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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 THE QUARTER ENDED JUNE 30, 1995
COMMISSION FILE NUMBER 1-6351
---
ELI LILLY AND COMPANY
(Exact name of Registrant as specified in its charter)
INDIANA 35-0470950
(State or other jurisdiction (I.R.S. Employer
of 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
July 31, 1995:
Class Number of Shares Outstanding
Common 292,011,493
1
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
Eli Lilly and Company and Subsidiaries
Three Months Six Months
Ended June 30, Ended June 30,
1995 1994 1995 1994
------------------------------
(Dollars in millions except per-share data)
------------------------------------------
Net sales $1,614.8 $1,346.8 $3,332.1 $2,655.9
Cost of sales 459.4 385.8 971.9 767.9
Research and development 260.5 202.2 497.2 379.5
Marketing and administrative 436.3 330.6 843.5 610.6
Special charges - 10.0 - 66.0
Interest expense 72.3 18.7 138.5 35.4
Other income - net (50.3) (61.0) (83.5) (96.8)
1,178.2 886.3 2,367.6 1,762.6
Income from continuing operations
before income taxes 436.6 460.5 964.5 893.3
Income taxes 126.6 141.3 279.7 273.4
Income from continuing 310.0 319.2 684.8 619.9
operations
Income from discontinued
operations, net of tax 17.1 27.4 35.5 57.4
Net income $327.1 $346.6 $720.3 $677.3
===== ===== ===== =====
Earnings per share:
Income from continuing $1.07 $1.10 $2.37 $2.14
operations
Income from discontinued .06 .10 .12 .20
operations
Net income $1.13 $1.20 $2.49 $2.34
==== ==== ==== ====
Dividends paid per share $ .645 $ .625 $1.29 $1.25
See Notes to Consolidated Condensed Financial Statements.
2
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
Eli Lilly and Company and Subsidiaries
June 30, December 31,
1995 1994
-------------------
(Millions)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $989.7 $536.9
Short-term investments 208.6 209.8
Accounts receivable, net of allowances
of $57.0 (1995) and $46.6 (1994) 1,549.2 1,550.2
Other receivables 307.2 284.4
Inventories 903.4 968.9
Deferred income taxes 172.0 245.0
Other current assets 280.2 167.1
----- -----
TOTAL CURRENT ASSETS 4,410.3 3,962.3
OTHER ASSETS
Prepaid retirement 417.2 411.9
Investments 513.2 464.1
Goodwill and other intangibles, net of
allowances for amortization of
$390.4 (1995) and $326.2 (1994) 4,352.6 4,411.5
Sundry 936.3 846.1
------- --------
6,219.3 6,133.6
PROPERTY AND EQUIPMENT
Land, buildings, equipment, and
construction-in-progress 7,221.3 7,026.4
Less allowances for depreciation 2,753.7 2,614.9
------- -------
4,467.6 4,411.5
------- -------
$15,097.2 $14,507.4
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term borrowings $3,169.2 $2,724.4
Accounts payable 874.1 878.2
Employee compensation 271.0 304.6
Dividends payable - 188.8
Other liabilities 892.9 1,065.1
Income taxes payable 446.0 508.4
----- -------
TOTAL CURRENT LIABILITIES 5,653.2 5,669.5
LONG-TERM DEBT 2,102.1 2,125.8
DEFERRED INCOME TAXES 226.4 188.9
RETIREE MEDICAL BENEFIT OBLIGATION 166.6 170.5
OTHER NONCURRENT LIABILITIES 975.1 997.1
COMMITMENTS AND CONTINGENCIES - -
SHAREHOLDERS' EQUITY
Common stock 183.0 183.0
Additional paid-in capital 406.6 421.7
Retained earnings 5,614.3 5,062.1
Deferred costs-ESOP (210.7) (218.2)
Currency translation adjustments 46.7 (38.0)
------- ----------
6,039.9 5,410.6
Less cost of common stock in treasury 66.1 55.0
------- -------
5,973.8 5,355.6
------- -------
$15,097.2 $14,507.4
======== ========
See Notes to Consolidated Condensed Financial Statements.
3
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Eli Lilly and Company and Subsidiaries
Six Months Ended
June 30,
1995 1994
--------------
(Millions)
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $720.3 $677.3
Adjustments to Reconcile Net Income to
Cash Flows from Operating Activities:
Changes in operating assets and liabilities (252.6) (405.7)
Change in deferred taxes 105.1 93.6
Depreciation and amortization 279.3 206.6
Special charges - 13.8
Other items, net (105.3) (98.3)
------- ------
NET CASH FLOWS FROM OPERATING ACTIVITIES 746.8 487.3
CASH FLOWS FROM INVESTING ACTIVITIES
Net additions to property and equipment (245.7) (251.1)
Additions to sundry assets and intangibles (8.9) (47.6)
Reduction of investments 229.6 645.7
Additions to investments (203.3) (801.0)
Acquisitions (48.4) -
------- ------
NET CASH USED FOR INVESTING ACTIVITIES (276.7) (454.0)
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid (373.4) (361.7)
Purchase of common stock and other capital
transactions (65.0) (29.2)
Net additions (reductions) to short-term borrowings (105.7) 157.2
Net additions to long-term debt 486.3 342.3
NET CASH PROVIDED BY (USED FOR)
FINANCING ACTIVITIES (57.8) 108.6
Effect of Exchange Rate Changes on Cash 40.5 25.3
---- -----
NET INCREASE IN CASH AND
CASH EQUIVALENTS 452.8 167.2
Cash and cash equivalents at January 1 536.9 539.6
----- -----
CASH AND CASH EQUIVALENTS AT JUNE 30 $ 989.7 $706.8
===== =====
See Notes to Consolidated Condensed Financial Statements.
4
NOTES TO CONSOLIDATED CONDENSED 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 flows 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 reflect a fair presentation 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 recoverables 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), and various products of the
discontinued operations. 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.
The product, patent, and environmental liabilities have been
reflected in the Company's consolidated balance sheets at their
gross, undiscounted amounts
5
(approximately $374 million at June 30, 1995). Estimated
insurance recoverables appear as assets in the consolidated
balance sheets (approximately $147 million at June 30, 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 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.
EARNINGS PER SHARE
Earnings per share are calculated based on the weighted-average
number of outstanding common shares.
SPECIAL CHARGES
During the first six months of 1994, the company incurred $66
million of pre-tax charges associated with the March 31 voluntary
recall of three of the Company's 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
these products were resumed during 1994.
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 by December 31, 1995, including the distribution of
its remaining 80 percent interest in Guidant Corporation
(Guidant) through a 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) and
the sale of Hybritech Incorporated.
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 second quarter of 1995 increased 20
percent from the second quarter of 1994. Overall, sales inside
and outside the United States increased 11 percent and 32
percent, respectively. Compared with the second quarter of 1994,
volume increased sales 15 percent, while foreign exchange rates
and selling prices increased sales 3 percent and 2 percent,
respectively.
The Company's sales for the first six months of 1995 increased 25
percent when compared with the same period in 1994. Sales
outside the United States increased 30 percent, while sales in
the United States increased 22 percent. Compared with the first
six months of 1994, volume increased sales 22 percent and foreign
exchange rates and selling prices contributed 3 percent and 1
percent, respectively.
Worldwide sales of pharmaceutical products increased 20 percent
and 26 percent for the second quarter and six months,
respectively, as compared with the same periods of 1994. Prozac,
Vancocin(R), and Humatrope were the major contributors to the
second-quarter growth. Prozac sales for the quarter were $513.4
million, an increase of 25 percent. The Company expects
continued growth for Prozac sales through 1995, but at a lower
rate, with total sales for the year currently expected to exceed
$2.0 billion. Pharmaceutical sales increased both inside and
outside the United States. International sales growth of 34
percent for the quarter was driven primarily by volume increases
resulting from the Company's continued efforts to expand
globally, particularly in emerging markets. Anti-infective sales
in international markets, especially cefaclor (up 30 percent to
$115.8 million), led the sales increase for the quarter.
Pharmaceutical sales in the United States grew 11 percent in the
quarter despite the negative effects of the introduction of
generic cefaclor by competitors (as discussed below) and the
growth in product discounts and rebates associated with the
Company's increased participation in managed-care programs. Also
contributing to the U.S. sales increase for the second quarter
were service revenues generated by PCS (acquired in November
1994) of $59 million.
In May 1995, two companies began marketing generic forms of
cefaclor capsules in the United States. Primarily as a result of
this new competition, U.S. cefaclor sales declined 55% to $37.7
million in the second quarter. The Company filed suit against
those companies in Federal district court in Indianapolis
asserting infringement of certain United States process patents
7
in the manufacture of cefaclor. On August 4, 1995, the district
court denied the Company's motion for a preliminary 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.
Worldwide sales of animal health products increased 15 percent in
both the second quarter and six months compared with the same
periods in 1994. These increases resulted from increased
performance across the entire product line in both the United
States and international markets.
Cost of sales in the second quarter was 28.4 percent of sales, as
compared to 28.6 percent in the second quarter of 1994. This
decrease is primarily attributable to increased production to
meet larger product demands partially offset by the inclusion of
PCS, sales mix and fluctuating foreign exchange rates. During
the first six months, manufacturing costs increased to 29.2
percent of sales compared with 28.9 percent for the same period
of 1994. The increase for the six months results primarily
from the inclusion of PCS, sales mix and the effect of foreign
exchange rates which were somewhat negated by higher production
levels.
Operating expenses increased 28 percent for the second quarter
and 27 percent for the six months compared to the same periods in
1994. Research and development grew 29 percent and 31 percent
for the second quarter and six months, respectively, over the
same periods in 1994. The large number of compounds in the later
and most expensive phases of clinical trials, primarily
raloxifene, drove the increase in research and development
expenses for both periods. The increase in the marketing and
administrative expenses (32 percent for the second quarter and 38
percent for the six months compared with the same periods in
1994) was caused primarily by the inclusion of PCS, the efforts
to expand the Company's products globally, particularly in
emerging markets, and increased compensation accruals resulting
from the Company's performance-based bonus programs. Special
charges of $10 million and $66 million were incurred in the
second quarter and first six months of 1994, respectively,
relating to the Company's voluntary recall of three of its liquid
oral antibiotics. The rate of growth of 1995 operating expenses
as compared with 1994 would have been greater if the special
charges were not included in the comparisons.
For the second quarter and first six months of 1995, interest
expense was $72.3 million and $138.5 million, respectively,
compared to $18.7 million and $35.4 million for the same periods
in 1994. The higher level of interest expense in 1995 reflects
the additional borrowings associated with the purchase of PCS.
Net other income of $50.3 million for the second quarter and
$83.5 million for the six months was $10.7 million lower and
$13.3 million lower than the same periods in 1994. Both the
second quarter and six months of 1995 were negatively affected by
the amortization of goodwill related to PCS acquisition
(approximately $25.0 million per quarter). The goodwill
amortization in the second quarter was partially offset by
foreign exchange gains and income from a marketing agreement.
For the six months, the amortization was offset in part by non-
recurring income received under a development contract, foreign
exchange gains, the sale of the United States marketing rights to
methadone and a marketing agreement.
The Company's estimated tax rate for both the second quarter and
six months of 1995 was 29 percent compared to 30.7 percent and
30.6 percent for the same periods in 1994. The 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 strategies.
8
For the second quarter of 1995, the growth in sales and the
reduced estimated tax rate was offset by the growth in operating
expenses, including PCS and the impact of the PCS acquisition-
related expenses, resulting in a 3 percent decrease in both
income from continuing operations and earnings per share to
$310.0 million and $1.07, respectively, compared to the same
period of 1994. For the six months, income from continuing
operations grew 10 percent to $684.8 million and earnings per
share increased 11 percent to $2.37 over the same period in 1994
as a result of the strong sales growth, particularly in the first
quarter of 1995.
FINANCIAL CONDITION:
As of June 30, 1995, cash, cash equivalents and short-term
investments totaled $1,198.3 million as compared with $746.7
million at December 31, 1994. Total debt at June 30, 1995, was
$5,271.3, an increase of $421.1 million from December 31, 1995.
The additional borrowings were necessary to fund normal seasonal
operating needs. The short-term debt is primarily in the form of
commercial paper.
In June 1995, the Company replaced $500 million of commercial
paper with thirty-year, 7.125 percent notes. The notes were
issued under a $1 billion shelf registration filed with the
Securities and Exchange Commission (SEC) in the second quarter of
1995. In the first quarter of 1995, approximately $473 million
of Guidant debt, which is due January 8, 1996, was reclassified
from long-term to short-term. Therefore, the balance of long-
term debt remained relatively unchanged from December 31, 1994,
to June 30, 1995.
The company believes that cash generated from operations will be
sufficient to fund operating needs, including debt service,
capital expenditures, and dividends. The Company anticipates
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 committed
bank credit facilities.
9
PART II OTHER INFORMATION
Item 1. Legal Proceedings
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 1994 Annual Report on Form 10-K under Part I, Item 3,
"Legal Proceedings" as supplemented by Part II, Item 1 of the
Company's Report on Form 10-Q for the quarter ended March 31, 1995.
An additional related state court case has now been filed in New
York on behalf of certain retail pharmacies in that state. In
California, the state court has certified a class of retail
pharmacy plaintiffs and a class of consumer plaintiffs.
On June 15, 1995, an action was filed in the Northern District of
California against the Company and PCS Health Systems, Inc. (PCS).
The action, brought by a California retail pharmacy, alleges that
the Company's acquisition of PCS violates federal antitrust laws
and seeks divestiture of PCS by the Company. The Company believes
the claim is without merit and will vigorously defend this action.
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its annual meeting of shareholders on April 17,
1995. The following is a summary of the matters voted on at the
meeting.
(a) Election of Directors to serve the terms indicated:
Term Ending at
Nominee Annual Meeting of For Withhold Vote
------- ----------------- --- -------------
Steven C. Beering 1998 259,921,606 1,561,371
James W. Cozad 1998 259,832,202 1,650,775
Alfred G. Gilman 1996 260,079,886 1,403,091
Franklyn G. Prendergast 1998 260,027,311 1,455,666
Kathi P. Seifert 1998 260,051,989 1,430,988
Randall L. Tobias 1998 260,089,848 1,393,129
(b) Ratification of appointment of Ernst & Young LLP as the Company's
principal independent auditors:
For: 260,246,757
Against: 626,990
Abstain: 609,230
10
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits. The following documents are filed as
-------- exhibits to this Report:
11. Statement re: Computation of Earnings Per
Share on Primary and Fully
Diluted Bases
12. Statement re: Computation of Ratio of
Earnings to Fixed Charges
27. Financial Data Schedule
99. Attachment to Form 10-Q: Contingent Payment
Obligation Units
(b) Reports on Form 8-K. On June 12, 1995, the
-------------------
Company filed a Form 8-K in order to file as exhibits certain
documents required for the Company to issue its 7.125 percent,
30-year notes under its Registration Statement on Form S-3
(Reg. No. 33-58977).
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 August 7, 1995 s/Daniel P. Carmichael
-------------- ---------------------------
Daniel P. Carmichael
Secretary and Deputy
General Counsel
Date August 7, 1995 s/Arnold C. Hanish
-------------- -----------------------
Arnold C. Hanish, Director
Corporate Accounting and
Chief Accounting Officer
11
INDEX TO EXHIBITS
The following documents are filed as a part of this Report:
Exhibit Page
11. Statement re:
Computation of Earnings Per Share
on Primary and Fully Diluted Bases 13
12. Statement re:
Computation of Ratio of Earnings
to Fixed Charges 14
27. Financial Data Schedule 15
99. Attachment to Form 10-Q:
Contingent Payment Obligation Units 17
EXHIBIT 11. STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
ON PRIMARY AND FULLY DILUTED BASES
(Unaudited)
Eli Lilly and Company and Subsidiaries
Three Months Six Months
Ended June 30, Ended June 30,
1995 1994 1995 1994
---------------------------------
(Dollars in millions except
per-share data)
(Shares in thousands)
PRIMARY:
Net income $327.1 $346.6 $720.3 $ 677.3
Average number of common
shares outstanding 289,284 289,259 289,173 289,336
Add incremental shares:
Stock plans and
contingent payments 3,901 2,352 3,739 2,030
----- ----- ----- -----
Adjusted average shares 293,185 291,611 292,912 291,366
======= ======= ======= =======
Primary earnings per share $1.12 $1.19 $2.46 $2.32
FULLY DILUTED:
Net income $327.1 $346.8 $720.3 $677.3
Average number of common shares
outstanding 289,284 289,259 289,173 289,336
Add incremental shares:
Stock plans and contingent
payments 4,385 2,840 4,922 2,593
----- ----- ----- -----
Adjusted average shares 293,669 292,099 294,095 291,929
======= ======= ======= =======
Fully diluted earnings
per share $1.11 $1.19 $2.45 $2.32
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)
Six
Months
Ended
June 30, Years Ended December 31,
-------------------------------------
1995 1994 1993 1992 1991 1990
---- ---- ---- ---- ---- ----
Consolidated Pretax
Income from Continuing
Operations before
Accounting Changes $964.5 $1698.6 $662.8 $1193.5 $1626.3 $1418.1
Interest from Continuing
Operations 158.2 129.2 96.1 108.4 87.1 94.7
Less Interest Capitalized
during the Period from
Continuing Operations (19.7) (25.4) (25.5) (35.2) (48.1) (27.3)
------- ------- ------- ----- ----- ------
Earnings $1103.0 $1802.4 $733.4 $1266.7 $1665.3 $1485.5
====== ====== ===== ====== ====== ======
Fixed Charges:
Interest Expense from
Continuing Operations $158.2 $ 129.2 $ 96.1 $ 108.4 $ 87.1 $ 94.7
===== ===== ==== ===== ==== ====
Ratio of Earnings to
Fixed Charges 7.0 14.0 7.6 11.7 19.1 15.7
===== ===== ==== ==== ==== ====
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)
---------------------------------------------
SECOND QUARTER FIRST HALF
-------------- ----------
1995 1994 1993 1995 1994 1993
-------------------- ------------------
(Millions) (Millions)
Sales $24.8 $32.7 $40.1 $50.3 $65.1 $80.3
Gross profits $13.2 $17.0 $22.5 $26.9 $32.2 $44.2
Sales for the second quarter were $24.8 million compared
with $32.7 million during the same period in 1994, a
decrease of 24 percent. Sales declines were experienced in
both domestic and international markets as the Company's
prostate cancer test, TandemR Prostate Specific Antigen
(PSA) continues to experience increased competition.
Gross profits for the second quarter were $13.2 million
compared with $17.0 million in the same period last year.
In addition, the previously announced sale of Pacific
Biotech Inc. in January 1995 contributed to the decline in
sales and gross profits.
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, if any, 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.