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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
Quarterly Report Under Section 13 or 15(d) of the
Securities Exchange Act of 1934
FOR QUARTER ENDED MARCH 31, 1995
COMMISSION FILE NUMBER 1-6351
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ELI LILLY AND COMPANY
(Exact name of Registrant as specified in its charter)
INDIANA 35-0470950
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
LILLY CORPORATE CENTER, INDIANAPOLIS, INDIANA 46285
(Address of principal executive offices)
Registrant's telephone number, including area code (317) 276-2000
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
--------- -----
The number of shares of common stock outstanding as of April 30, 1995:
Class Number of Shares Outstanding
----- ----------------------------
Common 292,461,934
1
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Eli Lilly and Company and Subsidiaries
Three Months
Ended March 31,
-------------------
1995 1994
-----------------
(Dollars in millions except
per-share data)
Net sales $1,717.3 $1,309.1
Cost of sales 512.5 382.1
Research and development 236.7 177.3
Marketing and administrative 407.2 280.0
Special charges - 56.0
Interest expense 66.2 16.7
Other income - net (33.2) (35.8)
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1,189.4 876.3
------- -----
Income from continuing operations before
income taxes 527.9 432.8
Income taxes 153.1 132.1
------- -------
Income from continuing operations 374.8 300.7
Income from discontinued operations, net of tax 18.4 30.0
------ -------
Net income $ 393.2 $ 330.7
====== ======
Earnings per share:
Income from continuing operations $1.30 $1.04
Income from discontinued operations .06 .10
---- ----
Net income $1.36 $1.14
==== ====
Dividends paid per share $ .645 $ .625
See Notes to Consolidated Financial Statements.
2
CONSOLIDATED BALANCE SHEETS
(Unaudited)
Eli Lilly and Company and Subsidiaries
March 31, December 31,
1995 1994
------------------------
(Millions)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 978.8 $ 536.9
Short-term investments 151.3 209.8
Accounts receivable, net of
allowances of $54.7 (1995)
and $46.6 (1994) 1,638.0 1,550.2
Other receivables 286.8 284.4
Inventories 901.1 968.9
Deferred income taxes 199.6 245.0
Prepaid expenses 278.0 167.1
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TOTAL CURRENT ASSETS 4,433.6 3,962.3
OTHER ASSETS
Prepaid retirement 413.6 411.9
Investments 465.0 464.1
Goodwill and other intangibles, net of
allowances for amortization of
$359.0 (1995) and $326.2 (1994) 4,379.1 4,411.5
Sundry 852.3 846.1
------- -------
6,110.0 6,133.6
PROPERTY AND EQUIPMENT
Land, buildings, equipment, and
construction-in-progress 7,101.9 7,026.4
Less allowances for depreciation 2,684.8 2,614.9
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4,417.1 4,411.5
------- -------
$14,960.7 $14,507.4
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term borrowings $3,620.0 $2,724.4
Accounts payable 783.7 878.2
Employee compensation 220.9 304.6
Dividends payable - 188.8
Other liabilities 960.8 1,065.1
Income taxes payable 543.6 508.4
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TOTAL CURRENT LIABILITIES 6,129.0 5,669.5
LONG-TERM DEBT 1,638.7 2,125.8
DEFERRED INCOME TAXES 218.7 188.9
RETIREE MEDICAL BENEFIT OBLIGATION 173.7 170.5
OTHER NONCURRENT LIABILITIES 965.4 997.1
SHAREHOLDERS' EQUITY
Common stock 183.0 183.0
Additional paid-in capital 417.6 421.7
Retained earnings 5,467.0 5,062.1
Deferred costs-ESOP (214.4) (218.2)
Currency translation adjustments 10.1 (38.0)
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5,863.3 5,410.6
Less cost of common stock in treasury 28.1 55.0
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5,835.2 5,355.6
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$14,960.7 $14,507.4
======== ========
See Notes to Consolidated Financial Statements.
3
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Eli Lilly and Company and Subsidiaries
Three Months Ended
March 31,
--------------------
1995 1994
-------------------
(Millions)
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $393.2 $330.7
Adjustments to Reconcile Net Income to
Cash Flows from Operating Activities:
Changes in operating assets and liabilities (288.5) (356.8)
Change in deferred taxes 60.9 60.4
Special charges - 56.0
Depreciation and amortization 140.1 103.6
Other items, net (21.9) (25.8)
---- ----
NET CASH FLOWS FROM OPERATING ACTIVITIES 283.8 168.1
CASH FLOWS FROM INVESTING ACTIVITIES
Net additions to property and equipment (96.9) (111.9)
Additions to sundry assets and intangibles (3.4) (34.0)
Reduction of investments 129.9 388.9
Additions to investments (57.0) (439.5)
Acquisitions (28.4) -
---- -----
NET CASH USED FOR INVESTING ACTIVITIES (55.8) (196.5)
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid (186.6) (181.0)
Purchase of common stock and other capital
transactions (22.4) (13.9)
Net additions to short-term borrowings 412.2 254.5
Net (reductions) additions to long-term debt (15.2) 21.6
---- -----
NET CASH PROVIDED BY FINANCING ACTIVITIES 188.0 81.2
Effect of Exchange Rate Changes on Cash 25.9 12.5
----- -----
NET INCREASE IN CASH AND CASH EQUIVALENTS 441.9 65.3
Cash and cash equivalents at January 1 536.9 539.6
----- -----
CASH AND CASH EQUIVALENTS AT MARCH 31 $978.8 $604.9
===== =====
See Notes to Consolidated Financial Statements.
4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed financial statements have
been prepared in accordance with the requirements of Form 10-Q and therefore
do not include all information and footnotes necessary for a fair presentation
of financial position, results of operations, and cash flow in conformity with
generally accepted accounting principles. In the opinion of management, the
financial statements reflect all adjustments (consisting only of normal
recurring accruals) that are necessary to a fair statement of the results for
the periods shown. Certain 1994 amounts have been reclassified to conform to
the 1995 presentation of discontinued operations.
As presented herein, sales include sales of the Company's life-sciences
products and service revenue from PCS Health Systems, Inc. (PCS).
CONTINGENCIES
The Company has been named as a defendant in numerous product liability
lawsuits involving primarily two products, diethylstilbestrol and Prozac(R).
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
recoveries is based on existing deductibles, coverage limits, and the existing
and projected future level of insolvencies among its insurance carriers.
The Company is a party to various patent litigation matters involving
Humatrope(R), Humulin(R), bovine somatotropin, and various products within the
former Medical Devices and Diagnostics Division. Based upon historical and
industry data, the Company has accrued for the anticipated cost of resolution
of the claims.
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 coverage for defense costs in certain environmental
proceedings and has reserved its right to pursue claims for insurance with
respect to certain 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.
5
The product, patent, and environmental liabilities have been reflected in the
Company's consolidated balance sheets at their gross amounts (approximately
$415 million at March 31, 1995). Estimated insurance recoverables appear as
assets in the consolidated balance sheets (approximately $150 million at March
31, 1995).
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 nearly
all U.S. retail pharmacies alleging an industrywide agreement to deny
favorable prices to retail pharmacies. Other related suits, brought by
several thousand pharmacies, involve claims of price discrimination or claims
under other pricing laws. These suits are presently in discovery.
While it is not possible to predict or determine the outcome of the patent,
product liability, antitrust or other legal actions brought against the
Company, or the ultimate cost of environmental matters, the Company continues
to believe the costs associated with all such matters will not have a material
adverse effect on its consolidated financial position.
SPECIAL CHARGES
In the first quarter of 1994, the Company incurred $56 million of pretax
charges associated with the March 31 voluntary recall of three of its liquid
oral antibiotics. The recall, which was initiated by the Company after
consultation with the FDA, was made after four instances were reported of
small plastic caps being found in the antibiotics. Shipments of all three
products were resumed during the second and third quarters of 1994.
EARNINGS PER SHARE
Earnings per share are calculated based on the average number of outstanding
common shares.
6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
DISCONTINUED OPERATIONS:
The Company is proceeding with its plan to complete the divestiture of the
Medical Devices and Diagnostics (MDD) Division businesses in 1995, including
the split-off (an exchange offer pursuant to which Lilly shareholders will be
given the opportunity to exchange some or all their Lilly shares for Guidant
shares) of its remaining 80 percent interest in Guidant Corporation (Guidant)
and the sale of Hybritech Incorporated. Currently, the Company intends to
complete the split-off of Guidant in the latter half of 1995.
As a consequence of the divestiture plan, 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. The Company expects to recognize a net gain on
the completion of the divestiture.
OPERATING RESULTS OF CONTINUING OPERATIONS:
The Company's sales for the first quarter increased 31 percent as compared
with the first quarter of 1994. Sales inside the United States increased 34
percent while sales outside the United States increased 28 percent. Compared
with the first quarter of 1994, volume increased 29 percent (24 percent
excluding PCS Health Systems, Inc. (PCS)), prices declined 1 percent, and
foreign exchange rates had a favorable effect of 3 percent.
Worldwide sales of pharmaceutical products increased 33 percent in the first
quarter compared with the same period last year. Contributing significantly
to the growth of worldwide pharmaceutical product sales were Axid(R),
cefaclor, Humulin, LorabidTM, and Prozac. Worldwide sales of Prozac in the
first quarter of 1995 were $456.7 million, an increase of 36 percent as
compared to the first quarter of 1994. The Company expects continued growth
of Prozac sales for the remainder of the year, but at a lower rate. U.S.
sales growth of 36 percent was achieved despite the growth in product
discounts and rebates associated with the Company's increased participation in
managed-care programs. U.S. sales of anti-infectives reflected an increase
over the first quarter of 1994 largely as a result of increased cefaclor
sales, including a generic form of the product marketed and distributed by the
Company's subsidiary STC Pharmaceuticals, Inc. (STC) under the previously
announced agreement between STC and Mylan Pharmaceuticals, Inc. A heavier
flu season in certain markets, as compared to the previous year, drove the
cefaclor sales increase. Service revenue from PCS, which was acquired in
November, 1994 contributed $63 million to the quarter's sales growth. U.S.
sales of Dobutrex(R) declined approximately 87 percent during the quarter as a
result of generic competition. International pharmaceutical sales growth of
28 percent was achieved primarily as a result of the Company's continuing
expansion in global markets.
In May 1995, two companies began marketing generic forms of cefaclor capsules
in the U.S. The Company has filed suit against those companies in Federal
court in Indianapolis asserting infringement of certain U.S. process patents
in the manufacture of cefaclor. The suit seeks, among other things, an
injunction against the sale of the product made by the infringed process. The
patents at issue expire in July 1996. There can be no assurance that the
Company will be successful in this litigation.
7
Worldwide sales of animal health products increased 15 percent over the first
quarter of 1994. The increase resulted from strong performance of the entire
product line both in the U.S. and international markets.
Cost of sales increased in the first quarter to 29.8 percent of sales from
29.2 percent of sales in the same quarter of 1994. This increase is primarily
the result of the inclusion of PCS and the impact of foreign exchange rates
offset, in part, by a favorable product mix.
Operating expenses increased 25 percent in the first quarter compared with the
same period in 1994. The increase reflects a 34 percent growth in research
and development due to the large number of compounds that have entered the
later and most expensive phases of clinical research. Also, marketing and
administrative expenses increased 45 percent from the first quarter of 1994
partially due to continued globalization of the Company's products,
particularly in emerging markets, the addition of PCS, and increased accruals
for performance-based compensation. In March 1994, the Company voluntarily
recalled three of its liquid oral antibiotics resulting in a special pre-tax
charge of $56 million. The rate of growth of 1995 operating expenses over
1994 would have been greater if this special charge was not included in the
comparison.
For the first quarter of 1995, the Company had interest expense of $66.2
million as compared with $16.7 million for the same quarter of 1994,
reflecting the Company's increased debt levels associated with the PCS
acquisition. Net other income of $33.2 million for the quarter was $2.6
million less than 1994. This decrease relates largely to amortization of
goodwill associated with the PCS acquisition (an expense of approximately $25
million each quarter), offset, in part, by non-recurring income received under
a development contract and the sale of the U.S. marketing rights to methadone.
The Company's estimated tax rate was 29.0 percent in the first quarter of 1995
versus a tax rate of 30.5 percent in the first quarter of 1994. This decline
is primarily the result of increased earnings outside the United States where
tax rates are lower, particularly in Ireland, and the effectiveness of various
tax planning strategies.
As a consequence of the sales growth and the lower effective tax rate which
were partially offset by increased expenses, due largely to the acquisition of
PCS, both net income and earnings per share increased 19 percent for the first
quarter compared with the first quarter of 1994 to $383.2 million and $1.36,
respectively. First quarter 1994 earnings per share were reduced by $.13 as a
result of the product recall.
FINANCIAL CONDITION:
As of March 31, 1995, cash, cash equivalents and short-term investments
totaled $1,130.1 million as compared with $746.7 million at December 31, 1994.
Total debt at March 31, 1995, was $5,258.7 million, an increase of $408.5
million from December 31, 1994. The increase primarily reflects additional
borrowings necessary to fund normal seasonal operating needs. Changes in the
classification of borrowings between long and short-term primarily reflect the
reclassification from long-term the debt of Guidant which is due January 8,
1996.
The Company has recently filed with the Securities and Exchange Commission a
shelf registration statement to register $1 billion of debt securities. These
securities may have maturities exceeding nine months and, once the
registration statement is effective, may be offered by the Company from time
to time as
8
business and financing needs dictate. The Company currently plans to use any
net proceeds from sales of these securities for general corporate purposes,
which would include reducing short-term indebtedness in the form of commercial
paper incurred in the acquisition of PCS and other working capital needs.
PART II OTHER INFORMATION
Item 1.Legal Proceedings.
In February 1995, the Federal Trade Commission requested the Company to
produce documents and information in connection with a non-public
investigation concerning the pharmacy benefit management business. The
Company understands that similar requests were made to several other
pharmaceutical companies and other businesses involved in pharmaceutical
health care. The Company is cooperating fully with the Commission's
investigation.
Reference is made to the discussion of the antitrust litigation brought by
retail pharmacies against the Company and numerous other U.S. prescription
pharmaceutical manufacturers, contained in the Company's Annual Report on Form
10-K for the year ended December 31, 1994, under Part I, Item 3, "Legal
Proceedings." A new trial date for the Federal class action cases, pending in
the Northern District of Illinois, has been set for April, 1996. 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 non-designated defendants, including the Company, are
stayed.
Item 6. Exhibits and Reports on Form 8-K
(a)Exhibits. The following documents are filed as exhibits to this
--------
Report:
10. Eli Lilly and Company Change in Control Severance
Pay Plan for Select Employees
11. Statement re: Computation of Earnings Per Share
on Primary and Fully Diluted Bases
12. Statement re: Computation of Ratio of Earnings
from Continuing Operations to Fixed Charges
27. Financial Data Schedule
99. Attachment to Form 10-Q: Contingent Payment
Obligation Units
(b)During the quarter for which this report is filed, the
Company filed no reports on Form 8-K.
9
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
ELI LILLY AND COMPANY
---------------------
(Registrant)
Date May 11, 1995 s/Daniel P. Carmichael
------------------- -----------------------------------
Daniel P. Carmichael
Secretary and Deputy
General Counsel
Date May 11, 1995 s/Arnold C. Hanish
------------------- -----------------------------------
Arnold C. Hanish
Director, Corporate Accounting and
Chief Accounting Officer
10
INDEX TO EXHIBITS
The following documents are filed as a part of this Report:
Exhibit Page
------- ----
10.Eli Lilly and Company Change in Control
Severance Pay Plan for Select Employees 12
11.Statement re: 28
Computation of Earnings Per Share
on Primary and Fully Diluted Bases
12.Statement re: 29
Computation of Ratio of Earnings from
Continuing Operations to Fixed Charges
27.Financial Data Schedule 30
99.Attachment to Form 10-Q:
Contingent Payment Obligation Units 32
11
EXHIBIT 10
ELI LILLY AND COMPANY
CHANGE IN CONTROL SEVERANCE PAY PLAN
FOR SELECT EMPLOYEES
1. PURPOSE
This Eli Lilly and Company Change in Control Severance Pay Plan For
Select Employees has been established by the Company to provide for the payment
of severance pay and benefits to Eligible Employees whose employment with a
Participating Employer terminates due to certain conditions created by a Change
in Control of the Company. The purpose of the Plan is to assure a continuity in
operations of the Company during a period of Change in Control by allowing
employees to focus on their responsibilities to the Company knowing that they
have certain financial security in the event of their termination of employment.
The accomplishment of this purpose is in the best interests of the Company and
its shareholders.
2. DEFINITIONS
The terms defined in this Section 2 shall have the meanings given
below:
(a) "Annual Base Salary" means the amount of the Eligible Employee's
Monthly Base Salary multiplied by twelve (12).
(b) "Board" means the Board of Directors of the Company.
(c) "Change in Control" has the meaning given in Section 3.
(d) "Code" means the Internal Revenue Code of 1986, as amended.
(e) "Committee" means the Compensation and Management Development
Committee of the Board, or such other committee appointed by the Board
to perform the functions of the Committee under the Plan, provided
that at all times the Committee shall be constituted solely of
directors who are Continuing Directors (as defined in Section 3) to
the extent any such directors remain on the Board and are willing to
serve in such capacity.
1
(f) "Covered Termination" has the meaning given in Section 6.
(g) "Company" means Eli Lilly and Company, an Indiana corporation.
(h) "Eligible Employee" means a Tier I Employee or a Tier II Employee.
(i) "ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
(j) "Exchange Act" means the Securities Exchange Act of 1934, as amended.
(k) "Monthly Base Salary" means an Eligible Employee's gross monthly base
salary before any deductions, exclusions or any deferrals or
contributions under any Participating Employer plan or program, but
excluding bonuses, incentive awards or compensation, employee benefits
or any other non-salary form of compensation.
(l) "Participating Employer" has the meaning given in Section 4.
(m) "Plan" means this Eli Lilly and Company Change in Control Severance
Pay Plan for Select Employees.
(n) "Severance Multiple" means the number of years represented by the
Severance Period for the Eligible Employee.
(o) "Severance Period" means (i) in the case of Tier I Employees, the
three (3) year period immediately following a Covered Termination and
(ii) in the case of Tier II Employees, the two (2) year period
immediately following a Covered Termination.
(p) "Tier I Employees" and "Tier II Employees" have the meanings given in
Section 5.
3. CHANGE IN CONTROL
2
For purposes of the Plan, a "Change in Control" of the Company shall
be deemed to have occurred upon:
(a) the acquisition by any "person," as that term is used in Sections
13(d) and 14(d) of the Exchange Act (other than (i) the Company, (ii) any
subsidiary of the Company, (iii) any employee benefit plan or employee
stock plan of the Company or a subsidiary of the Company or any trustee or
fiduciary with respect to any such plan when acting in that capacity, or
(iv) Lilly Endowment, Inc.) of "beneficial ownership," as defined in Rule
13d-3 under the Exchange Act, directly or indirectly, of 20% or more of the
shares of the Company's capital stock the holders of which have general
voting power under ordinary circumstances to elect at least a majority of
the Board (or which would have such voting power but for the application of
the Indiana Control Shares Statute) ("Voting Stock");
(b) the first day on which less than two-thirds of the total
membership of the Board shall be Continuing Directors (as that term is
defined in Article 13(f) of the Company's Articles of Incorporation);
(c) approval by the shareholders of the Company of a merger, share
exchange, or consolidation of the Company (a "Transaction"), other than a
transaction which would result in the Voting Stock of the Company
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity) more than 50% of the Voting Stock of the Company or such
surviving entity immediately after such Transaction;
(d) approval by the shareholders of the Company of a complete
liquidation of the Company or a sale or disposition of all or substantially
all the assets of the Company, other than a sale or disposition of assets
to any subsidiary of the Company;
(e) either (i) the Company shall have entered into a definitive
agreement with any Person, which, if consummated, would result in a Change
in Control as specified in paragraphs (a) through (d) of this Section 3 or
(ii) any Person initiates a tender offer or exchange offer to acquire
shares of the Voting Stock which, if consummated, would result in a Change
in Control as specified in paragraphs (a) through (d) of this Section 3;
provided, however, that if the Board shall make a final determination that
such agreement, tender offer or exchange offer will not be consummated, the
occurrence of any such event shall cease to constitute a Change in Control
3
and the termination of employment of an Eligible Employee after such
determination shall not be treated as a Covered Termination on the basis of
such event; or
(f) the Board adopts a resolution to the effect that any Person has
taken actions which, if consummated, would result in its having acquired
effective control of the business and affairs of the Company; provided,
however, that if the Board shall make a final determination that such
actions will not be consummated, the occurrence of any such event shall
cease to constitute a Change in Control and the termination of employment
of an Eligible Employee after such determination shall not be treated as a
Covered Termination on the basis of such event.
For purposes of this Section 3 only, the term "subsidiary" means a corporation
of which the Company owns directly or indirectly fifty (50) percent or more of
the voting power.
4. PARTICIPATING EMPLOYERS
A. Designation of Participating Employers. The Company and each
subsidiary corporation of which the Company owns directly or indirectly one-
hundred (100) percent of the voting power at the time of the Change in Control
shall be Participating Employers under the Plan. In addition, the Committee may
designate other affiliates of the Company as Participating Employers under the
Plan, from time to time and under such terms and conditions, as shall be
specified by an action in writing by the Committee. Such terms and conditions
may impose limitations on the extent to which any such affiliate participates in
the Plan (including but not limited to the duration of any such participation),
but shall not provide rights or benefits to Eligible Employees that are broader
than those set forth in the Plan. Any entity that is a Participating Employer
at the time of a Change in Control shall continue to be a Participating Employer
following a Change in Control, and any person, firm or business that is a
successor to the business or interests of a Participating Employer following a
Change in Control shall be treated as a Participating Employer under the Plan.
B. Limitations in Foreign Jurisdictions.
Notwithstanding the foregoing or anything elsewhere in the Plan to the contrary,
the Committee shall have the discretionary authority, as specified below, to
exclude from participation or limit the participation of any Participating
Employer with respect to its Eligible Employees employed outside of the
United States. The Committee shall exercise this authority only by an action
4
in writing taken prior to a Change in Control on the basis of a good faith
determination that, as a result of the specific effect of applicable local
law or practice with respect to the Plan, it would be in the best interests
of the Company to so exclude or limit such participation. In addition, to
the extent specified by an action in writing prior to a Change in Control,
the Committee may offset the benefits provided under the Plan to any such
Eligible Employee by benefits under severance arrangements that exist by
reason of applicable local law or practice.
5. ELIGIBLE EMPLOYEES
The following individuals shall be eligible to participate in the Plan
and shall be considered an Eligible Employee for all purposes hereunder:
(i) "Tier I Employees" - the Chief Executive Officer of the Company
----------------
immediately prior to the Change in Control, and all members of the
Operations Committee (or a successor committee) of the Company appointed by
the Chief Executive Officer, as constituted immediately prior to the Change
in Control; and
(ii) "Tier II Employees" - all employees of the Participating
-----------------
Employers (other than Tier I Employees) who are classified by the Company
as Executive Directors or above (or any successor classifications)
immediately prior to the Change in Control.
Any person who is an Eligible Employee in accordance with the foregoing shall
continue to be an Eligible Employee (and shall retain his/her status as a Tier I
or Tier II Employee for purposes of the Plan) notwithstanding any change in
his/her position or classification following a Change in Control. The Committee
shall notify each Eligible Employee of his/her participation in the Plan and
status as a Tier I or Tier II Employee at the time of the Change in Control.
6. COVERED TERMINATIONS
A. General. An Eligible Employee shall be treated as having
suffered a "Covered Termination" hereunder under the following circumstances:
1. Tier I Employees. The termination of employment of a Tier I
----------------
Employee shall be treated as a Covered Termination if his/her employment is
terminated under one of the following circumstances:
5
(i) at anytime within two (2) years following the date of a Change in
Control, termination of employment by a Participating Employer without
"Cause" or by the Eligible Employee for "Good Reason"; or
(ii) beginning with the one (1) year anniversary of the date of a
Change in Control and for a period of thirty (30) calendar days thereafter,
termination of employment by a Participating Employer without "Cause" or by
the Eligible Employee for any reason (whether or not for "Good Reason").
2. Tier II Employees. The termination of employment of a Tier
-----------------
II Employee shall be treated as a Covered Termination if his/her employment
is terminated, within a period of two (2) years following the date of a
Change in Control, by a Participating Employer other than for "Cause" or by
the Eligible Employee for "Good Reason."
For purposes of the foregoing, the time periods specified above within which a
termination of employment may be treated as a Covered Termination shall commence
on the date the Change in Control becomes effective and, with respect to a
Change in Control under paragraphs (e) and (f) of Section 3, shall recommence
(for the full applicable period) on the date of consummation of the underlying
actions; provided, however, that in the event of a Change in Control under
paragraphs (e) and (f) of Section 3, the time period within which a Covered
Termination under clause (ii) of paragraph 1 above may occur shall be measured
only from the date of consummation of the underlying actions (and not from any
earlier date).
An Eligible Employee shall not be treated as having suffered a Covered
Termination in the event of his/her death, total disability (within the meaning
of the Company's Extended Disability Plan), transfer of employment among
Participating Employers (unless such transfer gives rise to a "Good Reason") or
involuntary termination for "Cause."
B. Termination For Cause. For purposes hereof, the termination of
an Eligible Employee's employment shall be deemed to be a termination for
"Cause" if as a result of:
(i) the willful refusal of the Eligible Employee to perform, without
legal cause, his/her material duties to the Participating Employer,
resulting in demonstrable economic harm to any Participating Employer,
which the Eligible Employee has failed to cure after thirty (30) calendar
days' advance written notice from the Company; or
6
(ii) the conviction of the Eligible Employee by a court of competent
jurisdiction of any crime (or enters a plea of guilty or nolo contendere to
a charge of any crime) constituting a felony.
C. Termination for Good Reason. For purposes hereof, an Eligible
Employee may terminate his/her employment for "Good Reason" as a result of:
(i) a material diminution in the nature or status of the Eligible
Employee's position, title, reporting relationship, duties,
responsibilities or authority, or the assignment to him/her of additional
responsibilities that materially increase his/her workload;
(ii) any reduction in the Eligible Employee's then-current Monthly
Base Salary;
(iii) a material reduction in the Eligible Employee's
opportunities to earn incentive bonuses below those in effect for the year
most recently completed before the date of the Change in Control, taking
into account all material bonus factors such as targeted bonus amounts and
corporate performance measures;
(iv) a material reduction in the Eligible Employee's employee benefits
and coverages (including, without limitation, pension, profit sharing and
all welfare and fringe benefits) that are provided to the Eligible Employee
from the benefit levels in effect immediately prior to the Change in
Control;
(v) the failure to grant to the Eligible Employee stock options,
performance shares or similar equity incentive rights during each twelve
(12) month period following the Change in Control on the basis of a number
of shares or units and all other material terms (including vesting
requirements) at least as favorable to the Eligible Employee as those
rights granted to him/her on an annualized average basis for the three (3)
year period immediately prior to the Change in Control; or
(vi) relocation of the Eligible Employee by more than fifty (50) miles
from his/her regularly assigned workplace existing on the date of the
Change in Control.
7. SEVERANCE PAYMENT
7
The amount of the severance payment to be received by an Eligible
Employee whose employment is terminated under conditions constituting a Covered
Termination shall equal the applicable Severance Multiple for the Eligible
Employee multiplied by the sum of:
(i) the Eligible Employee's Annual Base Salary at the time of Covered
Termination (calculated without regard to any reduction in Monthly Base
Salary that results in a Good Reason termination) or, if greater, at the
time of the Change in Control, plus
(ii) the greater of (a) the amount of the Eligible Employee's target
incentive bonus for the year of Covered Termination or (b) the amount of
the Eligible Employee's incentive bonus earned for the year immediately
prior to the Change in Control.
The severance payment to be made hereunder shall be paid to the
Eligible Employee in a single lump-sum cash payment, net of any required tax
withholding, within fifteen (15) calendar days after the date of the Eligible
Employee's Covered Termination. Any payment required under this Section 7 or
any other provision of the Plan that is not made in a timely manner shall bear
interest at a rate equal to one hundred twenty (120) percent of the monthly
compounded applicable federal rate, as in effect under Section 1274(d) of the
Code for the month in which the payment is required to be made.
8. OTHER SEVERANCE BENEFITS
In addition to the severance payment provided under Section 7, an
Eligible Employee shall be entitled to the following benefits and other rights
in the event of his/her Covered Termination:
A. Welfare Benefits. The Eligible Employee shall be entitled to
continued coverage and benefits for the duration of the applicable Severance
Period, at the Company's sole expense for coverage, under all employee welfare
benefit plans (including, without limitation, medical, dental, group life, death
benefit, dependent life, supplemental life, accidental death and dismemberment,
short-term disability and long-term disability plans, health care reimbursement
account and dependent day care reimbursement account) of a Participating
Employer for which he/she was eligible at the time of Covered Termination or, if
it would provide benefit coverages more favorable to the Eligible Employee, at
the time of the Change in Control, as though his/her termination of employment
had not occurred (the "Welfare Continuation Coverages"). All Welfare
8
Continuation Coverages shall apply to the Eligible Employee and any of his/her
dependents who would have been eligible for coverage if the Eligible Employee
remained employed for the applicable Severance Period. The Company may provide
the Eligible Employee with the Welfare Continuation Coverages under arrangements
other than its generally applicable welfare benefit plans, provided that the
benefit coverages so provided are at least as favorable to the Eligible Employee
as coverage under the otherwise applicable Welfare Continuation Coverages, on a
coverage by coverage basis, and taking into account all tax consequences to the
Eligible Employee. At the expiration of the applicable Severance Period, the
Eligible Employee shall be treated as a then terminating employee with respect
to the right to elect continued medical and dental coverages in accordance with
Section 4980B of the Code (or any successor provision thereto).
B. Pension Supplement. The Eligible Employee shall be entitled to
the additional pension benefits that would be payable to him/her, under all
defined benefit pension plans of a Participating Employer in which he/she is
participating at the time of Covered Termination (including all such tax-
qualified and supplemental plans), by taking into account under such plans (i)
an additional number of years equal to the Severance Period applicable to the
Eligible Employee for purposes of the age and service credit of the Eligible
Employee under such plans and (ii) the amount of the severance payment to which
the Eligible Employee is entitled under Section 7, expressed on an annualized
basis for the number of years equal to the Severance Period applicable to the
Eligible Employee, for purposes of the compensation credit of the Eligible
Employee under such plans (but only to the extent such additional credit would
produce a higher benefit for the Eligible Employee than if it were not taken
into account). The additional pension benefits provided hereby shall be paid
pursuant to a supplemental pension plan of the Company, at the same time and in
the same form as pension benefits are otherwise payable to the Eligible Employee
(subject to clause (iii) of Section 8.D).
C. Equity Incentives. Immediately upon a Covered Termination, (i)
any stock options or similar equity-based incentive rights granted to the
Eligible Employee under a stock incentive plan of a Participating Employer that
are not then fully vested and exercisable shall become fully vested and
immediately exercisable and the Eligible Employee shall be entitled to exercise
any such rights until the expiration of their original full term (without regard
to any earlier termination otherwise applicable in the event of termination of
employment), and (ii) any performance shares or shares of restricted stock
granted to the Eligible Employee under a stock incentive plan of a Participating
9
Employer that remain subject to forfeiture, performance conditions or transfer
restrictions at such time shall become fully and immediately vested and all such
conditions and restrictions shall immediately lapse. In addition, as to any
other types of equity-based incentive awards granted to the Eligible Employee
under a stock incentive plan of a Participating Employer prior to the date of
Covered Termination, any restrictions on exercise, payment or transfer shall
immediately lapse, and the Eligible Employee shall have all rights associated
with such awards as of the date of Covered Termination. Notwithstanding the
foregoing, the rights provided by this Section 8.C shall not apply with respect
to an Eligible Employee who is subject to Section 16 of the Exchange Act to the
extent that any such rights could not be made available under the terms of a
stock incentive plan of a Participating Employer, unless such plan could be
amended to make such rights available without any requirement for shareholder
approval for such plan to continue to meet the requirements for exemption of
Rule 16b-3 under the Exchange Act. The provisions of this Section 8.C shall
apply equally to any awards or rights into which the equity incentive rights
described herein are converted or for which such rights are substituted in
connection with a Change in Control.
D. Accrued Rights. The Eligible Employee shall be entitled to the
following payments and benefits in respect of accrued compensation rights at the
time of a Covered Termination, in addition to all other rights provided under
the Plan: (i) immediate payment of any accrued but unpaid Annual Base Salary
through the date of Covered Termination; (ii) payment within fifteen (15)
calendar days of Covered Termination of the accrued bonus for the year in effect
on the date of the Covered Termination, determined on the basis of the bonus
earned under terms of the applicable bonus plan through the date of termination
or, if greater, the pro-rata amount of the target bonus for the period of such
year through the date of termination; (iii) payment within fifteen (15) calendar
days of Covered Termination of all non-tax-qualified deferred compensation
rights, in lieu of payment in respect of such rights that would otherwise be
made at a later date in accordance with the terms of such arrangements, except
to the extent such rights are funded by amounts held under an irrevocable
grantor trust or other irrevocable commitment of funds by the Company; and (iv)
all benefits and rights accrued under the employee benefit plans, fringe benefit
programs and payroll practices of a Participating Employer (other than those
described in clause (iii) above) in accordance with their terms (including,
without limitation, employee pension, employee welfare, incentive bonus and
stock incentive plans).
E. Outplacement; Relocation. The Eligible Employee shall be
provided, at the Company's sole expense, with professional outplacement services
selected by the Eligible Employee consistent with his/her duties or profession
10
and of a type and level customary for persons in his/her position; provided,
however, that the Company shall not be required to pay fees in connection with
the foregoing in an amount greater than fifteen (15) percent of the Eligible
Employee's Annual Base Salary for purposes of clause (i) of Section 7. The
Company shall honor any prior agreement or understanding with an Eligible
Employee who has suffered a Covered Termination to reimburse his/her relocation
expenses to the Indianapolis, Indiana metropolitan area or, if it does not
result in a greater cost to the Company, to such other location selected by the
Eligible Employee.
F. Indemnification. With respect to any Eligible Employee who is,
immediately prior to a Change in Control or a Covered Termination, indemnified
by the Company for his/her service as a director, officer or employee of a
Participating Employer, the Company shall indemnify such Eligible Employee to
the fullest extent permitted by applicable law, and the Company shall maintain
in full force and effect, for the duration of all applicable statute of
limitation periods, insurance policies at least as favorable to the Eligible
Employee as those maintained by the Company for the benefit of its directors and
officers at the time of Change in Control, with respect to all costs, charges
and expenses whatsoever (including payment of expenses in advance of final
disposition of a proceeding) incurred or sustained by the Eligible Employee in
connection with any action, suit or proceeding to which he/she may be made a
party by reason of being or having been a director, officer or employee of a
Participating Employer or serving or having served any other enterprise as a
director, officer or employee at the request of a Participating Employer.
9. EXCISE TAX REIMBURSEMENT
In the event it shall be determined that any payment or distribution
by the Company or any other person or entity to or for the benefit of an
Eligible Employee who suffers a Covered Termination is a "parachute payment"
within the meaning of Section 280G of the Code, whether paid or payable or
distributed or distributable pursuant to the terms of this Plan or otherwise, or
whether prior to or following the Covered Termination, in connection with, or
arising out of, his/her employment with a Participating Employer or a change in
ownership or effective control of the Company or a substantial portion of its
assets (a "Payment"), and would be subject to the excise tax imposed by Section
4999 of the Code (the "Excise Tax"), concurrent with the making of such Payment,
the Company shall pay to the Eligible Employee an additional payment (the
"Gross-Up Payment") in an amount such that the net amount retained by the
Eligible Employee, after deduction of any Excise Tax on such Payment and any
11
federal, state or local income tax and Excise Tax on the Gross-Up Payment shall
equal the amount of such Payment. In the event the Internal Revenue Service
subsequently may assess or seek to assess from the Eligible Employee an amount
of Excise Tax in excess of that determined in accordance with the foregoing, the
Company shall pay to the Eligible Employee an additional Gross-Up Payment,
calculated as described above in respect of such excess Excise Tax, including a
Gross-Up Payment in respect of any interest or penalties imposed by the Internal
Revenue Service with respect to such excess Excise Tax.
10. NO MITIGATION OR OFFSET
The Eligible Employee shall be under no obligation to minimize or
mitigate damages by seeking other employment, and the obtaining of any such
other employment shall in no event effect any reduction of the Company's
obligation to make the payments and provide the benefits required under the
Plan. In addition, the Company's obligation to make the payments and provide
the benefits required under the Plan shall not be affected by any circumstances,
including, without limitation, any set-off, counterclaim, recoupment, defense or
other rights which a Participating Employer may have against the Eligible
Employee.
11. UNFUNDED STATUS
The Plan is intended to constitute an employee pension benefit plan
under ERISA which is unfunded and is maintained primarily for the purpose of
providing deferred compensation for a select group of management or highly
compensated employees, and shall be interpreted and administered accordingly.
The payments and benefits provided hereunder shall be paid from the general
assets of the Company. Nothing herein shall be construed to require the Company
to maintain any fund or to segregate any amount for the benefit of any employee,
and no employee or other person shall have any right against, right to, or
security or other interest in any fund, account or asset of the Company from
which the payment pursuant to the Plan may be made. Consistent with the
foregoing, the Company may, in its sole discretion, deposit funds in a grantor
trust or otherwise establish arrangements to pay amounts that become due under
the Plan, and, notwithstanding anything elsewhere in the Plan to the contrary,
the payments and benefits due under the Plan shall be reduced to reflect the
amount of any payment made in respect of any Eligible Employee from a grantor
trust or other arrangement established for this purpose.
12
12. ADMINISTRATION
The Committee shall be the named fiduciary of the Plan and the plan
administrator for purposes of ERISA. The Committee shall be responsible for the
overall operation of the Plan and shall have the fiduciary responsibility for
the general operation of the Plan. The Committee may allocate to any one or
more of the Company's employees any responsibility the Committee may have under
the Plan and may designate any other person or persons to carry out any of the
Committee's responsibilities under the Plan. As plan administrator, the
Committee shall maintain records pursuant to the Plan's provisions and shall be
responsible for the handling, processing and payment of any claims for benefits
under the Plan.
13. CLAIMS AND DISPUTES
Within fifteen (15) calendar days of a Covered Termination, the
Company shall notify each Eligible Employee whom the Company determines is
entitled to payments and benefits under the Plan of his/her entitlement to such
payments and benefits. An Eligible Employee who is not so notified may submit a
claim for payments and benefits under the Plan in writing to the Company within
ninety (90) calendar days after becoming entitled to such benefits as described
in Section 6. All such claims shall be approved or denied in writing by the
Company within fifteen (15) calendar days after submission.
Any denial of a claim by the Company shall be in writing and shall
include: (i) the reason or reasons for the denial; (ii) reference to the
pertinent Plan provisions on which the denial is based; (iii) a description of
any additional material or information necessary for the Eligible Employee to
perfect the claim together with an explanation of why the material or
information is necessary; and (iv) an explanation of the Plan's claim review
procedure, described below.
An Eligible Employee shall have a reasonable opportunity to appeal a
denied claim to the Company for a full and fair review. The Eligible Employee
or authorized representative shall have thirty (30) calendar days after receipt
of written notification of the denial of claim in which to request a review and
to review pertinent documents of the Plan. The Company shall notify the
Eligible Employee or his/her authorized representative of the time and place for
the claim review. The Company shall issue a decision on the reviewed claim
promptly, but no later than fifteen (15) calendar days after receipt of the
13
request for review. The Company's decision shall be in writing and shall
include: (i) the reasons for the decision, and (ii) references to the Plan
provisions on which the decision is based.
If the Eligible Employee shall dispute the Company's final decision,
the dispute shall be submitted to an arbitration proceeding, conducted before a
panel of three arbitrators, in accordance with the rules of the Center for
Public Resources (or such other organization selected by mutual agreement of the
Company and the Eligible Employee). Such arbitration shall take place in the
location most practicably proximate to the Eligible Employee's principal
workplace. Judgment may be entered on the arbitrators' award in any court
having jurisdiction. Notwithstanding the foregoing, if an Eligible Employee
believes the claims procedure or dispute resolution mechanism provided under
this Section 13 would be futile or would cause such Eligible Employee
irreparable harm, the Eligible Employee may, in his/her sole discretion, elect
to enforce his/her rights under the Plan pursuant to Section 502 of ERISA.
The Company shall bear the expense of any enforcement proceeding
brought by an Eligible Employee under the Plan and shall reimburse the Eligible
Employee for all of his/her reasonable costs and expenses relating to such
enforcement proceeding, including, without limitation, reasonable attorneys'
fees and expenses, provided that the Eligible Employee is the prevailing party
in such proceeding. For purposes hereof, the trier of fact in such enforcement
proceeding shall be requested to make a determination as to the reimbursement of
the Eligible Employee's costs and expenses as a prevailing party hereunder. In
no event shall the Eligible Employee be required to reimburse the Company for
any of the costs or expenses relating to such enforcement proceeding.
14. TERM AND AMENDMENT
The Plan shall become effective on the date of its adoption by the
Board (the "Effective Date") and shall continue to be effective until the
"Expiration Date." The Expiration Date shall initially be the third anniversary
of the Effective Date, but as of the first anniversary of the Effective Date and
each anniversary date thereafter, the Expiration Date shall be extended by an
additional one (1) year unless, not later than ninety (90) calendar days prior
to the respective anniversary date of the Effective Date, the Board shall
specify by resolution or other written action that the Expiration Date shall not
be so extended. Notwithstanding the foregoing, in the event of a Change in
Control, the Plan shall continue in effect, and the Expiration Date shall not
14
occur, until the satisfaction of all severance payments and benefits to which
Eligible Employees are or may become entitled to under the Plan. The Board
shall have the right, by resolution or other written action, to amend the Plan;
provided, however, that the Plan may only be amended prior to a Change in
Control, and then only to the extent such amendment is of a technical or
clarifying nature, or increases the rights or benefits of all affected Eligible
Employees, and does not in any manner reduce the rights or benefits of any
Eligible Employee, unless the Company has obtained the express written consent,
in return for good and valuable consideration, of all affected Eligible
Employees in respect of any such amendment.
15. SUCCESSORS AND ASSIGNS
The Plan shall be binding upon any person, firm or business that is a
successor to the business or interests of the Company, whether as a result of a
Change in Control of the Company or otherwise. All payments and benefits that
become due to an Eligible Employee under the Plan shall inure to the benefit of
his/her heirs, assigns, designees or legal representatives.
16. ENFORCEABILITY
The Company intends the Plan to constitute a legally enforceable
obligation between it and each Eligible Employee, and that the Plan confer
vested rights on each Eligible Employee in accordance with the terms of the
Plan, with each Eligible Employee being a third-party beneficiary thereof.
Nothing in the Plan, however, shall be construed to confer on any Eligible
Employee any right to continue in the employ of a Participating Employer or
affect the right of a Participating Employer to terminate the employment or
change the terms and conditions of employment of an Eligible Employee, with or
without notice or cause, prior to a Change in Control, or to take any such
action following a Change in Control, subject to the consequences specified by
the Plan.
The Plan shall be construed and enforced in accordance with ERISA and
the laws of the State of Indiana to the extent not preempted by ERISA,
regardless of the law that might otherwise govern under applicable principles or
provisions of choice or conflict of law doctrines. To the extent any provision
of the Plan shall be invalid or unenforceable under any applicable law, it shall
be considered deleted herefrom and all other provisions of the Plan shall be
unaffected and shall continue in full force and effect.
15
IN WITNESS WHEREOF, the Board has caused this Plan to be adopted and
executed by its duly authorized representative as of March 1, 1995.
ELI LILLY AND COMPANY
By: s/Pedro P. Granadillo
-------------------------------------
Title: Vice President of Human Resources
Attest:
- ---------------------------
EXHIBIT 11. STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE ON PRIMARY
AND FULLY DILUTED BASIS
(Unaudited)
Eli Lilly and Company and Subsidiaries
Three Months Ended
March 31,
------------------
1995 1994
---- ----
(Dollars in millions except
per-share data)
(Shares in thousands)
PRIMARY:
Net income $393.2 $330.7
Average number of common shares outstanding 289,062 289,413
Add incremental shares:
Stock plans and contingent payments 3,576 1,707
------- ------
Adjusted average shares 292,638 291,120
======= =======
Primary earnings per share $1.34 $1.14
FULLY DILUTED:
Net income $393.2 $330.7
Average number of common shares outstanding 289,062 289,413
Add incremental shares:
Stock plans and contingent payments 4,471 1,707
----- ------
Adjusted average shares 293,533 291,120
======= =======
Fully diluted earnings per share $1.34 $1.14
28
EXHIBIT 12. STATEMENT RE: COMPUTATION OF RATIO OF
EARNINGS FROM CONTINUING OPERATIONS TO FIXED CHARGES
(Unaudited)
Eli Lilly and Company and Subsidiaries
(Dollars in Millions)
EXHIBIT 99. ATTACHMENT TO FORM 10-Q
CONTINGENT PAYMENT OBLIGATION UNITS
In connection with the acquisition of Hybritech Incorporated by the Company on
March 18, 1986, the Company issued Contingent Payment Obligation Units (CPUs).
The following information is provided relative to the CPUs.
Hybritech Sales and Gross Profits (Unaudited)
FIRST QUARTER
-------------
1995 1994* 1993*
---- ----- -----
(Millions)
Sales $25.4 $32.4 $40.2
Gross profits $13.7 $15.2 $21.7
* Includes Pacific Biotech, Inc., another subsidiary of Eli Lilly and Company.
Sales for the first quarter were $25.4 million compared with $32.4 million
during the same period in 1994, a decrease of 22 percent. Sales declined in
both domestic and international markets. Gross profits for the first quarter
were $13.7 million compared with $15.2 million in the same period last year, a
decrease of 10 percent.
Sales of the Company's leading product, Tandem(R) Prostate Specific Antigen
(PSA), were lower compared with the same period last year because of continued
competitive pressures. In addition, the previously announced sale of Pacific
Biotech, Inc., in January 1995, contributed to the decline in sales and gross
profits.
Lilly announced in 1994 that it intends to divest itself of its interest in
Hybritech in a manner consistent with its obligations under the CPUs.
Computation of Contingent Payment Obligation Unit Payment
CPU holders are entitled to receive cash payments based upon the annual sales
and gross profits of Hybritech over the period ending December 31, 1995 if
certain performance criteria are achieved. The total amount payable for each
year will equal the sum of 6 percent of Hybritech's sales and 20 percent of
Hybritech's gross profits for that year, less a deductible amount. Sales is
defined in the Indenture governing the CPUs to include net sales of products
and royalties but to exclude contract revenues. Gross profits are the excess
of sales over costs of products sold and do not represent the net income of
Hybritech. The deductible amount was $11 million for 1986 and increases by 35
percent in each subsequent year. The deductible for 1995 is $163.8 million.
The total amount payable is then divided by 12,933,894 to determine the
payment per CPU. The maximum payment that may be made on each CPU if the
criteria are achieved cannot, however, exceed $22. No payments have been made
to date.
32