<PAGE> 1
Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From to
-------------------------------------------------------------------
Commission File Number 333-07063
SMITHKLINE BEECHAM HOLDINGS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 51-0374608
(State of incorporation) (I.R.S. Employer
Identification No.)
1403 Foulk Road, Suite 102, P.O. Box 7108, Wilmington, Delaware 19803-2775
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (302)479-5801
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 twelve months, and (2) has been subject to such
filing requirements for the past 90 days. YES NO X
----------- -----------
The number of shares outstanding of Common Stock as of June 30, 1996 was
2,925.2
<PAGE> 2
SMITHKLINE BEECHAM HOLDINGS CORPORATION
INDEX TO FORM 10-Q
JUNE 30, 1996
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
Part I - Financial Information
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets-
June 30, 1996 and December 31, 1995 1
Condensed Consolidated Statements of Operations-
Three Months Ended June 30, 1996 and 1995 2
Condensed Consolidated Statements of Operations-
Six Months Ended June 30, 1996 and 1995 3
Condensed Consolidated Statements of Cash
Flows-Six Months Ended June 30, 1996 and 1995 4
Condensed Consolidated Statements of Shareholders' Equity 5
Notes to Condensed Consolidated Financial Statements 6-9
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition 10-17
Part II - Other Information
Item 6. Index to Exhibits and Reports on Form 8-K 18
Signatures 19
</TABLE>
<PAGE> 3
SMITHKLINE BEECHAM HOLDINGS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN MILLIONS EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
ASSETS
JUNE 30, DECEMBER 31,
1996 1995
---- ----
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . $ 122 $ 120
Trade receivables net of allowance . . . . . . . . . . . . 214 252
Inventories . . . . . . . . . . . . . . . . . . . . . . . . 186 195
Receivables from affiliates . . . . . . . . . . . . . . . . 59 84
Loans receivable from affiliates . . . . . . . . . . . . . 788 1,144
Other current assets . . . . . . . . . . . . . . . . . . . 62 55
------------- -------------
Total current assets . . . . . . . . . . . . . . . . . . 1,431 1,850
Property, plant and equipment, net . . . . . . . . . . . . . . . 178 190
Investments in affiliates . . . . . . . . . . . . . . . . . . . . 155 144
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . 402 409
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . 17 22
------------- -------------
Total assets . . . . . . . . . . . . . . . . . . . . . . $ 2,183 $ 2,615
============= =============
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . $ 61 $ 65
Payables to affiliates . . . . . . . . . . . . . . . . . . 107 105
Loans payable to affiliates . . . . . . . . . . . . . . . . 77 468
Income taxes payable . . . . . . . . . . . . . . . . . . . 18 62
Other current liabilities . . . . . . . . . . . . . . . . . 188 217
------------- -------------
Total current liabilities . . . . . . . . . . . . . . . 451 917
Minority interests . . . . . . . . . . . . . . . . . . . . . . . 197 188
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . 67 77
------------- -------------
Total liabilities . . . . . . . . . . . . . . . . . . . 715 1,182
------------- -------------
Shareholders' equity
Cumulative foreign currency translation adjustment . . . . (17) 23
Junior preferred stock, no par value, 10.0 shares
authorized, 9.7 issued and outstanding . . . . . . . . . 15 -
Common stock, no par value, 10,000.0 shares
authorized, 2,925.2 issued and outstanding . . . . . . . 1,470 -
SmithKline Beecham equity . . . . . . . . . . . . . . . . . - 1,410
------------- -------------
Total shareholders' equity . . . . . . . . . . . . . . . 1,468 1,433
------------- -------------
Total liabilities and shareholders' equity . . . . . . . $ 2,183 $ 2,615
============= =============
</TABLE>
See accompanying notes to condensed consolidated financial statements
1
<PAGE> 4
SMITHKLINE BEECHAM HOLDINGS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN MILLIONS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED JUNE 30,
1996 1995
---- ----
(UNAUDITED)
<S> <C> <C>
Net sales . . . . . . . . . . . . . . . . . . . . . . $ 363 $ 408
Operating costs and expenses:
Cost of sales . . . . . . . . . . . . . . . . . . . 184 200
Marketing, administrative and general . . . . . . . 125 126
Research and development . . . . . . . . . . . . . 4 6
-------------- --------------
Operating income . . . . . . . . . . . . . . . . . . 50 76
Non-operating income (expense):
Interest income . . . . . . . . . . . . . . . . . . 9 8
Minority interests . . . . . . . . . . . . . . . . (12) (9)
Equity in net income of affiliates . . . . . . . . 9 7
Other, net . . . . . . . . . . . . . . . . . . . . 1 (2)
-------------- --------------
Income before income taxes . . . . . . . . . . . . . 57 80
Provision for income taxes . . . . . . . . . . . . . 22 40
-------------- --------------
Net income $ 35 $ 40
============== ==============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE> 5
SMITHKLINE BEECHAM HOLDINGS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN MILLIONS)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
1996 1995
---- ----
(UNAUDITED)
<S> <C> <C>
Net sales . . . . . . . . . . . . . . . . . . . . . . $ 752 $ 826
Operating costs and expenses:
Cost of sales . . . . . . . . . . . . . . . . . . . 383 419
Marketing, administrative and general . . . . . . . 242 248
Research and development . . . . . . . . . . . . . 10 11
Restructuring . . . . . . . . . . . . . . . . . . . - 60
------------- --------------
Operating income . . . . . . . . . . . . . . . . . . 117 88
Non-operating income (expense):
Interest income . . . . . . . . . . . . . . . . . . 15 15
Minority interests . . . . . . . . . . . . . . . . (21) (15)
Equity in net income of affiliates . . . . . . . . 13 16
Other, net . . . . . . . . . . . . . . . . . . . . (36) (4)
------------- --------------
Income before income taxes . . . . . . . . . . . . . 88 100
Provision for income taxes . . . . . . . . . . . . . 34 50
------------- --------------
Net income . . . . . . . . . . . . . . . . . . . . . $ 54 $ 50
============= ==============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE> 6
SMITHKLINE BEECHAM HOLDINGS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-----------------------------
1996 1995
---- ----
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 54 $ 50
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . 20 19
Minority interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 15
Equity in net income of affiliates . . . . . . . . . . . . . . . . . . . . (13) (16)
Changes in assets and liabilities:
Decrease in trade receivable . . . . . . . . . . . . . . . . . . . . 28 42
Decrease (increase) in receivables from/payables
to affiliates . . . . . . . . . . . . . . . . . . . . . . . . . 27 (85)
Decrease in inventories . . . . . . . . . . . . . . . . . . . . . . 1 -
Increase in other assets . . . . . . . . . . . . . . . . . . . . . . (3) (16)
(Increase) decrease in accounts payable, other
liabilities and income taxes . . . . . . . . . . . . . . . . . . (76) 22
------------- -------------
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . 59 31
------------- -------------
Cash flows (used in) provided by investing activities:
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . (9) (25)
Proceeds from sale of fixed assets . . . . . . . . . . . . . . . . . . . . 3 95
------------- -------------
Net cash (used in) provided by investing activities . . . . . . . . . . . . . . (6) 70
------------- -------------
Cash flows (used in) provided by financing activities:
Increase in loans to/from affiliates, net . . . . . . . . . . . . . . . . . (63) (137)
Net capitalization from parent . . . . . . . . . . . . . . . . . . . . . . 17 80
------------- -------------
Net cash used in financing activities . . . . . . . . . . . . . . . . . . . . . (46) (57)
------------- -------------
Effect of exchange rates on cash . . . . . . . . . . . . . . . . . . . . . . . (5) 5
------------- -------------
Change in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . 2 49
Cash and cash equivalents at beginning of period . . . . . . . . . . . . . . . 120 45
------------- -------------
Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . . . $ 122 $ 94
============= =============
</TABLE>
See accompanying notes to condensed consolidated financial statements
4
<PAGE> 7
SMITHKLINE BEECHAM HOLDINGS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN MILLIONS)
<TABLE>
<CAPTION>
Cumulative
Junior Foreign Currency SmithKline Total
Preferred Common Translation Beecham Shareholders'
Stock Stock Adjustment Equity Equity
----- ----- ---------- ------ ------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994................ - - $ (30) $ 1,152 $ 1,122
Translation adjustments (unaudited)......... - - 114 - 114
Net income (unaudited)...................... - - - 50 50
Net transfers from affiliates (unaudited)... - - - 61 61
----------- ----------- ----------- ---------- ------------
Balance at June 30, 1995 (unaudited)........ $ - $ - $ 84 $ 1,263 $ 1,347
=========== =========== =========== ========== ============
Balance at December 31, 1995................ - - $ 23 $ 1,410 $ 1,433
Translation adjustments (unaudited)......... - - (40) - (40)
Net income (unaudited)...................... - - - 54 54
Net transfers from affiliates (unaudited)... - - - 21 21
Issuance of stock (unaudited)............... $ 15 $ 1,470 - (1,485) -
----------- ----------- ---------- ---------- -----------
Balance at June 30, 1996 (unaudited)........ $ 15 $ 1,470 $ (17) $ - $ 1,468
=========== =========== ========== ========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE> 8
SMITHKLINE BEECHAM HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(ALL AMOUNTS SHOWN IN MILLIONS EXCEPT SHARE INFORMATION)
(1) BASIS OF PRESENTATION
On May 20, 1996, SmithKline Beecham Holdings Corporation (the
"Company") was formed with the intent of holding the stock of certain
subsidiaries of SmithKline Beecham International Co., a Delaware Corporation
("Intco"), SmithKline Beecham Corporation, a Pennsylvania corporation ("SB
Corp"), and SBCL, Inc., a Delaware corporation ("SBCL"), (collectively, Intco,
SB Corp and SBCL are referred to as the "Transferors"). The Company, SB Corp,
Intco and SBCL are directly or indirectly owned by SmithKline Beecham plc, a
public limited company registered in England ("SmithKline Beecham"). On June
20, 1996, a share exchange agreement was executed by the Company and the
Transferors whereas the Transferors recorded or otherwise gave full legal
effect to transfer to SmithKline Beecham Holdings Corporation the shares of
capital stock of certain subsidiaries in consideration for shares of Common
Stock and Junior Preferred Stock of the Company. The principal purpose of the
formation of the Company was to acquire, own and manage certain non-U.S. assets
of the Transferors, primarily in the pharmaceuticals business.
All financial information, at dates and for periods prior to the
formation of the Company, was prepared as if the Company had existed and
operated as a separate business at such dates and during such periods. Such
financial information reflects operating expenses incurred by SmithKline
Beecham and its subsidiaries (the "SmithKline Beecham Group") that are
specifically identifiable to the Company, and certain corporate overhead
allocations that management believes represent the value of services performed
on behalf of the Company.
The condensed consolidated financial information presented herein is
unaudited, other than the condensed consolidated balance sheet at December 31,
1995, which is derived from audited financial statements. The unaudited
condensed consolidated financial statements have been prepared pursuant to
rules and regulations of the Securities and Exchange Commission and, therefore,
do not include all disclosures required by generally accepted accounting
principles. These condensed consolidated financial statements and notes
thereto should be read in conjunction with the financial statements and notes
thereto included in the Company's Registration Statement on Form F-3 filed with
the Securities and Exchange Commission on June 28, 1996.
In the opinion of management, the interim financial statements reflect
all adjustments (consisting of normally recurring accruals, except for the
restructuring accrual in 1995) necessary for a fair statement of the results
for interim periods. The current period's results of operations are not
necessarily indicative of results that ultimately may be achieved for the year.
6
<PAGE> 9
SMITHKLINE BEECHAM HOLDINGS CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(CONTINUED)
The condensed consolidated financial statements include the accounts
of the Company and its majority-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Investments in common stock of companies which are 20-50 percent owned by the
Company are accounted for using the equity method of accounting. Investments
in common stock of companies that are less than 20 percent owned by the Company
for which the remaining shares are owned by SmithKline Beecham or its other
subsidiaries are also accounted for using the equity method of accounting as
they are considered to be under common control. All other investments are
accounted for using the cost method. 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
and liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
(2) INVENTORIES
Inventories consist of the following and are shown net of total
inventory reserves at June 30, 1996, and December 31, 1995, respectively.
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
----------------- ------------------
(UNAUDITED)
<S> <C> <C>
Finished goods $ 53 $ 93
Work in progress 34 35
Raw materials and supplies 99 67
---------------- ----------------
$ 186 $ 195
================ ================
</TABLE>
(3) RELATED PARTY TRANSACTIONS
The Company is indirectly wholly owned by SmithKline Beecham and its
operations are integrated with SmithKline Beecham's other operations on a
worldwide basis. The Company is involved in various transactions with
SmithKline Beecham affiliates as follows:
7
<PAGE> 10
SMITHKLINE BEECHAM HOLDINGS CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(CONTINUED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
1996 1995
--------------- ----------------
(UNAUDITED)
<S> <C> <C>
Royalties paid to SmithKline Beecham affiliates $ 19 $ 21
Royalties received from SmithKline Beecham affiliates $ 1 $ 1
Sales to SmithKline Beecham affiliates $ 130 $ 159
Cost of sales to SmithKline Beecham affiliates $ 94 $ 111
Purchases of raw materials and finished good from
SmithKline Beecham affiliates $ 236 $ 300
Interest income attributable to SmithKline Beecham
affiliates $ 14 $ 14
Interest expense attributable to SmithKline Beecham
affiliates $ 1 $ 1
</TABLE>
(4) INCOME TAXES
The Company records income tax expense based on an estimated full year
effective income tax rate. The year to date June 30 reported effective income
tax rate approximated 38.7 percent in 1996, compared to 49.8 percent in 1995.
The decrease in the effective rate was due to the 1996 estimated effective
income tax rate not being impacted by the French exceptional surcharge tax, an
increase in foreign tax exempt income and the effects of increased income in
areas of operations which have lower effective tax rates.
(5) COMMITMENTS AND CONTINGENT LIABILITIES
The Company has approximately $62 in letters of credit outstanding
with the Toronto Dominion Bank. The letters are required by Canadian taxation
authorities with respect to pending litigation. The letters are
unconditionally guaranteed by SmithKline Beecham Corporation. The Company is
required to pay a commitment fee to the bank of 0.25 percent per annum.
The Company is involved in various legal and administrative
proceedings related to its business. Although the outcome of claims, legal
proceedings and other matters in which the Company is involved cannot be
predicted with any certainty, management does not expect the Company's ultimate
liability for such matters nor any liabilities related to the above mentioned
pending tax litigation to have a material adverse effect on its financial
condition, results of operations or cash flow.
8
<PAGE> 11
SMITHKLINE BEECHAM HOLDINGS CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(CONTINUED)
(6) SUBSEQUENT EVENT
As referenced in Note 1, on June 28, 1996 the Company filed a
registration statement with the Securities and Exchange Commission in
connection with an initial public offering of Flexible Auction Market Preferred
Stock ("AMPS") and Flexible Money Market Cumulative Preferred Stock ("MMP").
In a series of transactions occurring between July 15, 1996 and August 1, 1996
the Company issued 7,500 shares of the AMPS and 4,000 shares of the MMP. As a
result of these transactions, the Company's equity was increased by $750 (less
issuance costs) and $400 (less issuance costs) for the AMPS and MMP,
respectively, in the third quarter. The net proceeds from the sale of the AMPS
and MMP were loaned by the Company to other companies within SmithKline Beecham
Group.
9
<PAGE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
OVERVIEW
SmithKline Beecham Holdings Corporation was incorporated in May 1996
for the principal purpose of acquiring, owning and managing certain non-U.S.
assets of SmithKline Beecham, principally in the pharmaceuticals business. The
Company is a holding company and conducts its operations through approximately
60 subsidiaries. The Company's holdings also include fixed rate cumulative
preferred stock of SmithKline Beecham Biologicals S.A., an indirect Belgian
pharmaceuticals subsidiary of SmithKline Beecham, having an aggregate
redemption price of $650 million. The Company's primary activities consist of
the manufacture and sale of pharmaceuticals (prescription medicines) and
consumer healthcare products (OTC medicines), as part of the worldwide business
of SmithKline Beecham Group, as well as intercompany lending activity with
companies within SmithKline Beecham Group.
While there may be no direct correlation between the financial results
of the Company and those of SmithKline Beecham in any particular period, the
overall performance of the Company is interdependent with the performance of
other units of SmithKline Beecham Group. Moreover, the Company is dependent
upon SmithKline Beecham Group with respect to new product development, the
addition of any resulting new products to the Company's product line and the
expansion of the Company's marketing and distribution activities. There can be
no assurance that the Company or its subsidiaries will be requested to
manufacture or market any particular product or to engage in any particular
business of SmithKline Beecham Group.
RESULTS OF OPERATIONS
The descriptions of the Company's two principal business segments -
pharmaceuticals and consumer healthcare - below summarize the Company's role in
SmithKline Beecham Group and should be read in conjunction with the description
of SmithKline Beecham's business contained in the Company's Registration
Statement on Form F-3.
The Company's pharmaceuticals segment, in conjunction with other
members of SmithKline Beecham Group, manufactures and sells prescription
medicines concentrated in three therapeutic areas: anti-infectives/biologicals
(vaccines), gastrointestinal and neurosciences. The Company's pharmaceuticals
sales represented approximately 84 percent of total sales for the six months
ended June 30, 1996 (the "1996 Period") and 1995 (the "1995 Period").
10
<PAGE> 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
(CONTINUED)
The Company's main anti-infective products marketed and sold to third
parties are AUGMENTIN (amoxicillin and potassium clavulanate), a leading
broad-spectrum anti-infective against many penicillin-resistant organisms, and
AMOXIL (amoxicillin), another antibiotic with a wide range of applications.
The leading vaccine products are ENGERIX-B, a hepatitis B vaccine, and HAVRIX,
a hepatitis A vaccine. In the 1996 Period and 1995 Period, the Company's
anti-infectives/biologicals business accounted for approximately 68 and 74
percent of its third party pharmaceuticals sales, respectively.
TAGAMET (cimetidine), an H2 receptor antagonist product used in the
treatment of ulcer and other gastrointestinal disease, is the Company's
principal gastrointestinal product. Sales of gastrointestinal products
represented approximately 12 percent of the Company's third party
pharmaceuticals sales in the 1996 and 1995 Periods.
SEROXAT (paroxetine), belonging to the class of selective seratonin
reuptake inhibitors, is a treatment for depression and anxiety and for panic
disorder. SEROXAT is the Company's leading neurosciences product. Sales of
neuroscience products represented approximately 12 percent of the Company's
third party pharmaceuticals sales in the 1996 Period and 7 percent in the 1995
Period.
SmithKline Beecham's prescription medicines are manufactured at its
bulk chemical and secondary pharmaceutical production facilities. The Company
is involved in both types of manufacturing.
Bulk chemical production involves the manufacture of therapeutically
active compounds, principally through the application of chemical synthesis or
biological processes, such as fermentation. The Company's principal bulk
chemical production operations are located in Ireland and Singapore.
The Company or other members of SmithKline Beecham Group manufacture
most of the active ingredients contained in the Company's pharmaceutical
products and therefore the Company is generally not dependent on third-party
suppliers for these materials.
The Company's consumer healthcare segment markets a varied range of
OTC medicines, nutritional drinks and oral care products. In the 1996 and 1995
Periods, the Company's consumer healthcare sales were approximately 16 percent
of total sales.
11
<PAGE> 14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
(CONTINUED)
The Company's OTC medicines include a range of respiratory tract,
gastrointestinal and analgesic medicines, skin care products and vitamins and
natural medicines. The most significant of these products are CONTAC, for the
treatment of colds and influenza; ENO, an effervescent antacid; SONRISAL, an
antacid; and SYTHAL, a dermatological product. Leading oral care products
include AQUAFRESH toothpaste and ODOL mouthwashes. The principal nutritional
drink product is LUCOZADE, a glucose-based energy replacement drink.
Production facilities for the OTC products are engaged in the
formulation of ingredients and packaging into finished forms. The Company
maintains its principal production plants in France, Brazil, Austria and
Pakistan. CONTAC for the Japanese market and toothbrushes are supplied by third
party manufacturers.
The Company's sales are made throughout the world, the principal
markets being France, Brazil, Portugal, Ireland, Africa, Austria, Switzerland
and Japan. Sales in these countries together accounted for approximately 90
percent of the Company's third party sales in the 1996 Period. France is the
most important country for the sale of the Company's prescription medicines.
Total sales in France accounted for approximately 40 percent of the Company's
total sales in the 1996 Period.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
----------------------------------
1996 1995
------------- -------------
(UNAUDITED)
<S> <C> <C>
Europe $ 481 $ 565
Latin America 133 118
Asia 70 65
Rest of World 68 78
------------- -------------
$ 752 $ 826
============= =============
</TABLE>
Sales in Europe declined principally due to the completion of the
French-mandated hepatitis B vaccination campaign, increased government
pressures on antibiotic pricing and prescribing practices and a reduction of
antibiotic sales to affiliates.
Brazil, the most important country for Company sales in Latin America,
continued to experience economic stability in the 1996 Period. Company sales
in Brazil increased 10 percent over the 1995 Period.
12
<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
(CONTINUED)
Company sales within Asia increased $5 million over the 1995 Period
with a strong sales performance in Thailand. The Company continues to increase
its presence in Thailand through increased promotional activities and new
products.
Antibiotic sales in Africa declined in the 1996 Period due to social
unrest experienced in Algeria and other parts of Africa and lower sales to
affiliates within the African geographic area.
As the operations of the Company are conducted in international
markets, the consolidated financial results of the Company are subject to
exchange rate fluctuations involving the United States dollar and a number of
foreign currencies. The functional currency for the majority of the Company's
foreign operations is the applicable local currency. The principal functional
currencies of the Company are the French franc, Singapore dollar, Belgian
franc, Irish punt and the Portuguese escudo. The Company's operations in
Brazil and Venezuela operate in highly inflationary economies and are
re-measured as if the functional currency were the U.S. dollar. Inflation in
more highly developed economies is at reduced levels in recent years. However,
inflation continues to raise the cost of goods and services used by the
Company. Although the Company attempts to fully recover higher costs through
increased selling prices, the competitive environment as well as government
health policy in certain major markets may restrict this ability. The Company
is unable to predict what effect inflation and pricing restrictions may
ultimately have on its business.
THREE MONTHS ENDED JUNE 1996 VS. THREE MONTHS ENDED JUNE 1995
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
------------------------------------
1996 1995
-------------- --------------
(UNAUDITED)
<S> <C> <C>
SALES
-----
Pharmaceuticals $ 305 $ 342
Consumer Healthcare 58 66
-------------- --------------
Total sales $ 363 $ 408
============== ==============
OPERATING INCOME
----------------
Pharmaceuticals $ 46 $ 69
Consumer Healthcare 4 7
-------------- --------------
Total operating income $ 50 $ 76
============== ==============
</TABLE>
13
<PAGE> 16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
(CONTINUED)
Pharmaceuticals sales in the second quarter of 1996 were $305 million,
compared to $342 million in the second quarter of 1995. The completion of the
French-mandated hepatitis B vaccination campaign, increased government
pressures on antibiotic pricing and prescribing practices and a reduction of
antibiotic sales to affiliates were the principal factors contributing to the
decline in 1996 second quarter sales. The decline in vaccine and antibiotic
sales was partially offset by an increase in sales of SEROXAT. SEROXAT was
launched for the important additional indication for panic disorder in France.
The reduction in Pharmaceuticals operating income of $23 million is
primarily due to lower sales volume.
The Company's consumer healthcare segment reported sales of $58
million in the 1996 second quarter, representing a $8 million reduction from
the second quarter of 1995. The decrease is principally due to lower CONTAC,
AQUAFRESH and related party sales. Sales of CONTAC were unfavorably impacted
by exchange rates whereas lower AQUAFRESH sales were principally due to
decreased volume.
The decrease in consumer healthcare operating profit is attributed to
lower sales volumes partially offset by lower operating expenses as a result of
restructuring activity.
The effective tax rate was 38.7 percent and 49.8 percent for the
second quarter of 1996 and 1995, respectively. The decrease in the effective
rate was due to the second quarter of 1996 not being impacted by the French
exceptional surcharge tax, an increase in foreign tax exempt income and the
effects of increased income in areas of operations which have lower effective
tax rates.
14
<PAGE> 17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
(CONTINUED)
SIX MONTHS 1996 VS. SIX MONTHS 1995
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
------------------------------------
1996 1995
-------------- --------------
(UNAUDITED)
<S> <C> <C>
SALES
-----
Pharmaceuticals $ 631 $ 699
Consumer Healthcare 121 127
-------------- --------------
Total sales $ 752 $ 826
============== ==============
OPERATING INCOME
----------------
Pharmaceuticals $ 105 $ 94
Consumer Healthcare 12 (6)
-------------- --------------
Total operating income $ 117 $ 88
============== ==============
</TABLE>
Pharmaceuticals sales in the first six months of 1996 (the "1996
Period") were $631 million, compared to $699 million in the first six months of
1995 (the "1995 Period"). Sales of ENGERIX-B, AMOXIL and antibiotics to
affiliates decreased from the 1995 Period primarily due to the completion of
the French-mandated hepatitis B vaccination campaign, increased governmental
pressures on antibiotic pricing and prescribing practices and reduced
antibiotic sales to affiliates. Sales were also unfavorably impacted by
exchange rate movements of approximately $4 million. The decline of ENGERIX-B,
AMOXIL and antibiotic sales to affiliates was partially offset by an increase
in sales of SEROXAT. SEROXAT sales increased approximately $25 million with
sales in France, Brazil, Ireland, Austria and Switzerland exceeding 40 percent
growth over the 1995 Period. In France, SEROXAT was launched with the
additional indication of panic disorder.
Pharmaceuticals gross profit margin for the 1996 Period of 48.2
percent was .5 percentage point below the 1995 Period due primarily to product
mix.
Operating expenses for the pharmaceuticals segment were approximately
$47 million lower in the 1996 Period compared to the 1995 Period. The 1995
Period had higher selling and clinical trial costs associated with the French
vaccination campaign and SEROXAT pre-launch activity. Administration expenses,
excluding the 1995 pharmaceuticals restructuring charge of $36.3 million, were
below the 1995 Period due primarily to efficiencies realized from the
restructuring activity. The above mentioned expense reductions were partially
offset by exchange losses realized in France and Belgium.
15
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
(CONTINUED)
The Company's consumer healthcare segment reported sales of $121
million in the 1996 Period which were $6 million below the 1995 Period
principally due to lower volumes of AQUAFRESH in Indo China and SONRISAL in
Brazil and unfavorable exchange rate movement (approximately $3 million) of the
Japanese yen and French franc to the U.S. dollar.
The consumer healthcare segment's gross profit margin of 54.3 percent
was over one percentage point higher than the 1995 Period's rate of 53.2
percent and primarily reflects a more profitable mix of products sold.
Operating expenses for the consumer healthcare segment, excluding the
1995 restructuring charge, increased approximately $4 million due to non
recurring expenses and increased selling and distribution costs.
The Company's net non-operating expenses for the 1996 Period were $29
million versus net non-operating income of $12 million for 1995 Period. The
1996 non-operating expense was unfavorably impacted by exchange losses realized
on related party loan activity and lower income from affiliates.
The effective tax rate was 38.7 percent and 49.8 percent for the 1996
Period and 1995 Period, respectively. The decrease in the effective rate was
due to the 1996 Period not being impacted by the French exceptional surcharge
tax, an increase in foreign tax exempt income and the effects of increased
income in areas of operations which have lower effective tax rates.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $59 million and $31
million in the 1996 Period and 1995 Period, respectively. In the 1996 Period,
net cash provided by operations benefited from reduced working capital needs,
increased income and a decrease in the effective tax rate.
Net cash provided by investing activities in the 1995 Period resulted
from the sale of fixed assets for $95 million.
Cash used in financing activities was $46 million in the 1996 Period
and $57 million in the 1995 Period. Cash outflows for loans to affiliates
decreased from the 1995 Period due to less lending activity.
16
<PAGE> 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
(CONTINUED)
The Company expects its cash requirements for the future to include
funding for ongoing operations, capital expenditures, restructuring costs, and
dividends on the Flexible Auction Market Preferred Stock and the Flexible Money
Market Cumulative Preferred Stock issued after June 30, 1996.
The Company's anticipated cash requirements will be funded primarily
by cash flow from operations, supplemented by dividends on the SmithKline
Beecham Biologicals S.A. Preferred Stock, interest payments and principal
repayments on loans to affiliates (see Subsequent Event note) and the
utilization of local lines of credit for small daily cash activities in certain
countries. Management believes that these sources will be sufficient to fund
the cash needs of the Company's business for the foreseeable future.
Long-term liquidity is dependent upon the Company's competitive
position, including its ability to license and market new products and to
maximize benefits from new business alliances.
17
<PAGE> 20
PART II - OTHER INFORMATION
Item 6. Index to Exhibits and Reports on Form 8-K
(A) Exhibits
12 Ratio of Earnings to Fixed Charges
27 Financial Data Schedule
(B) Reports on Form 8-K
There were no reports on Form 8-K during the quarter
ended June 30, 1996.
18
<PAGE> 21
SIGNATURE:
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.
SMITHKLINE BEECHAM HOLDINGS CORPORATION
(Registrant)
DATE: August 12, 1996 BY: /S/DONALD F. PARMAN
Donald F. Parman
Secretary,
SmithKline Beecham Holdings Corporation
19
<PAGE> 1
Exhibit 12
SMITHKLINE BEECHAM HOLDINGS CORPORATION
Computation of Ratio of Earnings to Fixed Charges
(in millions except ratio)
<TABLE>
<CAPTION>
Six Months
Ended June 30,
---------------
<S> <C> <C>
1995 1996
Income before taxes................................ $ 54 $ 50
Less: Equity in net income and losses of
affiliates...................................... $ (21) $ (15)
Add: Interest expense.............................. 1 1
----- -----
Income, as adjusted................................ $ 34 $ 36
===== =====
Fixed charges:
Interest expensed and capitalized.................. $ 1 $ 1
===== =====
Ratio of earnings to fixed charges................. 34.0 36.0
</TABLE> ===== =====
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 100
<SECURITIES> 22
<RECEIVABLES> 1,072
<ALLOWANCES> 11
<INVENTORY> 186
<CURRENT-ASSETS> 1,431
<PP&E> 377
<DEPRECIATION> 199
<TOTAL-ASSETS> 2,183
<CURRENT-LIABILITIES> 451
<BONDS> 0
0
15
<COMMON> 1,470
<OTHER-SE> (17)
<TOTAL-LIABILITY-AND-EQUITY> 2,183
<SALES> 752
<TOTAL-REVENUES> 752
<CGS> 383
<TOTAL-COSTS> 635
<OTHER-EXPENSES> 29
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1
<INCOME-PRETAX> 88
<INCOME-TAX> 34
<INCOME-CONTINUING> 54
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 54
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
