SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
Quarterly Report Under Section 13 or 15(d) of the
Securities Exchange Act of 1934
FOR THE QUARTER ENDED MARCH 31, 1998
COMMISSION FILE NUMBER 1-6351
ELI LILLY AND COMPANY
(Exact name of Registrant as specified in its charter)
INDIANA 35-0470950
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
LILLY CORPORATE CENTER, INDIANAPOLIS, INDIANA 46285
(Address of principal executive offices)
Registrant's telephone number, including area code (317) 276-2000
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
---- ----
The number of shares of common stock outstanding as of April 30, 1998:
Class Number of Shares Outstanding
----- ----------------------------
Common 1,107,425,186
1
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
Eli Lilly and Company and Subsidiaries
Three Months
Ended March 31,
1998 1997
-------------------------------------------
(Dollars in millions
except per-share data)
Net sales ........................... $2,269.1 $1,953.0
Cost of sales ....................... 602.1 541.3
Research and development ............ 364.7 301.2
Marketing and administrative ........ 566.0 471.7
Interest expense .................... 48.6 60.6
Other (income) expense - net ........ (16.7) 1.4
--------- --------
1,564.7 1,376.2
--------- --------
Income before income taxes and
extraordinary item ............... 704.4 576.8
Income taxes ........................ 176.1 144.2
--------- --------
Income before extraordinary item .... 528.3 432.6
--------- --------
Extraordinary item -
Loss on early redemption of debt,
net of tax ..................... (7.2) --
--------- --------
Net income .......................... $ 521.1 $ 432.6
========= ========
Earnings per share
Income before extraordinary item . $ .48 $ .39
Extraordinary item ............... (.01) --
--------- --------
Net income ....................... $ .47 $ .39
========= ========
Earnings per share - diluted
Income before extraordinary item . $ .47 $ .38
Extraordinary item ............... (.01) --
--------- --------
Net income ....................... $ .46 $ .38
========= ========
Dividends paid per share ............ $ .20 $ .18
========= ========
See Notes to Consolidated Condensed Financial Statements.
2
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
Eli Lilly and Company and Subsidiaries
Three Months
Ended March 31,
1998 1997
-------------------------------------------
(Dollars in millions
except per-share data)
Net income ......................... $ 521.1 $ 432.6
Other comprehensive income ......... (4.8) (82.2)
-------- --------
Comprehensive income ............... $ 516.3 $ 350.4
======== ========
See Notes to Consolidated Condensed Financial Statements.
3
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
Eli Lilly and Company and Subsidiaries
March 31, December 31,
1998 1997
-------------------------------------------------
(Millions)
ASSETS
CURRENT ASSETS
Cash and cash equivalents .................................. $ 1,264.7 $ 1,947.5
Short-term investments ..................................... 63.1 77.1
Accounts receivable, net of allowances
for doubtful amounts of $59.3 (1998)
and $53.3 (1997) ......................................... 1,670.4 1,544.3
Other receivables .......................................... 163.3 338.9
Inventories ................................................ 977.8 900.7
Deferred income taxes ...................................... 342.1 325.7
Prepaid expenses ........................................... 297.6 186.5
--------- ---------
TOTAL CURRENT ASSETS ....................................... 4,779.0 5,320.7
OTHER ASSETS
Prepaid retirement ......................................... 585.2 579.1
Investments ................................................ 429.9 465.6
Goodwill and other intangibles, net of
allowances for amortization of
$131.1 (1998) and $119.3 (1997) .......................... 1,520.9 1,550.5
Sundry ..................................................... 690.0 559.8
--------- ---------
3,226.0 3,155.0
PROPERTY AND EQUIPMENT
Land, buildings, equipment, and
construction-in-progress ................................. 7,014.9 7,034.9
Less allowances for depreciation ........................... 2,973.1 2,933.2
--------- ---------
4,041.8 4,101.7
--------- ---------
$12,046.8 $12,577.4
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term borrowings ...................................... $ 220.0 $ 227.6
Accounts payable ........................................... 841.4 985.5
Employee compensation ...................................... 339.4 456.6
Dividends payable .......................................... -- 221.7
Income taxes payable ....................................... 1,229.0 1,188.0
Other liabilities .......................................... 900.7 1,112.2
--------- ---------
TOTAL CURRENT LIABILITIES .................................. 3,530.5 4,191.6
LONG-TERM DEBT ................................................ 2,337.2 2,326.1
DEFERRED INCOME TAXES ......................................... 333.6 215.5
RETIREE MEDICAL BENEFIT OBLIGATION ............................ 112.1 118.3
OTHER NONCURRENT LIABILITIES .................................. 780.0 920.3
--------- ---------
3,562.9 3,580.2
COMMITMENTS AND CONTINGENCIES ................................. -- --
MINORITY INTEREST IN SUBSIDIARY ............................... 160.0 160.0
SHAREHOLDERS' EQUITY
Common stock ............................................... 692.0 694.7
Retained earnings .......................................... 4,551.8 4,398.7
Deferred costs-ESOP ........................................ (154.0) (155.7)
Accumulated comprehensive income ........................... (187.4) (182.6)
--------- ---------
4,902.4 4,755.1
Less cost of common stock in treasury ...................... 109.0 109.5
--------- ---------
4,793.4 4,645.6
--------- ---------
$12,046.8 $12,577.4
--------- ---------
--------- ---------
See Notes to Consolidated Condensed Financial Statements.
4
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Eli Lilly and Company and Subsidiaries
Three Months Ended
March 31,
1998 1997
--------------------------------
(Millions)
OPERATING ACTIVITIES
Net income ................................................... $ 521.1 $ 432.6
Adjustments to Reconcile Net Income to Cash
Flows from Operating Activities:
Changes in operating assets and liabilities .................. (677.9) (121.8)
Change in deferred taxes ..................................... 108.4 (153.4)
Depreciation and amortization ................................ 119.2 139.0
Other items, net ............................................. (13.5) 7.3
-------- --------
NET CASH FLOWS FROM OPERATING ACTIVITIES ..................... 57.3 303.7
INVESTING ACTIVITIES
Net additions to property and equipment ...................... (77.7) (58.7)
Additions to sundry assets and intangibles ................... (7.4) (16.1)
Reduction of investments ..................................... 19.9 137.4
Additions to investments ..................................... (7.9) (60.2)
Divestitures/(Acquisitions) .................................. 24.6 (0.2)
-------- --------
NET CASH FROM (USED FOR) INVESTING ACTIVITIES ................ (48.5) 2.2
FINANCING ACTIVITIES
Dividends paid ............................................... (220.7) (197.9)
Purchase of common stock and other capital
transactions .............................................. (461.9) 53.0
Net additions to short-term borrowings ....................... 5.5 114.9
Net additions (reductions) to long-term debt ................. (2.4) 7.6
-------- --------
NET CASH USED FOR FINANCING ACTIVITIES ....................... (679.5) (22.4)
Effect of exchange rate changes on cash ...................... (12.1) (55.1)
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS ............................................... (682.8) 228.4
Cash and cash equivalents at January 1 ....................... 1,947.5 813.7
-------- --------
CASH AND CASH EQUIVALENTS AT MARCH 31 ........................ $1,264.7 $1,042.1
-------- --------
-------- --------
See Notes to Consolidated Condensed Financial Statements.
5
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed financial statements have been
prepared in accordance with the requirements of Form 10-Q and therefore do not
include all information and footnotes necessary for a fair presentation of
financial position, results of operations, and cash flows in conformity with
generally accepted accounting principles. In the opinion of management, the
financial statements reflect all adjustments (consisting only of normal
recurring accruals) that are necessary for a fair statement of the results of
operations for the periods shown. 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.
As presented herein, sales include sales of the Company's life-sciences
products and service revenue from PCS Health Systems, Inc. (PCS).
CONTINGENCIES
The Company has been named as a defendant in numerous product liability lawsuits
involving primarily two products, diethylstilbestrol and Prozac'r'. The
Company has accrued for its estimated exposure, including costs of litigation,
with respect to all current product liability claims. In addition, the Company
has accrued for certain future anticipated product liability claims to the
extent the Company can formulate a reasonable estimate of their costs. The
Company's estimates of these expenses are based primarily on historical claims
experience and data regarding product usage. The Company expects the cash
amounts related to the accruals to be paid out over the next several years. The
majority of costs associated with defending and disposing of these suits are
covered by insurance. The Company's estimate of insurance recoveries is based on
existing deductibles, coverage limits, and the existing and projected future
level of insolvencies among its insurance carriers.
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 the payment of those costs. The Company has reached a
settlement with its primary liability insurance carrier providing for coverage
for certain environmental liabilities and has instituted litigation seeking
coverage from certain excess carriers.
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 have settled the
federal class action case. The Company has also settled with a large number of
the remaining retail pharmacies. Still pending are related suits brought in
federal and some state courts by a large number of retail pharmacies involving
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 the gross amount of approximately
6
$342 million at March 31, 1998. Estimated insurance recoverables of
approximately $235 million have been reflected as assets in the consolidated
balance sheet at March 31, 1998.
Barr Laboratories, Inc. (Barr) and Geneva Pharmaceuticals, Inc. (Geneva) have
each submitted an Abbreviated New Drug Application (ANDA) seeking FDA approval
to market a generic form of Prozac several years before expiration of the
Company's patents. The ANDAs assert that Lilly's U.S. patents covering Prozac
are invalid and unenforceable. In April 1996, the Company filed suit against
Barr in federal court in Indianapolis seeking a ruling that Barr's challenge to
Lilly's patents is without merit. In June 1997, the Company filed a similar suit
against Geneva in the same court. While the Company believes that the claims of
Barr and Geneva are without merit, there can be no assurance that the Company
will prevail. An unfavorable outcome of this litigation 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.
EARNINGS PER SHARE
To reflect the impact of the Company's September 1997 stock split, previously
reported outstanding and weighted-average number of shares of common stock and
per share data have been adjusted.
At December 31, 1997, the Company adopted SFAS No. 128, "Earnings per Share,"
which requires presentation of both basic earnings per share and diluted
earnings per share in the income statement. Accordingly, earnings per share data
for previous periods has been restated. All per share amounts, unless otherwise
noted in the footnotes, are presented on a diluted basis, that is, based on the
weighted-average number of outstanding common shares and the effect of all
potentially dilutive common shares (primarily unexercised stock options).
ACCOUNTING CHANGES
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 130, "Reporting Comprehensive Income." Under provisions of
this statement, the Company has included a financial statement presentation of
comprehensive income to conform to these new requirements. SFAS No. 130 requires
unrealized gains or losses on the Company's available-for-sale securities,
minimum pension liability adjustments and foreign currency translation
adjustments, which prior to adoption were reported separately in shareholders'
equity to be included in other comprehensive income. As a consequence of this
change, certain balance sheet reclassifications will be necessary for previously
reported amounts to achieve the required presentation of comprehensive income.
Implementation of this disclosure standard will not affect the Company's
financial position or results of operations.
In June 1997, SFAS No. 131, "Disclosure about Segments of an Enterprise and
Related Information," was issued. The statement must be adopted by the Company
on December 31, 1998. Under provisions of this statement, the Company will be
required to modify or expand the financial statement disclosures for operating
segments, products and services, and geographic areas. Implementation of this
disclosure standard will not affect the Company's financial position or results
of operations.
7
In December 1997, SFAS No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits," was issued and is effective for the Company's 1998
fiscal year. The statement revises current disclosure requirements for
employers' pensions and other retiree benefits. Implementation of this
disclosure standard will not affect the Company's financial position or results
of operations.
8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
OPERATING RESULTS OF CONTINUING OPERATIONS:
The Company's sales for the first quarter of 1998 increased 16 percent from the
first quarter of 1997. Sales inside the United States increased 20 percent,
while sales outside the United States increased 9 percent. Compared with the
first quarter of 1997, worldwide sales reflected volume growth of 17 percent and
a 2 percent increase in global selling prices which were offset, in part, by the
unfavorable effect of exchange rates of 3 percent.
Worldwide pharmaceutical sales for the quarter were $2,123 million, an increase
of 17 percent compared with the same period of 1997. Sales growth was led by
three of the Company's newer products, Gemzar'r', ReoPro'tm', and Zyprexa'r',
and by Prozac. In addition, the quarter benefited from additional
health-care-management revenues and the launch of Evista'r' in the United States
in January for the prevention of osteoporosis in postmenopausal women. Evista
sales totaled $33 million, driven largely by initial stocking by wholesalers.
Revenue growth for the period was partially offset by lower sales of
anti-infective products, Axid'r' and Humulin'r'. Total U.S. pharmaceutical sales
and services increased 20 percent to $1,393 million primarily as a result of
increased volume. International pharmaceutical sales increased 11 percent
compared with the first quarter of 1997, as sales volume growth of 18 percent
was mitigated by the effect of unfavorable exchange rates (7 percent), while
selling prices remained level.
Worldwide sales of Prozac in the first quarter were $618 million, an increase of
10 percent from the first quarter of 1997. Prozac sales in the U.S. increased 11
percent to $485 million in the first quarter. Sales of Prozac outside the U.S.
experienced an increase of 4 percent to $133 million despite the effects of
unfavorable exchange rates.
Zyprexa posted worldwide sales in the first quarter of $287 million, an
increase of $182 million over the first quarter 1997. U.S. Zyprexa sales
increased $139 million, while sales outside of the U.S. increased $43
million.
Worldwide ReoPro sales of $70 million in the first quarter reflected an increase
of $18 million (35 percent) as compared with the first quarter of 1997.
Worldwide Gemzar sales grew to $57 million in the first quarter of 1998. Sales
both inside and outside the U.S. increased by $12 million, representing growth
of 72 percent and 87 percent, respectively.
Insulin sales, composed of Humulin, Humalog'r', and Iletin'r', decreased 1
percent compared with the first quarter of 1997. Insulin sales decreased 9
percent in the U.S., to $130 million, but increased 11 percent outside the U.S.
to $107 million. Worldwide Humulin sales decreased 7 percent, to $195 million,
compared with the first quarter of 1997. Growth comparisons for Humulin in the
quarter were negatively affected in the U.S. by wholesaler stocking which
occurred at the end of the fourth quarter 1997. In addition, Humulin faced
increased competitive pressures, including oral anti-diabetic products. As a
result, U.S. Humulin sales declined 16 percent to $106 million. International
Humulin sales increased 6 percent despite unfavorable exchange rates. Worldwide
Humalog sales for the first quarter were $25 million, an increase of $13
million.
Worldwide anti-infective sales decreased $48 million (14 percent) in the first
quarter. U.S. anti-infective sales declined 34 percent in the first quarter.
International anti-infective sales decreased 5 percent. These declines were due
in part to continued generic competition in certain markets and the impact of
unfavorable exchange rates. Cefaclor accounted for the majority of the decline
in anti-infective sales. Sales of cefaclor declined 17 percent in the first
quarter.
9
Worldwide sales of animal health products increased 7 percent over the first
quarter of 1998. This sales growth was led by Micotil'r'.
Health-care-management revenues increased 59 percent for the first quarter,
largely due to increased mail order pharmacy sales.
Gross margin improved to 73.5 percent of sales for the first quarter, compared
with 72.3 percent for the first quarter of 1997. The increase was primarily the
result of favorable changes in product mix, continued productivity improvements
and enhanced plant utilization. These improvements were offset, in part, by
increased health-care-management service revenues, which have lower margins than
pharmaceutical products.
Operating expenses for 1998 increased 20 percent for the first quarter. Research
and development increased 21 percent in the first quarter, as the result of
greater investments in both internal research efforts and external research
collaborations. Marketing and administrative expenses increased 20 percent from
the first quarter of 1997. This increase was driven by increased expenditures to
support continued new product launches around the world, including the U.S.
launch of Evista, enhancements of the Company's global information technology
capabilities, including expenditures relating to the Company's development and
implementation of the year 2000 computer initiatives, and direct-to-consumer
advertising campaigns in the U.S.
Compared with the first quarter of 1997, interest expense decreased $12 million
(20 percent). The decrease was primarily due to a decline in the Company's short
term borrowings.
Net other income of $17 million for the first quarter was $18 million higher
than the first quarter of 1997. The quarter benefited from a decrease in
goodwill amortization expense, gains on the sale of certain investments and
increased interest income. Also, the quarterly comparison benefited from
inclusion in the 1997 amount of the charges associated with the discontinuance
of a collaboration with Somatogen, Inc. These increases were partially offset by
the absence of DowElanco joint venture income in the first quarter of 1998 due
to the June 1997 divestiture.
The Company's effective tax rate for the quarter was 25 percent, which was
consistent with the first quarter of 1997.
The Company refinanced a portion of its long term debt, which resulted in a
one-time extraordinary charge of $7 million ($.01 per share), net of a $5
million tax benefit.
First quarter net income was $521 million and $ .46 per share (after
extraordinary item), representing increases of 20 percent and 21 percent,
respectively, as compared with the same periods of 1997. For the first quarter,
net income was favorably impacted by increased sales, improved gross margin, and
increased other income, offset somewhat by higher operating expenses as a
percent of sales.
FINANCIAL CONDITION:
As of March 31, 1998, cash, cash equivalents and short-term investments totaled
$1,328 million as compared with $2,025 million at December 31, 1997, a net
decrease of $697 million. The decrease in cash was due primarily to dividends
paid and stock repurchased for employee stock plans. Total debt at March 31,
1998, was $2,557 million, an increase of $3 million from December 31, 1997.
The Company believes that cash generated from operations in 1998, along with
available cash and cash equivalents, will be sufficient to fund essentially all
of the 1998 operating needs, including debt service, repayment of short term
borrowings, capital expenditures, and dividends.
Many of the Company's computer systems and laboratory and process automation
devices will require modification or replacement over the next two years in
order to render the systems ready for the year 2000. Modifications of some
10
systems have already occurred and others are in various stages of activity
ranging from evaluation to testing. The company is also assessing how it could
be affected by the failure of third parties (e.g., vendors and customers) to
mitigate their own Year 2000 issues. Management currently believes that the
incremental costs of addressing these issues will not materially affect the
Company's consolidated financial position, liquidity or results of operations
through December 31, 1999. The company believes it will be able to resolve all
major Year 2000 issues by the end of 1999. However, if the company is not able
to do so, the impact on business operations could be material to the company's
consolidated results of operations.
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995:
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 are subject to risks and uncertainties which may
cause actual results to differ materially from those projected. Economic,
competitive, governmental, technological and other factors which may affect the
Company's operations are discussed in Exhibit 99 to this Form 10-Q filing.
RECENT DEVELOPMENT:
The Company announced on May 6, 1998, that Randall L. Tobias, chairman and chief
executive officer, plans to retire at the end of the year. The Board of
Directors has elected Sidney Taurel president and chief executive officer
effective July 1, 1998. Mr. Taurel is currently president and chief operating
officer. Mr. Tobias will remain chairman until his retirement from the Company
and Board on December 31, 1998. At that time, Mr. Taurel will become chairman,
president and chief executive officer.
11
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Reference is made to the discussion of In re Brand Name Prescription Drugs
Antitrust Litigation (MDL No. 997) and related cases contained in the Company's
1997 Form 10-K under Item 3, "Legal Proceedings -- Pricing Litigation." The
Company and several other manufacturers have now reached settlements, subject in
each case to court approval, in the state court cases brought on behalf of
consumers in Arizona, District of Columbia, Florida, Kansas, Maine, Michigan,
Minnesota, New York, North Carolina, Tennessee, and Wisconsin.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits. The following documents are filed as exhibits to this
Report:
3. Amended Articles of Incorporation (amended through April 20,
1998)
10. 1998 Lilly Stock Plan
11. Statement re: Computation of Basic Earnings Per Share and
Diluted Earnings Per Share
12. Statement re: Computation of Ratio of Earnings from
Continuing Operations to Fixed Charges
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.
No reports on Form 8-K were filed during the first quarter of
1998.
12
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
ELI LILLY AND COMPANY
-----------------------------------------------
(Registrant)
Date May 12, 1998 S/Daniel P. Carmichael
----------------- -----------------------------------------------
Daniel P. Carmichael
Secretary and Deputy General Counsel
Date May 12, 1998 S/Arnold C. Hanish
----------------- -----------------------------------------------
Arnold C. Hanish
Director, Corporate Accounting and
Chief Accounting Officer
13
INDEX TO EXHIBITS
The following documents are filed as a part of this Report:
Exhibit
-------
3. Amended Articles of Incorporation (amended through
April 20, 1998)
10. 1998 Lilly Stock Plan*
11. Statement re: Computation of Basic Earnings Per
Share and Diluted Earnings Per Share
12. Statement re: Computation of Ratio of Earnings
from Continuing Operations to Fixed Charges
27. Financial Data Schedule
99. Cautionary Statement Under Private Securities Litigation
Reform Act of 1995 - "Safe Harbor" for Forward-Looking
Disclosures
*Incorporated by reference from Exhibit A to the Company's definitive Proxy
Statement filed with the Commission on March 4, 1998.
14
STATEMENT OF DIFFERENCES
------------------------
The trademark symbol shall be expressed as............................ 'tm'
The registered trademark symbol shall be expressed as................. 'r'
Exhibit 3
(As Amended through April 20, 1998)
ELI LILLY AND COMPANY
(AN INDIANA CORPORATION)
AMENDED ARTICLES OF INCORPORATION
1. The name of the Corporation shall be
ELI LILLY AND COMPANY.
2. The purposes for which the Corporation is formed are to engage in any
lawful act or activity for which a corporation may be organized under the
Indiana Business Corporation Law.
3. The period during which the Corporation is to continue as a
corporation is perpetual.
4. The total number of shares which the Corporation shall have authority
to issue is 3,205,000,000 shares, consisting of 3,200,000,000 shares of Common
Stock and 5,000,000 shares of Preferred Stock. The Corporation's shares do not
have any par or stated value, except that, solely for the purpose of any statute
or regulation imposing any tax or fee based upon the capitalization of the
Corporation, each of the Corporation's shares shall be deemed to have a par
value of $0.01 per share.
5. The following provisions shall apply to the Corporation's shares:
(a) The Corporation shall have the power to acquire (by purchase,
redemption, or otherwise), hold, own, pledge, sell, transfer, assign,
reissue, cancel, or otherwise dispose of the shares of the Corporation
in the manner and to the extent now or hereafter permitted by the laws
of the State of Indiana (but such power shall not imply an obligation on
the part of the owner or holder of any share to sell or otherwise
transfer such share to the Corporation), including the power to
purchase, redeem, or otherwise acquire the Corporation's own shares,
directly or indirectly, and without pro rata treatment of the owners or
holders of any class or series of shares, unless, after giving effect
thereto, the Corporation would not be able to pay its debts as they
become due in the usual course of business or the Corporation's total
assets would be less than its total liabilities (and without regard to
any amounts that would be needed, if the Corporation were to be
dissolved at the time of the purchase, redemption, or other acquisition,
to satisfy the preferential rights upon dissolution of shareholders
whose preferential rights are superior to those of the holders of the
shares of the Corporation being purchased, redeemed, or otherwise
acquired, unless otherwise expressly provided with respect to a series
of Preferred Stock). Shares of the Corporation purchased, redeemed, or
otherwise acquired by it shall constitute authorized but unissued
shares, unless prior to any
such purchase, redemption, or other acquisition, or within thirty (30)
days thereafter, the Board of Directors adopts a resolution providing
that such shares constitute authorized and issued but not outstanding
shares.
(b) Preferred Stock of any series that has been redeemed
(whether through the operation of a retirement or sinking fund or
otherwise) or purchased by the Corporation, or which, if convertible,
have been converted into shares of the Corporation of any other class
or series, may be reissued as a part of such series or of any other
series of Preferred Stock, subject to such limitations (if any) as may
be fixed by the Board of Directors with respect to such series of
Preferred Stock in accordance with the provisions of Article 7 of these
Amended Articles of Incorporation.
(c) The Board of Directors of the Corporation may dispose of,
issue, and sell shares in accordance with, and in such amounts as may
be permitted by, the laws of the State of Indiana and the provisions of
these Amended Articles of Incorporation and for such consideration, at
such price or prices, at such time or times and upon such terms and
conditions (including the privilege of selectively repurchasing the
same) as the Board of Directors of the Corporation shall determine,
without the authorization or approval by any shareholders of the
Corporation. Shares may be disposed of, issued, and sold to such
persons, firms, or corporations as the Board of Directors may
determine, without any preemptive or other right on the part of the
owners or holders of other shares of the Corporation of any class or
kind to acquire such shares by reason of their ownership of such other
shares.
6. The following provisions shall apply to the Common Stock:
(a) Except as otherwise provided by the Indiana Business
Corporation Law and subject to such shareholder disclosure and
recognition procedures (which may include voting prohibition sanctions)
as the Corporation may by action of its Board of Directors establish,
shares of Common Stock shall have unlimited voting rights and each
outstanding share of Common Stock shall, when validly issued by the
Corporation, entitle the record holder thereof to one vote at all
shareholders' meetings on all matters submitted to a vote of the
shareholders of the Corporation.
(b) Shares of Common Stock shall be equal in every respect
insofar as their relationship to the Corporation is concerned, but such
equality of rights shall not imply equality of treatment as to
redemption or other acquisition of shares by the Corporation. Subject
to the rights of the holders of any outstanding series of Preferred
Stock, the holders of Common Stock shall be entitled to share ratably
in such dividends or other distributions (other than purchases,
redemptions, or other acquisitions of shares by the Corporation), if
any, as are declared and paid from time to time on the Common Stock at
the discretion of the Board of Directors.
(c) In the event of any liquidation, dissolution, or winding
up of the Corporation, either voluntary or involuntary, after payment
shall have been made to the holders of any outstanding series of
Preferred Stock of the full amount to which they shall be entitled, the
holders of Common Stock shall be entitled, to the
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exclusion of the holders of the Preferred Stock of any and all series,
to share, ratably according to the number of shares of Common Stock
held by them, in all remaining assets of the Corporation available for
distribution to its shareholders.
7. The Board of Directors is hereby expressly authorized to provide,
out of the unissued shares of Preferred Stock, for one or more series of
Preferred Stock. Before any shares of any such series are issued, the Board of
Directors shall fix, and hereby is expressly empowered to fix, by the adoption
and filing in accordance with the Indiana Business Corporation Law, of an
amendment or amendments to these Amended Articles of Incorporation, the terms of
such Preferred Stock or series of Preferred Stock, including the following:
(a) the designation of such series, the number of shares to
constitute such series and the stated value thereof if different from
the par value thereof;
(b) whether the shares of such series shall have voting
rights, in addition to any voting rights provided by law, and, if so,
the terms of such voting rights, which may be general or limited and
may include the right, under specified circumstances, to elect
additional directors;
(c) the dividends, if any, payable on such series, whether any
such dividends shall be cumulative, and, if so, from what dates, the
conditions and dates upon which such dividends shall be payable, the
preference or relation which such dividends shall bear to the dividends
payable on any shares of stock of any other class or any other series
of Preferred Stock;
(d) whether the shares of such series shall be subject to
redemption by the Corporation and, if so, the times, prices and other
conditions of such redemption;
(e) the amount or amounts payable upon shares of such series
upon, and the rights of the holders of such series in, the voluntary or
involuntary liquidation, dissolution or winding up, or upon any
distribution of the assets, of the Corporation;
(f) whether the shares of such series shall be subject to the
operation of a retirement or sinking fund and, if so, the extent to and
manner in which any such retirement or sinking fund shall be applied to
the purchase or redemption of the shares of such series for retirement
or other corporate purposes and the terms and provisions relative to
the operation thereof;
(g) whether the shares of such series shall be convertible
into, or exchangeable for, shares of stock of any other class or any
other series of Preferred Stock or any other securities (whether or not
issued by the Corporation) and, if so, the price or prices or the rate
or rates of conversion or exchange and the method, if any, of adjusting
the same, and any other terms and conditions of conversion or exchange;
(h) the limitations and restrictions, if any, to be effective
while any shares of such series are outstanding upon the payment of
dividends or the making of other
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distributions on, and upon the purchase, redemption or other
acquisition by the Corporation of, the Common Stock or shares of stock
of any other class or any other series of Preferred Stock;
(i) the conditions or restrictions, if any, upon the creation
of indebtedness of the Corporation or upon the issue of any additional
stock, including additional shares of such series or of any other
series of Preferred Stock or of any other class of stock; and
(j) any other powers, preferences and relative, participating,
optional and other special rights, and any qualifications, limitations
and restrictions thereof.
Except to the extent otherwise expressly provided in these Amended Articles of
Incorporation or required by law (i) no share of Preferred Stock shall have any
voting rights other than those which shall be fixed by the Board of Directors
pursuant to this Article 7 and (ii) no share of Common Stock shall have any
voting rights with respect to any amendment to the terms of any series of
Preferred Stock; provided however, that in the case of this clause (ii) the
terms of such series of Preferred Stock, as so amended, could have been
established without any vote of any shares of Common Stock.
8. The Corporation shall have the power to declare and pay dividends or
other distributions upon the issued and outstanding shares of the Corporation,
subject to the limitation that a dividend or other distribution may not be made
if, after giving it effect, the Corporation would not be able to pay its debts
as they become due in the usual course of business or the Corporation's total
assets would be less than its total liabilities (and without regard to any
amounts that would be needed, if the Corporation were to be dissolved at the
time of the dividend or other distribution, to satisfy the preferential rights
upon dissolution of shareholders whose preferential rights are superior to those
of the holders of shares receiving the dividend or other distribution, unless
otherwise expressly provided with respect to any outstanding series of Preferred
Stock). The Corporation shall have the power to issue shares of one class or
series as a share dividend or other distribution in respect of that class or
series or one or more other classes or series.
9. The following provisions are inserted for the management of the
business and for the conduct of the affairs of the Corporation, and it is
expressly provided that the same are intended to be in furtherance and not in
limitation or exclusion of the powers conferred by statute:
(a) The number of directors of the Corporation, exclusive of
directors who may be elected by the holders of any one or more series of
Preferred Stock pursuant to Article 7(b) (the "Preferred Stock
Directors"), shall not be less than nine, the exact number to be fixed
from time to time solely by resolution of the Board of Directors, acting
by not less than a majority of the directors then in office.
(b) The Board of Directors (exclusive of Preferred Stock
Directors) shall be divided into three classes, with the term of office
of one class expiring each year. At the annual meeting of shareholders
in 1985, five directors of the first class shall be elected to hold
office for a term expiring at the 1986 annual meeting, five directors of
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the second class shall be elected to hold office for a term expiring at
the 1987 annual meeting, and six directors of the third class shall be
elected to hold office for a term expiring at the 1988 annual meeting.
Commencing with the annual meeting of shareholders in 1986, each class
of directors whose term shall then expire shall be elected to hold
office for a three-year term. In the case of any vacancy on the Board of
Directors, including a vacancy created by an increase in the number of
directors, the vacancy shall be filled by election of the Board of
Directors with the director so elected to serve for the remainder of the
term of the director being replaced or, in the case of an additional
director, for the remainder of the term of the class to which the
director has been assigned. All directors shall continue in office until
the election and qualification of their respective successors in office.
When the number of directors is changed, any newly created directorships
or any decrease in directorships shall be so assigned among the classes
by a majority of the directors then in office, though less than a
quorum, as to make all classes as nearly equal in number as possible. No
decrease in the number of directors shall have the effect of shortening
the term of any incumbent director. Election of directors need not be by
written ballot unless the By-laws so provide.
(c) Any director or directors (exclusive of Preferred Stock
Directors) may be removed from office at any time, but only for cause
and only by the affirmative vote of at least 80% of the votes entitled
to be cast by holders of all the outstanding shares of Voting Stock (as
defined in Article 13 hereof), voting together as a single class.
(d) Notwithstanding any other provision of these Amended Articles
of Incorporation or of law which might otherwise permit a lesser vote or
no vote, but in addition to any affirmative vote of the holders of any
particular class of Voting Stock required by law or these Amended
Articles of Incorporation, the affirmative vote of at least 80% of the
votes entitled to be cast by holders of all the outstanding shares of
Voting Stock, voting together as a single class, shall be required to
alter, amend or repeal this Article 9.
10. The Board of Directors of the Corporation is exclusively authorized
(a) to adopt, repeal, alter or amend the By-laws of the Corporation by the vote
of a majority of the entire Board of Directors and (b) to adopt any By-laws
which the Board of Directors may deem necessary or desirable for the efficient
conduct of the affairs of the Corporation, including, without limitation,
provisions governing the conduct of, and the matters which may properly be
brought before, meetings of the shareholders and provisions specifying the
manner and extent to which prior notice shall be given of the submission of
proposals to be submitted at any meeting of shareholders or of nominations of
elections of directors to be held at any such meeting.
11. The Corporation shall, to the fullest extent permitted by applicable
law now or hereafter in effect, indemnify any person who is or was a director,
officer or employee of the Corporation (an "Eligible Person") and who is or was
involved in any manner (including, without limitation, as a party or a witness)
or is threatened to be made so involved in any threatened, pending or completed
investigation, claim, action, suit or proceeding, whether civil, criminal,
administrative or investigative (including, without
-5-
limitation, any action, suit or proceeding by or in the right of the Corporation
to procure a judgment in its favor) (a "Proceeding") by reason of the fact that
such person is or was a director, officer or employee of the Corporation or is
or was serving at the request of the Corporation as a director, officer,
employee, partner, member, manager, trustee, fiduciary or agent of another
corporation, partnership, joint venture, limited liability company, trust or
other enterprise (including, without limitation, any employee benefit plan),
against all expenses (including attorneys' fees), judgments, fines or penalties
(including excise taxes assessed with respect to an employee benefit plan) and
amounts paid in settlement actually and reasonably incurred by such Eligible
Person in connection with such Proceeding; provided, however, that the foregoing
shall not apply to a Proceeding commenced by an Eligible Person except to the
extent provided otherwise in the Corporation's By-laws or an agreement with an
Eligible Person. The Corporation may establish provisions supplemental to or in
furtherance of the provisions of this Article 11, including, but not limited to,
provisions concerning the determination of any Eligible Person to
indemnification, mandatory or permissive advancement of expenses to an Eligible
Person incurred in connection with a Proceeding, the effect of any change in
control of the Corporation on indemnification and advancement of expenses and
the funding or other payment of amounts necessary to effect indemnification and
advancement of expenses, in the By-laws of the Corporation or in agreements with
any Eligible Person.
12. Except as otherwise expressly provided for in these Amended Articles
of Incorporation, the Corporation reserves the right to amend, alter or repeal
any provision contained in these Amended Articles of Incorporation, in the
manner now or hereafter prescribed by law, and all rights conferred upon
shareholders herein are subject to this reservation.
13. In addition to all other requirements imposed by law and these
Amended Articles and except as otherwise expressly provided in paragraph (c) of
this Article 13, none of the actions or transactions listed below shall be
effected by the Corporation, or approved by the Corporation as a shareholder of
any majority-owned subsidiary of the Corporation if, as of the record date for
the determination of the shareholders entitled to vote thereon, any Related
Person (as hereinafter defined) exists, unless the applicable requirements of
paragraphs (b), (c), (d), (e), and (f) of this Article 13 are satisfied.
(a) The actions or transactions within the scope of this Article
13 are as follows:
(i) any merger or consolidation of the Corporation or any
of its subsidiaries into or with such Related Person;
(ii) any sale, lease, exchange, or other disposition of
all or any substantial part of the assets of the Corporation or
any of its majority-owned subsidiaries to or with such Related
Person;
(iii) the issuance or delivery of any Voting Stock (as
hereinafter defined) or of voting securities of any of the
Corporation's majority-owned subsidiaries to such Related Person
in exchange for cash, other assets or securities, or a
combination thereof;
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(iv) any voluntary dissolution or liquidation of the
Corporation;
(v) any reclassification of securities (including any
reverse stock split), or recapitalization of the Corporation, or
any merger or consolidation of the Corporation with any of its
subsidiaries, or any other transaction (whether or not with or
otherwise involving a Related Person) that has the effect,
directly or indirectly, of increasing the proportionate share of
any class or series of capital stock of the Corporation, or any
securities convertible into capital stock of the Corporation or
into equity securities of any subsidiary, that is beneficially
owned by any Related Person; or
(vi) any agreement, contract, or other arrangement
providing for any one or more of the actions specified in the
foregoing clauses (i) through (v).
(b) The actions and transactions described in paragraph (a) of
this Article 13 shall have been authorized by the affirmative vote of at
least 80% of all of the votes entitled to be cast by holders of the
outstanding shares of Voting Stock, voting together as a single class.
(c) Notwithstanding paragraph (b) of this Article 13, the 80%
voting requirement shall not be applicable if any action or transaction
specified in paragraph (a) is approved by the Corporation's Board of
Directors and by a majority of the Continuing Directors (as hereinafter
defined).
(d) Unless approved by a majority of the Continuing Directors,
after becoming a Related Person and prior to consummation of such action
or transaction.
(i) the Related Person shall not have acquired from the
Corporation or any of its subsidiaries any newly issued or
treasury shares of capital stock or any newly issued securities
convertible into capital stock of the Corporation or any of its
majority-owned subsidiaries, directly or indirectly (except upon
conversion of convertible securities acquired by it prior to
becoming a Related Person or as a result of a pro rata stock
dividend or stock split or other distribution of stock to all
shareholders pro rata);
(ii) such Related Person shall not have received the
benefit directly or indirectly (except proportionately as a
shareholder) of any loans, advances, guarantees, pledges, or
other financial assistance or tax credits provided by the
Corporation or any of its majority-owned subsidiaries, or made
any major changes in the Corporation's or any of its
majority-owned subsidiaries' businesses or capital structures or
reduced the current rate of dividends payable on the
Corporation's capital stock below the rate in effect immediately
prior to the time such Related Person became a Related Person;
and
(iii) such Related Person shall have taken all required
actions within its power to ensure that the Corporation's Board
of Directors included
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representation by Continuing Directors at least proportionate to
the voting power of the shareholdings of Voting Stock of the
Corporation's Remaining Public Shareholders (as hereinafter
defined), with a Continuing Director to occupy an additional
Board position if a fractional right to a director results and,
in any event, with at least one Continuing Director to serve on
the Board so long as there are any Remaining Public Shareholders.
(e) A proxy statement responsive to the requirements of the
Securities Exchange Act of 1934, as amended, whether or not the
Corporation is then subject to such requirements, shall be mailed to the
shareholders of the Corporation for the purpose of soliciting
shareholder approval of such action or transaction and shall contain at
the front thereof, in a prominent place, any recommendations as to the
advisability or inadvisability of the action or transaction which the
Continuing Directors may choose to state and, if deemed advisable by a
majority of the Continuing Directors, the opinion of an investment
banking firm selected by a majority of the Continuing Directors as to
the fairness (or not) of the terms of the action or transaction from a
financial point of view to the Remaining Public Shareholders, such
investment banking firm to be paid a reasonable fee for its services by
the Corporation. The requirements of this paragraph (e) shall not apply
to any such action or transaction which is approved by a majority of the
Continuing Directors.
(f) For the purpose of this Article 13
(i) the term "Related Person" shall mean any other
corporation, person, or entity which beneficially owns or
controls, directly or indirectly, 5% or more of the outstanding
shares of Voting Stock, and any Affiliate or Associate (as those
terms are defined in the General Rules and Regulations under the
Securities Exchange Act of 1934) of a Related Person; provided,
however, that the term Related Person shall not include (a) the
Corporation or any of its subsidiaries, (b) any profit-sharing,
employee stock ownership or other employee benefit plan of the
Corporation or any subsidiary of the Corporation or any trustee
of or fiduciary with respect to any such plan when acting in such
capacity, or (c) Lilly Endowment, Inc.; and further provided,
that no corporation, person, or entity shall be deemed to be a
Related Person solely by reason of being an Affiliate or
Associate of Lilly Endowment, Inc.;
(ii) a Related Person shall be deemed to own or control,
directly or indirectly, any outstanding shares of Voting Stock
owned by it or any Affiliate or Associate of record or
beneficially, including without limitation shares
a. which it has the right to acquire pursuant to
any agreement, or upon exercise of conversion rights,
warrants, or options, or otherwise or
b. which are beneficially owned, directly or
indirectly (including shares deemed owned through
application of clause a.
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above), by any other corporation, person, or other entity
with which it or its Affiliate or Associate has any
agreement, arrangement, or understanding for the purpose
of acquiring, holding, voting, or disposing of Voting
Stock, or which is its Affiliate (other than the
Corporation) or Associate (other than the Corporation);
(iii) the term "Voting Stock" shall mean all shares of any
class of capital stock of the Corporation which are entitled to
vote generally in the election of directors;
(iv) the term "Continuing Director" shall mean a director
who is not an Affiliate or Associate or representative of a
Related Person and who was a member of the Board of Directors of
the Corporation immediately prior to the time that any Related
Person involved in the proposed action or transaction became a
Related Person or a director who is not an Affiliate or Associate
or representative of a Related Person and who was nominated by a
majority of the remaining Continuing Directors; and
(v) the term "Remaining Public Shareholders" shall mean
the holders of the Corporation's capital stock other than the
Related Person.
(g) A majority of the Continuing Directors of the Corporation
shall have the power and duty to determine for the purposes of this
Article 13, on the basis of information then known to the Continuing
Directors, whether (i) any Related Person exists or is an Affiliate or
an Associate of another and (ii) any proposed sale, lease, exchange, or
other disposition of part of the assets of the Corporation or any
majority-owned subsidiary involves a substantial part of the assets of
the Corporation or any of its subsidiaries. Any such determination by
the Continuing Directors shall be conclusive and binding for all
purposes.
(h) Nothing contained in this Article 13 shall be construed to
relieve any Related Person or any Affiliate or Associate of any Related
Person from any fiduciary obligation imposed by law.
(i) The fact that any action or transaction complies with the
provisions of this Article 13 shall not be construed to waive or satisfy
any other requirement of law or these Amended Articles of Incorporation
or to impose any fiduciary duty, obligation, or responsibility on the
Board of Directors or any member thereof, to approve such action or
transaction or recommend its adoption or approval to the shareholders of
the Corporation, nor shall such compliance limit, prohibit, or otherwise
restrict in any manner the Board of Directors, or any member thereof,
with respect to evaluations of or actions and responses taken with
respect to such action or transaction. The Board of Directors of the
Corporation, when evaluating any actions or transactions described in
paragraph (a) of this Article 13, shall, in connection with the exercise
of its judgment in determining what is in the best interests of the
Corporation and its shareholders, give due consideration to all relevant
factors, including without limitation the social and economic effects on
the employees, customers, suppliers, and other constituents of the
Corporation and its
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subsidiaries and on the communities in which the Corporation and its
subsidiaries operate or are located.
(j) Notwithstanding any other provision of these Amended Articles
of Incorporation or of law which might otherwise permit a lesser vote or
no vote, but in addition to any affirmative vote of the holders of any
particular class of Voting Stock required by law or these Amended
Articles of Incorporation, the affirmative vote of the holders of at
least 80% of the votes entitled to be cast by holders of all the
outstanding shares of Voting Stock, voting together as a single class,
shall be required to alter, amend, or repeal this Article 13.
14. A total of 1,400,000 shares of the 5,000,000 shares of authorized
Preferred Stock are designated as "Series A Participating Preferred Stock" (the
"Series A Preferred Stock"), which shall possess the rights, preferences,
qualifications, limitations, and restrictions set forth below:
(a) The holders of shares of Series A Preferred Stock shall have
the following rights to dividends and distributions:
(i) The holders of shares of Series A Preferred Stock
shall be entitled to receive, when, as and if declared by the
Board of Directors out of funds legally available for the
purpose, quarterly dividends payable in cash on the first day of
April, July, October and January in each year (each such date
being referred to herein as a "Quarterly Dividend Payment Date"),
commencing on the first Quarterly Dividend Payment Date after the
first issuance of a share or fraction of a share of Series A
Preferred Stock, in an amount per share (rounded to the nearest
cent) equal to the greater of (i) $0.05 or (ii) subject to the
provision for adjustment hereinafter set forth, 100 times the
aggregate per share amount of all cash dividends, and 100 times
the aggregate per share amount (payable in kind) of all non-cash
dividends or other distributions other than a dividend or
distribution payable in shares of Common Stock or a subdivision
of the outstanding shares of Common Stock (by reclassification or
otherwise), declared on the Common Stock, par value $.621/2 per
share, of the Corporation (the "Common Stock") since the
immediately preceding Quarterly Dividend Payment Date or, with
respect to the first Quarterly Dividend Payment Date, since the
first issuance of any share or fraction of a share of Series A
Preferred Stock. If on any Quarterly Dividend Payment Date the
Corporation's Articles of Incorporation shall limit the amount of
dividends which may be paid on the Series A Preferred Stock to an
amount less than that provided above, such dividends will accrue
and be paid in the maximum permissible amount and the shortfall
from the amount provided above shall be a cumulative dividend
requirement and be carried forward to subsequent Quarterly
Dividend Payment Dates.
(ii) In the event the Corporation shall at any time
declare or pay any dividend on Common Stock payable in shares of
Common Stock, or effect a subdivision or combination or
consolidation of the outstanding shares of Common Stock (by
reclassification or otherwise than by payment of a
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dividend in shares of Common Stock) into a greater or lesser
number of shares of Common Stock, then in each such case the
amount to which holders of shares of Series A Preferred Stock are
entitled immediately prior to such event under the second
preceding sentence shall be adjusted by multiplying such amount
by a fraction, the numerator of which is the number of shares of
Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that
were outstanding immediately prior to such event.
(iii) When, as and if the Corporation shall declare a
dividend or distribution on the Common Stock (other than a
dividend payable in shares of Common Stock), the Corporation
shall at the same time declare a dividend or distribution on the
Series A Preferred Stock as provided in this paragraph (a) and no
such dividend or distribution on the Common Stock shall be paid
or set aside for payment on the Common Stock unless such dividend
or distribution on the Series A Preferred Stock shall be
simultaneously paid or set aside for payment; provided that, in
the event no dividend or distribution shall have been declared on
the Common Stock during the period between any Quarterly Dividend
Payment Date and the next subsequent Quarterly Dividend Payment
Date, a dividend of $1.00 per share on the Series A Preferred
Stock shall nevertheless be payable, when, as and if declared by
the Board of Directors, on such subsequent Quarterly Dividend
Payment Date.
(iv) Dividends shall begin to accrue and be cumulative on
outstanding shares of Series A Preferred Stock from the date of
issue of such shares of Series A Preferred Stock, unless the date
of issue is a Quarterly Dividend Payment Date or is a date after
the record date for the determination of holders of shares of
Series A Preferred Stock entitled to receive a quarterly dividend
and before such Quarterly Dividend Payment Date, in which event
such dividends shall begin to accrue and be cumulative from such
Quarterly Dividend Payment Date. Accrued but unpaid dividends
shall not bear interest. Dividends paid on the shares of Series A
Preferred Stock in an amount less than the total amount of such
dividends at the time accrued and payable on such shares shall be
allocated pro rata on a share-by-share basis among all such
shares at the time outstanding. The Board of Directors may fix a
record date for the determination of holders of shares of Series
A Preferred Stock entitled to receive payment of a dividend or
distribution declared thereon, which record date shall be no more
than 60 days prior to the relevant Quarterly Dividend Payment
Date.
(b) The holders of shares of Series A Preferred Stock shall have
the following voting rights:
(i) The holders of outstanding Series A Preferred Stock
shall be entitled to vote as a class for the election of two (2)
directors if the Corporation shall fail for six quarters to pay
the dividend payable with respect to such shares pursuant to
paragraph (a) hereof. Such limited voting
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rights may be exercised at the next annual meeting of
shareholders following the failure to pay a dividend for the
sixth quarter and at each succeeding annual meeting of
shareholders until payment of all such preferred dividends which
are in arrears has been made or provided for (the "Dividend
Date"), at which time the right to vote for election of two
directors conferred upon the holders of the outstanding Series A
Preferred Stock shall cease. Each of such two directors shall be
elected to one of the three classes of directors so that the
three classes shall be as equal in number as may be feasible and
shall be elected to hold office for a term expiring at the
earlier of (i) the expiration of the term of the class to which
he is elected or (ii) the Dividend Date. In addition to the
conditional right to vote for election of two directors, any
proposal to amend the relative rights and privileges of shares of
Series A Preferred Stock (including those conferred by this
paragraph (b) (i)) upon which the holders of such Series A
Preferred Stock are entitled by the provisions of the Indiana
Business Corporation Law to vote upon as a class shall require,
instead of a vote of the holders of a majority of such shares,
the affirmative vote of the holders of two-thirds (2/3) of such
shares.
(ii) Except as specified in paragraph (b) (i) above, the
holders of Series A Preferred Stock shall not be entitled to any
vote on any matter, including questions of merger, consolidation,
and the sale of all or substantially all of the assets of the
Corporation.
(c) The Corporation shall be subject to the following
restrictions:
(i) Whenever quarterly dividends or other dividends or
distributions payable on the Series A Preferred Stock as provided
in paragraph (a) of this Article 14 are in arrears, thereafter
and until all accrued and unpaid dividends and distributions,
whether or not declared, on shares of Series A Preferred Stock
outstanding shall have been paid in full, the Corporation shall
not
a. declare or pay dividends on, make any other
distributions on, or redeem or purchase or otherwise
acquire for consideration any shares of stock ranking
junior (either as to dividends or upon liquidation,
dissolution or winding up) to the Series A Preferred
Stock;
b. declare or pay dividends on or make any other
distributions on any shares of stock ranking on a parity
(either as to dividends or upon liquidation, dissolution
or winding up) with the Series A Preferred Stock, except
dividends paid ratably on the Series A Preferred Stock and
all such parity stock on which dividends are payable or in
arrears in proportion to the total amounts to which the
holders of all such shares are then entitled;
c. except as permitted by subparagraph d of this
paragraph (c)(i), redeem or purchase or otherwise acquire
for consideration shares of any stock ranking on a parity
(either as to dividends or upon
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liquidation, dissolution or winding up) with the Series A
Preferred Stock, provided that the Corporation may at any
time redeem, purchase or otherwise acquire shares of any
such parity stock in exchange for shares of any stock of
the Corporation ranking junior (either as to dividends or
upon dissolution, liquidation or winding up) to the Series
A Preferred Stock; or
d. purchase or otherwise acquire for consideration
any shares of Series A Preferred Stock, or any shares of
stock ranking on a parity with the Series A Preferred
Stock, except in accordance with a purchase offer made in
writing or by publication (as determined by the Board of
Directors) to all holders of such shares upon such terms
as the Board of Directors, after consideration of the
respective annual dividend rates and other relative rights
and preferences of the respective series and classes,
shall determine in good faith will result in fair and
equitable treatment among the respective series or
classes, provided that the Corporation may at any time
purchase or otherwise acquire shares of any such parity
stock in exchange for shares of any stock of the
Corporation ranking junior (either as to dividends or upon
dissolution, liquidation or winding up) to the Series A
Preferred Stock.
(ii) The Corporation shall not permit any subsidiary of
the Corporation to purchase or otherwise acquire for
consideration any shares of stock of the Corporation unless the
Corporation could, under subparagraph (i) of this paragraph (c),
purchase or otherwise acquire shares at such time and in such
manner.
(iii) The Corporation shall not issue any shares of Series
A Preferred Stock except upon exercise of Rights issued pursuant
to that certain Rights Agreement dated as of July 18, 1988
between the Corporation and Bank One, Indianapolis, NA, a copy of
which is on file with the Secretary of the Corporation at its
principal executive office and shall be made available to
shareholders of record without charge upon written request
therefor addressed to said Secretary. Notwithstanding the
foregoing sentence, nothing contained herein shall prohibit or
restrict the Corporation from issuing for any purpose any series
of preferred stock with rights and privileges similar to or
different from those of the Series A Preferred Stock.
(d) Any shares of Series A Preferred Stock purchased or otherwise
acquired by the Corporation in any manner whatsoever shall be retired
and cancelled promptly after the acquisition thereof. All such shares
shall upon their cancellation without designation as to series, become
authorized but unissued shares of preferred stock and may be reissued as
part of a new series of preferred stock to be created by resolution or
resolutions of the Board of Directors, subject to the conditions and
restrictions on issuance set forth herein.
(e) Upon any voluntary liquidation, dissolution or winding up of
the Corporation, no distribution shall be made (i) to the holders of
shares of stock
-13-
ranking junior (either as to dividends or upon liquidation, dissolution
or winding up) to the Series A Preferred Stock unless, prior thereto,
the holders of shares of Series A Preferred Stock shall have received,
subject to adjustment as hereinafter provided, an aggregate amount equal
to (a) $100 per share, plus an amount equal to accrued and unpaid
dividends and distributions thereon, whether or not declared, to the
date of such payment or (b) if greater, an aggregate amount per share,
subject to the provision for adjustment hereinafter set forth, equal to
100 times the aggregate amount to be distributed per share to holders of
Common Stock plus an amount equal to accrued and unpaid dividends and
distributions thereon, whether or not declared, to the date of such
payment, or (ii) to the holders of stock ranking on a parity (either as
to dividends or upon liquidation, dissolution or winding up) with the
Series A Preferred Stock, except distributions made ratably on the
Series A Preferred Stock and all other such parity stock in proportion
to the total amounts to which the holders of all such shares are
entitled upon such liquidation, dissolution, or winding up, disregarding
for this purpose the amounts referred to in clause (i) (b) of this
paragraph (e). In the event the Corporation shall at any time declare or
pay any dividend or make any distribution on Common Stock payable in
shares of Common Stock, or effect a subdivision or combination or
consolidation of the outstanding shares of Common Stock (by
reclassification or otherwise than by payment of a dividend in shares of
Common Stock) into a greater or lesser number of shares of Common Stock,
then in each such case the aggregate amount to which holders of shares
of Series A Preferred Stock were entitled immediately prior to such
event under the provision in clause (i) of the preceding sentence shall
be adjusted by multiplying such amount by a fraction the numerator of
which is the number of shares of Common Stock outstanding immediately
after such event and the denominator of which is the number of shares of
Common Stock that were outstanding immediately prior to such event.
(f) In case the Corporation shall enter into any consolidation,
merger, combination or other transaction in which the shares of Common
Stock are exchanged for or changed into other stock or securities, cash
and/or any other property, then in any such case proper provision shall
be made so that the shares of Series A Preferred Stock shall at the same
time be similarly exchanged or changed in an amount per share (subject
to the provision for adjustment hereinafter set forth) equal to 100
times the aggregate amount of stock, securities, cash and/or any other
property (payable in kind), as the case may be, into which or for which
each share of Common Stock is changed or exchanged. The Corporation
shall not consummate any such consolidation, merger, combination or
other transaction unless prior thereto the Corporation and the other
party or parties to such transaction shall have so provided in any
agreement relating thereto. In the event the Corporation shall at any
time declare or pay any dividend on Common Stock payable in shares of
Common Stock, or effect a subdivision or combination or consolidation of
the outstanding shares of Common Stock (by reclassification or otherwise
than by payment of a dividend in share of Common Stock) into a greater
or lesser number of shares of Common Stock, then in each such case the
amount set forth in the preceding sentence with respect to the exchange
or change of shares of Series A Preferred Stock shall be adjusted by
multiplying such amount by a fraction the numerator of which is the
number of shares of Common Stock outstanding
-14-
immediately after such event and the denominator of which is the number
of shares of Common Stock that were outstanding immediately prior to
such event.
(g) The shares of Series A Preferred Stock shall not be
redeemable. Notwithstanding the foregoing sentence, the Corporation may
acquire shares of Series A Preferred Stock in any other manner permitted
by law, hereby and the Articles of Incorporation of the Corporation, as
from time to time amended.
(h) The Articles of Incorporation of the Corporation shall not be
amended in any manner which would increase or decrease the aggregate
number of authorized shares of Series A Preferred Stock, increase or
decrease the par value of the shares of Series A Preferred Stock, or
alter or change the powers, preferences or special rights of the shares
of Series A Preferred Stock so as to affect them adversely without the
affirmative vote of the holders of two-thirds or more of the outstanding
shares of Series A Preferred Stock, voting together as a single class.
-15-
EXHIBIT 11. STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
(Unaudited)
Eli Lilly and Company and Subsidiaries
Three Months Ended
March 31,
--------------------------------
1998 1997
---- ----
BASIC:
Net income ............................................... $ 521.1 $ 432.6
Preferred stock dividends ................................ (.6) (.6)
--------- ---------
Adjusted net income ...................................... 520.5 432.0
Average number of common shares outstanding .............. 1,101.1 1,098.9
Contingently issuable shares ............................. 1.2 1.7
--------- ---------
Adjusted average shares .................................. 1,102.3 1,100.6
--------- ---------
--------- ---------
Basic earnings per share ................................. $ .47 $ .39
--------- ---------
--------- ---------
DILUTED:
Net income ............................................... $ 521.1 $ 432.6
Preferred stock dividends ................................ (.6) (.6)
--------- ---------
Adjusted net income ...................................... 520.5 432.0
Average number of common shares outstanding .............. 1,101.1 1,098.9
Incremental shares - stock options and
contingently issuable shares .......................... 29.5 26.6
--------- ---------
Adjusted average shares .................................. 1,130.6 1,125.5
--------- ---------
--------- ---------
Diluted earnings per share ............................... $ .46 $ .38
--------- ---------
--------- ---------
Dollars in millions except per share data. Shares in millions.
EXHIBIT 12. STATEMENT RE: COMPUTATION OF RATIO OF EARNINGS FROM CONTINUING
OPERATIONS TO FIXED CHARGES
(Unaudited)
Eli Lilly and Company and Subsidiaries
(Dollars in millions)
Three Months
Ended
March 31, Years Ended December 31,
-------------- -------------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ----
Consolidated Pretax
Income from Continuing
Operations before
Accounting Changes &
Extraordinary Item .. $704.4 $510.2 $2,031.3 $1,765.6 $1,698.6 $662.8
Interest from Continuing
Operations .......... 53.3 260.0 324.9 324.6 129.2 96.1
Interest Capitalized
during the Period from
Continuing Operations .. (4.7) (23.8) (36.1) (38.3) (25.4) (25.5)
------ ------ ------- ------- ------- ------
Earnings ............... $753.0 $746.4 $2,320.1 $2,051.9 $1,802.4 $733.4
------ ------ ------- ------- ------- ------
------ ------ ------- ------- ------- ------
Fixed Charges(1) ....... $ 54.1 $264.2 $ 329.6 $ 324.6 $ 129.2 $ 96.1
------ ------ ------- ------- ------- ------
------ ------ ------- ------- ------- ------
Ratio of Earnings to
Fixed Charges .......... 13.9 2.8(2) 7.0 6.3 14.0 7.6
------ ------ ------- ------- ------- ------
------ ------ ------- ------- ------- ------
(1)Fixed charges include interest from continuing operations for all years
presented and beginning in 1996, preferred stock dividends.
(2)Included in the 1997 earnings is a noncash charge of $2,443 million due to
an asset impairment. See notes to consolidated condensed financial
statements. If the asset impairment charge had not occurred, the ratio of
earnings to fixed charges would have been 12.1.
5
1,000
3-MOS
DEC-31-1998
MAR-31-1998
1,327,825
63,137
1,729,728
59,339
977,769
4,779,014
7,014,914
2,973,169
12,046,750
3,530,461
2,337,204
692,037
0
0
4,101,326
12,046,750
2,172,077
2,269,105
541,079
602,062
930,728
0
48,606
704,449
176,111
528,337
0
(7,249)
0
521,088
.47
.46
Amounts include research and development, marketing and
administrative expenses.
The information called for is not given as the balances are not
individually significant.
Not in thousands.
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-Q 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 pricing and
pharmaceutical reimbursement.
- - The difficulties and uncertainties inherent in new product development. New
product candidates that appear promising in development may fail to reach the
market or may not be as commercially successful as anticipated 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.
- - Factors such as changes in business strategies and the impact of
restructurings, impairments in asset carrying values and business
combinations.
- - Difficulties in modification or replacement of existing computer systems
and/or software in order to render the Company's various computer systems
ready for the year 2000, including the difficulties encountered by third
party vendors and/or suppliers in their failure to render their systems
and/or software to be ready for the year 2000.
