1994)1
William R. Ringo 50 President, Infectious Diseases and Generics
Business Unit (since September 1995)1
Gino Santini 39 Vice President, Corporate Strategy and Business
Development (since September 1995)
Thomas Trainer 49 Vice President, Information Technology, and
Chief Information Officer (since January 1995)1
- ------------
1 Serves in office until successor is appointed.
8
EMPLOYEES
At the end of 1995, the Company had approximately 26,800 employees,
including approximately 11,500 employees outside the United States. A
substantial number of the Company's employees have long records of continuous
service.
FINANCIAL INFORMATION RELATING TO FOREIGN AND DOMESTIC OPERATIONS
Financial information relating to foreign and domestic operations, set
forth in the Company's 1995 Annual Report at pages 26-27 under "Review of
Operations--Segment Information" (pages 13-14 of Exhibit 13), is incorporated
herein by reference.
Eli Lilly International Corporation, a subsidiary, coordinates the
Company's manufacture and sale of products outside the United States.
Local restrictions on the transfer of funds from branches and
subsidiaries located abroad (including the availability of dollar exchange)
have not to date been a significant deterrent in the Company's overall
operations abroad. The Company cannot predict what effect these restrictions
or the other risks inherent in foreign operations, including possible
nationalization, might have on its future operations or what other
restrictions may be imposed in the future.
Item 2. PROPERTIES
The Company's principal domestic and international executive offices are
located in Indianapolis. At December 31, 1995, the Company owned 14
production plants and facilities in the United States and Puerto Rico. These
plants and facilities contain an aggregate of approximately 12.2 million
square feet of floor area. Most of the plants and facilities involve
production of both pharmaceutical and animal health products. The Company
also leases sales offices in a number of cities located in the United States
and abroad. PCS owns or leases administrative facilities in Scottsdale,
Arizona, containing an aggregate of approximately 475,000 square feet and
leases administrative space in other cities in the United States. Integrated
Medical Systems leases approximately 84,000 square feet of administrative
space in a number of locations.
The Company has 23 production plants and facilities in 19 countries
outside the United States, containing an aggregate of approximately 4.2
million square feet of floor space. Leased production and warehouse
facilities are utilized in Puerto Rico and 17 countries outside the United
States.
The Company's research and development facilities in the United States
consist of approximately 2.8 million square feet and are located primarily in
Indianapolis and Greenfield, Indiana. Its major research and development
facilities abroad are located in Belgium and the United Kingdom and contain
approximately 435,000 square feet. The Company also owns two tracts of land,
containing an aggregate of approximately 1,700 acres, a portion of which is
used for field studies of products.
The Company believes that none of its properties is subject to any
encumbrance, easement, or other restriction that would detract materially from
its value or impair its use in the operation of the business of the Company.
The buildings owned by the Company are of varying ages and in good condition.
9
Item 3. LEGAL PROCEEDINGS
Product Liability Litigation. The Company is currently a defendant in a
variety of product litigation matters involving primarily diethylstilbestrol
("DES") and Prozac. In approximately 265 actions, including several with
multiple claimants, plaintiffs seek to recover damages on behalf of children
or grandchildren of women who ingested DES during pregnancy. In March 1996 a
suit was filed in the federal district court for the Eastern District of New
York against the Company and several other manufacturers purporting to be a
nationwide class action on behalf of women who were exposed to DES in utero.
The suit does not seek compensation for personal injuries but instead seeks
establishment of a fund for various expenses allegedly incurred as a result of
DES exposure. In another approximately 70 actions, plaintiffs seek to recover
damages as a result of the ingestion of Prozac.
Pricing Litigation. The Company has been named, together with numerous
other U.S. prescription pharmaceutical manufacturers and in some cases
wholesalers or distributors, as a defendant in a large number of related
actions brought by retail pharmacies and consumers of prescription
pharmaceuticals in the United States alleging violations of federal or state
antitrust laws, or both, based on the practice of providing discounts or
rebates to managed-care organizations and certain other purchasers. The
federal cases have been consolidated or coordinated in the Northern District
of Illinois as In re Brand Name Prescription Drugs Antitrust Litigation (MDL
No. 997).
The federal suits include a certified class action on behalf of a
majority of retail pharmacies in the United States (the "Federal Class
Action"). The class plaintiffs allege an industrywide agreement in violation
of the Sherman Act to deny favorable pricing on sales of brand-name
prescription pharmaceuticals to certain retail pharmacies in the United
States. The Federal Class Action is scheduled to begin trial May 7, 1996.
The Company and eleven other manufacturers have agreed to settle the Federal
Class Action. The settlement amount, which is not material, was accrued by
the Company in the fourth quarter of 1995. The settlement is subject to
approval of the District Court. A hearing on the proposed settlement is
scheduled for March 27, 1996. The other federal suits, brought as individual
claims by several thousand pharmacies, allege price discrimination in
violation of the Robinson-Patman Act as well as Sherman Act claims. The suits
seek treble damages and injunctive relief against allegedly discriminatory
pricing practices. Defense motions for summary judgment on the Sherman Act
claims in these suits are pending. With respect to the Robinson-Patman Act
claims, the District Court has designated certain plaintiffs and defendants
named in the individual suits (not including the Company) to participate in an
initial trial or trials of the claims. No trial dates have been set.
Robinson-Patman claims asserted in the suits against nondesignated defendants,
including the Company, are stayed.
In addition, there are a number of related state court cases. The state
court suits typically seek money damages and injunctive relief against
allegedly discriminatory pricing practices. Cases have been brought in
Alabama, California, Minnesota, and Wisconsin by large numbers of retail
pharmacies alleging violations of various state antitrust and pricing laws,
purporting to be class actions on behalf of retail pharmacies in those states.
The court in California has certified a class of retail pharmacies. Cases
have also been brought in state courts in Alabama, Arizona, California,
Colorado, District of Columbia, Maine, Michigan, Minnesota, New York,
Washington and Wisconsin that purport to be class actions on behalf of
consumers of prescription pharmaceuticals, alleging violations of state
antitrust and pricing laws. The courts in Alabama and California have
10
certified classes of consumer plaintiffs. The Colorado and Washington cases
have been dismissed and appeals are pending. The Maine case has been removed
to federal court but a motion to remand to the state court is pending.
Other Litigation. In June 1995, a California retail pharmacy filed an
action in federal district court in the Northern District of California
against the Company and PCS alleging that the Company's acquisition of PCS
violated federal antitrust laws. The suit seeks divestiture of PCS by the
Company. The Company's motion to dismiss is pending. In October 1995,
Pfizer, Inc. sued PCS in the New York Supreme Court for New York County
alleging that PCS breached a 1994 rebate agreement between the companies. The
suit seeks injunctive relief and damages. Pfizer's request for a preliminary
injunction was denied and trial is scheduled to begin March 19, 1996.
The Company is also a defendant in other litigation, including product
liability and patent suits, of a character regarded as normal to its business.
While it is not possible to predict or determine the outcome of the legal
actions pending against the Company, in the opinion of the Company the costs
associated with all such actions will not have a material adverse effect on
its consolidated financial position or liquidity but could possibly be
material to the consolidated results of operations in any one accounting
period.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 1995, no matters were submitted to a vote of
security holders.
PART II
Item 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
Information relating to the principal market for the Company's common
stock and related stockholder matters, set forth in the Company's 1995 Annual
Report under "Review of Operations--Selected Quarterly Data (unaudited)," at
page 28 (page 15 of Exhibit 13), and "Review of Operations--Selected
Financial Data (unaudited)," at page 29 (page 16 of Exhibit 13), is
incorporated herein by reference.
Item 6. SELECTED FINANCIAL DATA
Selected financial data for each of the Company's five most recent fiscal
years, set forth in the Company's 1995 Annual Report under "Review of
Operations--Selected Financial Data (unaudited)," at page 29 (page 16 of
Exhibit 13), are incorporated herein by reference.
11
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
The following portions of the Company's 1995 Annual Report (found at pages
1-7 and 35-37 of Exhibit 13) constitute management's discussion and analysis
of results of operations and financial condition and are incorporated herein
by reference:
"Review of Operations--Strategic Actions" (page 16)
"Review of Operations--Stock Split" (page 16)
"Review of Operations--Operating Results of Continuing Operations and Net
Income--1995" (pages 16, 17, 19 and 20)
"Review of Operations--Operating Results of Continuing Operations and Net
Income--1994" (pages 20-21)
"Review of Operations--Financial Condition" (pages 21 and 24)
"Review of Operations--Environmental and Legal Matters" (page 24)
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company and its
subsidiaries, listed in Item 14(a)1 and included in the Company's 1995 Annual
Report at pages 18, 22, 23, and 25 (Consolidated Statements of Income,
Consolidated Balance Sheets, and Consolidated Statements of Cash Flows), pages
26 and 27 (Segment Information), and pages 30-43 (Notes to Consolidated
Financial Statements) (together, pages 9-14 and 17-32 of Exhibit 13), and the
Report of Independent Auditors set forth in the Company's 1995 Annual Report
at page 45 (page 34 of Exhibit 13), are incorporated herein by reference.
Information on quarterly results of operations, set forth in the
Company's 1995 Annual Report under "Review of Operations--Selected Quarterly
Data (unaudited)," at page 28 (page 15 of Exhibit 13), is incorporated herein
by reference.
Item 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information relating to the Company's directors, set forth in Section 1
of the Company's Proxy Statement dated March 4, 1996 (the "Proxy
Statement"), under "Nominees for Election" and "Certain Information
Concerning Director Nominees and Directors Continuing in Office," at pages 1-
5, is incorporated herein by reference. Information relating to the Company's
executive officers is set forth at pages 7-8 of this Form 10-K under
"Executive Officers of the Company." Information relating to certain filing
obligations of directors and executive officers under the federal securities
laws, set forth in the Proxy Statement under "Other Matters" at page 25, is
also incorporated herein by reference.
12
Item 11. EXECUTIVE COMPENSATION
Information relating to executive compensation, set forth in Section 1 of
the Proxy Statement under "Directors' Compensation", "Executive
Compensation", "Compensation Committee Interlocks", "Retirement Plan" and
"Change-in-Control Severance Pay Arrangements" at pages 7-18, is
incorporated herein by reference, except that the Compensation and Management
Development Committee Report and Performance Graph are not so incorporated.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information relating to ownership of the Company's common stock by
persons known by the Company to be the beneficial owners of more than 5% of
the outstanding shares of common stock and by management, set forth in Section
1 of the Proxy Statement under "Common Stock Ownership by Directors and
Executive Officers," at page 6, and "Principal Holders of Common Stock," at
page 7, is incorporated herein by reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)1. Financial Statements
The following consolidated financial statements of the Company and its
subsidiaries, included in the Company's 1995 Annual Report at the pages
indicated in parentheses, are incorporated by reference in Item 8:
Consolidated Statements of Income--Years Ended December 31, 1995, 1994,
and 1993 (page 18) (page 9 of Exhibit 13)
Consolidated Balance Sheets--December 31, 1995 and 1994 (pages 22-23)
(pages 10-11 of Exhibit 13)
Consolidated Statements of Cash Flows--Years Ended December 31, 1995,
1994, and 1993 (page 25) (page 12 of Exhibit 13)
Segment Information (pages 26 and 27) (pages 13-14 of Exhibit 13)
Notes to Consolidated Financial Statements (pages 30-43) (pages 17-32 of
Exhibit 13)
(a)2. Financial Statement Schedules
The consolidated financial statement schedules of the Company and its
subsidiaries have been omitted because they are not required, are
inapplicable, or are adequately explained in the financial statements.
13
Financial statements of interests of 50% or less, which are accounted for
by the equity method, have been omitted because they do not, considered in the
aggregate as a single subsidiary, constitute a significant subsidiary.
(a)3. Exhibits
3.1 Amended Articles of Incorporation
3.2 By-laws
4.1 Form of Indenture with respect to Contingent Payment Obligation
Units dated March 18, 1986, between Eli Lilly and Company and Harris
Trust and Savings Bank, as Trustee
4.2 Rights Agreement dated as of July 18, 1988, between Eli Lilly and
Company and Bank One, Indianapolis, NA
4.3 Form of Indenture dated as of February 21, 1989, between Eli Lilly
and Company and Merchants National Bank & Trust Company of
Indianapolis, as Trustee
4.4 Form of Eli Lilly and Company Five Year Convertible Note
4.5 Form of Indenture with respect to Debt Securities dated as of
February 1, 1991, between Eli Lilly and Company and Citibank, N.A.,
as Trustee
4.6 Form of Standard Multiple-Series Indenture Provisions dated, and
filed with the Securities and Exchange Commission on, February 1,
1991
4.7 Form of Indenture dated as of September 5, 1991, among the Lilly
Savings Plan Master Trust Fund C, as Issuer; Eli Lilly and
Company, as Guarantor; and Chemical Bank, as Trustee1
4.8 Form of Fiscal and Paying Agency Agreement dated July 8, 1993,
between Eli Lilly and Company and Citibank, N.A., Fiscal and Paying
Agent, including forms of Notes, relating to 5-1/2% Notes Due 19981
4.9 Form of Fiscal and Paying Agency Agreement dated February 7, 1995,
between Eli Lilly and Company and Citibank, N.A., Fiscal and Paying
Agent, including forms of Notes, relating to 8-1/8% Notes Due
February 7, 20001
4.10 Form of Fiscal and Paying Agency Agreement dated February 7, 1995,
between Eli Lilly and Company and Citibank, N.A., Fiscal and Paying
Agent, including forms of Notes, relating to 8-3/8% Notes Due
February 7, 20051
10.1 1984 Lilly Stock Plan, as amended2
- ---------------
1 These exhibits are not filed with this Report. Copies will be furnished
to the Securities and Exchange Commission upon request.
2 Indicates management contract or compensatory plan.
14
10.2 1989 Lilly Stock Plan, as amended2
10.3 1994 Lilly Stock Plan2
10.4 The Lilly Deferred Compensation Plan, as amended2
10.5 The Lilly Directors' Deferral Plan, as amended2
10.6 The Eli Lilly and Company EVA Bonus Plan, as amended2
10.7 Eli Lilly and Company Change in Control Severance Pay Plan for
Select Employees2
10.8 Letter Agreement dated September 3, 1993, between the Company and
Vaughn D. Bryson2
11. Computation of Earnings Per Share on Primary and Fully Diluted Bases
12. Computation of Ratio of Earnings to Fixed Charges
13. Annual Report to Shareholders for the Year Ended December 31, 1995
(portions incorporated by reference into this Form 10-K)
21. List of Subsidiaries
23. Consent of Independent Auditors
27. Financial Data Schedule
99. Report to Holders of Eli Lilly and Company Contingent Payment
Obligation Units
(b) Reports on Form 8-K
On October 2, 1995, the Company filed a Form 8-K reporting the completion
of its exchange offer pursuant to which holders of the Company's common stock
exchanged 16,504,298 shares of such stock for all 57,600,000 shares of the
common stock of Guidant Corporation owned by the Company.
- ---------------
2 Indicates management contract or compensatory plan.
15
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.
ELI LILLY AND COMPANY
By s/Randall L. Tobias
--------------------------------
(Randall L. Tobias, Chairman of the Board
and Chief Executive Officer)
March 18, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on March 18, 1996 by the following persons on
behalf of the Registrant and in the capacities indicated.
SIGNATURE TITLE
------------------------------------------------------------------------
s/Randall L. Tobias Chairman of the Board, Chief Executive Officer,
------------------------- and a Director (principal executive officer)
(RANDALL L. TOBIAS)
s/Charles E. Golden Executive Vice President, Chief Financial
------------------------- Officer, and a Director (principal
(CHARLES E. GOLDEN) financial officer)
s/Arnold C. Hanish Chief Accounting Officer
------------------------- (principal accounting officer)
(ARNOLD C. HANISH)
s/Steven C. Beering, M.D. Director
-------------------------
(STEVEN C. BEERING, M.D.)
s/James W. Cozad Director
-------------------------
(JAMES W. COZAD)
s/Karen N. Horn Director
-------------------------
(KAREN N. HORN, Ph.D.)
s/Alfred G. Gilman, M.D., Ph.D. Director
-------------------------------
(ALFRED G. GILMAN, M.D., Ph.D.)
16
SIGNATURE TITLE
----------------------------------------------------------------------
s/J. Clayburn La Force, Jr., Ph.D. Director
----------------------------------
(J. CLAYBURN LA FORCE, JR., Ph.D.)
Director
-------------------------
(KENNETH L. LAY, Ph.D.)
s/Franklyn G. Prendergast, M.D., Ph.D. Director
--------------------------------------
(FRANKLYN G. PRENDERGAST, M.D., Ph.D.)
s/Kathi P. Seifert Director
-------------------------
(KATHI P. SEIFERT)
s/Sidney Taurel Director
-------------------------
(SIDNEY TAUREL)
s/August M. Watanabe, M.D. Director
--------------------------
(AUGUST M. WATANABE, M.D.)
s/Alva O. Way Director
-------------------------
(ALVA O. WAY)
17
TRADEMARKS
ApralanR (apramycin sulfate, Elanco)
AxidR (nizatidine, Lilly)
CeclorR (cefaclor, Lilly)
CobanR (monensin sodium, Elanco)
CompudoseR (estradiol controlled-release implant, Elanco)
Darvocet-NR (propoxyphene napsylate with acetaminophen, Lilly)
DobutrexR (dobutamine hydrochloride, Lilly)
DynabacR (dirithromycin, Lilly)
EldisineR (vindesine sulfate, Lilly)
GemzarR (gemcitabine hydrochloride, Lilly)
HumalogTM (insulin lispro, Lilly)
HumatropeR (somatropin of recombinant DNA origin, Lilly)
HumulinR (human insulin of recombinant DNA origin, Lilly)
lletinR (insulin, Lilly)
KeflexR (cephalexin, Dista)
KeftabR (cephalexin hydrochloride, Dista)
KefuroxR (cefuroxime sodium, Lilly)
KefzolR (cefazolin sodium, Lilly)
LorabidR (loracarbef, Lilly)
MandolR (cefamandole nafate, Lilly)
MaxibanR (narasin and nicarbazine, Elanco)
IMS MEDACOMR (Integrated Medical Systems)
MicotilR (tilmicosin phosphate, Elanco)
MontebanR (narasin, Elanco)
NebcinR (tobramycin sulfate, Lilly)
OncovinR (vincristine sulfate, Lilly)
PermaxR (pergolide mesylate, Lilly)
ProzacR (fluoxetine hydrochloride, Dista)
RECAPR (PCS)
ReoProTM (abciximab), Lilly
RumensinR (monensin sodium, Elanco)
TazidimeR (ceftazidime, Lilly)
TylanR (tylosin, Elanco)
VancocinR (vancomycin hydrochloride, Lilly)
VelbanR (vinblastine sulfate, Lilly)
THE LILLY DIRECTORS' DEFERRAL PLAN
(As amended and restated through February 1, 1996)
Section 1. Establishment of the Plan.
- -------------------------------------
Effective January 1, 1996, there is hereby established a plan whereby
certain Directors of the Company who are not current salaried employees
of the Company may voluntarily defer compensation (the "Deferred
Compensation" portion of the Plan), and certain Directors of the Company
who are not current or former full-time salaried employees of the Company
can share in the long-term growth of the Company by acquiring an
ownership interest in the Company (the "Deferred Stock" portion of the
Plan). Prior to January 1, 1996, the Company maintained the Deferred
Compensation portion of the Plan and the Deferred Stock portion of the
Plan as two separate plans, The Lilly Directors' Deferred Compensation
Plan and The Lilly Non-Employee Directors' Deferred Stock Plan,
respectively (the "Prior Plans"). The Plan is deemed to consist of the
amounts held under the Prior Plans, and any election made by a Director
under the Prior Plans, unless and until amended by the Director in
accordance with this Plan, shall remain in effect under this Plan.
Section 2. Definitions.
-----------------------
When used in the Plan, the following terms shall have the definitions set
forth in this Section 2:
2.1. Accrual Date. The term "Accrual Date" means the first day in
---- ------------
December of each calendar year on which the common stock of the
Company is traded, or such other annual date, not earlier than the third
Monday in February, established by the Committee as the date as of which
Shares are allocated to each Share Account.
2.2. Beneficiary. The term "Beneficiary" means the beneficiary or
---- -----------
beneficiaries (including any contingent beneficiary or beneficiaries)
designated pursuant to subsection 8.3 hereof.
2.3. Board of Directors. The term "Board of Directors" means the
---- ------------------
Board of Directors of the Company.
2
2.4. Committee. The term "Committee" refers to the Compensation and
---- ---------
Management Development Committee of the Board of Directors, provided
that no Participant shall be considered to be a member of the Committee
for purposes of the Plan.
2.5. Company. The term "Company" means Eli Lilly and Company.
---- -------
2.6. Company Credit. The term "Company Credit" means an amount
---- --------------
computed, and credited annually to a Participant's Deferred Compensation
Account at a rate that is two percent (2%) above the rate that the
Treasurer of the Company determines was the prime rate ofinterest
charged by Chemical Bank, New York, New York (the "Bank"), on loans made
on the immediately preceding December 15 or, if the Bank was closed on
December 15, the last day preceding December 15 on which the Bank was
open for business.
2.7. Compensation. The term "Compensation" means the retainer and the
---- ------------
aggregate of all meeting fees to which a Director is entitled for
services rendered to the Company as a Director.
3
2.8. Deferral Allocation Date. The term "Deferral Allocation Date"
---- ------------------------
means the third Monday of any month, or if Shares are not traded on
The New York Stock Exchange on such third Monday of the month, the last
day before the third Monday of the month on which Shares are traded on
The New York Stock Exchange, that follows the earlier of (a) the date
on which an amount deferred under the Plan would have been paid in cash
if a deferral election had not been made hereunder, or (b) in the case
of an award of compensation which by its terms is subject to a deferred
payment date, the date of award.
2.9. Deferred Amount. The term "Deferred Amount" means the amount of a
---- ---------------
Deferred Compensation Participant's Compensation that the Participant
elects to defer in accordance with Section 4 hereof.
2.10. Deferred Compensation Participant. The term "Deferred Compensation
----- ---------------------------------
Participant" means a Director who is not a salaried employee of the
Company and who has elected to defer all or part of his Compensation
pursuant to the Plan in accordance with Section 4 hereof.
2.11. Deferred Stock Participant. The term "Deferred Stock Participant"
----- --------------------------
means a Director who is not a current or former full-time salaried
employee of the Company and who becomes a Participant in the Plan in
accordance with Section 3 hereof.
4
2.12. Director. The term "Director" means each member of the Board of
----- --------
Directors.
2.13. Dividend Allocation Date. The term "Dividend Allocation Date"
----- ------------------------
means the first Monday that (a) follows a Dividend Payment Date and
(b) is the third Monday of a Month.
2.14. Dividend Payment Date. The term "Dividend Payment Date" means the
----- ---------------------
date as of which the Company pays a cash dividend on Shares.
2.15. Dividend Record Date. The term "Dividend Record Date" means,
----- --------------------
with respect to any Dividend Payment Date, the date established by the
Board of Directors as the record date for determining shareholders
entitled to receive payment of the dividend.
2.16. Individual Accounts. The term "Individual Accounts" or
----- -------------------
"Accounts" means the separate accounts (the Deferred Compensation
Account and the Share Account), described in Section 7 hereof, one or
both of which is established under the Plan for each Participant. When
used in the singular, the term shall refer to one of these two accounts,
as the context requires.
5
2.17. Participant. The term "Participant" means a Director who is a
----- -----------
Deferred Stock Participant, a Deferred Compensation Participant, or both,
as the case may be.
2.18. Plan. The term "Plan" means The Lilly Directors' Deferral Plan,
----- ----
as set forth herein and as it may be amended from time to time.
2.19. Share. The term "Share" means a share of common stock of the
----- ------
Company.
Section 3. Deferred Stock Participants.
--------------------------------------
Each Director who participated in The Lilly Non-Employee Directors'
Deferred Stock Plan immediately before the effective date of this Plan
shall continue as a Deferred Stock Participant on such effective date,
and all elections in effect under The Lilly Non-Employee Directors'
Deferred Stock Plan shall remain in effect under this Plan, unless and
until amended in accordance with this Plan. Each person who is
6
thereafter elected or appointed as a Director, and who is not and has
never been a full-time salaried employee of the Company, shall become a
Deferred Stock Participant beginning with the month in which such
Director takes office. A Deferred Stock Participant shall cease to
participate in the Plan when the Participant ceases to be a Director.
For purposes of the Plan, a Deferred Stock Participant shall be deemed to
cease to be a Director on the first day of the month next following the
month in which he last serves as a Director.
Section 4. Deferred Compensation Participants.
----------------------------------------------
Each Director who participated in The Lilly Directors' Deferred
Compensation Plan immediately before the effective date of the Plan shall
continue as a Deferred Compensation Participant on such effective date,
and all elections in effect under The Lilly Directors' Deferred
Compensation Plan shall remain in effect under this Plan, unless and
until amended in accordance with this Plan. Prior to the beginning of
each calendar year, any Director who is not a salaried employee of the
Company may defer the receipt of Compensation to be earned by the
Director during such year by filing with the Company a written election
that:
7
(i) defers payment of a designated amount (of one Thousand
Dollars ($1,000) or more) or percentage of his
Compensation for services attributable to the following
calendar year or portion thereof (the "Deferred Amount");
(ii) specifies the payment option selected by the Participant
pursuant to subsection 8.2 hereof for such Deferred Amount; and
(iii) specifies the option selected by the Participant pursuant
to Section 5 hereof for such Deferred Amount.
The amount deferred may not exceed the Director's Compensation for the
calendar year. Notwithstanding the foregoing, any individual who is
newly elected or appointed to serve as a Director may, not later than
thirty (30) days after his election or appointment becomes effective,
elect in accordance with the preceding provisions of this Section 4, to
defer the receipt of Compensation earned during the portion of the
current calendar year that follows the filing of the election with the
Company. Except as provided in subsections 8.2 and 8.4 hereof, any
elections made pursuant to this Section 4 with respect to a calendar
year shall be irrevocable when made. If a Participant fails to make an
8
election under section 5 with respect to his Deferred Amount for a
future calendar year, the Participant's previous election shall remain
in effect, provided that the Participant may amend his election with
regard to a future calendar year at any time.
Section 5. Form of Deferred Compensation Credits.
-------------------------------------------------
5.1. Deferred Compensation Account. Except with respect to the
---- -----------------------------
deferral of Compensation for a calendar year in which a Deferred
Compensation Participant elects to have all or a percentage of the
Deferred Amount credited in Shares in accordance with subsection 5.2
hereof, the Deferred Amount shall be denominated in U.S. dollars and
credited to the Participant's Deferred Compensation Account pursuant to
subsection 7.1 hereof.
5.2. Shares. Prior to the beginning of each calendar year, a Deferred
---- ------
Compensation Participant may elect to have all or a percentage of the
Deferred Amount for the following calendar year credited in Shares and
allocated to the Participant's Share Account pursuant to subsection
7.2 hereof.
9
5.3. Transfer of Deferred Compensation Account Balance to Share Account.
---- ------------------------------------------------------------------
Prior to the effective date of the Plan, a Deferred Compensation
Participant may elect to have all or a portion of his final credited
account balance in The Lilly Directors' Deferred Compensation Plan
converted to Shares and credited to the Participant's Share Account.
Such conversion shall take place as of January 1, 1996 based upon the
combined average of the high and low prices of Shares on The New York
Stock Exchange on each of the last five (5) days of 1995 on which Shares
are traded on The New York Stock Exchange. Such conversion shall,
however, be contingent upon receipt by the Company of (a) a no-action
letter from the Securities and Exchange Commission ("EC"), or (b) an
opinion of counsel satisfactory to the Company, to the effect that
such conversion shall not disqualify the participate from being a "is
interested person" within the meaning of prior SEC Rule 16b-3(d)(3)
and new SEC Rule 16b-3(c)(2)(i) for purposes of administering the
Company's employee stock incentive plans.
Section 6. Allocations to Share Accounts.
-----------------------------------------
6.1. Allocation of Shares. As of the Accrual Date of each calendar
---- --------------------
year, there shall be allocated to the Share Account of each Deferred
10
Stock Participant, as part of the compensation to such Deferred
Stock Participant for service on the Board of Directors, eight hundred
(800) Shares, or, if less, the number of Shares that could be purchased
with the Participant's Compensation for the calendar year, assuming
attendance at eight one-day meetings, at the average of the high and low
prices of Shares on The New York Stock Exchange on the Accrual Date.
Shares allocated to each Deferred Stock Participant's Share Account shall
be hypothetical and not issued or transferred by the Company until
payment is made pursuant to Section 8 hereof.
6.2. Special Allocation. As of February 1, 1996, there shall be
---- ------------------
allocated to the Share Account of each Deferred Stock Participant the
number of Shares having a market value (calculated as set forth below)
equal to the present value as of December 31, 1995 of the accrued benefit
of the Participant in The Lilly Non-Employee Directors' Retirement Plan,
whether or not such Participant was vested in such benefit on that date.
Such present value calculation shall be performed by the Company in its
discretion and shall be converted to Shares based upon the combined
average of the high and low prices of Shares on The New York Stock
Exchange on each of the last five (5) days preceding February 1, 1996 on
which Shares are traded on The New York Stock Exchange. Such conversion
shall, however, be contingent upon receipt by the Company of (a) a
11
no-action letter from the Securities and Exchange Commission ("EC"), or
(b) an opinion of counsel satisfactory to the Company, to the effect that
such conversion shall not disqualify the participate from being a "is
interested person" within the meaning of prior SEC Rule 16b-3(d)(3) and
new SEC Rule 16b-3(c)(2)(i) for purposes of administering the Company's
employee stock incentive plans.
Section 7. Individual Accounts.
-------------------------------
The Company shall maintain Individual Accounts for Participants, as
follows:
7.1. Deferred Compensation Account. The Company shall maintain a
---- -----------------------------
Deferred Compensation Account in the name of each Deferred Compensation
Participant in respect of each calendar year the Deferred Compensation
Participant elects to defer the receipt of Compensation pursuant to
Section 4 hereof and does not elect to have the Deferred Amount for such
calendar year credited in Shares pursuant to subsection 5.2 hereof. The
opening balance of each Deferred Compensation Account on January 1, 1996
shall be equal to the closing balance on December 31, 1995 of the
12
corresponding account maintained under The Lilly Directors' Deferred
Compensation Plan, less any portion of such account converted to Shares and
allocated to the Participant's Share Account pursuant to subsection 5.3
hereof. The Deferred Compensation Account shall be denominated in U.S.
dollars, rounded to the nearest whole cent. A Deferred Amount allocated
to a Deferred Compensation Account pursuant to subsection 5.1 hereof
shall be credited to the Deferred Compensation Account as of the Deferral
Allocation Date.
7.2. Share Account. The Company shall maintain a Share Account for each
---- -------------
Deferred Stock Participant and for each Deferred Compensation Participant
who elects to have a Deferred Amount credited in Shares pursuant to
subsection 5.2 hereof, or who elects to convert all or a portion of his
final account balance under The Lilly Directors' Deferred Compensation
Plan to Shares pursuant to subsection 5.3 hereof. The opening balance of
each Share Account on January 1, 1996, shall be equal to the closing
balance on December 31, 1995, of the corresponding Share Account
maintained under The Lilly Non-Employee Directors' Deferred Stock Plan.
The Share Account shall be denominated in Shares, and shall be maintained
in fractions rounded to three (3) decimal places.
13
Shares allocated to a Deferred Compensation Participant's Share Account
in accordance with the Participant's election under subsection 5.2 hereof
shall be credited to the Participant's Share Account as of the Deferral
Allocation Date. Shares and, if necessary, fractional Shares, shall be
credited to a Participant's Share Account based upon the average of the
high and low price of Shares on The New York Stock Exchange on the
Deferral Allocation Date.
7.3. Former Interest Account. All balances in the Account known
---- -----------------------
previously as the "Interest Account" under The Lilly NonEmployee
Directors' Deferred Stock Plan shall be transferred to the Share Account
effective on January 1, 1996, utilizing the same price of Shares set
forth in subsection 5.3 hereof for purposes of the calculation.
7.4. Accrual of Company Credit. The Treasurer of the Company shall
---- -------------------------
determine the annual rate of Company Credit on or before December 31 of
each calendar year. This rate shall be effective for the following
calendar year. The Company Credit shall accrue monthly, at one-twelfth
of the applicable annual rate, on all amounts credited to a Participant's
Deferred Compensation Account, including the Company Credits for prior
14
years. The Company Credit shall not accrue on any amount distributed to
a Participant (or to the Participant's Beneficiary) during the month for
which the accrual is determined, except where an amount is distributed to
a Beneficiary in the month of the Participant's death. The Company
Credit for each year shall be credited to each Deferred Compensation
Account as of December 31 of that year and shall be compounded monthly.
7.5. Cash Dividends. Cash dividends paid on Shares shall be deemed to
---- --------------
have been paid on the Shares allocated to each Participant's Share
Account as if the allocated Shares were actual Shares issued and
outstanding on the Dividend Record Date. An amount equal to the amount
of such dividends shall be credited in Shares to each Share Account as of
each Dividend Allocation Date based upon the average of the high and low
prices for Shares on The New York Stock Exchange on the Divided
Allocation Date, or, if Shares are not traded on the Divided Allocation
Date, the next day on which Shares are traded.
7.6. Capital Adjustments. The number of Shares referred to in Section 6
---- -------------------
hereof and the number of Shares allocated to each Share Account shall be
adjusted by the Committee, as it deems appropriate, to reflect stock
dividends, stock splits, reclassifications, spinoffs, and other
15
extraordinary distributions, as if those Shares were actual Shares.
7.7. Account Statements. Within a reasonable time following the end of
---- ------------------
each calendar year, the Company shall render an annual statement to each
Participant. The annual statement for each Deferred Stock Participant
shall report the number of Shares credited to the Participant's Share
Account as of December 31 of that year. The annual statement for each
Deferred Compensation Participant shall report the dollar amount credited
to the Participant's Deferred Compensation Account as of December 31 of
that year, and, if the Deferred Compensation Participant elects to invest
a Deferred Amount in Shares pursuant to subsection 5.2 hereof, or if the
Deferred Compensation Participant elects to convert his final account
balance under The Lilly Directors' Deferred Compensation Plan to Shares
pursuant to subsection 5.3 hereof, the number of Shares credited to the
Participant's Share Account as of December 31 of that year.
Section 8. Payment Provisions.
------------------------------
8.l. Method of Payment. All payments to a Participant (or to a
---- -----------------
Participant's Beneficiary) with respect to the Participant's Deferred
16
Compensation Account shall be paid in cash. All payments to a
Participant (or to a Participant's Beneficiary) with respect to the
Participant's Share Account shall be paid in Shares, at which time the
Shares shall be issued or transferred on the books of the Company. All
Shares to be transferred hereunder shall be transferred out of treasury
shares to the extent available. Fractional Shares shall not be
transferred to a Participant, provided that in the case of a final
payment under the Plan with respect to a Participant, any fractions
remaining in the Participant's Share Account shall be rounded up to the
next whole Share and that number of whole Shares shall be transferred to
the Participant (or, after the Participant's death, to the Participants's
Beneficiary). If Shares are not traded on The New York Stock Exchange on
any day on which a payment of Shares is to be made under the Plan, then
that payment shall be made on the next day on which Shares are traded on
The New York Stock Exchange.
8.2. Payment Options. Prior to each calendar year, or within 30 days
---- ---------------
after becoming a Participant, the Participant shall select a payment
election with respect to the payment of any one or all of the
Participant's Individual Accounts from the following payment elections:
17
(i) a lump sum in January of the calendar year immediately
following the calendar year in which the Participant ceases
to be a Director; or
(ii) annual (or, in the case of the Deferred Compensation
Account only, monthly) installments over a period of two to ten
years commencing in January of the calendar year following the
calendar year during which the Participant ceases to be a
Director.
If the payment option described in paragraph (i), above, has been
elected, the amount of the lump sum with respect to the Participant's
Deferred Compensation Account shall be equal to the amount credited to
the Participant's Deferred Compensation Account as of the December 31
next preceding the date of the payment, and the amount of the lump sum
with respect to the Participant's Share Account shall be equal to the
number of Shares credited to the Share Account as of the December 31 next
preceding the date of payment. If the payment option described in
paragraph (ii), above, has been elected, the amount of each installment
with respect to the Participant's Deferred Compensation Account shall be
equal to the amount credited to the Participant's Deferred Compensation
Account as of the last day of the month next preceding the date of a
18
monthly installment payment, or the December 31 next preceding the date
of an annual installment payment, divided by the number of installment
payments that have not yet been made. The amount of each installment
with respect to the Participant's Share Account shall be equal to the
number of Shares credited to the Participant's Share Account as of the
December 31 next preceding the date of an annual installment payment,
divided by the number of installment payments that have not yet been made.
A Participant may elect that his final payment election may control
over all prior payment elections. If the Participant fails to elect a
payment option, the amount credited to the Participant's Individual
Account shall be distributed in a lump sum in accordance with the payment
option described in paragraph (i), above. If the amount credited to a
Participant's Deferred Compensation Account or the value of Shares
credited to a Participant's Share Account is less than $25,000, the
Committee, in its sole discretion, may pay out the amount credited to the
Participant's Individual Account in a lump sum.
8.3. Payment Upon Death. Within a reasonable period of time following
---- ------------------
the death of a Participant, the amount credited to a Participant's
Deferred Compensation Account and all of the Shares credited to the
19
Participant's Share Account shall be paid by the Company in a lump sum
to the Participant's Beneficiary. For purposes of this subsection 8.3,
the amount credited to the Participant's Deferred Compensation Account
and the number of Shares credited to the Participant's Share Account
shall be determined as of the date of payment. A Participant may
designate the Beneficiary, in writing, in a form acceptable to the
Committee before the Participant's death. A Participant may, before the
Participant's death, revoke a prior designation of Beneficiary and may
also designate a new Beneficiary without the consent of the previously
designated Beneficiary, provided that such revocation and new designation
(if any) are in writing, in a form acceptable to the Committee, and filed
with the Committee before the Participant's death. If the Participant
does not designate a Beneficiary, or if no designated Beneficiary
survives the Participant, any amount not distributed to the Participant
during the Participant's life shall be paid to the Participant's estate
in a lump sum in accordance with this subsection 8.3.
8.4. Payment on Unforeseeable Emergency. The Administrator may, in
---- ----------------------------------
its sole discretion, direct payment to a Participant of all or of any
portion of the Participant's Individual Account balance, notwithstanding
an election under subsection 8.2 above, at any time that it determines
20
that such Participant has an unforeseeable emergency, and then only to
the extent reasonably necessary to meet the emergency. For purposes of
this section, "unforeseeable emergency" means severe financial hardship
to the Participant resulting from a sudden and unexpected illness or
accident of the Participant or of a dependent of the Participant, loss
of the Participant's property due to casualty, or other similar
extraordinary and unforeseeable circumstances arising as a result of
events beyond the control of the Participant. The circumstances that
will constitute an unforeseeable emergency will depend upon the facts of
each case, but, in any case, payment may not be made to the extent that
such hardship is, or may be, relieved --
(i) Through reimbursement or compensation by insurance or
otherwise,
(ii) By liquidation of the Participant's assets, to the extent the
liquidation of such assets would not itself cause severe
financial hardship, or
(iii) By cessation of deferrals under the Plan.
21
Examples of what are not considered to be unforeseeable emergencies
include the need to send a Participant's child to college or the desire
to purchase a home.
Section 9. Ownership of Shares.
-------------------------------
A Participant shall have no rights as a shareholder of the Company with
respect to any Shares until the Shares are transferred to the Participant
on the books of the Company.
Section 10. Prohibition Against Transfer.
-----------------------------------------
The right of a Participant to receive payments of Shares and cash under
the Plan may not be transferred except by will or applicable laws of
descent and distribution. A Participant may not assign, sell, pledge, or
otherwise transfer Shares or cash to which he is entitled hereunder prior
to transfer or payment thereof to the Participant.
Section 11. General Provisions.
-------------------------------
22
11.1. Director's Rights Unsecured. The Plan is unfunded. The right
----- ---------------------------
of any Participant to receive payments of cash or Shares under
the provisions of the Plan shall be an unsecured claim against the
general assets of the Company.
11.2. Administration. Except as otherwise provided in the Plan, the
----- --------------
Plan shall be administered by the Committee, which shall have the
authority to adopt rules and regulations for carrying out the Plan,
and which shall interpret, construe, and implement the provisions of the
Plan.
11.3. Legal Opinions. The Committee may consult with legal counsel,
----- --------------
who may be counsel for the Company or other counsel, with respect to its
obligations and duties under the Plan, or with respect to any action,
proceeding, or any questions of law, and shall not be liable with
respect to any action taken, or omitted, by it in good faith pursuant to
the advice of such counsel.
11.4. Liability. Any decision made or action taken by the Board of
----- ---------
Directors, the Committee, or any employee of the Company or any of its
subsidiaries, arising out of or in connection with the construction,
23
administration, interpretation, or effect of the Plan, shall be
absolutely discretionary, and shall be conclusive and binding on all
parties. Neither the Committee nor a member of the Board of Directors
and no employee of the Company or any of its subsidiaries shall be liable
for any act or action hereunder, whether of omission or commission, by
any other member or employee or by any agent to whom duties in connection
with the administration of the Plan have been delegated or, except in
circumstances involving bad faith, for anything done or omitted to be
done.
11.5. Withholding. The Company shall have the right to deduct from all
----- -----------
payments hereunder any taxes required by law to be withheld from such
payments. The recipients of such payments shall bear all taxes on
amounts paid under the Plan to the extent that no taxes are withheld
thereon, irrespective of whether withholding is required.
11.6. Incapacity. If the Committee determines that any person entitled
----- ----------
to benefits under the Plan is unable to care for his or here affairs
because of illness or accident, any payment due (unless a duly qualified
guardian or other legal representative has been appointed) may be paid
for the benefit of such person to such person's spouse, parent, brother,
sister, or other party deemed by the Committee to have incurred expenses
for such person.
24
11.7. Inability to Locate. If the Committee is unable to locate a
----- -------------------
person to whom a payment is due under the plan for a period of twelve
(12) months, commencing with the first day of the month as of which the
payment becomes payable, the total amount payable to such person shall
be forfeited.
11.8. Legal Holidays. If any day on (or on or before) which action
----- --------------
under the Plan must be taken falls on a Saturday, Sunday, or legal
holiday, such action may be taken on (or on or before) the next
succeeding day that is not a Saturday, Sunday, or legal holiday;
provided, that this subsection 11.8 shall not permit any action that must
be taken in one calendar year to be taken in any subsequent calendar
year.
Section 12. Amendment, Suspension, and Termination.
---------------------------------------------------
The Board of Directors shall have the right at any time, and from time
to time, to amend, suspend, or terminate the Plan, provided that no
25
amendment or termination shall reduce the number of Shares or the cash
balance in an Individual Account, and provided further that the number of
Shares allocated annually pursuant to Section 6 hereof may not be changed
more frequently than every calendar year.
Section 13. Applicable Law.
---------------------------
The Plan shall be governed by, and construed in accordance with, the
laws of the State of Indiana, except to the extent that such laws are
preempted by Federal law.
Section 14. Effective Date.
---------------------------
The effective date of this Plan is January 1, 1996. Nothing herein shall
invalidate or adversely affect any previous election, designation,
deferral, or accrual in accordance with the terms of The Lilly Directors'
Deferred Compensation Plan or The Lilly Non-Employee Directors' Deferred
Stock Plan that were in effect prior to the effective date of this Plan.
Eli Lilly and Company EVA Bonus Plan
ARTICLE I
Bonus Plan Statement of Purpose and Summary
-------------------------------------------
1.1 The purpose of the Plan is to provide a system of bonus
compensation for certain executive, management and
technical personnel of Eli Lilly and Company and
subsidiaries which will promote the maximization of
shareholder value over the long term, by linking
performance incentives to increases in shareholder
value. The Plan ties bonus compensation to Economic
Value Added ("EVA"), and thereby rewards employees for
long-term, sustained improvement in shareholder value.
1.2 EVA will be used as the performance measure of value
creation. EVA reflects the benefits and costs of
capital employment. Employees create economic value
when the operating profits from a business exceed the
cost of the capital employed.
ARTICLE II
Definitions of Certain Terms
----------------------------
Unless the context requires a different meaning, the
following terms shall have the following meanings:
2.1 "Company" means Eli Lilly and Company and its
-------
subsidiaries.
2.2 "Committee" means the Compensation and Management
---------
Development Committee, the members of which shall be
selected by the Board of Directors from among its
members.
2.3 "Participant" means an executive, management or
-----------
technical employee of the Company designated by the
Committee as a participant in the Plan with respect to
any Plan Year. In its discretion, the Committee may
designate Participants either on an individual basis or
by determining that all employees in specified job
categories, classifications or levels shall be
Participants.
2.4 "Plan" means this Eli Lilly and Company EVA Bonus Plan.
----
2.5 "Plan Year" means the applicable calendar year.
---------
2.6 "Retirement" means the cessation of employment upon the
----------
attainment of at least eighty age and service points,
as determined by the provisions of The Lilly Retirement
Plan as amended from time to time, assuming eligibility
to participate in that plan.
2.7 "Disability" means the time at which a Participant
----------
becomes eligible for a payment under The Lilly Extended
Disability Plan, assuming eligibility to participate in
that plan.
ARTICLE III
-----------
Definition and Components of EVA
--------------------------------
The following terms set forth the calculation of EVA and the
components of calculating EVA. The calculation of EVA for a
Plan Year is used in determining the bonuses earned by
Participants under the Plan, as set forth in Article IV.
3.1 "Economic Value Added" or "EVA" means the excess NOPAT
-----------------------------
that remains after subtracting the Capital Charge.
3.2 "Net Operating Profit After Tax" or "NOPAT'' means the
-------------------------------------------
after tax operating earnings of the Company for the
Plan Year. NOPAT is determined by adding net sales plus
other income (excluding interest income from
operational cash) and subtracting the following: cost
of goods sold, selling, general and administrative
expenses (excluding goodwill amortization and interest
expense), amortization of research and development,
taxes (excluding the tax benefit of net interest
expense) and amounts associated with discontinued
operations.
3.3 Capital Charge" means the deemed opportunity cost of
--------------
employing Capital for the Company. The Capital Charge
is calculated by multiplying Capital times Cost of
Capital (C*).
3.4 "Capital" means the net investment employed in the
-------
operations of the Company produced by operations and
financing activities. Capital is calculated by adding
together current assets (excluding operating cash), net
property, plant and equipment, gross goodwill, net
intangibles, other assets, capitalized research and
development, and the present value of operating leases,
and subtracting the following: non-interest bearing
liabilities and capital associated with discontinued
operations.
3.5 "Cost of Capital" or "C*" is the percentage calculated
-----------------------
from the weighted average of Cost of Debt and Cost of
Equity. Cost of Capital for each Plan Year is
determined by reference to the percentage calculated at
the end of October of the prior Plan Year.
Cost of Debt capital is the marginal long-term
borrowing rate of the Company times (one minus the
tax rate). Cost of Equity capital is the risk-free
rate plus (beta times the market risk premium).
ARTICLE IV
Definition and Computation of the EVA Bonus
-------------------------------------------
Bonuses earned under the Plan for a Plan Year are determined
based on a comparison of actual EVA to the "Target EVA" for
the year, which is established as described below to ensure
improvement in EVA from year to year. The result of this
comparison is adjusted by a "Leverage Factor" measuring the
volatility of industry returns. The factor produced is
referred to as the "Bonus Multiple," which is multiplied by
the Participant's "Target Bonus" amount established for the
year to produce the actual bonus earned. This amount,
referred to as the "Declared Bonus," is credited to the
Participant's "Bonus Bank" balance and paid out in the
manner provided below.
4.1 Target Bonus. The Target Bonus Awards will be
determined by the Committee according to a schedule
that associates job responsibilities with a specified
dollar amount of Target Bonus. If a Participant moves
from one global job level to another during a Plan Year
by virtue of a change in job responsibilities (except
for changes as a result of moves to certain global job
levels designated by the Committee or changes between
part-time and full-time status) his or her Target Bonus
will not be changed for the Plan Year in which the move
occurs. The Target Bonus will be based on the currency
in which the highest portion of base pay is regularly
paid. The Committee shall determine the appropriate
foreign exchange conversion methodology in its
discretion.
4.2 Declared Bonus. A Declared Bonus is the Target Bonus
times the Bonus Multiple.
4.3 Bonus Multiple. The Bonus Multiple is Actual EVA minus
Target EVA over the Leverage Factor, plus one.
4.4 Bonus Bank. All bonus payments are made from the Bonus
Bank. Each Participant's beginning Bonus Bank balance
in his/her first year of participation is zero. The
Bonus Bank is increased or decreased for any plan year
by the amount of Declared Bonus. If the available
Bonus Bank balance is positive, the participant will be
paid from such balance up to the Target Bonus amount,
plus one third of any such balance that remains after
subtracting the Target Bonus from available Bonus Bank
balance. If the available Bonus Bank balance is
negative, no payment will occur.
4.5 Target EVA. The Target EVA for each year shall be
calculated as follows:
Target EVA = [Prior Year's Actual EVA + Prior Year's Target EVA]+Expected
------------------------------------------------- Improvement
2
4.6 Expected Improvement. The Expected Improvement is the
additional EVA amount determined by the Committee that
is used to assure that a minimum level of improvement
is achieved in order to earn target awards.
4.7 Leverage Factor. The Leverage Factor determines the
rate of change in bonuses as EVA surpasses or falls
short of Target EVA, determined by the Committee from
an evaluation of the long term volatility of industry
returns.
4.8 Working Plan Example. Examples of the mechanics of the
Plan are shown on Schedule A.
ARTICLE V
Plan Administration
-------------------
5.1 Time of Payment. Payment from the Bonus Bank will be
made before March 1 of the year following the Plan
Year.
5.2 Certification of Results. Before any amount is paid
under the Plan, the Committee shall certify in writing
the calculation of EVA for the Plan Year and the
satisfaction of all other material terms of the
calculation of the Declared Bonus.
5.3 New Hires, Promotions. New hires or individuals
promoted who are first selected for participation by
the Committee effective on a date other than January 1
will participate on a pro-rata basis in their first
year of participation, based on the Declared Bonus
determined for the Plan Year, pro-rated for that period
of the year during which the Participant was selected
for participation in the Plan.
5.4 Termination of Employment. If a Participant ceases
employment with the Company before the end of a Plan
Year for reasons other than Retirement, Disability or
death, the Participant shall receive a fraction of a
Bonus for that Plan Year equal to the number of days
worked during the plan year divided by the total number
of days in the Plan Year, and his/her Bank Balance
shall be forfeited. The Committee may make complete or
partial exceptions to this rule, with respect to the
Bank Balance only, in its sole discretion.
5.5 Retirement, Disability or Death. If a Participant
ceases employment with the Company because of
Retirement, Disability or death, the Participant or
personal representative, as the case may be, shall
receive full payment of his/her Bank Balance and a
bonus based on the Declared Bonus determined for the
Plan Year but pro-rated for that period of the year
during which the Participant was an active employee of
the Company.
5.6 Plan Participation. A Participant may not participate
in this Plan for any portion of a year for which he/she
is entitled to receive payment under the Eli Lilly and
Company Contingent Compensation Plan, and shall be
treated in accordance with 5.3.
ARTICLE VI
General Provisions
------------------
6.1 Withholding of Taxes. The Company shall have the right
to withhold the amount of taxes which in the sole
determination of the Company are required to be
withheld under law with respect to any amount due or
payable under the Plan.
6.2 Expenses. All expenses and costs in connection with
the adoption and administration of the plan shall be
borne by the Company.
6.3 No Prior Right or Offer, No Right to Employment.
Except and until expressly granted pursuant to the
Plan, nothing in the Plan shall be deemed to give any
employee any contractual or other right to participate
in the benefits of the Plan. No award to any such
Participant in any Plan Year shall be deemed to create
a right to receive any award or to participate in the
benefits of the Plan in any subsequent Plan Year.
6.4 Rights Personal to Employee. Any rights provided to an
employee under the Plan shall be personal to such
employee, shall not be transferable, except by will or
pursuant to the laws of descent or distribution, and
shall be exercisable during his/her lifetime, only by
such employee, or a court-appointed guardian for the
employee.
6.5 Non-Allocation of Award. In the event of a suspension
of the Plan in any Plan Year, as described in Section
11.1, no awards under the Plan for the Plan Year during
which such suspension occurs shall affect the
calculation of awards for any subsequent period in
which the Plan in continued.
ARTICLE VII
Limitations
-----------
7.1 No Continued Employment. Neither the establishment of
the Plan nor the grant of an award thereunder shall be
deemed to constitute an express or implied contract of
employment of any Participant for any period of time or
in any way abridge the rights of the Company to
determine the terms and conditions of employment or to
terminate the employment of any employee with or
without notice or cause at any time.
7.2 No Vested Rights. Except as expressly provided herein,
no employee or other person shall have any claim of
right (legal, equitable, or otherwise) to any award,
allocation, or distribution or any right, title, or
vested interest in any amounts in his/her Bonus Bank
and no officer or employee of the Company or any other
person shall have any authority to make representations
or agreements to the contrary. No interest conferred
herein to a Participant shall be assignable or subject
to claim by a Participant's creditors.
7.3 Non-alienation. Except as provided in Subsection 5.1,
no Participant or other person shall have any right or
power, by draft, assignment, or otherwise, to mortgage,
pledge or otherwise encumber in advance any payment
under the plan, and every attempted draft, assignment,
or other disposition thereof shall be absolutely void.
ARTICLE VIII
Committee Authority
-------------------
8.1 Authority to Interpret and Administer. Except as
otherwise expressly provided herein, full power and
authority to interpret and administer this Plan shall
be vested in the Committee. The Committee may from
time to time make such decisions and adopt such rules
and regulations for implementing the Plan as it deems
appropriate for any Participant under the Plan. Except
as to Participants who are executive officers of the
Company, the Committee may delegate in writing to
officers or employees of the Company the power and
authority granted by this Section 8.1 to interpret and
administer this Plan. Any decision taken by the
Committee, or officer or employee to whom authority has
been delegated, arising out of or in connection with
the construction, administration, interpretation and
effect of the Plan shall be final, conclusive and
binding upon all Participants and any person claiming
under or through Participants.
8.2 Committee Discretion to Revise Rates and Amounts. The
Committee may, in its sole discretion, revise the
various rates, amounts and percentages provided in the
Plan from time to time (including, without limitation,
with respect to each of the foregoing defined terms),
provided that the methods and assumptions used in
making such determinations shall be established and
applied by the Committee on the basis of reasonable,
objective criteria that are applied in a uniform manner
from Plan Year to Plan Year.
8.3 Financial And Accounting Terms. Except as otherwise
provided, financial and accounting terms, including
terms defined herein, shall be determined by the
Committee in accordance with generally accepted
accounting principles and as derived from the audited
consolidated financial statements of the Company,
prepared in the ordinary course of business.
ARTICLE IX
Notice
------
9.1 Any notice to be given to the Company or Committee
pursuant to the provisions of the Plan shall be in
writing and directed to Secretary, Eli Lilly and
Company, Lilly Corporate Center, Indianapolis, IN
46285.
ARTICLE X
Effective Date
--------------
10.1 This Plan shall be effective as of January 1, 1995, as
amended and restated effective January 1, 1996.
ARTICLE XI
Amendments and Termination
--------------------------
11.1 This Plan may be amended, suspended or terminated at
any time at the discretion of the Board of Directors of
Eli Lilly and Company, and may, except for this Section
11.1, be amended at any time by the Committee.
ARTICLE XII
Applicable Law
--------------
12.1 This Plan shall be governed by and construed in
accordance with the provisions of the laws of the State
of Indiana.
SCHEDULE A
----------
YEAR ONE
Target EVA = $150MM
Actual EVA = $200MM
Leverage Factor = $100MM
Declared Bonus
- --------------
Actual EVA - Target EVA = $50MM
Bonus Multiple = 1 + (Actual EVA - Target EVA)/Leverage Factor
1.5 = 1 + 50/100
Target Bonus = $20,000
Declared Bonus = $30,000 (1.5 x $20,000)
Bonus Bank
- ----------
Declared Bonus $30,000
Beginning Bank Balance $ -0-
-------
Available Bank Balance $30,000
Target Bonus Paid $20,000*
-------
Remaining Balance $10,000
Pay 1/3 Remaining Balance $3,333*
Ending Bank Balance $6,667
*Total bonus paid = $20,000 + $150MM) / 2 + 0
= $175MM
YEAR TWO
Target EVA = $175MM
Actual EVA = $140MM
Leverage Factor = $100MM
Declared Bonus
- --------------
Actual EVA - Target EVA = ($35MM)
Bonus Multiple = 1 + (Actual EVA - Target EVA)/Leverage Factor
0.65 = 1 + (35)/100
Target Bonus = $20,000
Declared Bonus = $13,000 (0.65 x $20,000)
Bonus Bank
- ----------
Declared Bonus $13,000
Beginning Bank Balance $6,667
-------
Available Bank Balance $19,667
Target Bonus Paid $19,667*
(up to available balance)
Remaining Balance $0
Pay 1/3 Remaining Balance $0*
-------
Ending Bank Balance $0
*Total bonus paid = $19,667 + $0 = $19,667
EVA Target Reset (for year three) = ($140MM + $175MM)/2 + 0
= $157.5MM
EXHIBIT 11. COMPUTATION OF EARNINGS PER SHARE ON PRIMARY
AND FULLY DILUTED BASES
Eli Lilly and Company and Subsidiaries
Year Ended December 31
1995 1994 1993
---- ---- ----
(Dollars in millions, except
per-share data; shares in
thousands)
PRIMARY:
Net income............................ $2,290.9 $1,286.1 $ 480.2
Average number of common shares
outstanding........................ 569,026 578,378 585,346
Add incremental shares:
Stock plans and contingent payments 8,655 4,614 2,356
----- ------- ------
Adjusted average shares............... 577,681 582,992 587,702
======= ======= =======
Primary earnings per share............ $3.97 $ 2.21 $ .82
FULLY DILUTED:
Net Income............................ $2,290.9 $1,286.1 $ 480.2
Average number of common shares
outstanding....................... 569,026 578,378 585,346
Add incremental shares:
Stock plans and contingent payments 15,023 7,080 3,232
------- ------- ------
Adjusted average shares 584,049 585,458 588,578
======= ======= =======
Fully diluted earnings per share...... $ 3.92 $ 2.20 $ .82
EXHIBIT 12. STATEMENT RE: COMPUTATION OF RATIO OF
EARNINGS TO FIXED CHARGES
Years Ended December 31,
---------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
Consolidated Pretax
Income
From Continuing
Operations
Before Changes in
Accounting Principles $1,765.6 $1,698.6 $ 662.8 $1,193.5 $1,626.3
Interest from Continuing
Operations 324.6 129.2 96.1 108.4 87.1
Less Interest Capitalized
During the Period from
Continuing Operations (38.3) (25.4) (25.5) (35.2) (48.1)
----- ----- ----- ----- -----
Earnings $2,051.9 $1,802.4 $ 733.4 $1,266.7 $1,665.3
======= ======= ====== ======= =======
Fixed Charges:
Interest Expense from
Continuing Operations $324.6 $ 129.2 $ 96.1 $ 108.4 $ 87.1
===== ======= ====== ====== =====
Ratio of Earnings to
Fixed Charges 6.3 14.0 7.6 11.7 19.1
===== ======= ====== ====== =====
EXHIBIT 13. ANNUAL REPORT TO SHAREHOLDERS FOR THE YEAR
ENDED DECEMBER 31, 1995
REVIEW OF OPERATIONS
STRATEGIC ACTIONS
During 1995, the company completed the divestiture of the nine
Medical Devices and Diagnostics (MDD) Division businesses. In
1994, a separate company, Guidant Corporation (Guidant), was formed
to be the parent company of five of the MDD companies: Advanced
Cardiovascular Systems, Inc.; Cardiac Pacemakers, Inc.; Devices for
Vascular Intervention, Inc.; Heart Rhythm Technologies, Inc.; and
Origin Medsystems, Inc. In December 1994, Guidant sold
approximately 20 percent of its common stock in an initial public
offering. In September 1995, the company distributed its remaining
80 percent interest in Guidant through a splitoff, an exchange
offer under which Lilly shareholders could exchange their Lilly
shares for Guidant shares. Pursuant to the splitoff, approximately
16.5 million shares of the company's common stock (expressed on a
pre-stock-split basis) were exchanged for the Guidant shares owned
by the company, resulting in an increase in the company's treasury
stock and a corresponding reduction of shares outstanding. The
splitoff resulted in a tax-free gain calculated as the difference
between the market and carrying values of the shares of Guidant
common stock held by the company on the expiration date of the
exchange offer. Sales of three of the MDD companies, IVAC
Corporation, Pacific Biotech, Inc., and Physio-Control Corporation,
were completed during 1994 and 1995, and the divestiture of
Hybritech Incorporated was finalized in January 1996.
As a consequence of the divestiture, the operating results of the
MDD companies have been reflected as "discontinued operations" in
the company's financial statements and have been excluded from
consolidated sales and expenses reflected therein. As a result of
completion of the divestiture, the company recognized a net gain of
$921.5 million. All assets, liabilities and equity of the MDD
businesses have been removed from the company's balance sheet. See
Note 4 to the consolidated financial statements for a further
discussion.
In December 1995, the company acquired Integrated Medical Systems,
Inc. (IMS), which develops and operates physician-focused medical
communications networks. The acquisition will provide an
opportunity to forge closer ties with the health care community,
deliver health care information quickly to users of the network and
provide disease-management utilization tools for current and future
subscribers of the system. The company hopes to utilize the IMS
networks in conjunction with the pharmacy-benefit-management
capabilities of PCS Health Systems, Inc. (PCS), in an effort to
create a nationally integrated information technology system for
health care providers and payers. See Note 2 to the consolidated
financial statements for a further discussion.
STOCK SPLIT
On October 16, 1995, the company's board of directors declared a
two-for-one stock split to be effected in the form of a 100 percent
stock dividend payable to shareholders of record at the close of
business November 15, 1995. The outstanding and weighted-average
number of shares of common stock and per-share data herein have
been adjusted to reflect the stock split. Treasury shares held by
the company were not split.
OPERATING RESULTS OF CONTINUING OPERATIONS AND NET INCOME--1995
Worldwide sales rose 18 percent in 1995, to nearly $6.8 billion.
The factor that contributed most to the increase was a 17 percent
rise in unit volume. Prices decreased 1 percent, while exchange
rates increased sales by 2 percent.
The company achieved sales increases both in the United States and
abroad. Sales in the United States were $3.8 billion, a 16 percent
increase. Sales outside the United States were $3.0 billion, an
increase of 21 percent from the previous year.
Pharmaceutical sales for the year increased approximately 19
percent, to approximately $6.3 billion, led by the antidepressant
Prozac (up 24 percent, to approximately $2.1 billion). Other
products contributing significantly to worldwide pharmaceutical
sales growth included the antiulcer drug Axid (up 13 percent, to
$548 million), the human insulin product Humulin (up 19 percent, to
$794 million), the human growth hormone Humatrope (up 19 percent,
to $269 million) and the oral antibiotic Lorabid (up 31 percent, to
$169 million). Sales also benefited from the inclusion of PCS
service revenue. All the company's therapeutic classes reflected
increased sales compared with 1994 levels. Pharmaceutical sales in
the United States increased 17 percent, to nearly $3.6 billion, in
1995 despite continued growth in product discounts and rebates
associated with the company's increased participation in managed-
care programs. The negative effects of federally mandated rebates
to the states on sales to Medicaid recipients declined in 1995, to
$143.1 million, a 14 percent decrease from 1994. This decline is
primarily the result of changes in the mix of products sold to
Medicaid recipients. The company anticipates product discounts and
rebates associated with managed care and Medicaid programs to
increase in 1996. Pharmaceutical sales outside the U.S. increased
22 percent, to nearly $2.7 billion, in 1995. The international
sales growth relates largely to volume growth resulting from the
company's continued globalization efforts and favorable exchange
rates.
U.S. sales of the oral antibiotic cefaclor, which were $227.5
million in 1995 (approximately 3 percent of the company's worldwide
sales), declined by 42 percent compared with 1994. This decline
was offset in part by sales of cefaclor outside the U.S., which
increased 18 percent, to $494.7 million. The decline in U.S.
cefaclor sales is primarily due to pricing pressures and strong
generic competition. Since May 1995, several companies have been
marketing generic forms of cefaclor capsules in the United States.
Quantities of the competing generic product to date have been
greater than anticipated by the company. The company expects that
generic cefaclor competition, together with strong competition from
other anti-infectives, will result in a continued decline in U.S.
cefaclor sales in 1996. Although the impact of this competition
cannot be predicted with certainty, it is not expected to have a
material adverse effect on the company's 1996 consolidated results
of operations.
Worldwide sales of Elanco Animal Health products increased 11
percent, to $512.4 million. Sales increased 6 percent in the
United States and 14 percent outside the U.S. compared with 1994.
The worldwide sales increase occurred across the entire product
line but was led primarily by TylanR, an antibiotic for swine and
cattle.
Cost of sales was 27.9 percent for 1995 compared with 29.4 percent
in 1994. This decrease is primarily attributable to productivity
improvements, increased production to meet larger product demands
and favorable exchange rates that were partially offset by the
inclusion of PCS.
Research and development expenses increased 24 percent in 1995.
Research expenditures continue to increase primarily due to the
growth of global clinical trials to support the company's extensive
pipeline of potential new products, including olanzapine and
raloxifene. The company anticipates that research and development
expenses will grow at a rate in excess of sales for at least the
next year as raloxifene moves into the final stages of clinical
research.
Marketing and administrative expenses increased 33 percent in 1995.
Marketing costs increased largely due to the continued efforts to
expand the company's products globally, particularly in emerging
markets. Administrative expenses increased primarily due to
charges for anticipated settlements of certain pending litigation,
the inclusion of PCS, increased compensation accruals due to the
company's performance-based bonus programs and development of
enhanced information technology capabilities.
The company implemented various restructuring and streamlining
initiatives and strategic actions in both 1993 and 1992. These
strategic actions were taken largely in response to the changing
business environment in which the company operates and were
designed to enhance the company's core competencies, enable the
company to deliver more clinical and economic value to its
customers worldwide, streamline global manufacturing operations and
improve the company's competitiveness. See Note 3 to the
consolidated financial statements for a further discussion. Of the
1993 and 1992 restructuring charges, approximately $51 million and
$110 million was paid in cash in 1995 and 1994, respectively.
Charges yet to be paid in cash total approximately $253 million and
are expected to be funded from operations primarily over the next
few years.
Interest expense increased in 1995, to $286.3 million, due to
increased debt levels associated with the purchase of PCS. Net
other income of $70.1 million for 1995 was $61.8 million lower than
in 1994 due primarily to the amortization of goodwill related to
the PCS acquisition of approximately $100 million. The goodwill
amortization was partially offset by nonrecurring income from the
sale of the U.S. marketing rights to certain products and income
received under a development contract.
The effective tax rate for 1995 was 26 percent compared with 30.2
percent in 1994. The 1995 tax rate had been forecasted to be 29
percent; however, after confirmation in the fourth quarter of
evolving long-term operating and tax trends outside the United
States, confidence in the sustainability of a lower level of
taxation resulted in an effective tax rate for the year of 26
percent. The decline is primarily the result of changes in the mix
of earnings between jurisdictions having lower tax rates compared
with those having higher rates and the effectiveness of various
tax-planning strategies. The full-year impact of the tax rate
reduction was recognized in the fourth quarter, resulting in a
benefit of $42.1 million in fourth-quarter income from continuing
operations and net income. The company expects current tax
strategies will allow its 1996 effective tax rate to remain
approximately the same as the 1995 rate.
For 1995, increased sales-related gross margins and the favorable
impact of the reduced estimated tax rate were partially offset by
the growth in operating expenses, including PCS and the impact of
PCS-acquisition-related expenses, resulting in a 10 percent
increase in income from continuing operations and a 12 percent
increase in earnings per share from continuing operations, to $1.3
billion and $2.30, respectively. The percentage increase would
have been lower if not for the special charges of $66 million
incurred in 1994 relating to a voluntary antibiotic recall and a
charge of $58.4 million for acquired research associated with the
acquisition of Sphinx Pharmaceuticals Corporation.
Net income and earnings per share increased $1.0 billion and $1.81,
respectively, in 1995 compared with 1994. Net income was
significantly affected by the net gain of $921.5 million realized
from the company's divestiture of its MDD businesses, primarily
Guidant.
For the fourth quarter, in addition to the previously noted benefit
from the reduced effective tax rate, earnings per share from
continuing operations of $.57 and net income per share of $.63
were favorably affected by the reduced number of shares outstanding
as a consequence of the Guidant splitoff. The impact of the
reduced shares outstanding was $.03 and $.04 on earnings per share
from continuing operations and net income, respectively. The
impact of the reduced number of shares outstanding on the annual
per-share amounts was not material.
In the United States, significant health-care-reform legislation at
the federal level does not appear likely in the near term.
However, various reform measures are currently being debated in a
number of states. Outside the United States, changes in health
care delivery and pharmaceutical reimbursement policies are
occurring to varying degrees. It is difficult to predict the
impact these changes will have on the industry or the company. As
previously noted, the company continues to position itself to be
responsive to these changes.
OPERATING RESULTS OF CONTINUING OPERATIONS AND NET INCOME -- 1994
Worldwide sales rose 10 percent in 1994, to $5.7 billion. The
factor that contributed most to the increase was an 11 percent rise
in unit volume. Price declines reduced sales by 2 percent, while
exchange rates increased sales by 1 percent. Sales in the United
States were $3.3 billion, a 6 percent increase. Sales outside the
United States were $2.4 billion, an increase of 16 percent from
1993.
Pharmaceutical sales for 1994 increased approximately 10 percent,
to $5.2 billion, led by Prozac (up 39 percent, to approximately
$1.7 billion). Other products contributing significantly to
worldwide pharmaceutical sales growth included Axid, Humulin,
Humatrope and Lorabid. Sales also benefited slightly from the
inclusion of PCS. Sales of central-nervous-system, diabetes-care
and gastrointestinal products, as therapeutic classes, increased
from 1993 levels. However, sales of anti-infectives decreased as
international sales growth was offset by a decline in the U.S. In
addition, U.S. sales of DobutrexR declined approximately 91 percent
compared with 1993 as a result of the product's patent expiration
in October 1993. U.S. pharmaceutical sales increased 6 percent, to
nearly $3.1 billion, in 1994 despite the growth in product
discounts and rebates associated with the company's increased
participation in managed-care programs and the negative effects of
federally mandated rebates to the states on sales to Medicaid
recipients. For 1994, Medicaid rebates totaled $166 million, a 6
percent increase over 1993. Pharmaceutical sales outside the U.S.
increased 17 percent, to nearly $2.2 billion, in 1994.
Contributing substantially to the international sales growth were
strong results in emerging markets, including Eastern Europe, Asia
and Latin America.
Sales of the oral antibiotic Ceclor in the United States, which
accounted for approximately 7 percent of the company's worldwide
sales in 1994, declined in both 1993 and 1994 primarily as a result
of intense competition from other anti-infective products.
Worldwide sales of Elanco Animal Health products increased 6
percent, to $464 million. Sales increased 1 percent in the United
States and 9 percent outside the U.S. compared with 1993. The
worldwide sales increase was led by Tylan, an antibiotic for swine
and cattle.
Manufacturing costs of products sold increased in 1994, to 29.4
percent of sales, from 27.9 percent of sales in 1993. The increase
is due primarily to a decision in early 1994 to reduce certain in-
process inventory levels, which resulted in greater amounts of
overhead costs being charged against income. This increase was
partially offset by a favorable product mix and continued reduction
in spending.
Research and development expenses increased 11 percent in 1994,
largely due to the growth of global clinical trials to support the
company's extensive pipeline of potential new products. See Note 2
to the consolidated financial statements for a discussion of
acquired research.
Marketing and administrative expenses increased 5 percent in 1994.
Marketing costs increased largely due to the continued expansion of
sales forces in emerging international markets. Administrative
expenses reflected a decrease compared with 1993 due in part to the
impact of special charges taken as part of the 1993 restructuring.
This decrease was offset in part by increased legal expenses
associated with litigation resolved during the year.
In the first half of 1994, the company incurred $66 million of
pretax charges associated with the March 31 voluntary recall of
three of the company's liquid oral antibiotics. The recall was
made after four instances were reported of small plastic caps being
found in the antibiotics. Shipments of these products were resumed
during the second and third quarters.
Interest expense for 1994 reflected an increase compared with 1993
of approximately $33 million, or 47 percent. The increased
interest expense was the result of higher debt levels, as a
consequence of the PCS acquisition and borrowings made by Guidant
as part of the company's divestiture strategy. Net other income
for 1994 increased $29 million, or 28 percent, compared with 1993
primarily due to increased interest and joint venture income,
offset in part by the amortization of goodwill from the acquisition
of PCS.
The effective tax rate for 1994 was 30.2 percent compared with 29.9
percent in 1993. This increase was due largely to the impact of
the Omnibus Budget Reconciliation Act (OBRA) of 1993, which reduced
the tax benefit from operations in Puerto Rico.
Net income and earnings per share were $1.3 billion and $2.22,
respectively, for 1994. These amounts reflect substantial
increases over 1993 due to both the negative impact on 1993
operations of the company's 1993 restructuring and special charges
and the continued growth of the company's pharmaceutical and animal
health businesses in 1994. This growth was partially offset by the
impact of increased interest expense related to the Guidant debt
and the debt used to finance the PCS acquisition, amortization of
goodwill associated with the PCS acquisition, the product recall
and the acquired research related to the Sphinx acquisition.
FINANCIAL CONDITION
The company maintained a sound financial position in 1995. The
cash generated from operations provided the resources to fund
capital expenditures, dividends and debt service. As of December
31, 1995, cash, cash equivalents and short-term investments totaled
$1.1 billion compared with $746.7 million at December 31, 1994.
Total debt at December 31, 1995, was $4.5 billion, a decrease of
$348.5 million from the prior year. The decrease in debt is
primarily due to the splitoff of Guidant. Short-term debt
aggregating $1.9 billion is primarily in the form of commercial
paper. The company believes that cash generated from operations
will be sufficient to fund essentially all the company's operating
needs, including debt service, capital expenditures and dividends
in 1996.
In 1994, the company incurred additional debt to finance the
acquisition of PCS and as part of the overall Guidant divestiture
strategy. As a consequence of the additional debt and heightened
competition for the antibiotic Ceclor, the company's long-term debt
rating was lowered from AAA to AA by Standard & Poor's in October
1994 and from Aa1 to Aa3 by Moody's in November 1994. Commercial
paper ratings of A1+ by Standard & Poor's and Prime-1 by Moody's
were affirmed. These ratings were reaffirmed in 1995. Maintenance
of these ratings in the future will depend largely on continued
strong financial performance and reductions of existing debt
levels.
Since the date of the PCS acquisition, the company has replaced
$1.8 billion of the commercial paper used to finance the
acquisition with fixed-rate debt with maturities ranging from 5 to
40 years, including the January 1996 issuance of 20 and 40 year
fixed-rate notes aggregating $500 million. See Note 7 to the
consolidated financial statements for additional information.
The company believes that amounts available through existing
commercial paper programs should be adequate to fund maturities of
short-term borrowings. The outstanding commercial paper is also
backed up by $3.0 billion of committed bank credit facilities.
The company conducts its business in various foreign currencies
and, as a result, is subject to the exposures that arise from
foreign exchange rate movements. The company's hedging activities,
all of which are for "purposes other than trading" (as defined by
Statement of Financial Accounting Standards No. 119), are initiated
within the guidelines of documented corporate risk-management
policies and do not create additional risk because gains and losses
on these instruments generally offset losses and gains on the
assets, liabilities and transactions being hedged.
The company uses foreign currency forward contracts, currency swaps
and option contracts to reduce the effect of fluctuating foreign
currencies. Instruments related to transactional exposures are
carried in the financial statements at current rates, with rate
changes reflected directly in income. Gains and losses on
instruments designed to hedge anticipated foreign currency
transactions are deferred and recognized in the same period as the
hedged transactions. Further, interest rate swap agreements are
used to reduce the impact of interest rate changes on net income.
In 1995, the impact of the company's risk-management strategies was
not material to the results of operations.
Capital expenditures of $551.3 million during 1995 were $25.2
million less than in 1994, as new manufacturing, development,
research and administrative facilities construction neared
completion. The company expects near-term capital expenditures to
decline slightly from 1995 levels. Sufficient cash flows exist to
meet these near-term requirements.
The company is a 40 percent partner in DowElanco, a global
agricultural products joint venture, with The Dow Chemical Company.
The company holds a put option, which became exercisable after
October 31, 1994, which requires Dow to purchase the company's
interest in DowElanco at specified amounts based largely on fair
market value. The company did not exercise its put option in 1995.
Common stock held in treasury increased to $1.6 billion at December
31, 1995. The increase was largely due to the distribution of the
company's remaining 80 percent interest in Guidant through the
splitoff. Pursuant to the splitoff, 16,504,298 shares (expressed
on a pre-stock-split basis) of the company's common stock were
exchanged for Guidant shares, resulting in the increase in the
company's treasury stock and corresponding decrease in shares
outstanding.
Dividends of $1.31 per share were paid in 1995, an increase of
approximately 5 percent from the $1.25 per share paid in 1994. In
the fourth quarter, the quarterly dividend was increased $.02 per
share (6 percent). This increase, the second in 1995, was nearly
twice the previous dividend increase. The 1994 dividend reflected
a 3 percent increase from the $1.21 per share paid in 1993. The
year 1995 was the 111th consecutive year that the company made
dividend payments and the 28th consecutive year in which dividends
have been increased.
ENVIRONMENTAL AND LEGAL MATTERS
As with other industrial enterprises, the company's operations are
subject to complex and changing federal, state, and local
environmental laws and regulations, which will continue to require
capital investment and operational expenses. The company also has
been designated a potentially responsible party under the
Comprehensive Environmental Response, Compensation, and Liability
Act, commonly known as Superfund, with respect to approximately 10
sites with which the company had varying degrees of involvement.
Further, the company continues remediation of certain of its own
properties consistent with current environmental practices. The
company has accrued for estimated Superfund costs and remediation
of its own properties, taking into account, as applicable,
available information regarding site conditions, potential cleanup
methods, estimated costs and the extent to which other parties can
be expected to contribute to those costs. In addition, the company
has accrued for certain other environmental matters.
During 1995, the company continued to be named as a defendant in
lawsuits involving Prozac. However, the number of new case filings
in 1995 and the number of pending cases declined significantly from
1994 levels.
The company has been named, together with numerous other U.S.
prescription drug manufacturers, as a defendant in a large number
of related actions in federal courts and the courts of four states
brought by retail pharmacies alleging violations of federal and
state antitrust and pricing laws. The federal suits include a
class action on behalf of the majority of U.S. retail pharmacies.
The class plaintiffs allege an industrywide agreement to deny
favorable prices on prescription drugs to retail pharmacies that
manufacturers grant to managed-care organizations and certain other
purchasers. Other related suits, brought by several thousand
pharmacies, involve claims of price discrimination under the
federal Robinson-Patman Act or other pricing laws. In addition,
claims have been brought on behalf of consumers of prescription
drugs in eight states. The company and 11 other manufacturers have
agreed to settle the federal class action case. The settlement
amount, which is not material, was accrued in the fourth quarter of
1995. The settlement is subject to approval of the district court.
In the federal Robinson-Patman Act cases, the court in the Northern
District of Illinois has designated certain plaintiffs and
defendants named in the individual suits to participate in an
initial trial or trials of the plaintiffs' Robinson-Patman Act
claims. Robinson-Patman claims asserted in suits filed against
nondesignated defendants, including the company, are stayed.
While it is not possible to predict or determine the outcome of the
product liability, antitrust or other legal actions brought against
the company or the ultimate cost of environmental matters, the
company believes the costs associated with all such matters will
not have a material adverse effect on its consolidated financial
position or liquidity but could possibly be material to the
consolidated results of operations in any one accounting period.
For additional information on litigation and environmental matters,
see Note 12 to the consolidated financial statements.
1995 Financial Highlights
ELI LILLY AND COMPANY AND SUBSIDIARIES
(Dollars in millions, except per-share data)
December 31 1995 1994 Change
-----------------------------------------------------------------
Net sales.......................... $6,763.8 $5,711.6 18%
Research and development expenses.. 1,042.3 838.7 24%
Income from continuing operations.. 1,306.6 1,185.1 10%
Net income......................... 2,290.9 1,286.1 78%
Earnings per share:
Income from continuing operations $2.30 $2.05 12%
Net income....................... 4.03 2.22 82%
Dividends paid per share........... 1.31 1.25 5%
Capital expenditures............... $551.3 $576.5 (4)%
Return on shareholders' equity..... 42.5% 25.9%
Return on assets................... 15.6 11.8
Income from continuing operations
as a percent of sales.............. 19.3 20.7
Results of operations of the Medical Devices and Diagnostics
(MDD) Division have been reflected as "discontinued operations"
and are excluded from consolidated net sales and operating
expenses. Net income for 1995 includes a net gain on the
divestiture of MDD. Amounts for 1994 reflect the impact of
acquired research and special charges. See Notes 2, 3 and 4 to
the consolidated financial statements.
Per-share data for both years reflect the two-for-one stock
split in 1995. See Note 9 to the consolidated financial
statements.
Consolidated Statements of Income
ELI LILLY AND COMPANY AND SUBSIDIARIES
(Dollars in millions, except per-share data)
Year Ended December 31 1995 1994 1993
-------------------------------------------------------------------
Net sales...................... $6,763.8 $5,711.6 $5,198.5
Cost of sales.................. 1,885.7 1,679.7 1,448.0
Research and development....... 1,042.3 838.7 755.0
Acquired research (Note 2)..... - 58.4 -
Marketing and administrative... 1,854.0 1,398.3 1,332.4
Restructuring and special charges
(Note 3).................... - 66.0 1,032.6
Interest expense............... 286.3 103.8 70.6
Other income--net.............. (70.1) (131.9) (102.9)
------- ------ ------
4,998.2 4,013.0 4,535.7
------- ------- -------
Income from continuing operations
before income taxes and cumulative
effect of change in accounting
principle...................... 1,765.6 1,698.6 662.8
Income taxes (Note 10)......... 459.0 513.5 198.0
------- ------- -------
Income from continuing operations
before cumulative effect of change in
accounting principle........... 1,306.6 1,185.1 464.8
Discontinued operations, net of tax
(Note 4)...................... 984.3 101.0 26.3
------- ------- -------
Income before cumulative effect of
change in accounting principle... 2,290.9 1,286.1 491.1
Cumulative effect of change in
accounting principle - net of tax
(Note 5)........................ - - (10.9)
------- ------ ------
Net income....................... $2,290.9 $1,286.1 $480.2
======= ======= =====
Earnings per share:
Income from continuing operations
before cumulative effect of
change in accounting principle $2.30 $2.05 $ .79
Discontinued operations........ 1.73 .17 .05
Cumulative effect of change in
accounting principle........ - - (.02)
---- ---- ----
Net income..................... $4.03 $2.22 $ .82
==== ==== ====
See notes to consolidated financial statements.
Consolidated Balance Sheets
ELI LILLY AND COMPANY AND SUBSIDIARIES
(Dollars in millions)
December 31 1995 1994
-------------------------------------------------------------
Assets
Current Assets
Cash and cash equivalents.......... $ 999.5 $ 536.9
Short-term investments............. 84.6 209.8
Accounts receivable, net of allowances of
$55.1 (1995) and $46.6 (1994).... 1,520.5 1,550.2
Other receivables.................. 287.9 284.4
Inventories (Note 1)............... 839.6 968.9
Deferred income taxes (Note 10).... 259.2 245.0
Prepaid expenses................... 147.3 167.1
------- ------
Total current assets............ 4,138.6 3,962.3
Other Assets
Prepaid retirement (Note 11)....... 484.2 411.9
Investments (Note 6)............... 573.8 464.1
Goodwill and other intangibles, net of
allowances for amortization of $192.2
(1995) and $326.2 (1994) (Note 2) 4,105.2 4,411.5
Sundry................................... 871.4 846.1
------- -------
6,034.6 6,133.6
Property and Equipment (Note 1) 4,239.3 4,411.5
------- -------
$14,412.5 $14,507.4
======== ========
Consolidated Balance Sheets
ELI LILLY AND COMPANY AND SUBSIDIARIES
(Dollars in millions)
December 31 1995 1994
----------------------------------------------------------------
Liabilities and Shareholders' Equity
Current Liabilities
Short-term borrowings (Note 7) $1,908.8 $2,724.4
Accounts payable 1,018.0 878.2
Employee compensation 316.0 304.6
Dividends payable 189.1 188.8
Income taxes payable (Note 10) 660.5 508.4
Other liabilities 874.6 1,065.1
------- -------
Total current liabilities 4,967.0 5,669.5
Other Liabilities
Long-term debt (Note 7) 2,592.9 2,125.8
Deferred income taxes (Note 10) 295.5 188.9
Retiree medical benefit obligation
(Note 11) 147.8 170.5
Other noncurrent liabilities 976.7 997.1
------- -------
4,012.9 3,482.3
Commitments and contingencies (Note 12) - -
Shareholders' Equity (Notes 8 and 9)
Common stock--no par value
Authorized shares: 800,000,000
Issued shares: 568,902,054 355.6 183.0
Additional paid-in capital 418.3 421.7
Retained earnings 6,484.3 5,062.1
Deferred costs--ESOP (199.5) (218.2)
Currency translation adjustments (0.6) (38.0)
------- -------
7,058.1 5,410.6
Less cost of common stock in treasury:
1995 -- 18,149,494 shares
1994 -- 871,514 shares 1,625.5 55.0
-------- -------
5,432.6 5,355.6
-------- -------
$14,412.5 $14,507.4
======== ========
See notes to consolidated financial statements.
Consolidated Statements of Cash Flows
ELI LILLY AND COMPANY AND SUBSIDIARIES
(Dollars in millions)
Year Ended December 31 1995 1994 1993
--------------------------------------------------------------------
Cash Flows From Operating Activities
Net income $2,290.9 $1,286.1 $ 480.2
Adjustments To Reconcile Net Income to
Cash Flows From Operating Activities
Net gain on disposition of
discontinued operations (921.5) - -
Depreciation and amortization 553.7 432.2 398.3
Change in deferred taxes 144.0 172.2 (231.6)
Restructuring and special charges-
-net of payments - - 1,041.3
Cumulative effect of change in
accounting principle - - 10.9
Other noncash expense (income)--net (9.8) 63.1 (53.1)
------- ------- -------
2,057.3 1,953.6 1,646.0
Changes in operating assets and liabilities:
Receivables--increase (189.3) (322.9) (32.1)
Inventories--(increase) decrease (22.1) 107.1 (192.3)
Other assets--increase (114.5) (130.6) (104.5)
Accounts payable and other
liabilities--increase (decrease) 93.2 (74.9) 199.8
------- ------- -------
(232.7) (421.3) (129.1)
Net Cash From Operating Activities 1,824.6 1,532.3 1,516.9
Cash Flows From Investing Activities
Acquisitions (36.8) (4,050.8) (56.1)
Additions to property and equipment (551.3) (576.5) (633.5)
Disposals of property and equipment 21.5 58.7 5.4
Additions to other assets (54.1) (72.9) (70.1)
Reductions of investments 430.8 1,387.0 889.3
Additions to investments (372.9) (1,150.5)(1,001.7)
------ ------- ------
Net Cash Used for Investing Activities (562.8) (4,405.0) (866.7)
Cash Flows From Financing Activities
Dividends paid (747.2) (723.1) (708.4)
Proceeds from Guidant initial public
offering - 192.5 -
Purchase of common stock and other
capital transactions (156.0) (111.0) (25.8)
Issuance under stock plans 54.7 50.5 19.8
Increase (decrease) in short-term
borrowings (967.7) 2,126.1 (152.7)
Additions to long-term debt 1,019.5 1,478.1 383.8
Reductions of long-term debt (17.0) (175.8) (39.8)
------- ------- -------
Net Cash From (Used for) Financing
Activities (813.7) 2,837.3 (523.1)
Effect of exchange rate changes on cash 14.5 32.7 (19.9)
------- ------- -------
Net increase (decrease) in cash and
cash equivalents 462.6 (2.7) 107.2
Cash and cash equivalents at beginning
of year 536.9 539.6 432.4
------- ------- -------
Cash and cash equivalents at end of year $ 999.5 $ 536.9 $ 539.6
------- ------- -------
See notes to consolidated financial statements.
Segment Information
Industry Data (Dollars in millions) 1995 1994 1993
-----------------------------------------------------------------
Net sales--to unaffiliated customers
Life-sciences products and services
Central nervous system $2,266.4 $1,835.6 $1,393.6
Anti-infectives 1,673.9 1,634.4 1,731.4
Endocrine 1,179.1 1,006.1 885.3
Gastrointestinal 548.4 487.4 396.8
Animal health 512.4 463.6 439.1
Health care management 259.4 25.1 -
All other 324.2 259.4 352.3
------- ------- ------
Net sales $6,763.8 $5,711.6 $5,198.5
======= ======= =======
Life-sciences products and services include a broad range of
pharmaceuticals used for the treatment of human and animal
diseases and the company's health-care-management activities. The
largest category of the products is central-nervous-system agents,
which include Prozac, DarvonR and PermaxR. Anti-infectives
include Ceclor, Keflex, KefzolR, Lorabid, Nebcin R, TazidimeR and
Vancocin. Endocrine products consist primarily of Humatrope,
Humulin and IletinR. Other major groups are gastrointestinal, all
of which is Axid, and animal health products that include Tylan,
an antibiotic for promoting feed efficiency and growth in swine
and cattle; RumensinR, a nonhormonal cattle feed additive;
MicotilR, an antibiotic for bovine respiratory disease;
anticoccidial agents for use in broilers and layer replacements,
the largest of which is CobanR; and other products for livestock
and poultry. Health care management includes revenue from
pharmacy benefit management, such as pharmacy claims processing
and adjudication as well as physician-focused medical
communications networks, of which PCS is the largest component.
Major products in the all-other category include cardiovascular
therapy products, of which Dobutrex is the largest, and other
miscellaneous pharmaceutical products.
Most of the pharmaceutical products are distributed through
wholesalers that serve physicians, dentists, pharmacies and
hospitals. In 1995, the company's largest wholesaler accounted
for approximately 11 percent of consolidated net sales. Animal
health products are sold to wholesale distributors, retailers,
manufacturers and producers.
Geographic Information (Dollars in millions) 1995 1994 1993
----------------------------------------------------------------------
Net sales
United States
Sales to unaffiliated customers $3,812.9 $3,281.5 $3,101.5
Transfers to other geographic areas 485.5 405.2 394.6
------- ------- -------
4,298.4 3,686.7 3,496.1
Europe, Middle East and Japan
Sales to unaffiliated customers 2,193.8 1,765.3 1,526.4
Transfers to other geographic areas 336.9 269.0 218.5
------- ------ -------
2,530.7 2,034.3 1,744.9
Other
Sales to unaffiliated customers 757.1 664.8 570.6
Transfers to other geographic areas 13.8 11.3 3.9
----- ----- -----
770.9 676.1 574.5
Eliminations--transfers between
geographic areas (836.2) (685.5) (617.0)
------ ------ ------
$6,763.8 $5,711.6 $5,198.5
======= ======= =======
Income from continuing operations before
income taxes and cumulative effect of
change in accounting principle
United States $ 997.8 $1,067.0 $444.3
Europe, Middle East and Japan 697.1 554.2 158.0
Other 92.1 102.9 74.1
Eliminations and adjustments (21.4) (25.5) (13.6)
----- ----- -----
$1,765.6 $1,698.6 $662.8
======= ======= =====
Total assets
United States $11,321.8 $12,105.0 $7,187.8
Europe, Middle East and Japan 3,178.0 3,209.1 2,507.1
Other 527.0 505.3 382.5
Eliminations and adjustments (614.3) (1,312.0) (453.8)
------ ------- ------
$14,412.5 $14,507.4 $9,623.6
======== ======== =======
Transfers between geographic areas are made at prices that are
intended to reasonably approximate an arms-length value of the
products. Remittances to the United States are subject to various
regulations of the respective governments as well as to fluctuations
in exchange rates.
Selected Quarterly Data (unaudited)
ELI LILLY AND COMPANY AND SUBSIDIARIES
(Dollars in millions, except per-share data)
1995(1) Fourth(2) Third Second First
-------------------------------------------------------------------
Net sales $1,799.8 $1,631.9 $1,614.8 $1,717.3
Cost of sales 494.1 419.7 459.4 512.5
Operating expenses 850.9 704.7 696.8 643.9
Other loss - net (91.0) (70.2) (22.0) (33.0)
Income from:
Continuing operations 311.3 310.5 310.0 374.8
Discontinued operations 31.3 917.5 17.1 18.4
Net income 342.6 1,228.0 327.1 393.2
Earnings per share:
Continuing operations .57 .54 .54 .65
Discontinued operations .06 1.60 .03 .03
Net income .63 2.14 .57 .68
Dividends paid per share .3425 .3225 .3225 .3225
Common stock prices:
High 57.00 47.19 39.69 38.44
Low 44.31 37.56 34.63 31.25
1994(1) Fourth Third Second(3) First(3)
---------------------------------------------------------------------
Net sales $1,548.4 $1,507.3 $1,346.8 $1,309.1
Cost of sales 460.4 451.4 385.8 382.1
Operating expenses 667.0 579.9 532.8 457.3
Restructuring and special charge - - 10.0 56.0
Acquired research - 58.4 - -
Other income (loss) - net (42.5) 9.2 42.3 19.1
Income from:
Continuing operations 269.6 295.6 319.2 300.7
Discontinued operations 20.5 23.1 27.4 30.0
Net income 290.1 318.7 346.6 330.7
Earnings per share:
Continuing operations .47 .51 .55 .52
Discontinued operations .03 .04 .05 .05
Net income .50 .55 .60 .57
Dividends paid per share .3125 .3125 .3125 .3125
Common stock prices:
High 33.13 29.63 29.44 30.94
Low 28.69 23.63 23.56 24.25
(1)Per-share data and common stock prices for all periods reflect
the two-for-one stock split in 1995. See Note 9 to consolidated
financial statements.
(2)Fourth-quarter income from continuing operations includes a
benefit of $42.1 million ($.08 per share) resulting from a
decline in the 1995 effective tax rate from 29 percent to 26
percent. Also, see Note 4 to consolidated financial statements
for a discussion of the impact on earnings per share resulting
from the Guidant splitoff.
(3)Reflects the impact of special charges relating to the
voluntary recall of three antibiotic products. See Note 3 to
the consolidated financial statements.
The company's common stock is listed on the New York, Tokyo,
London and other stock exchanges.
Selected Financial Data (unaudited)
ELI LILLY AND COMPANY AND SUBSIDIARIES
(Dollars in millions, except per-share data)
1995 1994 1993 1992 1991
-------------------------------------------
Operations
Net sales $6,763.8 $5,711.6 $5,198.5 $4,963.1 $4,533.4
Research and development
expenses 1,042.3 838.7 755.0 731.0 590.5
Other costs and expenses 3,739.7 3,136.4 2,780.4 2,664.5 2,412.0
Restructuring and special
charges - 66.0 1,032.6 404.4 -
Income from continuing operations
before taxes and accounting
changes 1,765.6 1,698.6 662.8 1,193.5 1,626.3
Income taxes 459.0 513.5 198.0 351.0 460.2
Income from continuing
operations 1,306.6 1,185.1 464.8 842.5 1,166.1
Income (loss) from discontinued
operations 984.3 101.0 26.3 (14.9) 148.6
Net income 2,290.9 1,286.1 480.2 708.7 1,314.7
Income from continuing
operations as a percent
of sales 19.3% 20.7% 8.9% 17.0% 25.7%
Per-share data1:
Income from continuing
operations $2.30 $2.05 $ .79 $1.43 $2.00
Income (loss) from discontinued
operations 1.73 .17 .05 (.03) .25
Net income 4.03 2.22 .82 1.20 2.25
Dividends declared 1.33 1.26 1.22 1.128 1.025
Average number of shares
and share equivalents
(thousands)1 569,026 578,378 588,578 588,956 588,488
======= ======= ======= ======= =======
Financial Position
Current assets $4,138.6 $3,962.3 $3,697.1 $3,006.0 $2,939.3
Current liabilities 4,967.0 5,669.5 2,928.0 2,398.6 2,272.0
Property and equipment 4,239.3 4,411.5 4,200.2 4,072.1 3,782.5
Total assets 14,412.5 14,507.4 9,623.6 8,672.8 8,298.6
Long-term debt 2,592.9 2,125.8 835.2 582.3 395.5
Other noncurrent liabilities 1,420.0 1,356.5 1,291.6 799.8 665.0
Shareholders' equity 5,432.6 5,355.6 4,568.8 4,892.1 4,966.1
======= ======= ======= ======= =======
Supplementary Data2
Return on shareholders' equity 42.5% 25.9% 10.2% 14.4% 31.2%
Return on assets 15.6% 11.8% 5.2% 8.3% 17.2%
Capital expenditures $551.3 $576.5 $633.5 $912.9 $1,142.4
Depreciation and amortization 553.7 432.2 398.3 368.1 299.5
Effective tax rate 26.0% 30.2% 29.9% 29.4% 28.3%
Number of employees 26,800 24,900 24,900 24,500 23,600
Number of shareholders 52,600 55,900 59,300 53,900 46,000
====== ====== ====== ====== ======
1 Per-share data and average number of shares have been
adjusted for all years to reflect the two-for-one stock split
in 1995. Earnings per share for 1995 and 1994 are calculated
based on the weighted-average number of shares outstanding,
while prior years were calculated on a fully diluted basis
using average shares and share equivalents. See Note 1 to the
consolidated financial statements.
2 All supplementary financial data, other than the effective
tax rate, have been computed using net income. The effective
tax rate reflects continuing operations only. The number of
employees reflects employees of continuing operations only.
Notes to Consolidated Financial Statements
ELI LILLY AND COMPANY AND SUBSIDIARIES
(Dollars in millions, except per-share data)
Note 1: Summary of Significant Accounting Policies
Basis of Presentation: The accounts of all wholly owned and
majority-owned subsidiaries are included in the consolidated
financial statements. All intercompany balances and
transactions have been eliminated. The preparation of
financial statements in conformity with generally accepted
accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets,
liabilities, revenues, expenses and related disclosures at the
date of the financial statements and during the reporting
period. Actual results could differ from those estimates.
The number of shares of common stock and per-share data have
been restated for all periods presented to reflect the impact
of the company's stock split (see Note 9).
Cash Equivalents: The company considers all highly liquid
investments, generally with a maturity of three months or
less, to be cash equivalents. The cost of these investments
approximates fair value.
Inventories: The company states all its inventories at the
lower of cost or market. The company uses the last-in, first-
out (LIFO) method for substantially all its inventories
located in the continental United States, or approximately 54
percent of its total inventories. Other inventories are
valued by the first-in, first-out (FIFO) method. Inventories
at December 31 consisted of the following:
1995 1994
---- ----
Finished products $ 273.8 $ 288.0
Work in process 446.4 515.1
Raw materials and supplies 154.0 239.0
----- -------
874.2 1,042.1
Less reduction to LIFO cost 34.6 73.2
----- -------
$ 839.6 $ 968.9
===== =======
Investments: All short-term debt securities are classified as
held-to-maturity because the company has the positive intent
and ability to hold the securities to maturity. Held-to-
maturity securities are stated at amortized cost, adjusted for
amortization of premiums and accretion of discounts to
maturity. Substantially all long-term debt and marketable
equity securities are classified as available-for-sale at
December 31, 1995. Available-for-sale securities are carried
at fair value, with the unrealized gains and losses, net of
tax, reported in a separate component of shareholders' equity.
The company owns no investments that are considered to be
trading securities.
Intangible Assets: Intangible assets arising from
acquisitions and research alliances are amortized over their
estimated useful lives, ranging from 5 to 40 years, using the
straight-line method. Impairments are recognized in operating
results if a permanent decline in value occurs.
Property and Equipment: Property and equipment is stated on
the basis of cost. Provisions for depreciation of buildings
and equipment are computed generally by the straight-line method
at rates based on their estimated useful lives. At December
31, property and equipment consisted of the following:
1995 1994
---- ----
Land $ 136.1 $ 163.5
Buildings 1,925.7 2,040.0
Equipment 3,990.5 4,060.9
Construction in progress 776.0 762.0
------- -------
6,828.3 7,026.4
Less allowances for depreciation 2,589.0 2,614.9
------- -------
$4,239.3 $4,411.5
======= =======
Approximately $38.3 million, $25.4 million and $25.5 million
of interest costs were capitalized as part of property and
equipment in 1995, 1994 and 1993, respectively. The estimated
cost to complete significant construction projects in progress
at December 31, 1995, approximated $199.1 million. Total
rental expense for all leases related to continuing operations,
including contingent rentals (not material), amounted to
approximately $106.8 million for 1995, $81.8 million for 1994 and
$80.1 million for 1993. Capital leases included in property and
equipment in the consolidated balance sheets and future minimum
rental commitments are not material.
Income Taxes: Deferred taxes are recognized for the future
tax effects of temporary differences between financial and
income tax reporting based on enacted tax laws and rates.
Federal income taxes are provided on the portion of the income
of foreign subsidiaries that is expected to be remitted to the
United States and be taxable.
Earnings per Share: Earnings per share for 1995 and 1994 are
calculated based on the weighted-average number of outstanding
common shares. Earnings per share for 1993 is calculated on a
fully diluted basis based on the weighted-average number of
outstanding common shares and common share equivalents
(primarily stock options). Primary earnings per share has not
been presented for 1993 because it does not differ
significantly from the reported earnings per share computed on
a fully diluted basis. Earnings per share in 1995 and 1994
are not materially different from the amount calculated using
the method followed for 1993.
Note 2: Acquisitions
On December 18, 1995, the company acquired Integrated Medical
Systems, Inc. (IMS), a company that develops and operates
physician-focused medical communications networks. The
purchase price was approximately $93 million, consisting of
cash and redeemable securities. Substantially all the
purchase price was allocated to goodwill and other intangibles
and will be amortized over 10 years.
On November 21, 1994, the company purchased PCS Health
Systems, Inc. (PCS), McKesson Corporation's pharmaceutical-
benefits-management business, for approximately $4.1 billion.
Substantially all the purchase price was allocated to
goodwill, which is being amortized over 40 years.
The acquisition was structured in the form of a tender offer
for all McKesson's common stock. Immediately prior to the
tender offer, McKesson spun off to its shareholders all its
businesses other than PCS. In connection with the spinoff,
the newly created corporation ("New McKesson") assumed all PCS
liabilities not related to the purchased business, including
approximately $239 million of long-term notes and debentures.
New McKesson has indemnified the company with respect to these
liabilities and has agreed that it will, if the company so
requests, seek consents from the debt holders to release the
company from its obligations thereunder. Pending repayment of
the debt or receipt of releases from the debt holders, the
company remains a co-obligor with New McKesson.
The results of operations of PCS from the date of acquisition
are included in the company's consolidated financial
statements. The following unaudited pro forma summary
reflects the company's consolidated results from continuing
operations as if PCS had been acquired as of the beginning of
1993. This summary includes the impact of adjustments for the
amortization of goodwill associated with the acquisition and
an increase in interest expense resulting from the issuance of
debt to finance the acquisition. The pro forma results are
not necessarily indicative of what actually would have
occurred if the acquisition had been in effect for the entire
year, nor are they intended to be a projection of future
results.
Year ended December 31 1994 1993
--------------------
Net sales $5,890.3 $5,372.0
Income from continuing operations
before accounting change 989.2 246.8
Earnings per share from continuing operations $ 1.71 $ .42
On September 9, 1994, the company acquired Sphinx
Pharmaceuticals Corporation, a company engaging in drug
discovery and development by generating combinatorial
chemistry libraries of small-molecule compounds and high-
throughput screening against biological targets central to
human diseases. The purchase price was approximately $80
million, of which $58.4 million was allocated to in-process
research and development projects, based on an independent
valuation. The company determined that the feasibility of the
acquired research had not yet been established and that the
technology had no alternative future use. Accordingly, this
acquired research was charged to expense in 1994.
Note 3: Restructuring and Special Charges
In 1994, the company incurred $66 million of pretax charges
associated with a voluntary recall of three of its liquid oral
antibiotics. The recall was made after four instances were
reported of small plastic caps being found in the antibiotics.
Shipments of all three products were resumed during 1994.
In both 1993 and 1992, the company announced major actions
designed to enhance the company's competitiveness in the
changing health care environment, reduce expenses and improve
efficiencies. As a result of these actions, the company
recognized restructuring and special charges relating to
continuing operations of $1,032.6 million and $404.4 million
for 1993 and 1992, respectively. Restructuring costs include
those amounts that arose as a direct result of management's
commitment to revised strategic actions. Special charges
represent unusual, generally nonrecurring, expense items.
Significant components of these charges and their status at
December 31, 1994 and 1995, respectively, are summarized as
follows:
Original
Charges 1994 1995
----------------------------
1993
----
Work force reductions $ 534.5 $ 52.5 $ 37.7
Manufacturing consolidations
and other closings 204.3 136.1 125.2
Pharmaceutical streamlining 35.3 23.8 6.3
Asset write-downs, legal
accruals and other 258.5 39.9 30.2
------ ----- -----
Total - continuing $1,032.6 $252.3 $199.4
------- ----- -----
1992
----
Global manufacturing strategy $ 218.9 $108.4 $ 87.3
Legal, environmental,
asbestos abatement 139.4 66.8 65.4
Research investment expense 46.1 - -
----- ----- -----
Total - continuing operations $ 404.4 $175.2 $152.7
------- ----- -----
The 1993 restructuring actions consisted primarily of early-
retirement and other severance programs associated with work
force reductions, as well as streamlining core pharmaceutical
operations. In addition, restructuring actions in both 1993
and 1992 have resulted or will result in a consolidation of
certain manufacturing operations and changes in the nature
and/or location of certain manufacturing operations. Asset
write-downs reflected changes in pharmaceutical markets.
Special charges were established for patent and product
liability matters in both 1993 and 1992.
Note 4: Discontinued Operations
During 1995, the company completed the divestiture of the nine
Medical Devices and Diagnostics (MDD) Division businesses. In
1994, a separate company, Guidant Corporation (Guidant), was
formed to be the parent company of five of the MDD companies:
Advanced Cardiovascular Systems, Inc.; Cardiac Pacemakers,
Inc.; Devices for Vascular Intervention, Inc.; Heart Rhythm
Technologies, Inc.; and Origin Medsystems, Inc. In December
1994, Guidant sold approximately 20 percent of its common
stock in an initial public offering. In September 1995, the
company distributed its remaining 80 percent interest in
Guidant through a splitoff (an exchange offer pursuant to
which Lilly shareholders could exchange Lilly shares for
Guidant shares). Pursuant to the splitoff, 16,504,298 shares
of the company's common stock (expressed on a pre-stock-split
basis) were exchanged for the Guidant stock. The splitoff
resulted in a tax-free gain calculated as the difference
between the market and carrying values of the shares of
Guidant common stock held by the company on the expiration
date of the exchange offer. Sales of three of the MDD
companies, IVAC Corporation, Pacific Biotech, Inc., and
Physio-Control Corporation, were completed during 1994 and
1995, and the divestiture of Hybritech Incorporated was
finalized in January 1996.
The income from discontinued operations appearing on the
consolidated statements of income represents the results of
the MDD division for the periods presented and the net gain
upon divestiture and is summarized as follows:
Year ended December 31
------------------------------
1995 1994 1993
---- ---- ----
Net sales $ 771.6 $1,289.2 $1,254.0
Cost of sales 258.2 536.6 511.3
Restructuring and special charges - - 140.1
Other operating expenses 356.8 561.5 580.8
Income before tax 111.9 168.1 39.0
Income from operations, net of tax 62.8 101.0 26.3
Net gain on disposition, net of tax
($88.1 million) 921.5 - -
----- ----- -----
Discontinued operations $ 984.3 $ 101.0 $ 26.3
===== ===== =====
At December 31, 1994, net assets of discontinued operations
aggregated $441.7 million and were included in the
consolidated balance sheet. Due to the disposition, all
assets, liabilities and equity of the MDD businesses have been
removed from the company's balance sheet at December 31, 1995.
The shares of the company's common stock exchanged in the
splitoff resulted in a reduction in the average number of
shares outstanding used to calculate earnings per share. As a
consequence, earnings per share from continuing operations for
the fourth quarter and year were $.03 and $.04 higher,
respectively, than had the splitoff not occurred.
Note 5: Accounting Changes
In March 1995, Statement of Financial Accounting Standards
(SFAS) No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of," was
issued. The statement must be adopted by the company in the
first quarter of 1996. Under provisions of the statement,
impairments, measured using fair market value, are recognized
whenever events or changes in circumstances indicate that the
carrying amount of long-lived assets may not be recoverable
and the future undiscounted cash flows attributable to the
asset are less than its carrying value. The statement is not
expected to have a material impact on the company's results of
operations or financial position.
In October 1995, SFAS No. 123, "Stock Based Compensation," was
issued. This statement will require the company to choose
between two different methods of accounting for stock options.
The statement defines a fair- value-based method of accounting
for stock options but allows an entity to continue to measure
compensation cost for stock options using the accounting
prescribed by APB Opinion No. 25 (APB 25), "Accounting for
Stock Issued to Employees." Use of the APB 25 accounting
method results in no compensation cost being recognized if
options are granted at an exercise price at the current market
value of the stock. The company will continue to use the
intrinsic value method under APB 25 but will be required by
SFAS 123 to make pro forma disclosures of net income and
earnings per share as if the fair value method had been
applied in its 1996 financial statements.
Effective January 1, 1993, the company adopted SFAS No. 112,
"Employers' Accounting for Postemployment Benefits." SFAS 112
requires employers to recognize currently the obligation to
provide postemployment benefits for former or inactive
employees and others. The company's adoption of SFAS 112
resulted in a pretax charge of $17.3 million ($10.9 million
after tax; $.02 per share), relating primarily to disability
benefits. Prior to 1993, the company expensed these
obligations when paid.
Note 6: Financial Instruments
Risk-Management Instruments and Off-Balance-Sheet Risk
In the normal course of business, operations of the company are
exposed to continuing fluctuations in currency values and
interest rates. These fluctuations can vary the costs of
financing, investing and operating. The company addresses
these risks through a controlled program of risk management
that includes the use of derivative financial instruments. The
company's derivative activities, all of which are for purposes
other than trading, are initiated within the guidelines of
documented corporate risk-management policies and do not create
risk because gains and losses on derivative contracts offset
losses and gains on the assets, liabilities and transactions
being hedged.
The notional amounts of derivatives summarized in the following
paragraphs do not represent amounts exchanged by the parties
and thus are not a measure of the exposure of the company
through its use of derivatives. The company is exposed to
credit-related losses in the event of nonperformance by
counterparties to financial instruments, but it does not expect
any counterparties to fail to meet their obligations given
their high credit ratings.
Foreign Exchange Risk Management: The company enters into
----------------------------------
foreign currency forward and option contracts to reduce the
effect of fluctuating currency exchange rates (principally
European currencies and the Japanese yen) on two types of
foreign currency exposures. Exposures arising from affiliate
foreign currency balances are managed principally through the
use of forward contracts. These contracts are marked to market
with gains and losses recognized currently in income to offset
the respective losses and gains recognized on the underlying
exposures. The company also enters into option contracts to
hedge anticipated foreign currency transactions, primarily
intercompany inventory purchases expected to occur within the
next year, and foreign currency forward contracts and currency
swaps to hedge firm commitments. Gains and losses on these
contracts that qualify as hedges are deferred and recognized as
an adjustment of the subsequent transaction when it occurs.
Forward and option contracts generally have maturities not
exceeding 12 months.
At December 31, the stated, or notional, amounts of the
company's outstanding foreign currency derivative financial
instruments were as follows:
1995 1994
---- ----
Forward exchange contracts $ 838.2 $ 1,138.1
Foreign currency options - purchased 415.2 98.6
Foreign currency options - issued - 62.6
Currency swaps - 20.4
Interest Rate Risk Management: See discussion on interest rate
-----------------------------
swaps in Note 7.
Concentrations of Credit Risk: Financial instruments that
------------------------------
potentially subject the company to credit risk consist
principally of trade receivables and interest-bearing
investments. Wholesale distributors of life-sciences products
and managed-care organizations account for a substantial
portion of trade receivables; collateral is generally not
required. The risk associated with this concentration is
limited due to the large number of wholesalers and their
geographic dispersion.
The company places substantially all its interest-bearing
investments with major financial institutions, in U.S.
Government securities or with top-rated corporate issuers. In
accordance with documented corporate policies, the company
limits the amount of credit exposure to any one financial
institution.
Fair Value of Financial Instruments
A summary of the company's outstanding financial instruments
at December 31 follows. As summarized, "cost" relates to
investments while "carrying amount" relates to long-term debt.
1995 1994
-------------------------------------------
Cost/Carrying Fair Cost/Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
Short-term investments:
Debt securities $ 84.6 $ 85.0 $191.4 $195.1
Marketable equity - - 19.1 18.4
Noncurrent investments:
Marketable equity 66.1 140.3 80.5 74.9
Debt securities 143.0 148.0 163.0 159.7
Nonmarketable equity 34.5 35.3 30.0 31.3
Long-term debt 2,734.3 2,885.6 2,206.8 2,147.1
The company determines fair values based on quoted market
values where available or discounted cash flow analyses
(principally long-term debt). The fair values of
nonmarketable equity securities, which represent either equity
investments in start-up technology companies or partnerships
that invest in start-up technology companies, are estimated
based on the fair value information provided by these
ventures. The fair value and carrying amount of risk-
management instruments were not material at December 31, 1995
or 1994.
At December 31, 1995 and 1994, the gross unrealized holding
gains on available-for-sale securities were $88.2 million and
$22.2 million, respectively, and the gross unrealized holding
losses were $8.2 million and $27.0 million, respectively.
Substantially all these gains and losses are associated with
the marketable equity securities. The proceeds from sales of
available-for-sale securities totaled $46.0 million and $24.3
million in 1995 and 1994, respectively. Realized gains and
losses and purchases of available-for-sale securities were not
significant in 1995 and 1994. The net adjustment to
unrealized gains and losses on available-for-sale securities
increased (reduced) shareholders' equity by $52.9 million and
($13.7 million) in 1995 and 1994, respectively.
The company is a limited partner in certain affordable housing
investments that generate benefits in the form of tax credits.
The determination of fair value of these investments is not
practicable. The carrying value of such investments was
$250.2 million and $194.9 million as of December 31, 1995 and
1994, respectively.
Effective January 1, 1994, the company adopted Statement of
Financial Accounting Standards (SFAS) No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," which
requires designation of certain investments as either trading,
held-to-maturity or available-for-sale. As a consequence of
the adoption, all available-for-sale securities on hand at
January 1, 1994, were marked to market and the opening balance
of shareholders' equity was increased by $10.7 million (net of
$7.0 million in deferred income taxes) to reflect the net
unrealized holding gains on these securities at that date.
On November 15, 1995, the Financial Accounting Standards Board
staff issued a Special Report, "A Guide to Implementation of
Statement 115 on Accounting for Certain Investments in Debt
and Equity Securities." In accordance with provisions in that
Special Report, the company chose to reclassify certain
securities from held-to-maturity to available-for-sale. At
the date of transfer, the amortized cost of those securities
was $139.6 million and the net unrealized gain on those
securities was $5.0 million, which is included in
shareholders' equity.
Note 7: Borrowings
Long-term debt at December 31 consisted of the following:
1995 1994
---------------------
6.25 to 8.38 percent notes (due 1999-2006) $ 750.0 $ 750.0
7.13 percent notes (due 2025) 500.0 -
6.09 to 8.06 percent medium-term notes
(due 1996-1999) 185.8 210.8
5.50 to 8.38 percent Eurodollar bonds
(due 1998-2005) 500.0 150.0
8.18 percent ESOP debentures (due 2006) 128.8 143.7
6.07 to 6.47 percent Guidant notes (due 1996) - 473.0
Commercial paper to be refinanced as long-term 500.0 350.0
Other, including capitalized leases 211.0 140.8
------- -------
2,775.6 2,218.3
Less current portion 182.7 92.5
------- -------
$2,592.9 $2,125.8
======= =======
The company's acquisition of PCS (see Note 2) was financed
primarily through the issuance of $3.8 billion in commercial
paper. Through December 1995, the company had replaced $1.3
billion of the commercial paper with long-term debt, including
the 1995 issuance of $350 million of Eurobonds and $500
million of 30 year notes with a 7.9 percent weighted-average
effective interest rate. Further, in January 1996, the
company replaced another $500 million of the commercial paper
through issuance of 20 and 40 year notes at 6.57 percent and
6.77 percent, respectively. Accordingly, this item has been
classified as long-term debt at December 31, 1995.
The company enters into interest rate swaps to lower funding
costs, to diversify sources of funding or to alter interest
rate exposures arising from mismatches between assets and
liabilities. The notional amounts of interest rate swaps
outstanding at December 31, 1995 and 1994, were $280 million
and $175 million, respectively. Substantially all the
interest rate swaps outstanding at December 31, 1995, were
closed out in January 1996.
The 8.18 percent Employee Stock Ownership Plan (ESOP)
debentures are obligations of the ESOP but are shown on the
consolidated balance sheet because they are guaranteed by the
company. The principal and interest on the debt will be
funded by contributions from the company and by dividends
received on certain shares held by the ESOP. Because of the
amortizing feature of the ESOP debt, bondholders will receive
both interest and principal payments each quarter.
The Guidant notes outstanding on December 31, 1994, were
retained by Guidant following the splitoff in September 1995
(see Note 4). The company is no longer a guarantor of any
Guidant obligations.
The aggregate amounts of maturities on long-term debt for the
next five years are as follows: 1996, $182.7 million; 1997,
$110.7 million; 1998, $173.1 million; 1999, $153.6 million;
and 2000, $216.9 million.
At December 31, 1995, short-term borrowings included $1,626.3
million of commercial paper and $99.8 million of notes payable
to banks. At December 31, 1994, commercial paper and notes
payable to banks totaled $2,364.9 million and $267.0 million,
respectively. The weighted-average interest rates on short-
term borrowings outstanding were 5.8 percent in 1995 and 6.0
percent in 1994. At December 31, 1995, unused committed lines
of credit totaled $3 billion. Compensating balances and
commitment fees are not material, and there are no conditions
that are probable of occurring under which the lines may be
withdrawn.
Cash payments of interest on borrowings totaled $271.7
million, $102.4 million and $63.7 million in 1995, 1994 and
1993, respectively.
Note 8: Stock Plans
Stock options and performance awards have been granted to
officers and other executive and key employees. Stock options
are granted at prices equal to 100 percent of the fair market
value at the dates of grant.
In October 1995, the company issued its second grant under the
GlobalShares program, under which essentially all employees
were given an option to buy 200 shares of the company's common
stock at a price equal to the fair market value at the date of
grant. Options to purchase approximately 5.2 million shares
were granted under the program.
Stock-option activity during 1995 and 1994 is summarized below:
Number of Shares
1995 1994
------------------------
Unexercised at January 1............ 31,081,360 28,903,636
Granted............................. 10,770,663 5,727,444
Exercised........................... (2,892,178) (2,583,370)
Terminated.......................... (1,343,050) (966,350)
---------- ----------
Unexercised at December 31 37,616,795 31,081,360
========== ==========
Exercisable at December 31 13,396,245 13,823,060
========== ==========
The per-share price range of unexercised options at December
31, 1995 and 1994, was $6.55 to $46.82 and $7.27 to $40.94,
respectively. Options were exercised at prices ranging from
$7.27 to $40.94 in 1995 ($4.57 to $23.53 in 1994). At
December 31, 1995, additional options, performance awards or
restricted stock grants may be granted under the 1994 Lilly
Stock Plan for not more than 7,366,003 shares (1994--
17,037,366 shares).
Note 9: Shareholders' Equity
Changes in the components of shareholders' equity were as follows:
Additional Deferred Common Stock in
Paid-in Retained Costs-- Treasury
---------------
Capital Earnings ESOP Shares Amount
-------- -------- -------- ---------------
Balance at January 1, 1993 $ 307.9 $4,743.1 $(263.9) 122,120 $ 7.8
Net income 480.2
Cash dividends declared
per share: $1.22 (715.7)
Purchase for treasury 550,000 29.8
Issuance of stock under employee
stock plans (16.3) (585,103) (32.5)
ESOP transactions 3.6 21.1
Other (0.6) (6.7) (27,740) (1.7)
------ ------ ------ ------ ----
Balance at December 31, 1993 294.6 4,500.9 (242.8) 59,277 3.4
Net income 1,286.1
Cash dividends declared
per share: $1.26 (728.6)
Purchase for treasury 1,990,000 115.0
Issuance of stock under
employee stock plans (12.0) (1,162,516) (62.5)
ESOP transactions (0.2) 24.6
Unrealized investment gains
and losses, net of tax (3.0)
Net impact of Guidant
public offering 139.9
Other (0.6) 6.7 (15,247) (0.9)
------ ---- ----- ------ ---
Balance at December 31, 1994 421.7 5,062.1 (218.2) 871,514 55.0
Net income 2,290.9
Cash dividends declared
per share: $1.33 (747.8)
Stock dividend declared (172.6)
Purchase for treasury 2,630,000 160.0
Increase in treasury shares
from Guidant exchange
transaction (Note 4) 10.9 16,504,298 1,533.6
Issuance of stock under
employee stock plans (24.1) (1,841,175) (122.0)
ESOP transactions 9.9 18.7
Unrealized investment gains
and losses, net of tax 52.9
Other (0.1) (1.2) (15,143) (1.1)
---- ---- ---- ------ ----
Balance at December 31, 1995 $418.3 $6,484.3 $(199.5) 18,149,494 $1,625.5
===== ======= ======= ========= =======
On October 16, 1995, the company's board of directors declared a
two-for-one stock split to be effected in the form of a 100
percent stock dividend payable to shareholders of record at the
close of business November 15, 1995. The outstanding and
weighted-average number of shares of common stock and per-share
data in these financial statements have been restated to reflect
the impact of the stock split for all years presented. The
company now has 568,902,054 issued shares of common stock without
par value, including 276,094,410 shares issued December 20, 1995,
as a result of the stock split. Treasury shares held by the
company were not split.
The company has an Employee Stock Ownership Plan (ESOP) as a
funding vehicle for the existing employee savings plan. The ESOP
used the proceeds of a loan from the company to purchase shares of
common stock from the treasury. In 1991, the ESOP issued $200
million of third-party debt, repayment of which was guaranteed by
the company (see Note 7). The proceeds were used to purchase
shares of the company's common stock on the open market. Shares
of common stock held by the ESOP will be allocated to
participating employees annually through 2006 as part of the
company's savings plan contribution. The fair value of shares
allocated each period is recognized as compensation expense.
The increase in paid-in capital during 1994 related to the Guidant
initial public offering reflects net proceeds of the offering
reduced by the resulting minority ownership interest in Guidant.
Generally, the assets and liabilities of foreign operations are
translated into U.S. dollars using the current exchange rate. For
those operations, changes in exchange rates generally do not
affect cash flows; therefore, resulting translation adjustments
are made to shareholders' equity rather than to income. Following
is an analysis of currency translation adjustments reflected in
shareholders' equity:
1995 1994 1993
----------------------
Balance at January 1 $(38.0) $(163.5) $(70.2)
Translation adjustments 37.4 125.5 (93.3)
----- ----- -----
Balance at December 31 $ (0.6) $ (38.0) $(163.5)
===== ===== =====
Under the terms of the company's Shareholder Rights Plan, all
shareholders of common stock received for each share owned a
preferred stock purchase right entitling them to purchase from
the company one four-hundredth of a share of Series A
Participating Preferred Stock at an exercise price of $81.25.
The rights are not exercisable until after the date on which the
company's right to redeem has expired. The company may redeem
the rights for $.0025 per right up to and including the 10th
business day after the date of a public announcement that a
person (the "Acquiring Person") has acquired ownership of stock
having 20 percent or more of the company's general voting power
(the "Stock Acquisition Date").
The plan provides that, if the company is acquired in a business
combination transaction at any time after a Stock Acquisition
Date, generally each holder of a right will be entitled to
purchase at the exercise price a number of the acquiring
company's shares having a market value of twice the exercise
price. The plan also provides that, in the event of certain
other business combinations, certain self-dealing transactions,
or the acquisition by a person of stock having 25 percent or more
of the company's general voting power, generally each holder of a
right will be entitled to purchase at the exercise price a number
of shares of the company's common stock having a market value of
twice the exercise price. Any rights beneficially owned by an
Acquiring Person shall not be entitled to the benefit of the
adjustments with respect to the number of shares described above.
The rights will expire on July 28, 1998, unless redeemed earlier
by the company.
Note 10: Income Taxes
Following is the composition of income taxes attributable to
continuing operations:
1995 1994 1993
---- ---- ----
Current:
Federal $ 177.0 $ 244.9 $ 296.5
Foreign 140.1 60.2 81.6
State 3.8 30.9 26.7
----- ----- -----
320.9 336.0 404.8
Deferred:
Federal 114.2 140.4 (81.9)
Foreign 1.9 1.9 (89.6)
State 22.0 35.2 (35.3)
---- ---- ----
138.1 177.5 (206.8)
----- ----- -----
Income taxes $ 459.0 $ 513.5 $ 198.0
===== ===== =====
Significant components of the company's deferred tax assets and
liabilities as of December 31 are as follows:
1995 1994
---- ----
Deferred tax assets:
Restructuring and special charges $ 164.7 $ 283.4
Compensation and benefits 148.4 154.2
Divestiture related 143.6 -
Litigation, environmental and asbestos 95.3 141.6
Inventory 90.5 77.6
Net operating losses of subsidiaries 63.9 69.4
Other 202.2 216.7
------ ------
908.6 942.9
Valuation allowances (85.9) (97.9)
------ ------
Total deferred tax assets 822.7 845.0
Deferred tax liabilities:
Property and equipment (519.7) (490.7)
Prepaid employee benefits (200.7) (181.4)
Other (77.0) (50.1)
------ ------
Total deferred tax liabilities (797.4) (722.2)
------ ------
Deferred tax assets--net $ 25.3 $ 122.8
====== ======
At December 31, 1995, the company had net operating loss
carryforwards for income tax purposes of $175 million, of which
$29 million will expire within five years. Approximately one-
third of the remaining carryforwards do not expire.
Unremitted earnings of foreign subsidiaries that have been, or
are intended to be, permanently reinvested for continued use in
foreign operations and which, if distributed, would result in
taxes at approximately the U.S. statutory rate, aggregated
$1,544 million at December 31, 1995 ($1,216 million at December
31, 1994). Cash payments of taxes totaled $449 million, $378
million and $455 million in 1995, 1994 and 1993, respectively.
Following is a reconciliation of the effective income tax rate
of the continuing operations:
1995 1994 1993
---- ---- ----
United States federal statutory tax rate 35.0% 35.0% 35.0%
Add (deduct):
State taxes, net of federal tax benefit .9 2.5 (.9)
Tax savings from operations in Puerto Rico (4.2) (2.1) (9.7)
General business credits (1.2) (0.5) (2.1)
Effect of international operations (5.7) (3.7) 1.9
Nondeductible goodwill amortization 2.1 0.3 .3
Nondeductible impact of restructuring - - 3.0
Sundry (.9) (1.3) 2.4
----- ---- ----
Effective income tax rate 26.0% 30.2% 29.9%
==== ==== ====
Note 11: Retirement Benefits
Pension Plans:
The company has noncontributory defined benefit retirement plans
that cover substantially all United States employees and a
majority of employees in other countries. Benefits under the
domestic plans are calculated by using one of several formulas.
These formulas are based on a combination of the following: (1)
years of service, (2) final average earnings, (3) primary social
security benefit and (4) age. The benefits for the company's
plans in countries other than the United States are based on
years of service and compensation.
The company's funding practice for all plans is consistent with
local governmental and tax funding regulations. Generally,
pension costs accrued are funded. Plan assets consist primarily
of equity and fixed income instruments.
Net pension expense/income for the company's retirement plans
included the following components related to continuing
operations:
1995 1994 1993
---- ---- ----
Service cost--benefits earned during the year $ 69.8 $ 69.3 $ 58.9
Interest cost on projected benefit obligations 160.2 156.3 124.6
Actual return on assets (434.8) (38.3) (276.4)
Net amortization and defferal 227.4 (164.3) 88.6
------ ------ ------
Net annual pension expense (income) $ 22.6 $ 23.0 $ (4.3)
====== ====== =====
The increase in the 1994 net annual pension expense was due
primarily to the decrease in the discount rate at December 31,
1993.
In addition to the net pension cost above, the 1993 restructuring
charges include curtailment losses and special termination costs
resulting from the early-retirement programs of $133.3 million
and $113.4 million, respectively.
The funded status and amounts recognized in the consolidated
balance sheets for the company's defined benefit retirement
plans at December 31 were as follows:
Plans in Which Plans in Which
Assets Exceed Accumulated Benefits
Accumulated Benefits Exceed Assets
1995 1994 1995 1994
----------------------------------------
Plan assets at fair value $2,374.4 $2,066.4 $ 4.2 $ -
Actuarial present value of
benefit obligations:
Vested benefits 1,682.3 1,511.5 119.2 88.5
Nonvested benefits 100.0 96.0 4.0 1.2
------- ------- ----- ----
Accumulated benefit obligation 1,782.3 1,607.5 123.2 89.7
Effect of projected future
salary increases 320.9 258.2 9.4 10.1
------- ------- ----- ----
Projected benefit obligation 2,103.2 1,865.7 132.6 99.8
------- ------- ----- -----
Funded status 271.2 200.7 (128.4) (99.8)
Unrecognized net (gain) loss 114.3 100.2 8.1 (8.5)
Unrecognized prior service cost 96.7 111.2 16.2 13.7
Unrecognized net obligation at
January 1, 1986 2.0 1.8 1.8 2.4
Additional minimum liability - - (20.1) -
------- ------- -------- -------
Prepaid (accrued) pension cost $ 484.2 $ 413.9 $ (122.4) $(92.2)
======= ======= ======= ======
The assumptions used to develop net periodic pension expense
from continuing operations and the actuarial present value of
projected benefit obligations are shown below:
(percents) 1995 1994 1993
---- ---- ----
Weighted-average discount rate 7.6 8.6 7.6
Rate of increase in future
compensation levels 4.5-9.5 4.5-9.5 4.5-9.5
Weighted-average expected long-term
rate of return on plan assets 10.5 10.9 11.0
The discount rate decrease at December 31, 1995, increased the
projected benefit obligation by approximately $231.6 million.
The company has defined contribution savings plans that cover
its eligible employees worldwide. The purpose of these defined
contribution plans is generally to provide additional financial
security during retirement by providing employees with an
incentive to make regular savings. Company contributions to
the plans are based on employee contributions and the level of
company match. Expenses attributable to continuing operations
under the plans totaled $38.3 million, $37.9 million and $24.7
million for the years 1995, 1994 and 1993, respectively.
Retiree Health Benefits:
The company's noncontributory defined benefit postretirement
plans provide health benefits for the majority of the United
States retirees and their eligible dependents. Certain of the
company's non-U.S. subsidiaries have similar plans for
retirees. Eligibility for these benefits is based upon
retirement from the company. An eligible employee's credited
service period begins when the combination of an employee's age
and years of service equals 60.
The company's funding practice for all plans is consistent with
local governmental and tax funding regulations. Plan assets
consist primarily of equity and fixed income instruments.
Net postretirement benefit expense from continuing operations
included the following components:
1995 1994 1993
---- ---- ----
Service cost--benefits earned during
the year $ 9.8 $ 11.4 $ 10.7
Interest cost on accumulated
postretirement benefit obligations 24.7 25.9 19.8
Actual return on assets (20.4) 1.1 (11.2)
Net amortization and deferral (4.9) (23.3) (10.2)
----- ----- -----
Net periodic postretirement benefit cost $ 9.2 $ 15.1 $ 9.1
===== ===== =====
In connection with the company's early-retirement programs in
1993, restructuring charges include curtailment and termination
costs relating to these plans of $52.4 million and $7.0
million, respectively.
The funded status and amounts recognized in the consolidated
balance sheets for the company's defined benefit postretirement
plans at December 31 were as follows:
1995 1994
---- ----
Accumulated postretirement benefit obligation:
Retirees $308.3 $231.5
Fully eligible active plan participants 26.5 19.4
Other active plan participants 59.8 53.7
---- -----
394.6 304.6
Plan assets at fair value 168.2 147.0
----- -----
Accumulated postretirement benefit
obligation in excess of plan assets 226.4 157.6
Unrecognized benefit of plan amendment 20.6 29.2
Unrecognized net loss (99.2) (13.9)
----- -----
Accrued postretirement benefit cost $147.8 $172.9
----- -----
The assumptions used to develop the net postretirement benefit
expense from continuing operations and the present value of the
accumulated postretirement benefit obligations are shown below:
(percents) 1995 1994 1993
---- ---- ----
Weighted-average discount rate 7.5 8.5 7.5
Expected long-term rate of return 10.5 11.0 11.0
Health care cost trend rate for
participants:
Under age 65 7.0 8.0 8.0
Over age 65 5.0 6.0 6.0
If these trend rates were to be increased by 1 percentage
point each future year, the December 31, 1995, accumulated
postretirement benefit obligation would increase by 11 percent
and the aggregate of the service and interest cost components
of 1995 annual expense from continuing operations would
increase by 14 percent. The decrease in the discount rate at
December 31, 1995, increased the accumulated postretirement
benefit obligation by approximately $36.3 million.
Note 12: Contingencies
The company has been named as a defendant in numerous product
liability lawsuits involving primarily two products,
diethylstilbestrol and Prozac. The company has accrued for
its estimated exposure, including costs of litigation, with
respect to all current product liability claims. In addition,
the company has accrued for certain future anticipated product
liability claims to the extent the company can formulate a
reasonable estimate of their costs. The company's estimates
of these expenses are based primarily on historical claims
experience and data regarding product usage. The company
expects the cash amounts related to the accruals to be paid
out over the next several years. The majority of costs
associated with defending and disposing of these suits are
covered by insurance. The company's estimate of insurance
recoverables is based on existing deductibles, coverage
limits, and the existing and projected future level of
insolvencies among its insurance carriers.
Under the Comprehensive Environmental Response, Compensation,
and Liability Act, commonly known as Superfund, the company
has been designated as one of several potentially responsible
parties with respect to certain sites. Under Superfund, each
responsible party may be jointly and severally liable for the
entire amount of the cleanup. The company also continues
remediation of certain of its own sites. The company has
accrued for estimated Superfund cleanup costs, remediation and
certain other environmental matters, taking into account, as
applicable, available information regarding site conditions,
potential cleanup methods, estimated costs and the extent to
which other parties can be expected to contribute to those
costs. The company has asserted its right to insurance
coverage for certain environmental liabilities and has
reserved its right to pursue claims for insurance with respect
to certain other environmental liabilities. However, because
of uncertainties with respect to the timing and ultimate
realization of those claims, the company has not recorded any
environmental insurance recoverables.
The company has been named, along with numerous other U.S.
prescription drug manufacturers, as a defendant in a large
number of related actions brought by retail pharmacies
alleging violations of federal and state antitrust and pricing
laws. The federal suits include a class action on behalf of
the majority of U.S. retail pharmacies alleging an
industrywide agreement to deny favorable prices to retail
pharmacies. The company and 11 other manufacturers have
agreed to settle the federal class action case. The
anticipated settlement amount was accrued in the fourth
quarter of 1995. The settlement is subject to approval of the
district court. Other related suits, brought by several
thousand pharmacies in federal court and courts in four
states, involve claims of price discrimination or claims under
other pricing laws. Additional cases have been brought on
behalf of consumers in eight states.
The environmental liabilities and litigation accruals have
been reflected in the company's consolidated balance sheet at
a gross amount of approximately $342 million. Estimated
insurance recoverables of approximately $140 million have been
reflected as assets in the consolidated balance sheet.
While it is not possible to predict or determine the outcome
of the product liability, antitrust or other legal actions
brought against the company or the ultimate cost of
environmental matters, the company believes the costs
associated with all such matters will not have a material
adverse effect on its consolidated financial position or
liquidity but could possibly be material to the consolidated
results of operations in any one accounting period.
Responsibility for Financial Statements
Eli Lilly and Company and Subsidiaries
The consolidated financial statements and related notes have
been prepared by management, who are responsible for their
integrity and objectivity. The statements have been prepared
in accordance with generally accepted accounting principles
and include amounts based on judgments and estimates by
management. The other financial information in this annual
report is consistent with that in the financial statements.
The company maintains internal accounting control systems that
are designed to provide reasonable assurance that assets are
safeguarded, that transactions are executed in accordance with
management's authorization and are properly recorded and that
accounting records are adequate for preparation of financial
statements and other financial information. The design,
monitoring and revision of internal accounting control systems
involve, among other things, management's judgments with
respect to the relative cost and expected benefits of specific
control measures. A staff of internal auditors regularly
monitors, on a worldwide basis, the adequacy and effectiveness
of internal accounting controls.
In addition to the system of internal accounting controls, the
company maintains guidelines of company policy emphasizing
proper overall business conduct, possible conflicts of
interest, compliance with laws and confidentiality of
proprietary information. The guidelines are reviewed on a
periodic basis with members of management worldwide.
The financial statements have been audited by Ernst & Young
LLP, independent auditors. Their responsibility is to examine
the company's financial statements in accordance with
generally accepted auditing standards and to express their
opinion with respect to the fairness of presentation of the
statements.
The members of the audit committee of the board of directors,
none of whom are employees of the company, recommend
independent auditors for appointment by the board of
directors, review the services performed by the independent
auditors, and receive and review the reports submitted by
them. The audit committee meets several times during the year
with management, the internal auditors and the independent
auditors to discuss audit activities, internal controls and
financial reporting matters. The internal auditors and the
independent auditors have full and free access to the
committee.
Randall L. Tobias Sidney Taurel
Chairman of the Board and Executive Vice President and
Chief Executive Officer Acting Chief Financial Officer
February 7, 1996
Report of Independent Auditors
Board of Directors and Shareholders
Eli Lilly and Company
We have audited the accompanying consolidated balance sheets
of Eli Lilly and Company and subsidiaries as of December 31,
1995 and 1994, and the related consolidated statements of
income and cash flows for each of the three years in the
period ended December 31, 1995. These financial statements
are the responsibility of the company's management. Our
responsibility is to express an opinion on these financial
statements 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, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Eli Lilly and Company and subsidiaries
at December 31, 1995 and 1994, and the consolidated results of
their operations and their cash flows for each of the three
years in the period ended December 31, 1995, in conformity
with generally accepted accounting principles.
Indianapolis, Indiana
February 5, 1996
Appendix to Exhibit 13
Graphs in Annual Report to Shareholders
for the Year Ended December 31, 1995
Set forth below, converted to tabular format, are the graphs
contained in the paper format of the portions of the Company's
Annual Report to Shareholders that are contained in this Exhibit
13.
Graph #1--Net Sales
($ millions)
Year Amount
---- ------
1985 $2,140.0
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995 6,763.8
Strong worldwide volume growth in 1995 led to an 18 percent
increase in net sales from continuing operations.
Graph #2--Sales Outside the U.S.
($ millions)
Year Amount
---- ------
1986 $ 844.0
1987
1988
1989
1990
1991
1992
1993
1994
1995 2,950.9
Investments made in international markets since 1986 have resulted
in an increase in sales outside the U.S. as a percent of total
sales. Sales outside the U.S. increased from 34 percent in 1986 to
nearly 44 percent in 1995.
Graph #3--Sales by Therapeutic Class
($ millions; percentages represent change from 1994))
Percent Change
Class Amount from 1994
----- ------ --------------
Central Nervous System $2,266.4 +23%
Anti-infectives 1,673.9 +2%
Endocrine 1,179.1 +17%
Gastrointestinal 548.4 +13%
Animal Health 512.4 +11%
Among Lilly's top five therapeutic classes, four experienced
double-digit sales growth in 1995. Growth was led by the central-
nervous-system class, which included increased Prozac sales of 24
percent.
Graph #4--Research and Development Expenses
($ millions)
Year Amount
---- ------
1991 $590.5
1992 731.0
1993 755.0
1994 838.7
1995 1,042.3
The company's spending in support of global clinical trials
increased 40 percent in 1995, driven by 19 compounds in Phase II or
Phase III. Overall research and development spending increased 24
percent in 1995.
Graph #5--Income from Continuing Operations
($ millions)
Year Amount
---- ------
1991 $1,166.1
1992 842.5
1993 464.8
1994 1,185.1
1995 1,306.6
Strong operating income growth substantially offset the negative
impact of a full year's interest expense and goodwill amortization
associated with the PCS acquisition. A lower effective tax rate
also contributed to the growth of income from continuing
operations. Operating income for 1992 and 1993 includes
restructuring and special charges. See Note 3 to the consolidated
financial statements.
Graph #6--Capital Expenditures
($ millions)
Year Amount
---- ------
1991 $1,142.4
1992 912.9
1993 633.5
1994 576.5
1995 551.3
Capital expenditures during 1995 declined 4 percent from the 1994
level, their lowest level in five years.
Graph #7--Dividends Paid per Share
(dollars)
Year Amount
---- ------
1991 1.00
1992 1.10
1993 1.21
1994 1.25
1995 1.31
Dividends paid during 1995 were increased twice, totaling 4.8
percent. The increases continue to reflect the company's commitment
to its shareholders. Nineteen ninety-five was the 28th consecutive
year in which dividends increased.
EXHIBIT 21 - LIST OF SUBSIDIARIES AND AFFILIATES
The following are the subsidiaries and affiliated corporations of
the Company at December 31, 1995.
State or Jurisdiction
of Incorporation %
or Organization Owned
ELI LILLY AND COMPANY Indiana
Eli Lilly International Corporation Indiana 100
Eli Lilly Int'l. Corp. - Branch: England 100
Eli Lilly Iran, S.A. Iran 100
ELCO Insurance Company, Ltd. Bermuda 100
Eli Lilly Interamerica, Inc. Indiana 100
Eli Lilly Interamerica, Inc. - Branch: Argentina 100
Eli Lilly Interamerica, Inc. - Branch: Colombia 100
Eli Lilly Interamerica, Inc. - Branch: Peru 100
Eli Lilly Interamerica, Inc. - Branch: Dominican Republic 100
Elanco Quimica Limitada Brazil 100
Eli Lilly do Brasil Limitada Brazil 100
Darilor Sociedad Anonima Uruguay 100
Beimirco Sociedad Anonima Uruguay 100
Eli Lilly Interamerica Inc., y Compania Chile 100
Limitada
STC Pharmaceuticals, Inc. Indiana 100
Lilly Ranbaxy Pharmaceuticals L.L.C. Indiana 50
Dista, Inc. Indiana 100
Dista, Inc. - Branch: Colombia 100
Eli Lilly de Centro America, S.A. Guatemala 100
Eli Lilly de Centro America, S.A.-Branch: Panama 100
Eli Lilly de Centro America, Sociedad Costa Rica 100
Anonima
Eli Lilly de Centro America, S.A.-Branch: Costa Rica 100
Eli Lilly y Compania de Mexico, S.A. de C.V. Mexico 100
Dista Mexicana, S.A. de C.V. Mexico 100
EPCO, Inc. Indiana 100
DowElanco Indiana 40
Hybritech Incorporated California 100
Hybritech International, Inc. California 100
Hybritech Europe, S.A. Belgium 100
Hybritech Clinical, Inc. California 100
Hybrigenetics Cancer Research, Inc. California 100
Hybritech G.m.b.H. Germany 100
Hybritech International Sales Corp. California 100
Eli Lilly Industries, Inc. Delaware 100
Eli Lilly and Company (Taiwan), Inc. Taiwan 100
CBI Uniforms, Inc. Delaware 50
Control Diabetes Services, Inc. Indiana 100
Integrated Disease Management, Inc. Indiana 100
ELI LILLY AND COMPANY (Cont'd) Indiana
PCS Holding Corporation (formerly McKesson Delaware 100
Delaware)
Clinical Pharmaceuticals, Inc. Delaware 100
Convenience Office Prescriptions California 100
Integrated Medical Systems, Inc. Colorado 100
IMS-NET of Alabama, Inc. Alabama 100
Alabama Joint Venture Alabama 51
IMS-NET of Arizona, Inc. Arizona 100
Arizona Joint Venture, Limited Arizona 50
IMS-NET of Illinois, Inc. Illinois 100
Illinois Medical Information Network,Inc. Illinois 68
IMS-NET of California, Inc. California 100
IMS-NET of Sacramento, Inc. California 100
IMS-NET of Arkansas, Inc. Arkansas 51
IMS-NET of Central Florida, Inc. Colorado 51
IMS-NET of Colorado, Inc. Colorado 100
IMS-NET of Kansas City, Inc. Colorado 100
Indiana Medical Communication Network LLC Colorado 51
Medical Communication Networks, Inc. California 100
Minnesota Medical Communication Network LLC Colorado 90
LP Holding Corporation (formerly Maryland 100
McKesson Maryland)
PCS Health Systems, Inc. Delaware 100
PCS of New York, Inc. New York 100
PCS Services, Inc. Delaware 100
ELCO Management Corporation Delaware 100
Eli Lilly Australia Pty. Limited Australia 100
Eli Lilly Australia Custodian Pty. Limited Bermuda 100
AZA Research Pty. Ltd. Australia 49
Eli Lilly and Company (N.Z.) Limited New Zealand 100
Eli Lilly (NZ)Staff Benefits Custodian New Zealand 100
Limited
Integrated Disease Management (NZ) New Zealand 100
Limited
Eli Lilly Canada Inc. Canada 100
RxPlus Canada 100
ELCO Dominicana, S.A. Dominican Republic 100
ELCO International Sales Corporation Virgin Islands-US 100
Possess.
Eli Lilly Group Limited England 100
Lilly Industries Limited England 100
Dista Products Limited England 100
Eli Lilly and Company Limited England 100
Lilly Research Centre Limited England 100
Elanco Products Limited England 100
Creative Packaging Limited England 100
Greenfield Pharmaceuticals Limited England 100
Lilly Medical Instruments Limited England 100
Eli Lilly Group Pension Trustees Limited England 100
Lilly Deutschland GmbH Germany 100
Eli Lilly (Suisse) S.A. & Co. Germany 100
Beteiligungs-KG
Beiersdorf-Lilly GmbH Germany 74.8
Lilly Medizintechnik GmbH Germany 100
Eli Lilly & Co. (Ireland) Limited Ireland 100
Eli Lilly Asia, Inc. Delaware 100
Eli Lilly Asia, Inc. - Branch Hong Kong 100
Eli Lilly Asia, Inc. - Branch Korea 100
Eli Lilly Asia, Inc. - Branch Thailand 100
Indian Branch India 100
China Branch China 100
Vietnam Branch Vietnam 100
Eli Lilly S.A. Switzerland 100
Branch Ireland 100
Eli Lilly Export S.A. Switzerland 100
Puerto Rico - Branch Puerto Rico 100
Egyptian Branch Egypt 100
Egyptian Branch Egypt 100
Russian Branch Russia 100
GEMS Services, S.A. Belgium 100
GEMS Services, S.A. - CC Branch Belgium 100
T. P. Eli Lilly and Elanco D.O.O. Yugoslavia 100
Elanco Trustees Limited Ireland 100
DowElanco, B.V. Netherlands 40
Eli Lilly (Suisse) S.A. Switzerland 100
Iranian Branch Iran 100
Bulgarian Branch Bulgaria 100
Croatian Branch Croatia 100
Czech Republic Branch Czech Republic 100
Estonian Branch Estonia 100
Hungarian Branch Hungary 100
Ivory Coast Branch Ivory Coast 100
Kazakhstan Branch Kazakhstan 100
Lebanon Branch Lebanon 100
Lithuanian Branch Lithuania 100
Pakistani Branch Pakistan 100
Polish Branch Poland 100
Romanian Branch Romania 100
Slovakian Branch Slovakia 100
Slovenian Branch Slovenia 100
Ukraine Branch Ukraine 100
United Arab Emirates Branch U.A.E. 100
Saudi Arabian Branch Saudi Arabia 100
Eli Lilly MHC S.A.R.L. Switzerland 100
Eli Lilly Mauritius Mauritius 99
Ranbaxy Lilly Company India 50
Oldfields Financial Management S.A. Switzerland 100
Eli Lilly Suzhou Pharmaceutical Company China 90
Limited
Eli Lilly Nederland B.V. Netherlands 100
Eli Lilly Ges.m.b.H. Austria 100
Lilly Development Centre S.A. Belgium 100
Lilly Services S.A. Belgium 100
Lilly Clinical Operations S.A. Belgium 100
Eli Lilly Benelux, S.A. Belgium 100
Eli Lilly CR s.r.o. Czech Republic 100
Eli Lilly Denmark A/S Denmark 100
Eli Lilly Egypt Egypt 75
Alkan Pharma S.A.E. Egypt 25
OY Eli Lilly Finland Ab Finland 100
Lilly France S.A. France 100
Elsa France, S.A. France 100
Medco Ltd. Hungary 50
Lilly Hungaria KFT Hungary 100
Eli Lilly Nederland B.V. (Cont'd) Netherlands 100
Eli Lilly (Philippines), Incorporated Philippines 100
Eli Lilly Ranbaxy Limited India 50<5
Dista Italia S.r.l. Italy 100
Eli Lilly Italia S.p.A. Italy 100
Eli Lilly Japan K.K. Japan 100
Daewoong Lilly Pharmaceutical Co., Ltd. Korea 50
Eli Lilly Malaysia Sdn Bhd. Malaysia 100
Damsen Trading Limited Malta 51
Eli Lilly Maroc S.a.r.l. Morocco 100
ELCO Production Services B.V. Netherlands 100
Eurobase B.V. Netherlands 55
Eli Lilly Norge A.S. Norway 100
Eli Lilly-Gohar (Private) Limited Pakistan 30
Eli Lilly Polska Sp. z.o.o. (Ltd.) Poland 100
Lilly Grodzisk Sp. z.o.o. Poland 99.8
Vitalia Pharma Sp. Z.o.o. Poland 51
Dista-Produtos Quimicos & Portugal 100
Farmaceuticos,LDA
Lilly-Farma, Produtos Farmaceuticos,Lda. Portugal 100
ELVA Joint Laboratory Russia 50
Pharmaserve - Lilly S.A.C.I. Greece 50.9
Eli Lilly Asia Pacific Pte. Ltd. Singapore 100
Eli Lilly (S.A.) (Proprietary) Limited South Africa 100
Glaxo/Eli Lilly Partnership South Africa 50
The Medikredit Joint Venture South Africa 37.6
Partnership
Medikredit Pty. Ltd. South Africa 80
Elanco-Valquimica, S.A. Spain 50<51
Derly, S.A. Spain 50<51
Dista, S.A. Spain 50<51
Lilly, S.A. Spain 50<51
Geserco, S.A. Spain 50<51
Hybritech, S.A. Spain 50<51
Eli Lilly Sweden AB Sweden 100
Lilly Ilac Ticaret A.S. Turkey 100
Eli Lilly y Compania de Venezuela, S.A. Venezuela 100
Dista Products & Compania Venezuela Venezuela 100
EXHIBIT 23. CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual
Report (Form 10-K) of Eli Lilly and Company of our report
dated February 5, 1996, included in the 1995 Annual Report
to Shareholders of Eli Lilly and Company.
We also consent to the incorporation by reference in
Registration Statement Number 33-29482 on Form S-8 dated
June 23, 1989, in Registration Statement Number 33-37341 on
Form S-8 dated October 17, 1990, in Registration Statement
Number 33-58466 on Form S-8 dated February 17 1993, in
Registration Statement Number 33-50783 on Form S-8 dated
October 27, 1993, and in Registration Statement Number 33-
56141 dated October 24, 1994 of our report dated February 5,
1996 with respect to the consolidated financial statements
incorporated by reference, in the Annual Report (Form 10-K)
of Eli Lilly and Company.
ERNST & YOUNG LLP
Indianapolis, Indiana
5
1,000
YEAR
DEC-31-1995
DEC-31-1995
999,549
84,644
1,575,605
55,076
839,564
4,138,561
6,828,340
2,589,026
14,412,503
4,966,985
2,592,894
0
0
355,564
5,077,059
14,412,503
6,504,386
6,763,804
1,721,110
1,885,701
2,896,297
0
286,317
1,765,641
459,067
1,306,575
984,349
0
0
2,290,924
3.97
3.92
Note 2 - Amounts include research and development, selling, and general
and . . . administrative expenses.
Note 1 - The information called for is not given as the balances are
not . . . individually significant.
EXHIBIT 99. REPORT TO HOLDERS OF ELI LILLY AND COMPANY
CONTINGENT PAYMENT OBLIGATION UNITS
To Holders of Eli Lilly and Company Contingent Payment Obligation
Units:
In 1995, sales of Hybritech Incorporated, including royalties,
decreased 21 percent to $97.8 million. Sales in 1994 were $123.6
million, down from $149.0 million in 1993.
Product sales declined in 1995 due primarily to lower unit volume.
Sales of the company's largest selling product, TandemR PSA, a
prostate cancer test, were down when compared to 1994, due to
competition.
Hybritech's gross profits declined 7 percent, to $54.9 million in
1995, compared with $58.9 million and $73.2 million in 1994 and
1993, respectively. The gross-profit decline in 1995 was largely
the result of lower sales.
Beginning in 1993, Hybritech combined certain operations with
Pacific Biotech, Inc. (PBI), a wholly owned Lilly subsidiary. PBI
was sold in January 1995. In addition, Lilly had previously
announced in 1994 that it intended to divest itself of its interest
in Hybritech in a manner consistent with its obligations under the
Contingent Payment Obligation Units (CPUs). The divestiture of
Hybritech to Beckman Instruments, Inc., which was completed on
January 2, 1996, had no effect on the CPU calculation.
Under the terms of the Contingent Payment Obligation Unit, payments
are earned if the sum of 6 percent of sales and 20 percent of gross
profits exceeds the annual deductible. The annual deductible was
originally set in 1986 at $11 million and increases at a compounded
rate of 35 percent per year thereafter. The deductibles through
1995 are as follows:
(Dollars in millions)
1991 1992 1993 1994 1995
-----------------------------------
$49.3 $66.6 $89.9 $121.4 $163.8
In accordance with the formula, for 1995 the sum of 6 percent of
sales and 20 percent of gross profits is approximately $16.8
million. Therefore, no payment was earned in 1995 (the final year
of measurement under the CPUs), and the CPUs expire without
payment.
Tandem(R) (dual monoclonal sandwich assay kits, Hybritech)
