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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, 1996 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 14, 1997 (Common Stock):
$42,991,879,970.
Number of shares of common stock outstanding as of February 14,
1997: 554,528,339
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, 1996
Registrant's Proxy Statement dated March 5, 1997 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 25 other countries, in 19 of which the Company owns
or has an interest in manufacturing facilities. Its products are
sold in approximately 155 countries. Through its PCS Health Systems
("PCS") and Integrated Medical Systems ("IMS") subsidiaries, 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.
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 1996 Annual Report at pages 34-
35 under "Review of Operations--Segment Information" (pages 12-13
of Exhibit 13 to this Form 10-K), is incorporated herein by
reference.
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, the Company's largest-selling
product group, including Prozac(R), a selective serotonin reuptake
inhibitor, indicated for the treatment of depression and, in
many countries, for bulimia and obsessive-compulsive disorder;
Zyprexa(TM), a product approved in the fall of 1996 in the United
States and several other countries for the treatment of
schizophrenia; the Darvon(R) line of analgesic products; and
PermaxR, a treatment for Parkinson's disease;
------------
*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
Anti-infectives, including the oral cephalosporin antibiotics
Ceclor(R) (cefaclor), Keflex(R), and Keftab(R), used in the treatment
of a wide range of bacterial infections; the oral carbacephem
antibiotic Lorabid(R), used to treat a variety of infections; the
oral macrolide antibiotic Dynabac(R); the injectable cephalosporin
antibiotics Mandol(R), Tazidime(R), Kefurox(R) and Kefzol(R), used
to treat a wide range of infections in the hospital setting;
Nebcin(R), an injectable aminoglycoside antibiotic used in
hospitals to treat various infections caused by staphylococci
and Gram-negative bacteria; and Vancocin(R) HCl, an injectable
antibiotic used primarily to treat staphylococcal infections;
Endocrine products, including Humulin(R), human insulin
produced through recombinant DNA technology; Humalog(R),
approved in 1996, a rapid-acting injectable human insulin analog
of recombinant DNA origin; Iletin(R), animal-source insulin in
its various pharmaceutical forms; and Humatrope(R), human growth
hormone produced by recombinant DNA technology;
An antiulcer agent, Axid(R), 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, for reflux esophagitis, and for benign gastric ulcer;
Cardiovascular agents, including ReoPro(R), a monoclonal
antibody product developed and manufactured by Centocor, Inc.
and marketed by the Company for use in angioplasty patients
considered at high risk for suffering abrupt reclosure of the
treated artery; Dobutrex(R), an inotropic agent; and Cynt(TM),
marketed outside the United States for treatment of
hypertension;
Oncolytic agents, including Gemzar(R), indicated for treatment
of advanced or metastatic pancreatic cancer, and, in many
countries outside the United States, for treatment of non-small-
cell lung cancer; Oncovin(R), indicated for treatment of acute
leukemia and, in combination with other oncolytic agents, for
treatment of several different types of advanced cancers;
Velban(R), used in a variety of malignant neoplastic conditions;
and Eldisine(R), indicated for treatment of acute childhood
leukemia resistant to other drugs; and
Additional pharmaceuticals, including sedatives and vitamins.
Animal Health Products
Animal health products include Tylan(R), an antibiotic used to
control certain diseases in cattle, swine, and poultry and to improve
feed efficiency and growth; Rumensin(R), a cattle feed additive that
improves feed efficiency and growth; Coban(R), Monteban(R) and Maxiban(R),
anticoccidial agents for use in poultry; ApralanR, an antibiotic used
to control enteric infections in calves and swine; Micotil(R) and
Pulmotil(R), antibiotics used to treat respiratory disease in cattle
and swine, respectively; and other products for livestock and
poultry.
Health Care Management Services
PCS provides computer-based prescription drug claims processing,
pharmacy benefit administration and management services, mail order
pharmacy services, data management 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
2
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. RECAP(R),
PCS's on-line prescription claims management system, is linked with
over 95% of retail pharmacies in the U.S. In 1996, PCS introduced a
mail order pharmacy program for its customers known as Performance
Mail. Integrated Medical Systems operates physician-based electronic
communication networks, called IMS MEDACOM(R) networks, that deliver
clinical, administrative, and financial information to hospitals,
payers/managed-care plans, laboratories, and physicians.
MARKETING
Most of the Company's major products are marketed worldwide.
Health care management services are marketed primarily in the United
States.
In the United States, the Company distributes pharmaceutical
products principally through approximately 210 independent 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. Four wholesale distributing companies in the United States
accounted for approximately 11%, 11%, 10%, and 8%, respectively, of
the Company's consolidated net sales in 1996. 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 major pharmaceutical products are promoted in the
United States under the Lilly and Dista trade names by Company sales
forces employing salaried sales representatives. These sales
representatives, many 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.
The Company has created new specialized sales forces dedicated to
specific products and product lines, such as diabetes care, Gemzar,
ReoPro, and Zyprexa. The Company has entered into licensing
arrangements under which certain products manufactured by the
Company, such as Ceclor CD, Dynabac, Keftab, and Permax, are
marketed by other pharmaceutical companies in the United States.
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 with a resulting
intensification of price competition. The Company has created
special sales groups to service managed-care organizations,
government and long-term care institutions, hospital contract
administrators, and certain retail pharmacies. 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.
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
3
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. Outside the United States, patent
protection varies widely. In many countries, patent protection is
weak or nonexistent. Patent protection of certain products,
processes, and uses--particularly that relating to Prozac, Axid,
Gemzar, Lorabid, and Zyprexa--is considered to be important to the
operations of the Company. The United States compound patent
covering Prozac expires in 2001 and a use patent for the mechanism of
action by which Prozac works expires in 2003. See "Legal
Proceedings" at page 10 for a discussion of certain litigation
involving these two patents. In other countries, Prozac patents
generally either have expired or will expire over the next several
years. Other U.S. compound patent expirations include the following:
Axid, 2002; Lorabid, 2006; and Zyprexa, 2011. The Gemzar compound
patent in the U.S. expires in 2006, but a use patent covering
treatment of neoplasms with Gemzar is in force until 2012.
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 $7 million in 1996, and royalties paid by
it in relation to pharmaceuticals amounted to approximately $119
million in 1996.
4
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 outside the United States, patent
protection is weak or nonexistent. The growth of managed care
organizations has intensified price competition significantly in the
United States and in varying degrees in some other countries.
The Company believes its long-term competitive position is
dependent upon the success of its research and development endeavors
in discovering and developing innovative, demonstrably 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, and promotion 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 the introduction of new
products will continue to require substantial scientific and
technical effort, time, and expense and significant capital
investment.
5
In the United States, the Omnibus Budget Reconciliation Act of
1990 requires the Company to provide rebates to state governments in
connection with their purchase of certain Company products under
state Medicaid programs, and other cost containment measures have
been adopted or proposed by federal, state, and local government
entities that provide or pay for health care. In most international
markets the Company operates in an environment of government-mandated
cost containment programs, which may include price controls,
discounts and rebates, restrictions on physician prescription levels,
compulsory licenses and generic substitution. The Company expects
that governments inside and outside the United States will continue
to adopt a variety of measures to contain health care costs,
including pharmaceutical costs. The Company cannot predict the
extent to which its business may be affected by these or other future
legislative or 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 1996,
approximately 4,950 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 $838.7 million on these research and development activities
in 1994, $1.04 billion in 1995, and $1.19 billion in 1996.
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 actively seeks out opportunities to invest in external
research and technologies that hold the promise to complement and
strengthen the Company's own research efforts. 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 21,
1997, 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 55 Chairman of the Board and Chief
Executive Officer (since June 1993)
and a Director
Sidney Taurel 48 President and Chief Operating
Officer (since February 1996)
and a Director
Charles E. Golden 50 Executive Vice President
and Chief Financial Officer
(since March 1996) and a Director
August M. Watanabe, 55 Executive Vice President,
M.D. Science and Technology (since
February 1996) and a Director
Mitchell E. Daniels, 47 Vice President, Corporate
Jr. Strategy and Policy (since
January 1997)
Rebecca O. Goss 49 Vice President and General
Counsel (since March 1995)
Pedro P. Granadillo 49 Vice President, Human
Resources (since April 1993)
Alan S. Clark 62 President, U.S. Operations (since
January 1997)*
Michael L. Eagle 49 Vice President, Manufacturing (since
January 1994)*
Brendan P. Fox, D.V.M. 53 President, Elanco Animal Health
Business Unit (since January 1991)*
Michael E. Hanson 49 President, Internal Medicine Business
Unit (since August 1994)*
James A. Harper 49 President, Endocrine Business Unit
(since August 1994)*
Gerhard N. Mayr 50 President, European, Middle East and
African Operations (since January 1993)*
Robert N. Postlethwait 48 President, Neuroscience Business Unit
(since August 1994)*
William R. Ringo, Jr. 51 President, Infectious Diseases
Business Unit (since September 1995)*
Gino Santini 40 Vice President, Corporate Strategy
and Business Development (since
September 1995)*
Thomas Trainer 50 Vice President, Information Technology,
and Chief Information Officer (since
January 1995)*
- ------------
*Serves in office until successor is appointed.
8
EMPLOYEES
At the end of 1996, the Company had approximately 29,200
employees, including approximately 13,700 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 1996 Annual Report at pages 34-35 under
"Review of Operations--Segment Information" (pages 12-13 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. In addition, changing currency values can either favorably
or unfavorably affect the financial position and results of
operations of the Company. The Company actively manages its foreign
exchange risk through various hedging techniques including the use of
foreign currency contracts. Further information on the Company's
hedging program is contained in Note 6 to the Company's financial
statements for 1996, "Financial Instruments -- Risk Management
Instruments and Off-Balance Sheet Risk", at pages 41-42 of the
Company's 1996 Annual Report (pages 19-20 of Exhibit 13).
Item 2. PROPERTIES
The Company's principal domestic and international executive
offices are located in Indianapolis. At December 31, 1996, the
Company owned 14 production and distribution facilities in the United
States and Puerto Rico. Together with the corporate administrative
offices, these facilities contain an aggregate of approximately 9.4
million square feet of floor area. Major production sites include
Indianapolis; Clinton and Lafayette, Indiana; and Carolina and
Mayaguez, Puerto Rico. 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 473,000 square feet, and
leases a 94,000 square foot mail-order pharmacy facility in Fort
Worth, Texas. It also leases administrative space in other cities in
the United States. Integrated Medical Systems leases administrative
space in a number of locations.
The Company has 27 production and distribution facilities in 19
countries outside the United States and Puerto Rico, containing an
aggregate of approximately 4.0 million square feet of floor space.
Leased production and warehouse facilities are utilized in Puerto
Rico and 15 countries outside the United States.
The Company's research and development facilities in the United
States consist of approximately 3.7 million square feet and are
located primarily in Indianapolis and Greenfield, Indiana. Its major
9
research and development facilities abroad are located in Belgium and
the United Kingdom and contain approximately 341,000 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.
Item 3. LEGAL PROCEEDINGS
Prozac Patent Litigation. In March 1996 the Company was informed
by Barr Laboratories, Inc. ("Barr") that it had submitted an
abbreviated new drug application to the U.S. FDA seeking to market a
generic form of Prozac in the United States several years before the
expiration of the Company's patents. Barr has alleged that the
Company's U.S. patents covering Prozac are invalid and
unenforceable. On April 11, 1996, the Company filed suit in the
United States District Court for the Southern District of Indiana
seeking a ruling that Barr's challenge to the Company's patents is
without merit. A trial date has been set for January 1998. The
compound patent expires in February 2001 and a use patent for the
mechanism of action by which Prozac operates expires in December
2003. These patents are material to the Company. The Company
believes that Barr's claims are without merit and that the Company
should be successful in this litigation. However, it is not possible
to predict or determine the outcome of this litigation and
accordingly there can be no assurance that the Company will prevail.
An unfavorable outcome could have a material adverse effect on the
Company's consolidated financial position, liquidity, or results of
operations.
Product Liability Litigation. The Company is currently a
defendant in a variety of product litigation matters involving
primarily diethylstilbestrol ("DES") and Prozac. In approximately
275 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 class action on behalf of New York resident 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 28 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
10
on sales of brand-name prescription pharmaceuticals to certain retail
pharmacies in the United States. The Company and several 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 was approved by the
District Court but an appeal was subsequently taken and is pending.
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. 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 retail
pharmacies alleging violations of various state antitrust and pricing
laws, purporting to be class actions on behalf of all 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, District of Columbia,
Florida, Kansas, Maine, Michigan, Minnesota, New York, Tennessee,
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 California and the
District of Columbia have certified classes of consumer plaintiffs,
while the Minnesota court denied class certification. The New York
and Washington cases have been dismissed and appeals are pending.
The Alabama, Florida, and Kansas cases have been removed to federal
court. The Alabama case was transferred to the MDL court in Chicago,
and the court denied a motion to remand to the state court. In the
Florida and Kansas cases, there are pending both motions to remand to
the state courts and petitions to transfer to the MDL court in
Chicago.
Other Matters. In June 1995, Bank Pharmacy, 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 believes
the claim is without merit.
In March 1996, the Federal Trade Commission ("FTC") commenced a
non-public investigation focusing on the pricing practices described
under "Pricing Litigation" above. In July 1996, the Company received
a subpoena from the FTC requesting production of certain documents.
The Company believes that all of its actions have been lawful and
proper and is cooperating with the investigation.
In October 1996, the FTC issued a subpoena to the Company and PCS
requesting production of certain documents in connection with a non-
public investigation reviewing whether the relationships and
activities between pharmacy benefit management companies and
pharmaceutical companies have violated federal antitrust law,
including a review of whether the Company has violated the consent
decree it entered into at the time it acquired PCS in 1994. The
Company believes that all its actions and those of PCS have been
lawful, proper and in compliance with the PCS consent decree. The
Company and PCS are cooperating with the FTC's investigation.
11
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 and investigations pending against the Company, the
Company believes that except as noted above, 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.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 1996, 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 1996 Annual Report under "Review of Operations---elected
Quarterly Data (unaudited)," at page 36 (page 14 of Exhibit 13), and
"Review of Operations---elected Financial Data (unaudited)," at
page 37 (page 15 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 1996 Annual Report under
"Review of Operations--Selected Financial Data (unaudited)," at
page 37 (page 15 of Exhibit 13), are incorporated herein by
reference.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
The following portions of the Company's 1996 Annual Report (found
at pages 1-6 and 32-34 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--Operating Results and Net Income--1996"
(pages 24, 25, and 27)
"Review of Operations--Operating Results and Net Income--1995"
(pages 27-28)
"Review of Operations--Financial Condition" (pages 28-29)
"Review of Operations--Environmental and Legal Matters" (pages
29 and 32)
"Review of Operations--Private Securities Litigation Reform Act
of 1995 -- A Caution Concerning Forward-Looking Statements"
(page 32)
12
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
1996 Annual Report at pages 26, 30, 31, and 33 (Consolidated
Statements of Income, Consolidated Balance Sheets, and Consolidated
Statements of Cash Flows), pages 34 and 35 (Segment Information), and
pages 38-51 (Notes to Consolidated Financial Statements) (together,
pages 8-13 and 16-29 of Exhibit 13), and the Report of Independent
Auditors set forth in the Company's 1996 Annual Report at page 52
(page 31 of Exhibit 13), are incorporated herein by reference.
Information on quarterly results of operations, set forth in the
Company's 1996 Annual Report under "Review of Operations--Selected
Quarterly Data (unaudited)," at page 36 (page 14 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 5, 1997 (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 -- Section
16(a) Beneficial Ownership Reporting Compliance" at page 19, is also
incorporated herein by reference.
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 8-18, is incorporated herein by reference,
except that the Compensation and Management Development Committee
Report and Performance Graph are not so incorporated.
13
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 pages 6-7, and
"Principal Holders of Common Stock," at page 7, is incorporated
herein by reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information in Section 1 of the Proxy Statement entitled
"Certain Business Relationships" at page 18 is incorporated herein by
reference.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a)1. Financial Statements
The following consolidated financial statements of the Company
and its subsidiaries, included in the Company's 1996 Annual Report at
the pages indicated in parentheses, are incorporated by reference in
Item 8:
Consolidated Statements of Income--Years Ended December 31,
1996, 1995, and 1994 (page 26) (page 8 of Exhibit 13)
Consolidated Balance Sheets--December 31, 1996 and 1995 (pages
30-31) (pages 9-10 of Exhibit 13)
Consolidated Statements of Cash Flows--Years Ended December 31,
1996, 1995, and 1994 (page 33) (page 11 of Exhibit 13)
Segment Information (pages 34-35) (pages 12-13 of Exhibit 13)
Notes to Consolidated Financial Statements (pages 38-51) (pages
16-29 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.
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.
14
(a)3. Exhibits
3.1 Amended Articles of Incorporation
3.2 By-laws
4.1 Rights Agreement dated as of July 18, 1988, between
Eli Lilly and Company and Bank One, Indianapolis, NA
4.2 Form of Indenture dated as of February 21, 1989,
between Eli Lilly and Company and Merchants National
Bank & Trust Company of Indianapolis, as Trustee
4.3 Form of Eli Lilly and Company Five Year Convertible Note
4.4 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
4.5 Form of Standard Multiple-Series Indenture Provisions dated, and
filed with the Securities and Exchange Commission on,
February 1, 1991
4.6 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
4.7 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
4.8 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
4.9 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 8-3/8%
Notes Due February 7, 20051
10.1 1984 Lilly Stock Plan, as amended2
10.2 1989 Lilly Stock Plan, as amended2
10.3 1994 Lilly Stock Plan, as amended2
10.4 The Lilly Deferred Compensation Plan, as amended2
10.5 The Lilly Directors' Deferral 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.
15
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,
1996 (portions incorporated by reference into this Form 10-K)
21. List of Subsidiaries
23. Consent of Independent Auditors
27. Financial Data Schedule
99. Cautionary Statement under Private Securities Litigation Reform
Act of 1995 -- "Safe Harbor" for Forward-Looking Disclosures
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the fourth
quarter of 1996.
- -------------------
2 Indicates management contract or compensatory plan.
16
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, 1997
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below on March 18, 1997 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 Director (principal
(RANDALL L. TOBIAS) executive officer)
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/Evan Bayh Director
-------------------------
(EVAN BAYH)
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.)
s/J. Clayburn La Force, Jr., Ph.D. Director
----------------------------------
(J. CLAYBURN LA FORCE, JR., Ph.D.)
s/Kenneth L. Lay, 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)
TRADEMARKS USED IN THIS REPORT
Trademarks or service marks owned by Eli Lilly and Company or
its subsidiaries or affiliates, when first used in this Report,
appear with an initial capital and are followed by the symbol (R)
or (TM), as applicable. In subsequent uses of the marks in the
Report, the symbols are omitted.
THE LILLY DIRECTORS' DEFERRAL PLAN
(As amended and restated through January 1, 1997)
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.
2.4. 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 of interest 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.
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.
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.
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 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:
(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 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.
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 Participant 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 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 all
regular Board meetings and further assuming that all such
meetings are 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 no-action letter from the
Securities and Exchange Commission ("SEC"), or (b) an opinion of
counsel satisfactory to the Company, to the effect that such
conversion shall not disqualify the participant from being a
"disinterested 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
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.
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 Non-
Employee 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
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 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 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 Participant'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:
(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 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 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 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.
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.
--------------------------------
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, 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.
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 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.
EXHIBIT 11. COMPUTATION OF EARNINGS PER SHARE ON PRIMARY
AND FULLY DILUTED BASES
Eli Lilly and Company and Subsidiaries
Year Ended December 31
----------------------
1996 1995 1994
---- ---- ----
(Dollars in millions, except per-
share data; shares in thousands)
PRIMARY:
Net income....................... $1,523.5 $2,290.9 $1,286.1
Preferred stock dividends........ (3.6) - -
------- ------- -------
Adjusted net income.............. 1,519.9 2,290.9 1,286.1
======= ======= =======
Average number of common shares
outstanding................... 546,827 569,026 578,378
Add incremental shares:
Stock plans and contingent payments13,105 8,655 4,614
------- ------- -------
Adjusted average shares.......... 559,932 577,681 582,992
======= ======= =======
Primary earnings per share....... $ 2.71 $ 3.97 $ 2.21
======= ======= =======
FULLY DILUTED:
Net income....................... $1,523.5 $2,290.9 $1,286.1
Preferred stock dividends........ (3.6) - -
------- ------- -------
Adjusted net income.............. 1,519.9 2,290.9 1,286.1
======= ======= =======
Average number of common shares
outstanding.................... 546,827 569,026 578,378
Add incremental shares:
Stock plans and contingent payments16,978 15,023 7,080
------- ------- -------
Adjusted average shares.......... 563,805 584,049 585,458
======= ======= =======
Fully diluted earnings per share. $ 2.70 $ 3.92 $ 2.20
======= ======= =======
Common stock equivalents are not materially dilutive and,
accordingly, have not been considered in the computation of
reported net earnings per common shares.
EXHIBIT 12. STATEMENT RE: COMPUTATION OF RATIO OF
EARNINGS TO FIXED CHARGES
Years Ended December 31,
----------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Consolidated Pretax
Income From Continuing
Operations Before
Accounting Changes $2,031.3 $1,765.6 $1,698.6 $ 662.8 $1,193.5
Interest from Continuing
Operations......... 324.9 324.6 129.2 96.1 108.4
Less Interest Capitalized
During the Period from
Continuing Operations (36.1) (38.3) (25.4) (25.5) (35.2)
------ ----- ----- ------ ------
Earnings............. $2,320.1 $2,051.9 $1,802.4 $ 733.4 $1,266.7
------ ------ ------ ----- -------
Fixed Charges(1)..... $329.6 $324.6 $ 129.2 $ 96.1 $ 108.4
----- ----- ----- ----- ------
Ratio of Earnings to
Fixed Charges..... 7.0 6.3 14.0 7.6 11.7
=== === ==== === =====
(1) Fixed charges include interest from continuing operations
for all years presented and beginning in 1996, preferred stock
dividends.
EXHIBIT 13. ANNUAL REPORT TO SHAREHOLDERS FOR THE YEAR
ENDED DECEMBER 31, 1996
REVIEW OF OPERATIONS
OPERATING RESULTS AND NET INCOME--1996
Worldwide sales rose 9 percent in 1996, to $7.3 billion. The
factor that contributed most to the increase was an 11 percent
growth in unit volume. Foreign exchange rates and selling prices
each decreased sales by 1 percent.
The company achieved sales increases both in the United States and
abroad. Sales in the United States were $4.2 billion, a 12 percent
increase. Sales outside the United States were $3.1 billion, an
increase of 4 percent from 1995.
Pharmaceutical sales for the year increased 9 percent, to $6.8
billion, led by the antidepressant Prozac (up $290 million, or 14
percent, to approximately $2.4 billion). Prozac sales increased
despite continuing competition from generic forms of Prozac in
Australia and Canada and substantial competitive pressures in
France. Other products contributing significantly to the worldwide
pharmaceutical sales growth included the human insulin product
Humulin (up 11 percent, to $884 million) and three of the company's
new products, Gemzar, ReoPro and Zyprexa. Gemzar, an oncolytic
launched in the U.S. in May 1996, contributed $62 million to sales,
while sales of ReoPro, a cardiovascular product launched in
February 1995, contributed $149 million, an increase of $127
million over 1995. Zyprexa, a treatment for schizophrenia and
related psychoses, had a very strong first three months after its
October launch with sales of $87 million. The company's sales also
benefited from increased health-care-management revenues, which
rose $112 million, to $370 million, in 1996, substantially all of
which was in the U.S. The company anticipates that Humulin, Prozac
and the newer products Gemzar, ReoPro and Zyprexa, among others,
will experience continued sales growth in 1997. The pharmaceutical
sales growth for the year was partially offset by a reduction in
worldwide anti-infectives sales, discussed further below, and
slightly lower sales of Axid (down 3 percent, to $531 million) as a
result of increased competitive pressures.
Worldwide anti-infectives sales of $1.5 billion reflected a 13
percent decline, most of which occurred in the U.S. where the
company experienced a decline of 37 percent due largely to
continued generic competition. Although sales growth was achieved
in many of the emerging markets, sales of anti-infectives outside
the U.S. reflected a 2 percent decline compared with 1995. The
primary contributor to this worldwide decline was cefaclor, which
was down 25 percent. In spite of continued strong generic
competition and substantial pricing pressures, worldwide sales of
cefaclor for 1996 exceeded $540 million. All the company's other
anti-infective products, except Dynabac, experienced declines in
the U.S. where competition has stiffened in a field increasingly
crowded by both generic products and newer branded products. The
company expects that worldwide anti-infectives sales in 1997 are
likely to be approximately equal to 1996 levels.
Pharmaceutical sales in the United States in 1996 increased 12
percent, to $4.0 billion, all of which was due to increased volume.
Major products contributing to this growth were Humulin (up $37
million), Prozac (up $292 million, or 20 percent), ReoPro (up $112
million), and Zyprexa, which had U.S. sales of $78 million since
its October 1996 launch. Also, Gemzar contributed $32 million in
U.S. sales. This growth was offset, in part, by the decline in
anti-infectives sales and an increase in Medicaid rebates compared
with 1995. The company anticipates that rebates associated with
Medicaid programs will increase in 1997.
Pharmaceutical sales outside the U.S. increased 4 percent, to
nearly $2.8 billion, in 1996. The increase reflects volume growth
of 10 percent resulting from the company's continued globalization
1
efforts offset, in part, by price decreases and the negative
effects of exchange rate fluctuations. Major products contributing
to this increase were Gemzar, Humulin, Permax and ReoPro. These
sales increases were partially offset by declines in anti-
infectives and Axid. Sales of Prozac outside the U.S. decreased
slightly compared with the prior year. Increases in Prozac sales
achieved in most countries around the world were offset by declines
in certain countries, primarily Australia and Canada, due to
generic competition, and France, due to competitive pressures.
Worldwide sales of animal health products increased 7 percent, to
$547 million. Sales increased 10 percent outside the U.S. and 3
percent in the U.S. The worldwide sales increase occurred across a
majority of the product line.
Cost of sales was 28.8 percent of sales for 1996 compared with 27.9
percent in 1995. This increase primarily reflects the impact of
increased health-care-management revenues, which have lower margins
than pharmaceuticals, and reduced production volumes of certain
products as the company endeavors to reduce inventory levels (which
resulted in greater amounts of overhead costs being charged against
income). These increases were partially offset by productivity
improvements and an improved pharmaceutical sales mix. The company
anticipates that cost of sales as a percent of sales may increase
slightly in 1997 as reductions in costs as a percent of sales for
the core pharmaceutical business will likely be more than offset by
increases in revenues from health-care-management services, which
have higher costs as a percent of revenues.
Research and development expenses increased 14 percent in 1996.
Expenses in support of global clinical trials, as well as an
increase in external research collaborations relating to the
discovery and development of new technologies, compounds and
delivery systems, drove this increase. The company expects
spending in research and development to increase approximately 14
to 17 percent during the next year. The actual increase may vary
depending upon the level of research collaboration activity.
Marketing and administrative expenses increased 7 percent in 1996.
In the second quarter of 1996, the company implemented cost-
containment programs designed to reduce the overall rate of expense
growth while directing greater funding to new product launches and
globalization efforts. These programs helped slow the rate of
marketing and administrative expense growth to 4 percent for the
last half of 1996 compared with 11 percent during the first six
months. Overall, marketing and administrative expenses for 1996
increased largely due to costs associated with the launches of the
company's new products, Gemzar, Humalog and Zyprexa; continued
efforts to expand globally, especially in emerging markets; the
development of enhanced information technology capabilities; and
increased compensation accruals due to the company's performance-
based bonus programs.
In both 1993 and 1992, the company initiated various restructuring
and streamlining initiatives and strategic actions. See Note 3 to
the consolidated financial statements for a further discussion.
During 1996, the company continued the implementation of these
initiatives. Of these restructuring charges, approximately $33
million and $51 million were paid in cash in 1996 and 1995,
respectively. Charges yet to be paid in cash total approximately
$212 million and are expected to be funded from operations
primarily over the next few years.
Interest expense of $289 million in 1996 was approximately the same
as in 1995. Net other income for 1996 amounted to $273 million,
which was $203 million higher than in 1995. The increase was
primarily the result of several nonrecurring items: the sale of the
U.S. marketing rights of Ceclora CD and Keftaba to Dura
Pharmaceuticals, Inc., in the third quarter for approximately $100
million; income received under royalty, codevelopment and
comarketing contracts; the sale of marketing rights for ReoProa in
Japan and Tapazolea in the U.S.; and gains from the sale of certain
equity securities.
The effective tax rate for 1996 was 25 percent compared with 26
percent in 1995. The decline is primarily the result of changes in
the mix of earnings between jurisdictions having lower tax rates
2
compared with those having higher rates and the effectiveness of
various tax-planning strategies. The company expects to sustain a
comparable effective tax rate for 1997.
Income from continuing operations was $1.5 billion and $2.78 per
share, which represents increases of 17 percent and 21 percent,
respectively, from last year. Income was favorably affected by
increased sales and other income and a lower effective tax rate,
offset in part by reduced gross margins and higher operating
expenses. Earnings per share from continuing operations also
benefited from a reduced average number of shares of stock
outstanding as a result of the Guidant splitoff.
In 1995, the company completed the divestiture of all its Medical
Devices and Diagnostics (MDD) Division subsidiaries, realizing a
net gain of $922 million. This gain and the results of operations
of the MDD operations through the date of divestiture added $984
million ($1.73 per share) to net income in 1995. Reported net
income and earnings per share in 1996 do not include income from
discontinued operations. As a consequence, net income and earnings
per share in 1996 reflect decreases of 33 percent and 31 percent,
respectively, as compared with 1995.
OPERATING RESULTS AND NET INCOME--1995
Worldwide sales increased 18 percent in 1995, to nearly $6.8
billion. The factor contributing most to the increase was a 17
percent rise in unit volume. Prices decreased 1 percent, while
exchange rates increased sales by 2 percent. 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
1994.
Pharmaceutical sales for 1995 increased approximately 19 percent,
to approximately $6.3 billion, led by Prozac (up 24 percent, to
approximately $2.1 billion). Other products contributing
significantly to worldwide pharmaceutical sales growth included
Axid (up 13 percent, to $548 million), Humulin (up 19 percent, to
$794 million), Humatrope (up 19 percent, to $269 million) and
Lorabid (up 31 percent, to $169 million). Sales also benefited
from the inclusion of PCS service revenue. All the company's
therapeutic classes achieved 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 million, a 14 percent
decrease from 1994. This decline is primarily the result of
changes in the mix of products sold to Medicaid recipients.
Pharmaceutical sales outside the U.S. increased 22 percent, to
nearly $2.7 billion, in 1995. The international sales growth
related 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 $228 million
in 1995, 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 $495 million. The decline in U.S.
cefaclor sales was primarily due to pricing pressures and strong
generic competition.
Worldwide sales of Elanco Animal Health products increased 11
percent, to $512 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 was 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.
3
Research and development expenses increased 24 percent in 1995.
Research expenditures continued to increase primarily due to the
growth of global clinical trials to support the company's pipeline
of potential new products, including olanzapine and raloxifene.
Marketing and administrative expenses increased 33 percent in 1995.
These expenses increased largely due to the continued efforts to
expand globally, 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.
Interest expense increased in 1995, to $286 million, due to
increased debt levels associated with the purchase of PCS. Net
other income of $70 million for 1995 was $62 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 decline was 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 million in fourth-quarter income from continuing
operations and net income.
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 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 $922 million realized
from the company's divestiture of its MDD businesses, primarily
Guidant Corporation.
For the fourth quarter, in addition to the previously noted benefit
from the reduced effective tax rate, earnings per share from
continuing operations and net income per share 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.
FINANCIAL CONDITION
The company further strengthened its sound financial position in
1996. Cash generated from operations provided the resources to
fund capital expenditures, dividends and debt service. As of
December 31, 1996, cash, cash equivalents and short-term
investments totaled approximately $1.0 billion compared with $1.1
billion at December 31, 1995. Total debt at December 31, 1996, was
$3.7 billion, a decrease of $772 million from the prior year.
Short-term debt aggregating $1.2 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 1997.
4
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 by $3 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 purchased 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 1996, as a result of these risk-management activities, the net
impact of foreign currency and interest rate fluctuations was not
material to the company's results of operations.
Capital expenditures of $444 million during 1996 were $107 million
less than in 1995 as new manufacturing, development, research and
administrative facilities construction neared completion. The
company expects near-term capital expenditures to decline from 1996
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 on fair market
value. The company did not exercise its put option in 1996.
Dividends of $1.37 per share were paid in 1996, an increase of
approximately 5 percent from the $1.31 per share paid in 1995. In
the fourth quarter of 1996, the quarterly dividend was increased
$.0175 per share (5 percent), resulting in an indicated annual rate
for 1997 of $1.44 per share. The year 1996 was the 112th
consecutive year in which the company made dividend payments and
the 29th 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 1996, the company continued to be named as a defendant in
lawsuits involving Prozac. However, the number of new case filings
in 1996 and the number of pending cases declined significantly from
1995 levels.
5
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 several
states brought by retail pharmacies and, in some cases, consumers,
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 several states. The company and
several 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 has been
approved by the U.S. District Court but an appeal of that decision
is pending. 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, not including the
company, 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.
Barr Laboratories, Inc. (Barr), has submitted an Abbreviated New
Drug Application to the U.S. Food and Drug Administration seeking
to market a generic form of Prozac in the United States several
years before the expiration of the company's patents. Barr has
alleged that the company's U.S. Prozac patents are invalid and
unenforceable. Lilly has filed suit in federal court in
Indianapolis seeking a ruling that Barr's challenge to Lilly's
patents is without merit. While the company believes Barr's claims
are without merit, there can be no assurance that the company will
prevail. An unfavorable outcome of this matter could have a
material adverse effect on the company's consolidated financial
position, liquidity or results of operations.
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 that, except as noted above, 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.
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 - -
A CAUTION CONCERNING FORWARD-LOOKING STATEMENTS:
Under the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995, the company cautions investors that
any forward-looking statements or projections made by the company,
including those made in this document, are subject to risks and
uncertainties that may cause actual results to differ materially
from those projected. Economic, competitive, governmental,
technological and other factors that may affect the company's
operations are discussed in Exhibit 99 to the company's most recent
report on Forms 10-Q and 10-K filed with the Securities and
Exchange Commission.
6
1996 Financial Highlights
ELI LILLY AND COMPANY AND SUBSIDIARIES
(Dollars in millions, except per-share data)
Change
December 31 1996 1995 (Percent)
-----------------------------------------------------------------
Net sales $7,346.6 $6,763.8 9
Research and development expenses 1,189.5 1,042.3 14
Income from continuing operations 1,523.5 1,306.6 17
Net income 1,523.5 2,290.9(1) (33)
Earnings per share:
Income from continuing operations $2.78 $2.30 21
Net income 2.78 4.03(1) (31)
Dividends paid per share 1.37 1.31 5
Capital expenditures $443.9 $551.3 (19)
Economic Value Added (EVA) $460.0 $333.0 38
Income from continuing operations as
a percent of sales 20.7% 19.3%
(1) Net income for 1995 includes the results of operations of the
company's discontinued Medical Devices and Diagnostics (MDD)
Division ($62.8 million) and a net gain of $921.5 million on the
divestiture of MDD. See Note 4 to the consolidated financial
statements.
7
Consolidated Statements of Income
ELI LILLY AND COMPANY AND SUBSIDIARIES
(Dollars in millions, except per-share data)
Year Ended December 31 1996 1995 1994
------------------------------------------------------------------
Net sales........................... $7,346.6 $6,763.8 $5,711.6
Cost of sales....................... 2,118.4 1,885.7 1,679.7
Research and development............ 1,189.5 1,042.3 838.7
Acquired research (Note 2).......... - - 58.4
Marketing and administrative........ 1,991.9 1,854.0 1,398.3
Special charges (Note 3)............ - - 66.0
Interest expense.................... 288.8 286.3 103.8
Other income--net................... (273.3) (70.1) (131.9)
------- ------- -------
5,315.3 4,998.2 4,013.0
------- ------- -------
Income from continuing operations
before
income taxes..................... 2,031.3 1,765.6 1,698.6
Income taxes (Note 10).............. 507.8 459.0 513.5
------- ------- -------
Income from continuing operations... 1,523.5 1,306.6 1,185.1
Discontinued operations, net of tax
(Note 4)......................... - 984.3 101.0
------- ------- -------
Net income.......................... $1,523.5 $2,290.9 $1,286.1
======= ======= =======
Earnings per share:
Income from continuing operations $2.78 $2.30 $2.05
Discontinued operations.......... - 1.73 .17
---- ---- ----
Net income....................... $2.78 $4.03 $2.22
==== ==== ====
See notes to consolidated financial statements.
8
Consolidated Balance Sheets
ELI LILLY AND COMPANY AND SUBSIDIARIES
(Dollars in millions)
December 31 1996 1995
-------------------------------------------------------------
Assets
Current Assets
Cash and cash equivalents ............... $813.7 $999.5
Short-term investments .................. 141.4 84.6
Accounts receivable, net of allowances of
$82.4 (1996) and $55.1 (1995) ........ 1,474.6 1,520.5
Other receivables ....................... 262.5 287.9
Inventories (Note 1) .................... 881.4 839.6
Deferred income taxes (Note 10) ......... 145.2 259.2
Prepaid expenses ........................ 172.5 147.3
------- -------
Total current assets ................. 3,891.3 4,138.6
Other Assets
Prepaid retirement (Note 11) ............ 512.9 484.2
Investments (Note 6) .................... 443.5 573.8
Goodwill and other intangibles, net of
allowances for amortization of $311.0
(1996)
and $192.2 (1995) (Note 2) ........... 4,028.2 4,105.2
Sundry .................................. 1,124.3 871.4
------- -------
6,108.9 6,034.6
Property and Equipment (Note 1) ......... 4,307.0 4,239.3
------- -------
$14,307.2 $14,412.5
======== ========
9
Consolidated Balance Sheets
ELI LILLY AND COMPANY AND SUBSIDIARIES
(Dollars in millions)
December 31 1996 1995
----------------------------------------------------------------
Liabilities and Shareholders' Equity
Current Liabilities
Short-term borrowings (Note 7)............. $1,212.9 $1,908.8
Accounts payable........................... 829.3 1,018.0
Employee compensation...................... 388.4 316.0
Dividends payable.......................... 198.8 189.1
Income taxes payable (Note 10)............. 691.8 660.5
Other liabilities.......................... 901.0 874.6
------- -------
Total current liabilities............... 4,222.2 4,967.0
Other Liabilities
Long-term debt (Note 7).................... 2,516.5 2,592.9
Deferred income taxes (Note 10)............ 376.0 295.5
Retiree medical benefit
obligation (Note 11).................... 136.4 147.8
Other noncurrent liabilities............... 956.0 976.7
------- -------
3,984.9 4,012.9
Commitments and contingencies (Note 12).... - -
Shareholders' Equity (Notes 8 and 9)
Common stock--no par value
Authorized shares: 1,600,000,000
Issued shares: 568,902,054........ 355.6 355.6
Additional paid-in capital................. 67.4 418.3
Retained earnings.......................... 7,207.3 6,484.3
Deferred costs---SOP....................... (176.9) (199.5)
Currency translation adjustments........... (57.4) (0.6)
------- -------
7,396.0 7,058.1
Less cost of common stock in treasury:
1996 -- 16,079,323 shares
1995 -- 18,149,494 shares.............. 1,295.9 1,625.5
------- --------
6,100.1 5,432.6
------- --------
$14,307.2 $14,412.5
======== ========
See notes to consolidated financial statements.
10
Consolidated Statements of Cash Flows
ELI LILLY AND COMPANY AND SUBSIDIARIES
(Dollars in millions)
Year Ended December 31 1996 1995 1994
--------------------------------------------------------------------
Cash Flows From Operating Activities
Net income............................. $1,523.5 $2,290.9 $1,286.1
Adjustments To Reconcile Net Income to
Cash Flows From Operating Activities
Depreciation and amortization..... 543.5 553.7 432.2
Change in deferred taxes.......... 207.3 144.0 172.2
Net gain on disposition of
discontinued operations - (921.5) -
Other noncash (income) expense--net (97.8) (9.8) 63.1
-------- ------- -------
2,176.5 2,057.3 1,953.6
Changes in operating assets and
liabilities:
Receivables--(increase) decrease.. 104.4 (189.3) (322.9)
Inventories--(increase) decrease.. (42.2) (22.1) 107.1
Other assets--(increase).......... (51.7) (114.5) (130.6)
Accounts payable and other
liabilities--increase (decrease) (195.6) 93.2 (74.9)
------- ------- ------
(185.1) (232.7) (421.3)
Net Cash From Operating Activities..... 1,991.4 1,824.6 1,532.3
Cash Flows From Investing Activities
Acquisitions........................... (97.1) (36.8) (4,050.8)
Additions to property and equipment.... (443.9) (551.3) (576.5)
Disposals of property and equipment.... 11.2 21.5 58.7
Additions to other assets.............. (40.8) (54.1) (72.9)
Reductions of investments.............. 396.9 430.8 1,387.0
Additions to investments............... (294.3) (372.9) (1,150.5)
------- ------ -------
Net Cash Used for Investing Activities. (468.0) (562.8) (4,405.0)
Cash Flows From Financing Activities
Dividends paid......................... (753.2) (747.2) (723.1)
Purchase of common stock and other
capital transactions................ (314.5) (156.0) (111.0)
Issuance under stock plans............. 218.4 54.7 50.5
Increase (decrease) in short-term (801.4) (967.7) 2,126.1
borrowings.............................
Additions to long-term debt............ - 1,019.5 1,478.1
Reductions of long-term debt........... (10.4) (17.0) (175.8)
Proceeds from Guidant initial public
offering............................ - - 192.5
-------- -------- -------
Net Cash From (Used for) Financing
Activities.......................... (1,661.1) (813.7) 2,837.3
Effect of exchange rate changes on cash (48.1) 14.5 32.7
-------- ------- -------
Net increase (decrease) in cash and
cash equivalents.................... (185.8) 462.6 (2.7)
Cash and cash equivalents at beginning
of year............................. 999.5 536.9 539.6
------- ------- -------
Cash and cash equivalents at end of year $813.7 $ 999.5 $ 536.9
====== ====== ======
See notes to consolidated financial statements.
11
Segment Information
Industry Data (Dollars in millions) 1996 1995 1994
-----------------------------------------------------------------
Net sales--to unaffiliated customers
Life-sciences products and services
Central nervous system .......... $2,659.4 $2,266.4 $1,835.6
Anti-infectives ................. 1,451.4 1,673.9 1,634.4
Endocrine ....................... 1,302.2 1,179.1 1,006.1
Animal health ................... 547.3 512.4 463.6
Gastrointestinal ................ 531.4 548.4 487.4
Health care management .......... 372.2 259.4 25.1
Cardiovascular .................. 326.5 195.8 142.8
All other ....................... 156.2 128.4 116.6
------- ------- -------
Net sales ........................... $7,346.6 $6,763.8 $5,711.6
======= ======= =======
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, Zyprexa, Darvon(R) and Permax. Anti-
infectives include Ceclor, Keflex, Kefzol(R), Lorabid, Nebcin(R),
Tazidime(R) and Vancocin. Endocrine products consist primarily of
Humulin, Humatrope, Humalog and Iletin(R). Animal health products
include Tylan, an antibiotic for promoting feed efficiency and
growth in swine and cattle; Rumensin(R), a nonhormonal cattle feed
additive; Micotil(R), 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. Other major groups are gastrointestinal, all of
which is Axid, and health care management, of which PCS is the
largest component. PCS derives revenue from pharmacy benefit
management, such as pharmacy claims processing and adjudication
as well as physician-focused medical communications networks.
Cardiovascular products consist primarily of ReoPro and Dobutrex.
Products in the all-other category include oncology products, of
which Gemzar 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 1996, two of the company's largest wholesalers
each accounted for approximately 11 percent of consolidated net
sales. Animal health products are sold to wholesale
distributors, retailers, manufacturers and producers.
12
Geographic Information (Dollars in millions) 1996 1995 1994
--------------------------------------------------------------------
Net sales
United States
Sales to unaffiliated customers.. $4,265.6 $3,812.9 $3,281.5
Transfers to other geographic areas 517.3 485.5 405.2
------- ------- ------
4,782.9 4,298.4 3,686.7
Europe, Middle East and Japan
Sales to unaffiliated customers.. 2,310.0 2,193.8 1,765.3
Transfers to other geographic areas 488.3 336.9 269.0
------- ------- ------
2,798.3 2,530.7 2,034.3
Other
Sales to unaffiliated customers.. 771.0 757.1 664.8
Transfers to other geographic areas 17.7 13.8 11.3
----- ----- -----
788.7 770.9 676.1
Eliminations - transfers between
geographic areas.................. (1,023.3) (836.2) (685.5)
------- ----- -----
$7,346.6 $6,763.8 $5,711.6
======= ======= =======
Income from continuing operations before
income taxes
United States.................... $1,273.5 $ 997.8 $1,067.0
Europe, Middle East and Japan.... 772.1 697.1 554.2
Other............................ 58.9 92.1 102.9
Eliminations and adjustments..... (73.2) (21.4) (25.5)
------- ---- ----
$2,031.3 $1,765.6 $1,698.6
======= ======= =======
Total assets
United States.................... $11,101.3 $11,321.8 $12,105.0
Europe, Middle East and Japan.... 3,332.6 3,178.0 3,209.1
Other............................ 590.7 527.0 505.3
Eliminations and adjustments..... (717.4) (614.3) (1,312.0)
--------- -------- --------
$14,307.2 $14,412.5 $14,507.4
======== ======== ========
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.
13
Selected Quarterly Data (unaudited)
ELI LILLY AND COMPANY AND SUBSIDIARIES
(Dollars in millions, except per-share data)
1996 Fourth Third(1) Second First
--------------------------------------------- ---------------------
Net sales ..................$2,061.1 $1,803.9 $1,698.3 $1,783.3
Cost of sales .............. 592.4 502.9 505.1 518.0
Operating expenses ......... 929.2 763.8 752.4 736.0
Other income (expense) - net (56.7) 22.2 24.5 (5.5)
Income before income taxes . 482.8 559.4 465.3 523.8
Net income ................. 373.0 415.6 345.7 389.2
Earnings per share ......... .68 .76 .63 .71
Dividends paid per share ... .3425 .3425 .3425 .3425
Common stock prices:
High .................... 80.38 66.13 67.25 67.63
Low ..................... 63.50 53.50 53.50 49.38
1995(2) Fourth(3) 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 (expense) - 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
(1) Third-quarter other income includes approximately $100 million
for the sale of the U.S. marketing rights of Ceclor CD and Keftab
to Dura Pharmaceuticals, Inc.
(2) Per-share data and common stock prices reflect the two-for-one
stock split in 1995.
(3) 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.
The company's common stock is listed on the New York, London and
other stock exchanges.
14
Selected Financial Data (unaudited)
ELI LILLY AND COMPANY AND SUBSIDIARIES
(Dollars in millions, except per-share data)
1996 1995 1994 1993 1992
--------------------------------------------
Operations
Net sales............... $7,346.6 $6,763.8 $5,711.6 $5,198.5 $4,963.1
Research and development
expenses............. 1,189.5 1,042.3 838.7 755.0 731.0
Other costs and expenses 4,110.3 3,739.7 3,136.4 2,780.4 2,664.5
Restructuring and special
charges.............. - - 66.0 1,032.6 404.4
Income from continuing
operations before taxes
and accounting changes 2,031.3 1,765.6 1,698.6 662.8 1,193.5
Income taxes............ 507.8 459.0 513.5 198.0 351.0
Income from continuing
operations before
accounting changes... 1,523.5 1,306.6 1,185.1 464.8 842.5
Income (loss) from
discontinued operations - 984.3 101.0 26.3 (14.9)
Net income.............. 1,523.5 2,290.9 1,286.1 480.2 708.7
Income from continuing
operations before
accounting changes as a
percent of sales.... 20.7% 19.3% 20.7% 8.9% 17.0%
Per-share data(1):
Income from continuing
operations before
accounting changes. $2.78 $2.30 $2.05 $ .79 $1.43
Income (loss) from
discontinued
operations......... - 1.73 .17 .05 (.03)
Net income........... 2.78 4.03 2.22 .82 1.20
Dividends declared... 1.388 1.33 1.26 1.22 1.128
Average number of shares
and share equivalents
(thousands)(1)........ 546,827 569,026 578,378 588,578 588,956
======= ======= ======= ======= =======
Financial Position
Current assets .......... $3,891.3 $4,138.6 $3,962.3 $3,697.1 $3,006.0
Current liabilities ..... 4,222.2 4,967.0 5,669.5 2,928.0 2,398.6
Property and equipment-net 4,307.0 4,239.3 4,411.5 4,200.2 4,072.1
........................
Total assets ............ 14,307.2 14,412.5 14,507.4 9,623.6 8,672.8
Long-term debt .......... 2,516.5 2,592.9 2,125.8 835.2 582.3
Shareholders' equity .... 6,100.1 5,432.6 5,355.6 4,568.8 4,892.1
======== ======== ======== ======= =======
Supplementary Data(2)
Return on shareholders'
equity ............... 26.4% 42.5% 25.9% 10.2% 14.4%
Return on assets ........ 10.7% 15.6% 11.8% 5.2% 8.3%
Capital expenditures .... $443.9 $551.3 $576.5 $633.5 $912.9
Depreciation and
amortization ......... 543.5 553.7 432.2 398.3 368.1
Effective tax rate ...... 25.0% 26.0% 30.2% 29.9% 29.4%
Number of employees ..... 29,200 28,500 26,400 26,200 25,800
Number of shareholders of
record ............... 54,500 52,600 55,900 59,300 53,900
====== ====== ====== ====== ======
(1) Earnings per share for the years 1994-1996 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. Per-share data and average number
of shares have been adjusted to reflect the two-for-one stock
split in 1995.
(2) All supplementary financial data, other than the effective tax
rate, have been computed using net income, which in 1995 includes
a net gain of $921.5 million from the divestiture of discontinued
operations. See Note 4 to the consolidated financial statements.
The effective tax rate reflects continuing operations only. The
number of employees reflects continuing operations including joint
ventures.
15
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 for all
periods presented reflect the impact of the company's November 1995
stock split.
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 51 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:
1996 1995
---- ----
Finished products.............. $294.5 $273.8
Work in process................ 423.4 446.4
Raw materials and supplies..... 171.7 154.0
----- -----
889.6 874.2
Less reduction to LIFO cost.... 8.2 34.6
----- -----
$881.4 $839.6
====== =====
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, 1996. 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 five to 40 years, using the straight-line
method. Impairments are recognized in operating results if
impairment indicators are present and the fair value of the
related assets is less than their carrying amounts.
Revenue Recognition: Revenue from sales of products is recognized
at the time products are shipped to the customer. Revenue from
health-care-management services is recognized when the services
are delivered.
16
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:
1996 1995
---- ----
Land............................. $ 143.9 $ 136.1
Buildings........................ 2,103.5 1,925.7
Equipment........................ 4,247.0 3,990.5
Construction in progress......... 602.0 776.0
------- -------
7,096.4 6,828.3
Less allowances for depreciation. 2,789.4 2,589.0
------- -------
$4,307.0 $4,239.3
======= =======
Depreciation expense relating to continuing operations for 1996,
1995 and 1994 was $394.9 million, $371.4 million and $328.7
million, respectively. Approximately $35.8 million, $38.3 million
and $25.4 million of interest costs were capitalized as part of
property and equipment in 1996, 1995 and 1994, respectively.
Total rental expense for all leases related to continuing
operations, including contingent rentals (not material), amounted
to approximately $119.6 million for 1996, $106.8 million for 1995
and $81.8 million for 1994. Capital leases included in property
and equipment in the consolidated balance sheets and future
minimum rental commitments are not material. However, the company
entered into capital lease obligations aggregating $27.4 million
in 1996.
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 are calculated based on
the weighted-average number of outstanding common shares.
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 which are being
amortized over 10 years.
In November 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 results of operations of the acquired businesses from the
dates of acquisition are included in the company's consolidated
financial statements.
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.
17
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.
During 1996, the company continued to take steps to complete these
actions.
Significant components of these charges and their status at
December 31, 1995 and 1996, respectively, are summarized as
follows:
Original
Charges 1995 1996
----------------------------
1993
----
Work force reductions.......... $ 534.5 $ 37.7 $ 24.7
Manufacturing consolidations
and other closings........... 204.3 125.2 91.8
Pharmaceutical streamlining.... 35.3 6.3 -
Asset write-downs, legal
accruals and other........... 258.5 30.2 4.4
------- ----- -----
Total - continuing operations. $1,032.6 $199.4 $120.9
======= ===== =====
1992
----
Global manufacturing strategy.. $ 218.9 $ 87.3 $ 59.1
Legal, environmental, asbestos
abatement and other......... 185.5 65.4 61.3
------- ----- -----
Total - continuing operations. $ 404.4 $152.7 $120.4
======= ===== =====
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 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. 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. Pursuant to the splitoff, 16,504,298 shares of the
company's common stock (expressed on a pre-stock-split basis) were
exchanged by company shareholders 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 the other MDD companies were all
finalized by January 1996.
18
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
---- ----
Net sales $ 771.6 $1,289.2
Cost of sales 258.2 536.6
Other operating expenses 356.8 561.5
Income before tax 111.9 168.1
Income from operations, net of tax 62.8 101.0
Net gain on disposition, net of tax
($88.1 million) 921.5 -
----- -----
Discontinued operations $ 984.3 $ 101.0
===== =====
Due to the disposition, all assets, liabilities and equity of the
MDD businesses have been removed from the company's balance
sheets.
Note 5: Implementation of New Financial Accounting Standards
Effective January 1, 1996, the company adopted 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." SFAS 121 requires that 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.
Adoption of this statement did not affect the company's
consolidated results of operations.
Effective January 1, 1996, the company adopted SFAS No. 123,
"Stock Based Compensation." This statement requires 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." The company has elected to continue using
the accounting methods prescribed by APB No. 25 but has included
the pro forma disclosures required by SFAS No. 123 in Note 8.
In June 1996, SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities,"
was issued. The statement must be adopted by the company in the
first quarter of 1997. Under the provisions of this statement,
each party to a transfer would be required to analyze the
components of financial asset transfers and to recognize only
assets it controls and liabilities it has incurred, to derecognize
assets only when control has been surrendered and to derecognize
liabilities only when they have been extinguished. This statement
is not expected to have a material impact on the company's
consolidated results of operations or financial position.
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.
19
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:
1996 1995
---- ----
Forward exchange contracts $ 688.2 $ 838.2
Foreign currency options - purchased 331.9 415.2
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.
1996 1995
-----------------------------------
Cost/Carrying Fair Cost/Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
Short-term investments:
Debt securities $ 141.4 $ 144.5 $ 84.6 $ 85.0
Noncurrent investments:
Marketable equity 72.0 91.4 66.1 140.3
Debt securities 56.9 57.0 143.0 148.0
Nonmarketable equity 20.3 19.0 34.5 35.3
Long-term debt 2,465.5 2,511.6 2,734.3 2,885.6
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, 1996 or 1995.
20
At December 31, 1996 and 1995, the gross unrealized holding gains
on available-for-sale securities were $27.5 million and $88.2
million, respectively, and the gross unrealized holding losses
were $9.4 million and $8.2 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 $102.1 million and $46.0 million in 1996 and
1995, respectively. Realized gains and losses and purchases of
available-for-sale securities were not significant in 1996 and
1995. The net adjustment to unrealized gains and losses on
available-for-sale securities increased (reduced) shareholders'
equity by ($39.0) million and $52.9 million in 1996 and 1995,
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 $276.3
million and $250.2 million as of December 31, 1996 and 1995,
respectively.
Note 7: Borrowings
Long-term debt at December 31 consisted of the following:
1996 1995
---------------------
6.57 to 7.13 percent notes (due 2016-2036) $1,000.0 $ 500.0
6.25 to 8.38 percent notes (due 1999-2006) 750.0 750.0
5.50 to 8.38 percent Eurodollar bonds
(due 1998-2005) 500.0 500.0
6.09 to 7.10 percent medium-term notes
(due 1997-1999) 100.7 185.8
8.18 percent ESOP debentures (due 2006) 114.4 128.8
Commercial paper to be refinanced as long-term - 500.0
Other, including capitalized leases 178.6 211.0
------- -------
2,643.7 2,775.6
Less current portion 127.2 182.7
------- -------
$2,516.5 $2,592.9
======== =======
The company's acquisition of PCS (see Note 2) was financed
primarily through the issuance of $3.8 billion in commercial
paper. Through December 1996, the company had replaced $1.8
billion of the commercial paper with long-term debt, including the
January 1996 issuance of 20 and 40 year notes aggregating $500
million at 6.57 percent and 6.77 percent, respectively.
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, 1996 and 1995, were $30 million and $280 million,
respectively.
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 aggregate amounts of maturities on long-term debt for the next
five years are as follows: 1997, $127.2 million; 1998, $196.4
million; 1999, $160.7 million; 2000, $219.3 million; and 2001,
$168.3 million.
At December 31, 1996, short-term borrowings included $1 billion of
commercial paper and $85.7 million of notes payable to banks. At
December 31, 1995, commercial paper and notes payable to banks
totaled $1,626.3 million and $99.8 million, respectively. The
weighted-average interest rates on short-term borrowings
outstanding were 5.7 percent in 1996 and 5.8 percent in 1995. At
December 31, 1996, unused committed lines of credit totaled $3
billion. Compensating balances and commitment fees are not
21
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 $292.9 million,
$271.7 million and $102.4 million in 1996, 1995 and 1994,
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 exercise prices equal to the fair market value of the company's
stock at the dates of grant. Generally, options vest 100 percent
three years from the grant date and have a term of 10 years.
In October 1995, the company issued its second grant under the
GlobalShares program. 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 of the company's stock at the date
of grant. Options to purchase approximately 5.2 million shares
were granted as part of the program. Individual grants generally
become exercisable on or after the third anniversary of the grant
date and have a term of 10 years.
The company has elected to follow Accounting Principles Board
Opinion (APB) No. 25, "Accounting for Stock Issued to Employees"
and related interpretations in accounting for its stock options.
Under APB No. 25, because the exercise price of the company's
employee stock options equals the market price of the underlying
stock on the date of grant, no compensation expense is recognized.
Total compensation expense for stock-based awards reflected in
income on a pretax basis was $164.2 million and $93.1 million in
1996 and 1995, respectively. However, SFAS No. 123, "Accounting
for Stock-Based Compensation," requires presentation of pro forma
net income and earnings per share as if the company had accounted
for its employee stock options granted subsequent to December 31,
1994, under the fair value method of that statement. For purposes
of pro forma disclosure, the estimated fair value of the options
is amortized to expense over the vesting period. Under the fair
value method, the company's net income and earnings per share
would have been reduced as follows:
1996 1995
---- ----
Net income............................ $27.0 $5.6
Earnings per share.................... .05 .01
Because SFAS No. 123 is applicable only to options granted
subsequent to December 31, 1994, and the options have a three-year
vesting period, the pro forma effect will not be fully reflected
until 1998.
The weighted-average fair value of the individual options granted
during 1996 and 1995 is estimated as $16.50 and $10.05,
respectively, on the date of grant. The fair values for both
years were determined using a Black-Scholes option-pricing model
with the following assumptions:
1996 1995
---- ----
Dividend yield.............. 3.24% 3.28%
Volatility.................. 21.0% 19.7%
Risk-free interest rate..... 6.36% 5.87%
Forfeiture rate............. 0 0
Expected life............... 7 years 7 years
22
Stock option activity during 1994-1996 is summarized below:
Shares of Weighted-
Common Stock Average
Attributable Exercise
to Options Price of
Options
------------------------------------
Unexercised at January 1, 1994 28,903,636 $25.8060
Granted 5,727,444 29.2984
Exercised (2,583,370) 20.9725
Forfeited (966,350) 25.4890
----------
Unexercised at December 31, 1994 31,081,360 26.8604
Granted 10,770,663 46.4970
Exercised (2,892,178) 21.2058
Forfeited (1,343,050) 24.2344
----------
Unexercised at December 31, 1995 37,616,795 33.0129
Granted 3,170,437 67.1045
Exercised (7,291,710) 25.8880
Forfeited (540,584) 41.8539
----------
Unexercised at December 31, 1996 32,954,938 37.7287
==========
The following table summarizes information concerning outstanding
and exercisable options at December 31, 1996:
Options Outstanding Options Exercisable
Weighted-
Average Weighted- Weighted-
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
- --------------------------------------------------------------------------
$5 - $20 61,040 1.1688 $16.6428 61,040 $16.6428
$20 - $30 13,827,250 6.1617 25.1785 9,513,570 23.5177
$30 - $40 4,112,277 4.5159 33.8680 3,739,783 33.8685
$40 - $50 11,981,803 8.0785 45.9193 1,949,457 41.3100
$50 - $70 2,972,568 9.6831 68.8661 18,900 69.1900
Shares exercisable at December 31, 1996 and 1995, were 15,282,750
and 13,396,245, respectively.
At December 31, 1996, additional options, performance awards or
restricted stock grants may be granted under the 1994 Lilly Stock
Plan for not more than 3,293,328 shares (1995 - 7,366,003 shares).
23
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, 1994 $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
Net income 1,523.5
Cash dividends declared
per share: $1.39 (762.9)
Purchase for treasury 5,315,000 318.5
Issuance of stock under
employee stock plans (368.4) (7,384,672) (648.0)
ESOP transactions 17.5 22.6
Unrealized investment gains
and losses, net of tax (39.0)
Other 1.4 (499) (0.1)
------- ------- -------- ---------- ------
Balance at December 31,1996 $67.4 $7,207.3 $(176.9) 16,079,323 $1,295.9
---- ------- ------ ---------- -------
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.
24
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 tenth 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:
1996 1995 1994
---- ---- ----
Current:
Federal....................... $306.0 $177.0 $244.9
Foreign....................... 143.1 140.1 60.2
State......................... 7.4 3.8 30.9
----- ----- -----
456.5 320.9 336.0
Deferred:
Federal....................... 26.6 114.2 140.4
Foreign....................... 7.8 1.9 1.9
State......................... 16.9 22.0 35.2
------ ----- -----
51.3 138.1 177.5
------ ----- -----
Income taxes..................... $ 507.8 $459.0 $513.5
====== ===== =====
Significant components of the company's deferred tax assets and
liabilities as of December 31 are as follows:
1996 1995
---- ----
Deferred tax assets:
Compensation and benefits $149.9 $148.4
Restructuring and special charges 91.0 164.7
Litigation, environmental and asbestos 91.4 95.3
Inventory 73.6 90.5
Net operating losses of subsidiaries 68.0 63.9
Divestiture related - 143.6
Other 266.5 202.2
----- -----
740.4 908.6
Valuation allowances (63.0) (85.9)
------ -----
Total deferred tax assets 677.4 822.7
Deferred tax liabilities:
Property and equipment (570.0) (519.7)
Prepaid employee benefits (215.7) (200.7)
Other (61.4) (77.0)
------- ------
Total deferred tax liabilities (847.1) (797.4)
------- ------
Deferred tax assets (liabilities)--net $(169.7) $ 25.3
======= =====
25
At December 31, 1996, the company had net operating loss
carryforwards for income tax purposes of $174 million, of which
$18 million will expire within five years. The majority 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 $1,883
million at December 31, 1996 ($1,544 million at December 31,
1995). Cash payments of taxes totaled $289 million, $449 million
and $378 million in 1996, 1995 and 1994, respectively.
Following is a reconciliation of the effective income tax rate of
the continuing operations:
1996 1995 1994
---- ---- ----
United States federal statutory tax rate 35.0% 35.0% 35.0%
Add (deduct):
State taxes, net of federal tax benefit .8 .9 2.5
Tax savings from operations in Puerto Rico (4.3) (4.2) (2.1)
General business credits (1.7) (1.2) (0.5)
Effect of international operations (5.0) (5.7) (3.7)
Nondeductible goodwill amortization 2.0 2.1 0.3
Sundry (1.8) (.9) (1.3)
----- ----- ----
Effective income tax rate 25.0% 26.0% 30.2%
===== ==== ====
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 for the company's retirement plans included
the following components related to continuing operations:
1996 1995 1994
---- ---- ----
Service cost--benefits earned during the
year $ 84.4 $ 69.8 $ 69.3
Interest cost on projected benefit
obligations 167.2 160.2 156.3
Actual return on assets (356.1) (434.8) (38.3)
Net amortization and deferral 130.2 227.4 (164.3)
----- ------ ------
Net annual pension expense $ 25.7 $ 22.6 $ 23.0
===== ====== ======
26
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
1996 1995 1996 1995
----------------------------------------
Plan assets at fair
value $2,629.2 $2,374.4 $ - $ 4.2
Actuarial present value
of benefit obligations:
Vested benefits 1,721.5 1,682.3 113.3 119.2
Nonvested benefits 112.7 100.0 2.5 4.0
------- ------- ----- -----
Accumulated benefit
obligation 1,834.2 1,782.3 115.8 123.2
Effect of projected future
salary increases 348.2 320.9 5.3 9.4
------- ------- ----- -----
Projected benefit
obligation 2,182.4 2,103.2 121.1 132.6
------- ------- ----- -----
Funded status 446.8 271.2 (121.1) (128.4)
Unrecognized net
(gain) loss (43.1) 114.3 6.3 8.1
Unrecognized prior
service cost 107.5 96.7 14.8 16.2
Unrecognized net
obligation at
January 1, 1986 1.7 2.0 1.4 1.8
Additional minimum
liability - - (17.2) (20.1)
----- ------- ----- -----
Prepaid (accrued)
pension cost $512.9 $ 484.2 $(115.8) $(122.4)
===== ======= ===== =====
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) 1996 1995 1994
------------------------
Weighted-average discount rate 8.1 7.6 8.6
Rate of increase in future
compensation levels 4.5-8.0 4.5-9.5 4.5-9.5
Weighted-average expected long-term
rate of return on plan assets 10.5 10.5 10.9
The discount rate increase at December 31, 1996, decreased the
projected benefit obligation by approximately $122.7 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 $42.6 million, $38.3 million and $37.9 million for
the years 1996, 1995 and 1994, 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.
27
Net postretirement benefit expense from continuing operations
included the following components:
1996 1995 1994
---- ---- ----
Service cost--benefits earned during
the year $11.7 $ 9.8 $11.4
Interest cost on accumulated
postretirement benefit obligations 28.8 24.7 25.9
Actual return on assets (29.7) (20.4) 1.1
Net amortization and deferral 6.0 (4.9) (23.3)
---- ---- ----
Net periodic postretirement benefit cost $16.8 $ 9.2 $15.1
==== ==== ====
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:
1996 1995
---- ----
Accumulated postretirement benefit obligation:
Retirees $308.4 $308.3
Fully eligible active plan participants 35.9 26.5
Other active plan participants 67.8 59.8
----- -----
412.1 394.6
Plan assets at fair value 200.1 168.2
----- -----
Accumulated postretirement benefit obligation
in excess of plan assets 212.0 226.4
Unrecognized benefit of plan amendment 11.0 20.6
Unrecognized net loss (86.6) (99.2)
----- -----
Accrued postretirement benefit cost $136.4 $147.8
===== =====
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) 1996 1995 1994
---- ---- ----
Weighted-average discount rate 8.0 7.5 8.5
Expected long-term rate of return 10.5 10.5 11.0
Health care cost trend rate for participants:
Under age 65 7.0 7.0 8.0
Over age 65 5.0 5.0 6.0
If these trend rates were to be increased by one percentage point
each future year, the December 31, 1996, accumulated
postretirement benefit obligation would increase by 10 percent and
the aggregate of the service and interest cost components of 1996
annual expense from continuing operations would increase by 14
percent. The increase in the discount rate at December 31, 1996,
decreased the accumulated postretirement benefit obligation by
approximately $19.1 million.
Postemployment Benefits:
The company provides certain other postemployment benefits,
primarily related to disability benefits, and accrues for the
related cost over the service lives of the employees. Expenses
associated with these benefit plans in 1996, 1995 and 1994 were
not significant.
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
28
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 payment of those costs. The company reached a
settlement with its primary liability insurance carrier providing
for coverage for certain environmental liabilities and has
reserved its rights to pursue claims against certain excess
carriers. However, because of uncertainties with respect to the
timing and ultimate realization of recoveries under the excess
policies, the company has not recorded any environmental insurance
recoverables with respect to those policies.
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. The company and several other
manufacturers agreed to settle the federal class action case and
the anticipated settlement was accrued in the fourth quarter of
1995. The settlement has been approved by the U.S. District Court
but an appeal of that decision is pending. Other related suits,
brought in federal and several state courts by several thousand
pharmacies, involve claims of price discrimination or claims under
other pricing laws. Additional cases have been brought on behalf
of consumers in several states.
The environmental liabilities and litigation accruals have been
reflected in the company's consolidated balance sheet at a gross
amount of approximately $437.8 million. Estimated insurance
recoverables of approximately $279.5 million have been reflected
as assets in the consolidated balance sheet.
Barr Laboratories, Inc. (Barr), has submitted an Abbreviated New
Drug Application (ANDA) seeking FDA approval to market a generic
form of Prozac several years before the expiration of the
company's patents. The ANDA asserts that Lilly's U.S. patents
covering Prozac are invalid and unenforceable. Lilly has filed
suit in federal court in Indianapolis seeking a ruling that Barr's
challenge to Lilly's patents is without merit. While the company
believes Barr's claims are without merit, there can be no
assurance that the company will prevail. An unfavorable outcome
of this claim could have a material adverse effect on the
company's consolidated financial position, liquidity or results of
operations.
While it is not possible to predict or determine the outcome of
the product liability, antitrust, patent or other legal actions
brought against the company or the ultimate cost of environmental
matters, the company believes that, except as noted above, 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.
29
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 Charles E. Golden
Chairman of the Board and Executive Vice President and Chief
Chief Executive Officer Financial Officer
January 31, 1997
30
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, 1996 and
1995, and the related consolidated statements of income and cash
flows for each of the three years in the period ended December 31,
1996. 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,
1996 and 1995, and the consolidated results of their operations
and their cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted
accounting principles.
Ernst & Young LLP
Indianapolis, Indiana
January 31, 1997
31
Appendix to Exhibit 13
Graphs in Annual Report to Shareholders
for the Year Ended December 31, 1996
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
---- ------
1987 $2,671.0
1988 2,943.7
1989 3,391.0
1990 4,178.3
1991 4,533.4
1992 4,963.1
1993 5,198.5
1994 5,711.6
1995 6,763.8
1996 7,346.6
Strong worldwide volume growth of 11 percent in 1996 was partially
offset by price reductions and exchange rates, resulting in a 9
percent increase in net sales.
Graph #2--Sales by Therapeutic Class
($ millions; percentages represent change from 1995)
Percent Change
Class Amount from 1995
----- ------ --------------
Central Nervous System $2,659.4 17%
Anti-Infectives 1,451.4 (13)%
Endocrine 1,302.2 10%
Animal Health 547.3 7%
Gastrointestinal 531.4 (3)%
Cardiovascular 326.5 67%
Oncology 100.2 126%
In 1996, the company's newer products, including ReoPro, Zyprexa,
Gemzar, and Humalog, contributed to the increases in four of the
therapeutic classes. Sales of anti-infective products declined
primarily due to intensified competition.
32
Graph #3--Sales Outside the U.S.
($ millions)
Year Amount
---- ------
1987 $1,005.9
1988 1,143.3
1989 1,335.7
1990 1,636.9
1991 1,807.0
1992 1,996.2
1993 2,097.5
1994 2,430.2
1995 2,950.9
1996 3,081.0
Sales outside the U.S. continued to grow in 1996. Volume growth of
10 percent was offset by the impact of exchange rates and intense
price competition in certain markets.
Graph #4--Research and Development Expenses
($ millions)
Year Amount
---- ------
1992 $ 731.0
1993 755.0
1994 838.7
1995 1,042.3
1996 1,189.5
Worldwide research and development expenditures increased 14
percent, a faster rate than sales, in support of the company's
strong product pipeline which includes 15 compounds in Phase II or
Phase III clinical trials.
Graph #5--Income from Continuing Operations
($ millions)
Year Amount
---- ------
1992 $ 842.5
1993 464.8
1994 1,185.1
1995 1,306.6
1996 1,523.5
Income from continuing operations increased 17 percent to
approximately $1.5 billion. The years 1992 and 1993 include
restructuring and special charges. See Note 3 to the consolidated
financial statements.
33
Graph #6--Capital Expenditures
($ millions)
Year Amount
---- ------
1992 $912.9
1993 633.5
1994 576.5
1995 551.3
1996 443.9
Capital expenditures declined 19 percent from the 1995 level to their
lowest level in eight years.
Graph #7--Dividends Paid per Share
(dollars)
Year Amount
---- ------
1992 $1.10
1993 1.21
1994 1.25
1995 1.31
1996 1.37
Dividends paid during 1996 increased 5 percent over 1995.
Nineteen ninety-six was the 29th consecutive year in which
dividends were increased. These increases reflect the company's
continued commitment to its shareholders.
34
EXHIBIT 21 - LIST OF SUBSIDIARIES AND AFFILIATES
The following are the subsidiaries and affiliated corporations
of the Company at December 31, 1996.
Certain subsidiaries have been omitted since they are not
significant in the aggregate.
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 Rep. 100
Eli Lilly do Brasil Limitada Brazil 100
Elanco Quimica Limitada Brazil 100
Darilor Sociedad Anonima Uruguay 100
Beimirco Sociedad Anonima Uruguay 100
Eli Lilly Interamerica Inc.,
y Compania Limitada Chile 100
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 Anonima Costa Rica 100
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
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
PCS Holding Corporation
(formerly McKesson Delaware) Delaware 100
Clinical Pharmaceuticals, Inc. Delaware 100
Convenience Office Prescriptions California 100
Integrated Medical Systems, Inc. Colorado 100
IMS-NET of Arizona, Inc. Arizona 100
IMS-NET of Arizona Joint
Venture, Ltd. Arizona 50
IMS-NET of Illinois, Inc. Illinois 100
Illinois Medical Information
Network, Inc. Illinois 68
IMS-NET of Northern 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 L.L.C. Colorado 51
Medical Communication Networks, Inc. California 100
Minnesota Medical Communication
Network L.L.C. Colorado 90
LP Holding Corporation
(formerly McKesson Maryland) Maryland 100
PCS Health Systems, Inc. Delaware 100
PCS of New York, Inc. New York 100
PCS Services, Inc. Delaware 100
PCS Mail Services, Inc. Delaware 100
Saudi Arabian Branch Saudi Arabia 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 Limited New Zealand 100
Integrated Disease Management
(NZ) Limited New Zealand 100
Eli Lilly Canada Inc. Canada 100
RxPlus Canada 100
ELCO Dominicana, S.A. Dominican Rep. 100
ELCO International Sales Corporation Virgin Is.-US 100
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 (Basingstoke) Limited England 100
Eli Lilly UK Limited England 100
Eli Lilly Group Pension
Trustees Limited England 100
Lilly Deutschland GmbH Germany 100
Eli Lilly (Suisse) S.A. & Co.
Beteiligungs-KG Germany 100
Beiersdorf-Lilly GmbH Germany 74.8
LIGEMA Lilly
Gesundheitsmanagement 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
Kinsale Financial Services, Ltd. 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 Repub. 100
Estonian Branch Estonia 100
Hungarian Branch Hungary 100
Ivory Coast Branch Ivory Coast 100
Kazakhstan Branch Kazakhstan 100
Kenyan Branch Kenya 100
Latvian Branch Latvia 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
Tunisian Branch Tunisia 100
Ukraine Branch Ukraine 100
United Arab Emirates Branch U.A.E. 100
Usbekistan Branch Usbekistan 100
Eli Lilly MHC S.A.R.L. Switzerland 100
Eli Lilly Mauritius Mauritius 100
Ranbaxy Lilly Company India 50
Oldfields Financial Management S.A. Switzerland 100
Eli Lilly Suzhou Pharmaceutical
Company Limited China 90
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 Repub. 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
Pharmaserve - Lilly S.A.C.I. Greece 50.9
Pharmabrand, S.A.C.I. Greece 50.9
PRAXICO Ltd. Hungary 50
Lilly Hungaria KFT Hungary 100
Eli Lilly Ranbaxy Limited India 50<51
Dista Italia S.r.l. Italy 100
Eli Lilly Italia S.p.A. Italy 100
Eli Lilly Japan K.K. Japan 100
Eli Lilly Kazakstan Kazakstan 100
Daewoong Lilly Pharmaceutical Co. Ltd. Korea 50<51
Elanco Animal Health, Korea Korea 100
Eli Lilly Malaysia Sdn Bhd. Malaysia 100
Damsen Trading Limited Malta 51
Damsen Trading Limited - Branch Switzerland 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 Pakistan (Pvt.) Ltd. Pakistan 100
Eli Lilly (Philippines), Incorporated Philippines 100
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 &
Farmaceuticos,LDA Portugal 100
Lilly-Farma, Produtos Farmaceuticos, Lda. Portugal 100
ELVA Joint Laboratory Russia 50
Eli Lilly Asia Pacific Pte. Ltd. Singapore 100
Lilly-NUS Centre for Clinical
Pharmacology Pte. Ltd. Singapore 60
Eli Lilly (S.A.)(Proprietary) Ltd. South Africa 100
Glaxo/Eli Lilly Partnership South Africa 50
The Medikredit Joint
Venture Partnership South Africa 75.1
Medikredit Pty. Ltd. South Africa 80
Elanco-Valquimica, S.A. Spain 100
Derly, S.A. Spain 100
Dista, S.A. Spain 100
Lilly, S.A. Spain 100
Geserco, S.A. Spain 100
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 S.A. 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 January 31, 1997, included in the 1996 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 33-37341 on Form S-
8 dated October 17, 1990, in Registration Statement Number
33-58466 on Form S-3 dated February 17, 1993, in
Registration Statement Number 33-50783 on Form S-8 dated
October 27, 1993, in Registration Statement Number 33-56141
on Form S-8 dated October 24, 1994 and in Registration
Statement Number 333-02021 on Form S-8 dated March 28, 1996
of our report dated January 31, 1997 with respect to the
consolidated financial statements incorporated herein by
reference, and our report included in the preceding
paragraph 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
s/Ernst & Young LLP
Indianapolis, Indiana
March 18, 1997
EXHIBIT 99 CAUTIONARY STATEMENT UNDER PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995 - "SAFE HARBOR" FOR
FORWARD LOOKING DISCLOSURES
Certain forward-looking statements are included in this Form 10-K
and may be made by Company spokespersons based on current
expectations of management. All forward-looking statements made by
the Company are subject to risks and uncertainties. Certain
factors, including but not limited to those listed below, may cause
actual results to differ materially from current expectations and
historical results.
- Economic factors over which the Company has no control,
including changes in inflation, interest rates and foreign
currency exchange rates.
- Competitive factors including generic competition as patents on
key products, such as Prozac, expire; pricing pressures, both
in the U.S. and abroad, primarily from managed care groups and
government agencies; and technological advances and patents
obtained by competitors.
- Governmental factors including laws and regulations and
judicial decisions at the state and federal level related to
Medicare, Medicaid and healthcare reform; and laws and
regulations affecting international operations.
- The difficulties and uncertainties inherent in new product
development. New product candidates that appear promising in
development may fail to reach the market because of efficacy or
safety concerns, inability to obtain necessary regulatory
approvals, difficulty or excessive costs to manufacture, or
infringement of the patents or intellectual property rights of
others.
- Delays and uncertainties in the FDA approval process and the
approval processes in other countries, resulting in lost market
opportunity.
- Unexpected safety or efficacy concerns arising with respect to
marketed products, whether or not scientifically justified,
leading to product recalls, withdrawals or declining sales.
- Legal factors including unanticipated litigation of product
liability claims; antitrust litigation; environmental matters;
and patent disputes with competitors which could preclude
commercialization of products or negatively affect the
profitability of existing products.
- Future difficulties obtaining or the inability to obtain
existing levels of product liability insurance.
- Changes in tax laws, including the amendment to the Section 936
income tax credit, and future changes in tax laws related to
the remittance of foreign earnings or investments in foreign
countries with favorable tax rates.
- Changes in accounting standards promulgated by the Financial
Accounting Standards Board, the Securities and Exchange
Commission, and the American Institute of Certified Public
Accountants which are adverse to the Company.
- Internal factors such as changes in business strategies and the
impact of restructurings and business combinations.