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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED)
AUGUST 14, 1995
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RHONE-POULENC RORER INC.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
PENNSYLVANIA 1-5851 23-1699163
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(STATE OF OTHER (COMMISSION FILE NUMBER) (I.R.S. EMPLOYER
JURISDICTION IDENTIFICATION NO.)
OF INCORPORATION)
500 ARCOLA ROAD
COLLEGEVILLE, PENNSYLVANIA 19426
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(ADDRESS OF PRINCIPAL (ZIP CODE)
EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (610) 454-8000
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(FORMER NAME OR FORMER ADDRESS, IF CHANGED SINCE LAST REPORT)
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The Exhibit Index is located on page 39.
<PAGE>
ITEM 5. OTHER EVENTS
In 1995, Rhone-Poulenc Rorer Inc. ("RPR") acquired from Rhone-Poulenc S.A.
the businesses of Cooperation Pharmaceutique Francaise ("Cooper"), with
operations primarily in France, and a pharmaceutical business in Brazil. The
acquisitions of these entities under common control were treated for
accounting purposes on an "as-if pooling" basis and accordingly, RPR has
restated its 1994 results to include the accounts of Cooper and the Brazilian
business as of April 1, 1994 and January 1, 1994, respectively. The
accompanying selected financial data, management's discussion and analysis of
results of operations and financial condition, and consolidated financial
statements and financial statement schedule give effect to the acquisition
transactions for the restated periods set forth above.
1
<PAGE>
RHONE-POULENC RORER INC. AND SUBSIDIARIES
TEN-YEAR SELECTED FINANCIAL DATA (UNAUDITED)
(DOLLARS AND SHARES IN MILLIONS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------------
1994 1993 1992 1991 1990 1989 1988 1987 1986 1985
-------- -------- -------- -------- -------- -------- -------- -------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales............... $4,486.6 $4,019.4 $4,095.9 $3,824.3 $2,917.4 $1,182.2 $1,041.6 $ 928.8 $ 844.6 $338.1
Operating income........ 597.7 675.3 675.0 558.5 88.9 125.5 144.1 122.7 52.9 59.9
Income from continuing
operations............. 367.1 421.1 423.3 326.5 1.0 86.5 61.8 54.3 3.5 36.0
Discontinued operations,
net of tax:
Gain on sale........... -- -- -- -- -- -- -- -- 122.1 --
Earnings from
operations............ -- -- -- -- -- -- -- -- -- .8
Cumulative effect of
change in accounting
for income taxes....... -- -- 15.0 -- -- -- -- (35.5) -- --
Net income available to
common shareholders.... 347.9 408.7 428.2 326.1 1.0 85.0 61.8 18.8 125.6 36.8
Primary earnings per
common share:
Continuing operations.. 2.50 2.96 2.99 2.37 .01 1.33 .98 .84 .05 .56
Discontinued
operations:
Gain on sale........... -- -- -- -- -- -- -- -- 1.88 --
Earnings from
operations............ -- -- -- -- -- -- -- -- -- .01
Cumulative effect of
change in accounting
for income taxes...... -- -- .11 -- -- -- -- (0.55) -- --
Primary earnings per
common share.......... 2.50 2.96 3.10 2.37 .01 1.33 .98 .29 1.93 .57
Fully diluted earnings
per common share....... 2.50 2.96 3.10 2.37 .01 1.21 .97 .29 1.93 .57
Cash dividends per
common share........... 1.12 1.00 .68 .445 .42 .405 .40 .386 .376 .373
Research and development
expenses............... 606.1 561.2 521.3 444.5 350.1 121.8 104.0 82.7 69.7 17.9
BALANCE SHEET DATA:
Working capital......... 591.7 446.6 667.1 407.0 391.3 436.9 312.4 226.6 155.7 53.9
Property, plant &
equipment, at cost..... 2,310.9 1,958.6 1,855.9 2,027.8 1,930.7 488.2 395.7 363.5 333.0 150.6
Capital expenditures:
U.S. corporate offices,
research center and
site.................. -- -- 63.1 102.1 92.1 29.3 10.8 -- -- --
Other.................. 229.9 250.4 221.2 181.6 124.8 82.1 59.9 45.1 36.7 14.5
Total assets............ 4,652.3 4,050.2 3,858.3 4,115.5 4,085.0 1,791.7 1,388.0 1,240.5 1,110.1 444.4
Long-term debt
(including payable to
RP).................... 439.9 432.2 779.7 960.5 1,634.3 882.5 564.6 509.7 444.3 37.3
Shareholders' equity.... 2,110.4 1,821.2 1,568.3 1,298.6 693.5 439.9 414.2 368.8 390.4 265.7
Common shares
outstanding at
year-end............... 134.1 137.0 138.3 137.9 137.4 63.1 63.6 62.9 65.4 64.9
Book value per common
share.................. 12.75 10.37 9.17 7.24 5.05 6.97 6.51 5.86 5.97 4.09
OTHER DATA:
Employees............... 25,000 22,300 22,900 22,500 23,500 8,500 8,400 7,400 7,500 8,900
Sales per employee
(thousands)............ 180 180 180 170 150 140 132 124 103 84
</TABLE>
--------
Results for 1994 have been restated to include the accounts of Cooperation
Pharmaceutique Francaise and a pharmaceutical business in Brazil from April 1,
1994 and January 1, 1994, respectively. Both businesses were acquired from
Rhone-Poulenc S.A. ("RP") in 1995.
Results include the accounts of the Human Pharmaceutical Business ("HPB") of
RP from May 5, 1990.
Results include pretax restructuring and other charges of $121.2 million in
1994, $93.8 million in 1993, $73.6 million in 1991, $289.3 million in 1990,
and $10.0 million in 1989.
Results for 1994 include a $30.6 million pretax charge related to the
reassessment of the carrying value of certain investments and $11.0 million of
acquired research and development expense associated with the Company's
investment in AIS. Results for 1993 include $105.0 million proceeds from
litigation settlement and pretax charges of $29.1 million related to AIS,
including acquired research and development expense.
Pretax gains on sales of product rights and investments totaled $46.2 million
in 1994, $30.2 million in 1993, $23.1 million in 1992, $95.7 million in 1991,
$78.8 million in 1990 and $30.9 million in 1989. Results for 1989 also include
a $19.9 million pretax gain on contract termination fee.
Effective January 1, 1992, the Company adopted SFAS 109, "Accounting for
Income Taxes," and recorded a cumulative effect adjustment increasing 1992
income by $15.0 million ($.11 per share). Prior years reflect the application
of SFAS 96, "Accounting For Income Taxes," effective January 1, 1987.
The year 1985 has been restated to reflect operations discontinued on February
28, 1986.
Employees and sales per employee for the year 1990 have been restated on a pro
forma basis to include HPB as if it were part of the Company from January 1,
1990.
Earnings per share for 1994 reflect pro forma adjustments giving effect to
interest and preferred dividends relative to the Cooper and Brazilian business
acquisitions.
All share and per share data have been adjusted to reflect a two-for-one
common stock split effective June 7, 1991.
2
<PAGE>
RHONE-POULENC RORER INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
Rhone-Poulenc Rorer Inc. ("RPR" or "the Company") is one of the largest
research-based pharmaceutical companies in the world. RPR was formed in 1990
by the combination of Rorer Group Inc. and substantially all of the Human
Pharmaceutical Business of Rhone-Poulenc S.A. ("RP"), based in Paris, France.
RP owns approximately two-thirds of RPR's common stock and controls the
Company. In the discussion which follows, percentage comparisons of year-to-
year sales, except when noted as reported sales, exclude the effects of
exchange rate fluctuations.
INDUSTRY TRENDS
The worldwide pharmaceutical industry continues to be affected by government
and private payor initiatives to reduce pharmaceutical prices and limit the
volume of prescriptions written by physicians. In certain cases, companies may
be able to negotiate terms or conditions which can minimize the effect of
legislation on revenues. The degree to which pharmaceutical companies are
individually affected depends upon each company's product portfolio and its
ability to manage in the environment specific to each country.
In the French prescription pharmaceutical market, direct price controls have
maintained prices at a low level compared to other markets and have slowed the
emergence of generic competition. As part of its efforts to reduce health care
expenditures, in 1994 the French government implemented physician prescribing
guidelines limiting the volume of prescriptions written. Also in 1994, the
government and certain pharmaceutical manufacturers, acting individually,
reached a three-year policy agreement ("convention") aimed at reducing annual
growth of reimbursable pharmaceuticals through a better mix of prices and
volumes. In December 1994, the Company's three major ethical subsidiaries in
France, through the Company's lead subsidiary, signed a convention with the
government setting forth volume and pricing terms for many of the products
sold by the subsidiaries. The French government may consider other cost
containment measures to respond to the nation's health care deficit.
In the U.S., existing legislation requiring payment of rebates to state
Medicaid programs reduced the Company's sales by $40 million in 1994, $34
million in 1993 and $21 million in 1992. In 1994, major health care reform,
including the Clinton Administration's proposed Health Security Act, which
would have made sweeping structural and financial changes to the U.S. health
care delivery system, was shelved by Congress. Health care reform will likely
be addressed by U.S. federal and state governments in the future, but the
precise form and effect of any final legislation cannot be predicted. Even
without government intervention, the U.S. marketplace continues to experience
growth and consolidation of managed care organizations which, on behalf of
payors, seek to reduce health care costs. Most pharmaceutical manufacturers,
including RPR, have reorganized their sales and marketing efforts to adapt to
managed care initiatives.
In the Company's other major markets, including Germany, the U.K., Italy and
Japan, national governments exert controls over pharmaceutical prices either
directly or by controlling admission to, or levels for, reimbursement by
government health programs.
The above measures, while indicative of a continuing global trend toward
more governmental control over health care expenditures, are neither new to
the industry nor to RPR. Whether initiated by governments or by private
payors, these measures tend to restrict future revenue growth derived from
existing products and, as a result, companies in the industry must look
increasingly to achieve profitability objectives through more rapid
commercialization of highly innovative therapies; integrated prescription,
over-the-counter and generic product strategies; aggressive cost reduction;
strategic alliances with others and creative marketing solutions to meet the
needs of payors.
3
<PAGE>
RESULTS OF OPERATIONS
In 1995, the Company acquired from RP the businesses of Cooperation
Pharmaceutique Francaise ("Cooper"), with operations primarily in France, and
a pharmaceutical business in Brazil. The acquisitions of entities under common
control were treated for accounting purposes on an "as-if pooling" basis and,
accordingly, RPR has restated its 1994 results to include the accounts of
Cooper and the Brazilian business as of April 1, 1994 and January 1, 1994,
respectively. Earnings per share for the restated periods reflect pro forma
adjustments giving effect to interest on indebtedness and preferred dividends
relative to the acquisition transactions. The discussion that follows reflects
the effect of such restatements.
Therapeutic Area Sales
In the table and discussion which follows, percentage comparisons of year-
to-year sales are presented excluding the effects of exchange rate
fluctuations. Certain reclassifications have been made from amounts shown in
prior periods for therapeutic area totals to conform to classifications now
used by the Company.
<TABLE>
<CAPTION>
.
1994 1993 1992
THERAPEUTIC AREA/PRINCIPAL OFFERINGS SALES % CHANGE* SALES % CHANGE* SALES
------------------------------------ ----- --------- ----- --------- -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
TOTAL CARDIOVASCULAR.............. $866 +15% $743 +6% $744
Clexane(R)/Lovenox(R)............ 214 + 38% 153 + 30% 127
Dilacor(R) XR.................... 128 +150% 51 +152% 20
Lozol(R)/Indapamide.............. 104 - 12% 118 - 13% 119
Selectol(R)/Selecor(R)........... 55 + 8% 50 + 43% 37
---------------------------------------------------------------------------
TOTAL ANTI-INFECTIVES/ONCOLOGY.... 572 +4% 542 +11% 530
Flagyl(R)........................ 97 + 28% 77 + 3% 82
Rovamycine(R).................... 83 - 13% 94 + 26% 82
Peflacine(R)..................... 77 + 1% 76 + 9% 75
---------------------------------------------------------------------------
TOTAL PLASMA PROTEINS............. 510 +26% 400 +20% 337
Albuminar(R)..................... 179 + 14% 154 + 6% 139
Monoclate-P(R)................... 148 + 28% 114 + 7% 112
---------------------------------------------------------------------------
TOTAL CENTRAL NERVOUS
SYSTEM/ANALGESIA................. 488 +5% 457 -5% 519
Doliprane(R)..................... 107 + 2% 102 + 23% 88
Sermion(R)....................... 96 + 8% 87 + 1% 92
Imovane(R)/Amoban(R)............. 94 + 7% 85 + 9% 84
---------------------------------------------------------------------------
TOTAL RESPIRATORY................. 433 +6% 407 +5% 396
Azmacort(R)...................... 147 + 3% 143 + 13% 127
Nasacort(R)...................... 90 + 14% 79 + 37% 58
---------------------------------------------------------------------------
TOTAL BONE
METABOLISM/RHEUMATOLOGY.......... 344 -10% 381 -1% 424
Orudis(R)/Profenid(R)/Oruvail(R). 192 + 10% 173 + 3% 186
Calcitonins...................... 98 - 39% 163 - 10% 198
---------------------------------------------------------------------------
TOTAL GASTROENTEROLOGY............ 474 -4% 490 +10% 471
Maalox(R)........................ 249 + 4% 239 + 4% 240
---------------------------------------------------------------------------
OTHER THERAPEUTIC AREAS........... 800 +33% 600 -5% 675
DDAVP(R)......................... 84 + 16% 73 - 4% 76
---------------------------------------------------------------------------
</TABLE>
* % change excludes currency translation effects.
1994 Compared with 1993
On sales of $4,487 million in 1994, net income available to common
shareholders was $348 million ($2.50 per share on a pro forma basis), 15%
below $409 million reported in 1993. Current year results included pretax
4
<PAGE>
restructuring charges of $121 million ($.58 per share). Prior year results
included pretax income of $11 million ($.03 per share) from the net effects of
settlement of litigation less restructuring and other charges.
Full year 1994 reported sales increased 12% primarily due to volume gains;
approximately 8 percentage points of growth was due to the effect of acquired
businesses. The impact of favorable currency fluctuations (+1%) was offset by
product divestitures (-1%); price changes had no material effect on sales
growth. No single product or offering contributed more than 6% of worldwide
sales in 1994 and the ten largest contributed approximately 35%.
Sales by geographic area were as follows:
<TABLE>
<CAPTION>
1994 % 1993 % 1992
SALES CHANGE* SALES CHANGE* SALES
------ ------- ------ ------- ------
<S> <C> <C> <C> <C> <C>
U.S. ...................................... $1,262 +13% $1,120 +12% $1,000
------ ---- ------ ---- ------
France..................................... 1,507 +10% 1,375 + 8% 1,388
Other Europe............................... 1,016 + 3% 978 - 8% 1,218
Rest of World.............................. 702 +30% 546 +13% 490
------ ---- ------ ---- ------
Total Non-U.S.............................. 3,225 +11% 2,899 + 2% 3,096
------ ---- ------ ---- ------
Total Sales................................ $4,487 +12% $4,019 + 5% $4,096
====== ==== ====== ==== ======
</TABLE>
* excludes effects of currency fluctuations and product divestitures.
Sales increases in the United States reflected growth of the Company's
prescription pharmaceuticals (Dilacor(R) XR, Lovenox(R), DDAVP(R) and
Nasacort(R)) following trade inventory adjustments in the first half of the
year. Sales growth in France reflected the inclusion of nine months of Cooper
sales in 1994; on a basis before contributions from Cooper, sales in France
declined 3%, largely as a result of lower sales of anti-infectives. In Other
European markets, sales of prescription pharmaceuticals in Germany recovered
14% from depressed prior year levels while ethical product sales in Italy (-
16%) and the U.K. (-11%) continued to be impacted by restrictive government
programs. In 1995, the recovery in Germany is expected to continue, although
at a somewhat lesser rate, while Italy may experience a return to modest
growth as a result of new product launches. Higher sales in Eastern Europe and
of generics in the U.K. contributed to the modest sales improvement in the
Other Europe region. The Rest of World area benefited from the inclusion in
1994 of sales associated with businesses acquired from RP (i.e. nine months of
sales from a Cooper subsidiary and a full year of sales from a Brazilian
entity). On a basis before these sales contributions, sales increased 6% in
the region as declines in Japan stemming primarily from government-imposed
price reductions were more than offset by sales growth, particularly of anti-
infectives, in South America and the rest of Asia.
If the effects of restructuring charges and prior year litigation settlement
are excluded from reported geographic area results, income before income taxes
as a percentage of sales ("IBT margin") improved in the U.S., Other Europe and
the Rest of World but fell in France.
Cardiovascular product sales were led by Clexane(R)/Lovenox(R) and
Dilacor(R) XR. Sales of Clexane(R)/Lovenox(R), a low molecular weight heparin
product, exceeded $200 million in 1994, bolstered by solid performance in the
U.S., France and Germany. Sales of Dilacor(R) XR, a once-daily calcium channel
blocker sold in the U.S., more than doubled from the prior year. Dilacor(R) XR
faces loss of U.S. FDA exclusivity in mid-1995 although management does not
anticipate any significant erosion in Dilacor(R) XR sales in 1995 from generic
intrusion. Despite higher sales of the Company's generic indapamide, which
partially mitigated the impact of reduced Lozol(R) brand indapamide sales,
total indapamide product sales were below the prior year's sales as
anticipated. Sales of Selectol(R)/Selecor(R), for treatment of hypertension,
improved in European markets, particularly France.
Sales of anti-infectives were below prior year levels in France which
suffered the combined effects of an increasingly competitive antibiotics
market and strong prior year sales related to a high incidence of influenza.
The successful introduction of Zagam(TM), a quinolone antibiotic, in France in
the third quarter partially offset
5
<PAGE>
reduced sales of other anti-infective products in that market; 1994 sales of
Zagam(TM) exceeded $20 million. Elsewhere, anti-infectives, particularly the
antiparasitic Flagyl(R), experienced sales growth in South American countries,
including contributions from the Brazilian business acquired from RP, as well
as in Asian markets.
Sales of oncology products increased over the prior year driven by the 1994
launch of Granocyte(R) for chemotherapy-induced neutropenia in France, Germany
and other European markets. During the year, the Company also acquired the
U.S. and Canadian marketing rights to Oncaspar(TM) for use in the treatment of
acute lymphoblastic leukemia.
The major plasma proteins (Albuminar(R), Monoclate-P(R), Gammar(R) IV and
Mononine(TM)) sold by the Company's Armour Pharmaceutical Company subsidiary
("Armour") achieved double-digit sales growth in 1994, with particularly good
performance in the United States. Monoclate-P(R) and Mononine(TM) also
registered sales increases in European markets including France and Germany.
Sales of Doliprane(R), the leading analgesic in France, improved in the
second half of 1994 but remained essentially level year-on-year following a
particularly strong 1993 influenza season. Increased sales in France and Japan
of Imovane(R)/Amoban(R), a non-benzodiazepine sleeping agent, were partially
offset by reduced sales in the U.K. due to government-imposed price
reductions.
Respiratory product sales improved as U.S. ex-factory sales of the inhaled
steriods Nasacort(R) and, to a lesser extent, Azmacort(R), recovered from the
negative impact of trade inventory reductions in the first half of the year.
Sales of Slo-bid(TM)/Slo-Phyllin(R), a theophylline bronchodilator, continued
to decline (-9%) due to greater use of inhaled steriods coupled with
increasing generic competition; the Company launched its own generic version
of Slo-bid(TM) in the second quarter of 1994. During the year, RPR entered
into various arrangements to further strengthen its respiratory products line,
including agreements with Fisons Pharmaceuticals to develop and market key
respiratory products in various European countries and an agreement with 3M
Pharmaceuticals to co-promote a beta2 agonist bronchodilator in the United
States.
A decline in sales of bone metabolism/rheumatology products included lower
1994 sales of calcitonin products for bone disorders. As expected, sales of
calcitonins were well below the prior year due to government reimbursement
programs in Italy and government price reductions in Spain and Japan. Generic
competition in the United States also contributed to reduced calcitonin
product sales. Sales of Orudis(R)/Profenid(R)/Oruvail(R), a ketoprofen anti-
inflammatory, improved on higher sales in Italy and South America offset by
sales declines in Japan.
Despite lower sales and declining market share in the U.S., worldwide sales
of the antacid Maalox(R) increased modestly with good performance in European
markets, particularly Germany, and Japan, where Maalox(R) granules were
launched at the end of 1994. Reduced sales of Zoltum(R), a peptic ulcer
medication co-marketed in France, and the daily fiber therapy product
Perdiem(R) contributed to an overall sales decline of gastroenterology
products. The U.S. and Canadian Maalox(R) and Perdiem(R) product rights were
transferred to Ciba-Geigy Limited ("Ciba") in December 1994/January 1995. RPR
retains marketing rights to Maalox(R) in other world markets.
Sales in other therapeutic categories included higher sales of DDAVP(R) for
nocturnal enuresis and sales of prescription skin care products marketed to
dermatologists by Dermik Laboratories, which were up slightly over the prior
year. The increase in other therapeutic area sales also reflected the
integration of the Cooper business in 1994.
Gross profit as a percentage of sales declined to 65.3% as compared with
67.0% in 1993 as the effect of manufacturing expense reductions in the
Company's existing business was offset by the integration of the lower margin
Cooper business. Selling, delivery and administrative expenses decreased as a
percentage of sales to 35.8% in 1994 from 36.5% in the prior year. In 1994,
the benefits of cost reduction initiatives were partially offset by increased
spending in support of new products and certain markets (Germany, Japan and
South America). Selling, delivery and administrative expenses also reflected
the lower commercial expense ratios of
6
<PAGE>
the Cooper business. As the benefits of the Company's restructuring programs,
discussed below, are realized, management expects to achieve further
improvements in the Company's underlying cost base; a portion of such savings
will be redirected to the development and promotion of new products.
At $606 million, research and development expense approximated 13.5% of
sales in 1994. The Company's research and development efforts continue to
focus on innovative global products and technologies, particularly those with
the potential to prolong significantly and/or improve the quality of life
worldwide. Among the Company's most important near-term projects are
Taxotere(R), for certain solid malignant tumors; Synercid(TM), a streptogramin
antibiotic for hospital-acquired infections; and CPT-11 for colorectal cancer.
Timing of a possible U.S. marketing approval for Taxotere(R) is dependent upon
further FDA consideration. Following the Company's 1993 investment in Applied
Immune Sciences, Inc. ("AIS"), in 1994 RPR created a division (RPR Gencell)
dedicated to discovery, development and commercialization of cell and gene
therapies. Through collaborations with various companies and research
organizations, the division will optimize existing technologies to accelerate
the application of cell and gene therapies in the areas of oncology,
cardiovascular diseases and central nervous system disorders. In 1995, the
Company's investment in research and development programs is expected to
approach $700 million.
In 1994, the Company recorded a $121 million charge related to a global
restructuring plan. The plan, which is expected to be completed in 1995, is
intended to contribute to management's objective to reduce the Company's cost
base (exclusive of research and development expenditures) as a percentage of
sales. Annual pretax savings associated with the 1994 restructuring are
expected to approach $50 million in 1996; such savings approximated $20
million in 1994. Total cash outlays under the plan are expected to exceed $90
million; the remainder of the restructuring charge relates to asset writeoffs
in conjunction with certain production facilities. As of December 31, 1994,
actual cash outlays and assets writeoffs associated with the plan totaled $34
million and $19 million, respectively. Total workforce reductions will
approximate 1,300 positions, or 6%, primarily from manufacturing,
sales/marketing and administrative functions in North America and France,
although other locations in Europe and elsewhere are also included. Reductions
are being effected through a variety of local programs, the cost of which
typically includes retirement incentives or other severance benefits as well
as outplacement services. As of December 31, 1994, the Company's workforce had
been reduced by just under 550 positions as a result of the 1994
restructuring.
In 1993, the Company recorded charges of $94 million for the cost of certain
restructuring and manufacturing streamlining programs and increased provisions
for certain litigation. The 1993 programs, principally in Europe, include
restructuring of the marketing and manufacturing operations in the Company's
German and Italian prescription pharmaceutical businesses following
governmental actions aimed at reducing prices and limiting prescription
volume. The programs also include a plan to divest a portion of a French
manufacturing facility by the end of 1995. Full year 1994 pretax savings
related to the 1993 restructuring approached $30 million. Cash outlays
associated with the programs totaled $19 million in 1994; asset writeoffs were
not significant. As of December 31, 1994, over 650 positions had been affected
by the programs; total workforce reductions upon completion of the programs
will approximate 800 employees.
Net interest expense declined 23% to $47 million due to lower average
worldwide net debt balances and lower average interest rates in Europe. At
December 31, 1994, after the effect of interest rate swap contracts,
substantially all of the Company's debt was at variable rates of interest. In
1995, net interest expense is expected to approximate 1994 levels as the
favorable effect of slightly lower average net debt balances will be offset by
higher global interest rates. Preferred dividends of $19 million were higher
than the prior year due to a net increase in average outstanding preferred
shares and the effect of higher U.S. short-term interest rates.
Gains on sales of assets and product rights, including the Company's U.S.
over-the-counter business, totaled $46 million in 1994 (1993-$30 million).
At $84 million, other expense, net, increased by $30 million in 1994,
primarily due to the reassessment of the carrying value of certain of the
Company's investments, including AIS call options. Equity losses associated
7
<PAGE>
with AIS were $29 million and included acquired research and development
expense of $11 million; similar AIS-related expenses totaled $29 million in
1993. Other expense, net also reflected higher 1994 foreign exchange losses,
including the effects of translation and financing in high inflation
economies.
The Company's reported effective tax rate was 28.4% in 1994 compared with
28.7%. A reduction in the Company's Possessions Tax Credit benefit beginning
in December 1994 under the U.S. Omnibus Budget Reconciliation Act of 1993
could increase the Company's effective tax rate in 1995 and thereafter. The
Company will seek to mitigate this effect through routine tax planning
measures.
1993 Compared with 1992
Net income available to common shareholders was $409 million ($2.96 per
share), 5% below $428 million reported in 1992 ($3.10 per share). The
Company's 1993 reported net sales of $4,019 million were down 2% from 1992.
The 2% decline consisted of currency fluctuations (which reduced sales by 6%),
divested products (-1%), price increases (less than +1%), and volume gains
(+4%).
In the United States, prescription pharmaceuticals and over-the-counter
products contributed to an increase in sales despite a fourth quarter decision
to curtail year-end trade incentives on certain prescription pharmaceuticals.
Sales increases in France were driven primarily by demand for anti-infectives
and analgesics following a strong influenza season. Sales in Other Europe fell
principally due to the impact of restrictive government programs in Germany
(where prescription product sales were down 26%) and Italy (down 31%). The
sales declines in these countries were partially offset by higher branded
product sales in Eastern and Southern Europe and generic products in Northern
Europe. Sales increases in the Rest of World area were led principally by
Japan. If the effects of restructuring charges and gains on asset sales are
excluded from reported geographic area results, IBT margin increased in 1993
in the U.S., France and Rest of World but fell in Other Europe, triggered by
market conditions in Italy and Germany.
Sales of the Company's cardiovascular products in 1993 were led by
Clexane(R)/Lovenox(R), which performed well in France and was launched in the
U.S. early in 1993. The Company introduced a half-strength presentation of
Lozol(R) in 1993 as well as a generic indapamide product through its U.S.
Arcola Labs unit in anticipation of further generic competition following
expiration of the FDA exclusivity of Lozol(R) in mid-1993. Dilacor(R) XR,
launched in the U.S. in mid-1992, attained steady prescription growth
throughout 1993. Other cardiovascular products Frumil(R) (-19%), a leading
diuretic facing generic competition in the U.K., and Biosinax(R) (-66%), a
ganglioside sold in Italy, experienced sales declines as anticipated.
Sales of anti-infectives/oncology products were higher in 1993 on stronger
first and fourth quarter demand for upper respiratory disease products in
France.
Sales of plasma proteins were led by Albuminar(R) human serum albumin in
Japan and Monoclate-P(R) (pasteurized anti-hemophiliac Factor VIII:C) in Other
Europe markets. In the U.S., Monoclate-P(R) encountered competition from a
recombinant form that entered the market in 1993; the Company launched its own
recombinant version in the U.S. in late 1993. Mononine(TM), launched in the
U.S. in late 1992 for treatment of hemophilia B, also contributed to 1993
plasma proteins sales growth.
Sales of central nervous system/analgesia products were headed by
Doliprane(R), driven by a higher incidence of influenza in France, and
Imovane(R)/Amoban(R), which performed well in France and Japan.
Respiratory products were led by sales of Azmacort(R) and Nasacort(R) in
North America. Sales of Slo-bid(TM)/Slo-Phyllin(R) declined due to a shift in
use to inhaled steroids, although brand market share was maintained.
Calcitonin products encountered competition and unfavorable legislation in
Italy, their largest market and faced generic competition in the United
States, where the Company's Arcola Labs unit launched a generic
8
<PAGE>
version in the second half of 1993. Elsewhere, RPR recorded higher calcitonin
sales in Spain and Japan in 1993. Sales of Orudis(R)/Profenid(R)/Oruvail(R)
were marginally higher, led by sales in Japan.
Sales of gastroenterology products benefited from higher Maalox(R) sales in
the U.S., Canada and Japan which exceeded declines in Other Europe. Expansion
of the U.S. antacid market contributed to higher factory sales in the U.S.
although the brand's share of the highly competitive antacid market trailed
1992. In 1993, the Company launched Anti-Gas and Anti-Diarrheal line
extensions of Maalox(R). Sales of Zoltum(R) more than doubled in 1993.
Sales in other therapeutic categories included sales of DDAVP(R), which
declined 4% and sales of Dermik skin care products, which increased 15%.
Gross profit, as a percentage of sales, improved one percentage point in
1993 to 67% due to cost control and product mix-related improvements.
Selling, delivery and administrative expenses were 36.5% of sales compared
to 36.7% sales in 1992. Higher expenses in support of selling and promotion of
U.S. prescription pharmaceuticals and in Japan were more than offset by
expense reductions in Europe, particularly Germany and Italy. Research and
development expenses increased 8% to $561 million, or 14% of sales, in 1993.
Excluding restructuring and other charges and litigation proceeds, operating
income was approximately level in 1993 and 1992. In 1993, the effects of
expense controls in manufacturing and administration exceeded relatively
higher research and development spending and lower selling price increases.
Net interest expense declined by $44 million in 1993 as a result of lower
average net debt balances and worldwide interest rates. Approximately 92% of
combined short- and long-term debt was at variable rates (principally in
Europe) at December 31, 1993 and 1992. In 1993, the Company issued $175
million of money market preferred stock in the U.S. with initial dividend
rates fixed for two to five years and redeemed $75 million of Market Auction
Preferred Shares ("MAPS"). Dividends on preferred shares were higher than in
1992 due to the $100 million net increase in outstanding preferred shares,
partially offset by the effect on auction rate dividends of lower U.S. short-
term interest rates earlier in the year.
Other expense, net, increased to $54 million due primarily to higher losses
associated with equity-method investments.
The Company's effective income tax rate for 1993 was 28.7% compared with
27.2% for 1992 as a result of reduced tax benefits from Puerto Rico operations
and reduced utilization of net operating losses outside the United States.
Inflation
Although its effect has stabilized at historically low levels in most
developed countries in recent years, price inflation continues to increase the
Company's cost of goods and services. As a result, limited ability to raise
selling prices in the current environment exposes companies in the industry to
risk of profit erosion. The Company attempts to mitigate such adverse
inflationary effects through quality initiatives to improve productivity and
to control costs.
FINANCIAL CONDITION
Cash Flows
Net cash provided by operating activities was $685 million in 1994, $721
million in 1993 and $357 million in 1992. The reduction in 1994 operating cash
flows reflects lower earnings, including the receipt in 1993 of $105 million
proceeds from the settlement of litigation, as well as higher cash outlays for
income taxes and
9
<PAGE>
occupancy costs at the U.S. corporate offices. Cash outflows for income taxes
increased by $68 million in 1994 primarily due to the prior year deferral of
tax payments. Net cash provided by operations benefited from reduced working
capital needs and the receipt of an advance royalty associated with the
Company's transfer to Ciba of its U.S. over-the-counter business. Operating
cash flows were substantially higher in 1993 than in 1992 because of lower
outlays for income taxes, working capital needs and restructuring activities.
Investing activities used cash of $124 million in 1994 and $346 million in
1993 and provided cash of $51 million in 1992. In 1994 and 1992, investing
cash flows reflected higher proceeds from sales of assets and product rights
while 1993 investing activities included the acquisition of an initial 37%
interest in AIS for $117 million. Investing activities included $154 million
proceeds from transfer of the U.S. over-the-counter business to Ciba in 1994.
Net cash outflows associated with 1994 net investment hedging totaled $30
million. Cash outlays for capital expenditures were $230 million in 1994, down
from $250 million in 1993 and $284 million in 1992. In the first quarter of
1995, investing cash outflows associated with certain investments in
technologies will approximate $60 million, including $21 million related to
the acquisition of an additional 5% interest in AIS. First quarter 1995 cash
inflows include the receipt of $35 million of proceeds upon the transfer of
the Company's Canadian over-the-counter business to Ciba.
Cash used in financing activities was $481 million in 1994, $375 million in
1993 and $500 million in 1992. Financing cash outflows in 1994 included lower
debt repayments and higher outlays for common share repurchases and dividends;
1993 financing activities included $97 million of net proceeds from issuance
of preferred stock. Net repayments of third party and RP borrowings totaled
$202 million in 1994 as compared with $265 million in 1993 and $403 million in
1992. During 1994, the Company completed its five million share repurchase
program, acquiring for $110 million approximately three million of its common
shares on the open market for the Employee Benefits Trust to fund employee
benefits in the United States; such share repurchases totaled $76 million (two
million shares) in 1993. Cash dividends paid to common shareholders were $152
million ($1.12 per share) in 1994, $138 million in 1993 ($1.00 per share) and
$94 million in 1992 ($.68 per share). In January 1995, the Board of Directors
declared a first quarter cash dividend of $.30 per share, a 7% increase above
the average 1994 quarterly dividend.
Liquidity
As a result of debt repayments, the Company's net debt (short- and long-term
debt including notes payable to RP, less cash and cash equivalents, short-term
investments and time deposits) to net debt plus equity ratio improved to .16
to 1 at December 31, 1994 from .26 to 1 at December 31, 1993. The ratio of
current assets to current liabilities was 1.40 to 1 compared to 1.37 to 1 a
year ago.
At December 31, 1994, the Company had committed lines of credit totaling
$1.2 billion with approximately $28 million of borrowings outstanding under
these lines. Of the $1.2 billion, $500 million relates to a long-term
revolving credit facility unconditionally guaranteed by RP; the amount
available under this facility reduces by $200 million per year until
expiration of the facility in 1997. In a separate agreement with RP related to
the issuance of MAPS, the Company must maintain as unused under this facility
the smaller of $325 million or the principal amount of debt outstanding
(excluding borrowings from, or guaranteed by, RP). The Company had an
additional $695 million available under several multicurrency line of credit
agreements expiring throughout the next four years. At December 31, 1994, the
Company had the ability and intent to renew, or to refinance under these
facilities, approximately $233 million of short-term third party borrowings
for at least one year. Accordingly, this amount was classified as long-term
debt.
Pursuant to a $500 million shelf registration, the Company issued $175
million of money market preferred stock in 1993 and has the ability to issue
an additional $325 million in public debt securities and/or preferred shares.
In 1993, Moody's Investors Service ("Moody's") and Standard & Poor's ("S&P")
lowered the Company's preferred share credit ratings, attributing the change
to the effects of the 1993 privatization of RP. The
10
<PAGE>
Company's preferred share issues are now rated BBB by S&P and Baa1 by Moody's.
The Company's senior unsecured debt ratings carry a rating of BBB+ by S&P and
A3 by Moody's.
Management believes that cash flows from operations, supplemented by
financing expected to be available from external sources, will provide
sufficient liquidity to meet its needs for the foreseeable future. Long-term
liquidity is dependent upon the Company's competitive position, including its
ability to discover, develop and market innovative therapies and maximize the
benefits of new business alliances. In 1994, in addition to the formation of
the RPR Gencell partnership dedicated to cell and gene therapy, the Company
entered into an alliance with Caremark International Inc., a U.S.
pharmaceutical benefit management company, to enhance the delivery of cost-
effective drug therapies through a shared investment in outcomes research.
Through the acquisition of Cooper from Rhone-Poulenc, RPR has access to an
extensive pharmacy distribution network in France. In February 1995, Armour
entered into an agreement with Behringwerke AG ("Behring"), a subsidiary of
Germany's Hoechst AG, to form a 50/50 joint venture in the global plasma
proteins business. Armour and Behring have complementary plasma proteins
offerings and geographic strengths which, when combined, would position the
resulting joint venture to become a global market leader. The arrangement will
also provide for increased investment in research and development activities.
The proposed joint venture received U.S. and European regulatory approvals in
the first half of 1995. The Company will continue to explore new strategic
business alliances as such opportunities arise.
Insurance and Litigation
The Company maintains significant levels of excess catastrophic general and
products liability insurance obtained from independent third-party insurers.
In light of the risks attendant to the Company's business activities, the
limits and coverage terms of such insurance are believed reasonable in amount
and scope and comparable to the insurance carried by others in the industry.
The Company is involved in litigation incidental to its business including,
but not limited to: (1) approximately 321 lawsuits pending in the United
States, Canada and Ireland against RPR and its Armour subsidiary, in which it
is claimed by individuals infected with the Human Immunodeficiency Virus
("HIV") that their infection with HIV and, in some cases, resulting illnesses,
including Acquired Immune Deficiency Syndrome-related conditions or death
therefrom, may have been caused by administration of anti-hemophilic factor
("AHF") concentrates processed by Armour in the early and mid-1980's. Armour
has also been named as a defendant in five proposed class action lawsuits
filed on behalf of HIV-infected hemophiliacs and their families. None of these
cases involves Armour's currently distributed AHF concentrates; (2) legal
actions pending against one or more subsidiaries of the Company and various
groupings of more than one hundred pharmaceutical companies, in which it is
generally alleged that certain individuals were injured as a result of the
development of various reproductive tract abnormalities because of in utero
exposure to diethylstilbestrol ("DES") (typically, two former operating
subsidiaries of the Company are named as defendants, along with numerous other
DES manufacturers, when the claimant is unable to identify the manufacturer);
(3) antitrust actions alleging that the Company engaged in price
discrimination practices to the detriment of certain independent community
pharmacists; (4) alleged breach of contract by a subsidiary of the Company
with respect to agreements involving a bisphosphonate compound and Lozol(R);
and (5) potential responsibility relating to past waste disposal practices,
including potential involvement, for which the Company believes its share of
liability, if any, to be negligible, at four sites on the U.S. National
Priority List created by Superfund legislation.
The eventual outcomes of the above matters of pending litigation cannot be
predicted with certainty. The defense of these matters and the defense of
expected additional lawsuits related to these matters may require substantial
legal defense expenditures. The Company follows Statement of Financial
Accounting Standards No. 5 in determining whether to recognize losses and
accrue liabilities relating to such matters. Accordingly, the Company
recognizes a loss if available information indicates that a loss or range of
losses is probable and reasonably estimable. The Company estimates such losses
on the basis of current facts and circumstances, prior experience with similar
matters, the number of claims and the anticipated cost of administering,
defending and,
11
<PAGE>
in some cases, settling such claims. The Company has also recorded as an asset
certain insurance recoveries which are determined to be probable of occurrence
on the basis of the status of current discussions with its insurance carriers.
If a contingent loss is not probable, but is reasonably possible, the Company
discloses this contingency in the notes to its consolidated financial
statements if it is material. Based on the information available, the Company
does not believe that reasonably possible uninsured losses in excess of
amounts recorded for the above matters of litigation would have a material
adverse impact on the Company's financial position, results of operations or
cash flows.
Advertising Costs
In December 1993, the AICPA issued Statement of Position (SOP) 93-7,
"Reporting on Advertising Costs." SOP 93-7 requires that the costs of
advertising other than direct response advertising be expensed as incurred or
the first time the advertising takes place. Adoption of the SOP in 1995 is not
expected to have a material impact on the Company's quarterly or annual
financial statements.
12
<PAGE>
ITEM 7. FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
RHONE-POULENC RORER INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
<TABLE>
<CAPTION>
PAGE IN THIS
FORM 8-K
------------
<C> <S> <C>
a. Consolidated Financial Statements:
Consolidated Statements of Income.......................... 14
Consolidated Balance Sheets................................ 15
Consolidated Statements of Cash Flows...................... 16
Notes to Consolidated Financial Statements................. 17-34
Report of Independent Accountants.......................... 35
Financial statement schedules:
Valuation and Qualifying Accounts (Schedule II)............ 38
Schedules not listed above have been omitted because they
are not applicable.
c. Exhibits:
A complete listing of exhibits required is given in the
exhibit index which precedes the exhibits filed with this
report.
</TABLE>
13
<PAGE>
RHONE-POULENC RORER INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
RESTATED
1994 1993 1992
---------------------- ----------
<S> <C> <C> <C>
Net sales.................................. $ 4,486.6 $ 4,019.4 $ 4,095.9
Cost of products sold...................... 1,555.8 1,326.3 1,394.6
Selling, delivery and administrative
expenses.................................. 1,605.8 1,467.8 1,505.0
Research and development expenses.......... 606.1 561.2 521.3
Restructuring and other charges............ 121.2 93.8 --
Proceeds from litigation settlement........ -- 105.0 --
---------- ---------- ----------
Operating income.......................... 597.7 675.3 675.0
Interest expense........................... 55.3 71.2 125.3
Interest income............................ (8.2) (10.4) (20.4)
Gain on sales of assets.................... (46.2) (30.2) (23.1)
Other expense, net......................... 83.9 54.2 11.5
---------- ---------- ----------
Income before income taxes................ 512.9 590.5 581.7
Provision for income taxes................. 145.8 169.4 158.4
---------- ---------- ----------
Net income before accounting change....... 367.1 421.1 423.3
Cumulative effect of accounting change..... -- -- 15.0
---------- ---------- ----------
Net income................................ 367.1 421.1 438.3
Dividends on preferred stock............... 19.2 12.4 10.1
---------- ---------- ----------
Net income available to common
shareholders............................. $ 347.9 $ 408.7 $ 428.2
========== ========== ==========
Primary earnings per common share:
Net income before cumulative effect of
accounting change........................ $ 2.96 $ 2.99
Net income before cumulative effect of
accounting change, pro forma............. $ 2.50
Cumulative effect of accounting change.... -- -- .11
---------- ---------- ----------
Net income available to common
shareholders............................. $ 2.96 $ 3.10
========== ==========
Net income available to common
shareholders, pro forma.................. $ 2.50
==========
</TABLE>
See Notes to Consolidated Financial Statements.
14
<PAGE>
RHONE-POULENC RORER INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
RESTATED
1994 1993
-------- --------
<S> <C> <C>
ASSETS
Current:
Cash and cash equivalents................................. $ 118.8 $ 35.4
Trade accounts receivable less reserves of $78.6 (1993:
$68.3)................................................... 812.1 746.6
Inventories............................................... 612.5 504.1
Other current assets...................................... 543.3 382.7
-------- --------
Total current assets.................................. 2,086.7 1,668.8
Time deposits, at cost.................................... 55.8 64.3
Property, plant and equipment, net........................ 1,199.8 1,032.0
Goodwill, net............................................. 705.9 676.5
Intangibles, net.......................................... 170.5 206.1
Other assets.............................................. 433.6 402.5
-------- --------
Total assets.......................................... $4,652.3 $4,050.2
======== ========
LIABILITIES
Current:
Short-term debt........................................... $ 90.5 $ 108.6
Notes payable to Rhone-Poulenc S.A. & affiliates.......... 37.3 201.3
Accounts payable.......................................... 470.5 365.6
Income taxes payable...................................... 70.6 55.8
Accrued employee compensation............................. 150.9 121.0
Other current liabilities................................. 675.2 369.9
-------- --------
Total current liabilities............................. 1,495.0 1,222.2
Long-term debt............................................ 439.9 432.2
Deferred income taxes..................................... 31.6 29.5
Other liabilities......................................... 575.4 545.1
-------- --------
Total liabilities..................................... 2,541.9 2,229.0
-------- --------
Contingencies.............................................
SHAREHOLDERS' EQUITY
Market Auction Preferred Shares, without par value (liqui-
dation preference $1,000 per share); authorized, issued
and outstanding 225,000 shares........................... 225.0 225.0
Money market preferred stock, without par value (liquida-
tion preference $100,000 per share); issued and outstand-
ing 1,750 shares......................................... 175.0 175.0
Common stock, without par value; stated value $1 per
share; authorized 200,000,000 shares; issued and out-
standing 134,095,649 shares (1993: 136,996,345 shares)... 139.1 139.0
Capital in excess of stated value......................... 412.2 290.0
Retained earnings......................................... 1,403.7 1,207.3
Employee Benefits Trust................................... (185.7) (75.8)
Cumulative translation adjustments........................ (58.9) (139.3)
-------- --------
Total shareholders' equity............................ 2,110.4 1,821.2
-------- --------
Total liabilities and shareholders' equity............ $4,652.3 $4,050.2
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
15
<PAGE>
RHONE-POULENC RORER INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------
RESTATED
1994 1993 1992
---------- ---------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................... $ 367.1 $ 421.1 $ 438.3
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization.......... 193.2 167.9 197.7
Provision for deferred income taxes.... (67.5) (40.8) (20.9)
Cumulative effect of accounting change. -- -- (15.0)
Gain on sales of assets................ (46.2) (30.2) (23.1)
Deferred royalty income................ 24.0 -- --
Equity losses of unconsolidated affili-
ates, net............................. 21.1 26.6 2.3
(Increase) decrease in trade accounts
receivable, net....................... 47.3 (33.0) (66.8)
(Increase) decrease in inventories..... (37.6) 2.5 (22.8)
Increase in accounts payable........... 19.6 39.4 47.5
Increase (decrease) in income taxes
payable............................... 13.3 83.7 (67.7)
Restructuring charges, net............. 68.3 44.6 (64.2)
Other items, net....................... 82.8 39.0 (48.0)
---------- ---------- ----------
Net cash provided by operating activ-
ities............................... 685.4 720.8 357.3
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures..................... (229.9) (250.4) (284.3)
Equity investment in Applied Immune Sci-
ences, Inc.............................. -- (117.3) --
Investment in time deposits, net......... 8.5 (13.8) 5.9
Proceeds from sales of assets............ 162.6 52.0 339.6
Purchase of assets and investments....... (35.3) (15.0) (10.5)
Net investment hedging, net.............. (29.8) (1.1) --
---------- ---------- ----------
Net cash provided by (used in) in-
vesting activities.................. (123.9) (345.6) 50.7
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term borrowings, net............... (223.1) (240.0) 298.3
Proceeds from issuance of long-term debt. 67.9 108.2 292.6
Repayment of long-term debt.............. (47.4) (133.0) (993.8)
Shares repurchased for Employee Benefits
Trust................................... (109.9) (75.8) --
Dividends paid........................... (170.7) (149.2) (103.4)
Issuance of money market preferred stock. -- 171.9 --
Redemption of Market Auction Preferred
Shares.................................. -- (75.0) --
Issuances of common stock................ 2.6 17.8 6.1
---------- ---------- ----------
Net cash used in financing activi-
ties................................ (480.6) (375.1) (500.2)
---------- ---------- ----------
Effect of exchange rate changes on cash.. 2.5 (4.2) (4.1)
---------- ---------- ----------
Net increase (decrease) in cash and cash
equivalents............................. 83.4 (4.1) (96.3)
Cash and cash equivalents at beginning of
year.................................... 35.4 39.5 135.8
---------- ---------- ----------
Cash and cash equivalents at end of year. $ 118.8 $ 35.4 $ 39.5
========== ========== ==========
NONCASH INVESTING AND FINANCING ACTIVI-
TIES:
Issuance of common stock under employee
benefit plans......................... $ 1.5 $ 4.0 $ 5.7
CASH PAID DURING YEAR FOR:
Interest, net of amounts capitalized... $ 61.7 $ 82.4 $ 128.2
Income taxes........................... $ 201.0 $ 133.0 $ 247.0
</TABLE>
See Notes to Consolidated Financial Statements.
16
<PAGE>
RHONE-POULENC RORER INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Rhone-Poulenc
Rorer Inc. and subsidiaries which are more than 50 percent owned and/or
controlled. All subsidiaries are consolidated on the basis of twelve-month
periods ending December 31. Investments in corporate joint ventures and other
companies in which the Company has a 20 to 50 percent ownership are accounted
for by the equity method. Cost investments, less than 20 percent owned, are
carried at their original cost. Certain prior year items have been
reclassified to conform to current classifications.
Cash and Cash Equivalents and Time Deposits
The Company considers cash on hand, cash in banks, certificates of deposit,
time deposits and U.S. government and other short-term securities with
maturities of three months or less when purchased as cash and cash
equivalents. Investments with a maturity period of greater than three months
but less than one year are classified as short-term investments. Certain
mortgage-backed certificates, repurchase obligations and certificates of
deposit with maturities of more than one year are classified as long-term time
deposits.
Inventories
Inventories are valued at the lower of cost or market, using the first-in,
first-out (FIFO) or average cost methods.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. For financial accounting
purposes, depreciation is computed principally on the straight-line method
over the estimated useful lives of the assets (generally, 20 to 30 years for
buildings and 5 to 15 years for machinery and equipment). For income tax
purposes, certain assets are depreciated using accelerated methods. Effective
January 1, 1993, the Company extended the depreciation lives for certain
production machinery and equipment. The change in estimate increased 1993 net
income by $11.1 million ($.08 per share).
Goodwill and Intangible Assets
Goodwill represents the excess of cost over the fair market value of net
assets of businesses acquired. Goodwill is amortized on a straight-line basis
over a period not to exceed forty years, and is reported net of accumulated
amortization of $210.2 million in 1994 and $172.1 million in 1993. The Company
assesses potential impairment of goodwill by comparing the carrying value of
goodwill at the balance sheet date with anticipated undiscounted future
operating income before amortization. Intangibles, which principally represent
the cost of acquiring patents and product lines, are amortized over their
estimated useful lives and are reported net of accumulated amortization of
$121.2 million in 1994 and $96.5 million in 1993.
Income Taxes
The Company and substantially all of its United States subsidiaries file a
consolidated federal income tax return. No provision has been made for United
States income taxes or withholding taxes on the unremitted earnings of non-
U.S. subsidiaries which are intended to be indefinitely reinvested. Effective
January 1, 1992, the Company adopted Statement of Financial Accounting
Standards No. 109 ("SFAS 109"), "Accounting for Income Taxes," and recorded a
cumulative effect adjustment increasing 1992 net income by $15.0 million ($.11
per share).
17
<PAGE>
RHONE-POULENC RORER INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Foreign Currency Translation
Financial information relating to the Company's subsidiaries located outside
the United States is translated using the current rate method. Local
currencies are considered the functional currencies except in countries with
highly inflationary economies.
Advertising
Advertising costs are generally expensed within the fiscal year that the
costs are incurred, except for direct response advertising, which is
capitalized and amortized over the expected period of future benefit.
NOTE 2. ACQUISITIONS
In 1995, the Company acquired from Rhone-Poulenc S.A. ("RP") the businesses
of Cooperation Pharmaceutique Francaise ("Cooper"), primarily in France, and a
pharmaceutical business in Brazil for cash and preferred stock of a French
subsidiary aggregating approximately $270 million. The preferred shares,
accounted for as minority interest in other liabilities at December 31, 1994,
have a liquidation preference approximating 645 million French francs and pay
dividends of 7.5% per annum on a stated value of 145 million French francs.
The acquisition agreements call for potential adjustments to the purchase
price of the businesses based on several factors, including earnings
performance.
For accounting purposes, the acquisitions of these entities under common
control were treated on an "as-if pooling" basis and, accordingly, the Company
has restated its 1994 results to include the accounts of Cooper and the
Brazilian business as of April 1, 1994 (the date that Cooper was acquired by
RP) and January 1, 1994, respectively. The effect of restatements in periods
prior to 1994 was not material. The assets and liabilities of the acquired
businesses were recorded by the Company at the carrying values used by RP as
of the restatement dates. Earnings per share for the restated periods reflect
pro forma adjustments giving effect to interest on indebtedness and preferred
dividends relative to the acquisition transactions.
NOTE 3. RESTRUCTURING AND OTHER CHARGES
In 1994, the Company recorded a $121.2 million ($.58 per share) pretax
charge in connection with a global restructuring plan that is expected to be
completed in 1995. The restructuring will reduce the Company's workforce by
approximately 1,300 positions, or 6%. The reductions will be primarily from
manufacturing, sales/marketing and administrative functions in North America
and in France, although other locations in Europe and elsewhere are also
included. Reductions are being effected through a variety of local programs,
the cost of which typically includes retirement incentives or other severance
benefits as well as outplacement services. The cash outlay related to the plan
is expected to exceed $90.0 million. The remainder of the restructuring charge
relates to asset writeoffs in conjunction with certain production facilities.
In 1994, the pretax savings associated with the restructuring approximated
$20.0 million; annual pretax savings are expected to approach $50.0 million in
1996. As of December 31, 1994, the Company's workforce has been reduced by
just under 550 employees as a result of the 1994 restructuring program.
A rollforward of the 1994 restructuring provision from the original
liability is as follows:
<TABLE>
<CAPTION>
PAYMENTS/ TRANSLATION
BEGINNING ASSET ADJUSTMENTS/ DECEMBER 31,
BALANCE WRITEOFFS OTHER 1994
--------- --------- ------------ ------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Social costs................... $ 89.6 $ (29.8) $(7.0) $52.8
Third parties.................. 12.5 (4.3) 0.2 8.4
Asset writeoffs................ 19.1 (19.4) 8.5 8.2
------ ------- ----- -----
Total........................ $121.2 $ (53.5) $ 1.7 $69.4
====== ======= ===== =====
</TABLE>
18
<PAGE>
RHONE-POULENC RORER INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In 1993, the Company recorded a pretax charge of $93.8 million ($.45 per
share) for the cost of certain restructuring and manufacturing streamlining
programs and increased provisions for certain litigation. The 1993
restructuring programs, principally in Europe, include restructuring of
marketing and manufacturing operations in the Company's German and Italian
prescription pharmaceutical businesses following governmental actions aimed at
reducing prices and limiting prescription volume. The programs also include a
plan to divest a portion of a manufacturing facility in Monts, France by the
end of 1995. Total workforce reductions associated with the plan will
approximate 800 positions; as of December 31, 1994, the Company's workforce
had been reduced by over 650 employees. Full year 1994 pretax savings
associated with the 1993 restructuring programs approached $30.0 million.
A rollforward of the 1993 restructuring provision from January 1, 1994 is as
follows:
<TABLE>
<CAPTION>
PAYMENTS/ TRANSLATION
JANUARY 1, ASSET ADJUSTMENTS/ DECEMBER 31,
1994 WRITEOFFS OTHER 1994
---------- --------- ------------ ------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Social costs.................. $26.6 $(14.0) $(0.4) $12.2
Third parties................. 1.8 (4.8) 3.0 --
Asset writeoffs............... 9.4 (1.2) 0.8 9.0
----- ------ ----- -----
Total....................... $37.8 $(20.0) $ 3.4 $21.2
===== ====== ===== =====
</TABLE>
NOTE 4. GAINS ON SALES OF ASSETS AND PROCEEDS FROM LITIGATION SETTLEMENT
In 1994, the Company recorded pretax gains on the sale of assets and product
rights totaling $46.2 million; such gains included the sale of certain assets
related to the Company's U.S. over-the-counter business to Ciba-Geigy Limited
("Ciba") in the fourth quarter. Under terms of that agreement, the Company
received a one-time payment totaling $178.0 million which included a prepaid
royalty of $24.0 million for the year 1995. Additional royalties of $24.0
million are expected per year for six years. At the end of the seven-year
period, Ciba has the option to purchase the U.S. product intellectual property
assets for approximately $143.0 million. The Canada portion of the asset sale
transaction closed in the first quarter of 1995, providing additional cash
proceeds of $34.6 million.
In 1993, pretax gains from asset sales including sales of product rights and
certain investments totaled $30.2 million. In 1993, the Company also received
$105.0 million cash proceeds from the settlement of a longstanding patent
lawsuit with Baxter International concerning Factor VIII:C concentrates for
the treatment of hemophilia.
In 1992, the Company recorded gains of $23.1 million related principally to
the sales of product rights in the U.S. and France.
NOTE 5. EQUITY INVESTMENT IN APPLIED IMMUNE SCIENCES, INC.
In 1993, the Company acquired for $117.3 million, including expenses, a 37%
interest in Applied Immune Sciences, Inc. ("AIS") and call options to purchase
up to six million additional shares which, if exercised, would result in
majority ownership by RPR approximating 60%. The companies also agreed to
establish joint ventures related to cell therapy products and services. Equity
losses associated with AIS for the year ended December 31, 1994 were $17.6
million. In 1994, AIS achieved a development milestone requiring RPR to
purchase an additional one million AIS shares, equal to an additional 5%
interest, in January 1995. In connection therewith, in 1994 the Company
recorded in equity losses of affiliates an $11.0 million pretax charge for
acquired research and development expense. In 1993, similar expenses
associated with AIS were $29.1 million ($.14 per share). The purchase of the
one million shares reduced the AIS call options held by RPR to five million
related shares.
19
<PAGE>
RHONE-POULENC RORER INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company may be required to purchase up to three million additional shares
of AIS common stock at a cost of up to $75.0 million between 1995 and 1997 if
AIS achieves certain other development milestones and/or sales and earnings
targets.
NOTE 6. OTHER EXPENSE, NET
<TABLE>
<CAPTION>
1994 1993 1992
------- ------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Equity losses of affiliates........................ $ 46.5 $ 50.0 $ 15.8
Minority interest.................................. 3.3 3.8 2.0
Foreign exchange (gains) losses.................... 10.5 (2.5) (8.1)
Other, net......................................... 23.6 2.9 1.8
------- ------- -------
$ 83.9 $ 54.2 $ 11.5
======= ======= =======
</TABLE>
Other, net for the year ended December 31, 1994 includes a charge of $30.6
million related to the reassessment of the carrying value of certain
investments including AIS call options.
NOTE 7. EARNINGS PER SHARE
Earnings per common share were computed by dividing net income available to
common shareholders by the weighted average number of shares of common stock
outstanding. For purposes of earnings per share calculations, net income
available to common shareholders in 1994 was adjusted for the pro forma
effects of interest on indebtedness and preferred dividends relative to the
acquisitions of businesses from RP. The weighted average number of shares used
to compute primary earnings per common share was 135,254,692; 138,168,739 and
138,073,872 for the years 1994, 1993 and 1992, respectively. Common share
equivalents in the form of stock options were excluded from the calculation as
their dilutive effect was not material.
NOTE 8. INVENTORIES
<TABLE>
<CAPTION>
1994 1993
---------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Finished goods........................................ $ 323.2 $ 235.3
Work in process....................................... 125.0 111.5
Raw materials and supplies............................ 164.3 157.3
---------- ----------
$ 612.5 $ 504.1
========== ==========
</TABLE>
NOTE 9. PROPERTY, PLANT AND EQUIPMENT, NET
<TABLE>
<CAPTION>
1994 1993
---------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Land.................................................. $ 66.3 $ 58.0
Buildings............................................. 658.2 568.7
Machinery and equipment............................... 1,416.6 1,197.2
Construction in progress.............................. 169.8 134.7
---------- ----------
2,310.9 1,958.6
Less accumulated depreciation......................... 1,111.1 926.6
---------- ----------
Property, plant and equipment, net.................... $ 1,199.8 $ 1,032.0
========== ==========
</TABLE>
20
<PAGE>
RHONE-POULENC RORER INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company incurred $58.7 million and $75.5 million in interest cost in
1994 and 1993, respectively, of which $3.4 million and $4.3 million,
respectively, was capitalized as part of the cost of additions to property,
plant and equipment.
NOTE 10. DEBT
Short-term debt consisted of the following:
<TABLE>
<CAPTION>
1994 1993
---------- -----------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Notes payable to banks................................ $ 68.5 $ 86.6
Current portion of long-term debt..................... 22.0 22.0
---------- -----------
$ 90.5 $ 108.6
---------- -----------
Notes payable to Rhone-Poulenc S.A. and affiliates.... $ 37.3 $ 201.3
========== ===========
</TABLE>
The weighted average interest rate of total outstanding short-term debt was
9.3% at December 31, 1994 (1993: 6.7%).
Long-term debt, net of current portion, consisted of the following:
<TABLE>
<CAPTION>
1994 1993
---------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Notes payable at variable rates averaging 5.1% at 1994
year-end (expected to be refinanced long-term)....... $ 233.3 $ 255.2
9.15% Series A Senior Notes due 2004, with interest
payable quarterly (guaranteed by Rhone-Poulenc S.A.). 56.6 60.1
8.95% Series B Senior Notes due 1997, with interest
payable quarterly (guaranteed by Rhone-Poulenc S.A.). 8.6 12.9
Yen-denominated variable rate notes under revolving
credit agreements due 1996 through 1998 (1994 year-
end rate 2.8%)....................................... 28.0 --
Notes, mortgages and capitalized lease obligations at
rates averaging 8.1% (1993: 9.0%).................... 82.1 74.4
---------- ----------
$ 408.6 $ 402.6
Notes payable to Rhone-Poulenc S.A. and affiliates
principally due in 2000 at rates averaging 6.2%
(1993: 6.0%)......................................... 31.3 29.6
---------- ----------
$ 439.9 $ 432.2
========== ==========
</TABLE>
At December 31, 1994, the Company had classified $233.3 million of various
short-term borrowings from banks as long-term debt in accordance with the
Company's intention and ability to refinance such obligations on a long-term
basis. These borrowings were in various currencies with interest rates as
follows: $77.1 million in British pounds at 5.7%, $42.1 million in French
francs at 5.6%, $41.8 million in U.S. dollars at 5.9%, $39.3 million in German
marks at 5.0% and $33.0 million in Japanese yen at 2.6%.
The aggregate maturities of all long-term debt at December 31, 1994,
including related party debt, were: $22.0 million in 1995, $135.5 million in
1996, $154.0 million in 1997, $35.6 million in 1998, $26.3 million in 1999 and
$88.5 million thereafter.
21
<PAGE>
RHONE-POULENC RORER INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The weighted average interest rate of total debt outstanding at December 31,
1994 was 7.0% (1993: 6.5%). At December 31, 1994, including the effect of
interest rate swap contracts, virtually all of the Company's outstanding debt
was at variable rates of interest (1993: 92%).
At December 31, 1994, the Company had committed lines of credit totaling
$1.2 billion with $28.0 million in borrowings outstanding under these lines.
Of the $1.2 billion, $500.0 million related to the Revolving Credit Facility
Agreement dated April 30, 1990 ("the Facility"). The Facility is
unconditionally guaranteed by RP and expires in $100.0 million installments
semi-annually through April 30, 1997. In connection with the 1991 issuance of
Market Auction Preferred Shares, the Company agreed to maintain as unused a
portion of the Facility of not less than the smaller of $325.0 million or
total indebtedness (excluding amounts owed to or guaranteed by RP). Terms of
the Facility contain certain covenants regarding the financial condition of
RP, the most restrictive of which is the maintenance of minimum stockholders'
equity and ratio of total indebtedness to net worth. The Company has an
additional $695.0 million available under several multicurrency credit line
agreements with various banks expiring throughout the next four years.
Borrowings under the above facilities can be made in various currencies,
principally U.S. dollars, French francs, German marks, British pounds and
Japanese yen; interest rates vary with the respective currency's interbank
offering rate. Amounts available under unused uncommitted lines of credit
approximated $634.7 million at December 31, 1994.
Pursuant to a 1993 U.S. shelf registration for $500.0 million, the Company
issued $175.0 million of money market preferred stock in 1993 and has the
ability to issue an additional $325.0 million in public debt securities and/or
preferred shares.
NOTE 11. LEASE COMMITMENTS
Rent expense was $55.0 million, $49.4 million and $28.2 million in 1994,
1993 and 1992, respectively. Future minimum lease commitments under all leases
with initial or remaining noncancelable lease terms in excess of one year at
December 31, 1994 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
---------- -----------
(DOLLARS IN MILLIONS)
<S> <C> <C>
1995.............................................. $ 7.2 $ 56.9
1996.............................................. 6.2 48.7
1997.............................................. 5.4 52.9
1998.............................................. 4.4 35.8
1999.............................................. 4.2 34.3
Thereafter........................................ 23.1 581.1
---------- -----------
Minimum lease payments............................ 50.5 $ 809.7
===========
Less imputed interest............................. (14.3)
----------
Present value of minimum lease payments (current--
$5.2, noncurrent--$31.0)......................... $ 36.2
==========
</TABLE>
In 1992, the Company sold its U.S. corporate offices and research facility
to a third party for $258.0 million and leased it back for an initial term of
thirty years with options to renew for a longer period. The Company also
leased the underlying land to the third party for sixty years and subleased it
back for thirty years with the facility. The Company pays taxes, insurance and
maintenance costs associated with the facility. Average annual accounting rent
is $22.5 million; under terms of the agreement, the first cash rental payment
was in July 1994.
22
<PAGE>
RHONE-POULENC RORER INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 12. INCOME TAXES
The components of income before income taxes are:
<TABLE>
<CAPTION>
1994 1993 1992
------- ------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
United States......................................... $ 241.0 $ 289.1 $ 258.9
Non-U.S............................................... 271.9 301.4 322.8
------- ------- -------
$ 512.9 $ 590.5 $ 581.7
======= ======= =======
</TABLE>
The provisions for income taxes are:
<TABLE>
<CAPTION>
1994 1993 1992
------- ------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Current:
United States.................................... $ 103.4 $ 100.2 $ 62.9
Non-U.S.......................................... 109.9 110.0 116.4
------- ------- -------
213.3 210.2 179.3
------- ------- -------
Deferred:
United States.................................... (51.7) (31.0) 2.2
Non-U.S.......................................... (15.8) (9.8) (23.1)
------- ------- -------
(67.5) (40.8) (20.9)
------- ------- -------
$ 145.8 $ 169.4 $ 158.4
======= ======= =======
</TABLE>
Deferred income taxes are provided for temporary differences between book
and tax bases of the Company's assets and liabilities. Temporary differences
giving rise to a significant portion of the deferred tax assets and
liabilities at December 31 are:
<TABLE>
<CAPTION>
1994 1993
---------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Assets (liabilities):
Depreciation and amortization...................... $ (64.5) $ (65.0)
Pension............................................ 50.2 51.8
Intercompany profit in ending inventory............ 36.2 30.5
Cost and equity investments........................ 30.9 10.7
Distributable earnings............................. (26.2) (14.7)
Restructuring...................................... 36.4 15.8
Net operating loss carryforwards................... 15.4 13.2
Other, including nondeductible accruals............ 108.7 52.7
---------- ----------
187.1 95.0
Less valuation allowance........................... (11.2) (8.9)
---------- ----------
Deferred income taxes, net......................... $ 175.9 $ 86.1
========== ==========
</TABLE>
The portion of the above net deferred tax assets classified as current was
$161.7 million and $60.3 million at December 31, 1994 and 1993, respectively.
At December 31, 1994, total deferred tax assets were $364.9 million and total
deferred tax liabilities were $177.8 million before netting. At December 31,
1993, similar temporary differences gave rise to total deferred tax assets of
$269.2 million and total deferred tax liabilities of $174.2 million.
23
<PAGE>
RHONE-POULENC RORER INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The differences between the U.S. statutory income tax rate and the Company's
effective income tax rate are:
<TABLE>
<CAPTION>
1994 1993 1992
------------- ------------- -------------
(PERCENT OF INCOME BEFORE INCOME TAXES)
<S> <C> <C> <C>
U.S. statutory income tax rate.. 35.0% 35.0% 34.0%
Non-U.S. tax rate differential.. (1.8) (1.7) 1.5
Puerto Rico operations.......... (5.0) (3.6) (4.9)
Research and development tax
credits........................ (1.4) (1.8) --
Non-U.S. net operating losses... -- -- (1.6)
Other, net...................... 1.6 0.8 (1.8)
------------- ------------- -------------
Effective income tax rate....... 28.4% 28.7% 27.2%
============= ============= =============
</TABLE>
The Company has subsidiaries in Puerto Rico and Ireland, where earnings are
either exempt or substantially exempt from income taxes under local government
incentive programs, the latest of which expires in the year 2010.
The Company has non-U.S. net operating loss carryforwards of $39.6 million
for tax return purposes which expire principally through the years 1995-1998.
The U.S. tax returns for the years 1987-1989 are currently being examined by
the Internal Revenue Service ("IRS"); the Company's French tax returns have
been examined through the year 1990. Neither the IRS nor the French tax
authorities have proposed any adjustments of a material nature.
Unremitted earnings of subsidiaries which are intended to be indefinitely
reinvested were $942.4 million at December 31, 1994. Withholding taxes payable
if the entire amount of these earnings were remitted would be $59.9 million.
U.S. income taxes payable if these earnings were remitted would be
substantially offset by available foreign tax credits.
NOTE 13. PENSIONS AND OTHER POSTRETIREMENT BENEFITS
Pensions
The Company has several defined benefit pension plans which cover a majority
of its employees throughout the world. In the United States, the Company's
funding policy is to contribute funds to a trust as necessary to provide for
current service and for any unfunded projected benefit obligation over a
reasonable period. To the extent that these requirements are fully covered by
assets in the trust, a contribution may not be made in a particular year.
Obligations under non-U.S. plans are systematically provided by depositing
funds with trustees, under insurance policies or through book reserves.
24
<PAGE>
RHONE-POULENC RORER INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The funded status of the Company's plans at December 31 was as follows:
<TABLE>
<CAPTION>
1994 1993
--------------------------- ---------------------------
PLANS WHOSE PLANS WHOSE PLANS WHOSE PLANS WHOSE
ASSETS EXCEED ACCUMULATED ASSETS EXCEED ACCUMULATED
ACCUMULATED BENEFITS ACCUMULATED BENEFITS
BENEFITS EXCEED ASSETS BENEFITS EXCEED ASSETS
------------- ------------- ------------- -------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Vested benefit
obligations............ $(141.7) $(330.7) $(128.7) $(317.9)
Nonvested benefits...... (4.2) (71.1) (4.1) (54.4)
------- ------- ------- -------
Accumulated benefit
obligation............. (145.9) (401.8) (132.8) (372.3)
Projected future salary
increases.............. (12.2) (55.1) (9.0) (62.3)
------- ------- ------- -------
Projected benefit
obligation............. (158.1) (456.9) (141.8) (434.6)
Fair value of plan
assets (invested
primarily in equities
and bonds)............. 186.1 122.4 158.8 132.2
------- ------- ------- -------
Plan assets in excess of
(less than) projected
benefit obligation..... 28.0 (334.5) 17.0 (302.4)
Unrecognized net
transition (asset)
liability.............. 0.7 1.6 (0.9) 5.9
Unrecognized net (gain)
loss................... (30.3) 59.9 (4.9) 78.3
Unrecognized prior
service cost........... 20.7 6.7 7.5 3.6
Adjustment required to
recognize minimum
liability.............. -- (52.4) -- (52.7)
------- ------- ------- -------
Prepaid (accrued)
pension cost........... $ 19.1 $(318.7) $ 18.7 $(267.3)
======= ======= ======= =======
</TABLE>
The accumulated benefit obligation of U.S. plans included in the above table
was $132.8 million in 1994 and $148.8 million in 1993. U.S. plan assets were
$122.7 million and $128.5 million at December 31, 1994 and 1993, respectively.
Of the net accrued pension cost, $306.2 million and $262.6 million are
included in other noncurrent liabilities in 1994 and 1993, respectively.
The following items are the components of net periodic pension cost for the
years ended December 31:
<TABLE>
<CAPTION>
1994 1993 1992
------- ------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Service cost...................................... $ 19.5 $ 16.9 $ 17.0
Interest cost..................................... 46.2 42.7 41.2
Actual return on plan assets...................... (26.6) (49.9) (25.5)
Amortization and deferral......................... 5.7 27.2 2.3
------- ------- -------
Net periodic pension cost......................... $ 44.8 $ 36.9 $ 35.0
======= ======= =======
</TABLE>
Net periodic pension cost for U.S. plans included in the above amounts is
$12.2 million, $8.5 million and $8.2 million for 1994, 1993 and 1992,
respectively.
The following weighted average assumptions, which are based on the economic
environment of each applicable country, were used to determine the return on
plan assets and benefit obligations:
<TABLE>
<CAPTION>
1994 1993 1992
---- ----- -----
<S> <C> <C> <C>
Discount rate............................................... 7.9% 7.7% 9.0%
Expected return on plan assets.............................. 9.6% 10.4% 10.1%
Rate of future compensation increases....................... 3.8% 4.6% 5.4%
</TABLE>
25
<PAGE>
RHONE-POULENC RORER INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
For U.S. plans, the discount rate was 8.5% in 1994, 7.5% in 1993 and 8.25%
in 1992. The expected return on plan assets of 9.5% remained constant from
1992 through 1994. The rate of future compensation increases was 4.5% in 1994,
5% in 1993 and 6% in 1992.
Savings Plans
The Company sponsors defined contribution savings plans covering
substantially all U.S. employees. Company contributions to the plans may not
exceed three thousand dollars per employee. Amounts charged to expense were
$7.3 million, $6.2 million and $4.8 million in 1994, 1993 and 1992,
respectively.
Postretirement Benefits Other Than Pensions
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 106, "Employers' Accounting for Postretirement
Benefits Other than Pensions" and is amortizing the $6.0 million accumulated
postretirement benefit obligation over twenty years. The Company's non-U.S.
affiliates generally contribute to government insurance programs during the
employees' careers and do not sponsor additional postretirement programs. In
the United States, the Company grants retirees access to its medical,
prescription and life insurance programs for a premium targeted to equal the
cost of such benefits.
Postemployment Benefits
Effective January 1, 1994, the Company adopted Statement of Accounting
Standards No. 112, "Employers' Accounting for Postemployment Benefits". The
new standard did not materially affect the Company's financial position or
results of operations.
NOTE 14. STOCK PLANS
Stock options and restricted shares have been granted to employees under
plans approved by the shareholders in 1982 and 1985, as amended in 1988
("Stock Plan"). The aggregate number of shares originally available for
issuance or transfer to employees under these plans was 7,000,000. Option
prices are equal to the fair market value of the shares on the date of grant.
Options are exercisable during a period determined by the Company, but in no
event later than ten years from the date granted. Shares issued under a
restricted grant may not be sold or otherwise disposed of for a period
designated by the Company. Restricted shares are returned to the Company if
the grantee's employment terminates during the period of restriction. During
the restriction period, the grantee is entitled to vote the shares and receive
any dividends paid. The 1985 Stock Plan, as amended, permits the Company to
grant stock appreciation rights in tandem with stock options. As of December
31, 1994, no such rights have been granted. The Equity Compensation Plan
adopted in 1990 supplements the Stock Plan by providing for an additional
6,000,000 shares that may be issued to participants after all shares
authorized pursuant to the terms of the Stock Plan have been utilized. The
terms of the Equity Compensation Plan are substantially the same as those of
the Stock Plan.
Effective January 1, 1993, the Company substantially curtailed the granting
of restricted shares to employees. In 1992, 90,146 restricted shares were
granted to employees under the Stock Plan. Due to employee terminations 2,228;
12,312 and 23,561 restricted shares were returned to the Company in 1994, 1993
and 1992, respectively.
26
<PAGE>
RHONE-POULENC RORER INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Stock option activity is shown below:
<TABLE>
<CAPTION>
1994 1993 1992
-------------- -------------- --------------
(IN THOUSANDS, EXCEPT PRICE PER SHARE DATA)
<S> <C> <C> <C>
Shares under option at be-
ginning of year........... 5,815 4,999 4,165
Additions (deductions):
Granted.................. 1,898 2,342 1,323
Exercised................ (116) (662) (336)
Canceled................. (450) (864) (153)
Shares under option at
year-end.................. 7,147 5,815 4,999
Options exercisable at De-
cember 31................. 3,443 2,455 2,165
Shares reserved for future
grants.................... 2,862 4,272 5,738
Price range of options ex-
ercised................... $ 8.24-30.18 $ 7.92-41.63 $ 4.67-45.63
Price range for all options
outstanding............... $ 4.67-63.00 $ 4.67-63.00 $ 4.67-63.00
Price range for all options
exercisable............... $ 4.67-63.00 $ 4.67-63.00 $ 4.67-58.50
</TABLE>
NOTE 15. SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
MARKET MONEY COMMON CAPITAL IN
AUCTION MARKET STOCK AT EXCESS OF EMPLOYEE CUMULATIVE
PREFERRED PREFERRED STATED STATED RETAINED BENEFITS TRANSLATION
SHARES STOCK VALUE VALUE EARNINGS TRUST ADJUSTMENTS
--------- --------- -------- ---------- -------- -------- -----------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1,
1992: $300.0 $ -- $137.9 $256.9 $ 602.6 $ -- $ 1.2
Net income--1992....... -- -- -- -- 438.3 -- --
Cash dividends, $.68
per common share...... -- -- -- -- (93.9) -- --
Dividends on Market
Auction Preferred
Shares................ -- -- -- -- (10.1) -- --
Issuance of shares
under employee benefit
plans................. -- -- .4 12.1 -- -- --
Translation
adjustments, including
hedging (net of $1.7
tax effect)........... -- -- -- -- -- -- (77.1)
------ ------ ------ ------ -------- ------- -------
Balance, December 31,
1992: 300.0 -- 138.3 269.0 936.9 -- (75.9)
Net income--1993....... -- -- -- -- 421.1 -- --
Cash dividends, $1.00
per common share...... -- -- -- -- (138.3) -- --
Dividends on preferred
shares................ -- -- -- -- (12.4) -- --
Issuance of money
market preferred
stock................. -- 175.0 -- (3.1) -- -- --
Redemption of Market
Auction Preferred
Shares................ (75.0) -- -- -- -- -- --
Shares repurchased for
Employee Benefits
Trust................. -- -- -- -- -- (75.8) --
Issuance of shares
under employee benefit
plans................. -- -- .7 24.1 -- -- --
Translation
adjustments, including
hedging (net of $11.6
tax effect)........... -- -- -- -- -- -- (63.4)
------ ------ ------ ------ -------- ------- -------
Balance, December 31,
1993: 225.0 175.0 139.0 290.0 1,207.3 (75.8) (139.3)
Net income--1994....... -- -- -- -- 367.1 -- --
Cash dividends, $1.12
per common share...... -- -- -- -- (151.5) -- --
Dividends on preferred
shares................ -- -- -- -- (19.2) -- --
Capital contributions
from Rhone- Poulenc
S.A................... -- -- -- 107.1 -- -- --
Shares repurchased for
Employee Benefits
Trust................. -- -- -- -- -- (109.9) --
Issuance of shares
under employee benefit
plans................. -- -- .1 15.1 -- -- --
Translation
adjustments, including
hedging (net of $1.0
tax effect)........... -- -- -- -- -- -- 80.4
------ ------ ------ ------ -------- ------- -------
Balance, December 31,
1994: $225.0 $175.0 $139.1 $412.2 $1,403.7 $(185.7) $ (58.9)
====== ====== ====== ====== ======== ======= =======
</TABLE>
27
<PAGE>
RHONE-POULENC RORER INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In December 1991, the Company issued $300.0 million of Market Auction
Preferred Shares ("MAPS") represented by four series, each consisting of
75,000 shares. Each series of MAPS is sold in units of 100 shares and is
identical except as to dividend terms. Dividend rates, which are determined at
separate auctions for each series, averaged 4.63% during 1994 (1993: 3.01%;
1992: 3.14%). Dividends are paid every 49 days, subject to certain exceptions.
In 1993, the Company issued $175.0 million of money market preferred stock.
A portion of the proceeds was used to redeem $75.0 million MAPS Series B. The
money market preferred stock was issued in three series, consisting of 750
shares, 500 shares and 500 shares, respectively. The initial dividend period
for all series commenced on August 1, 1993 at initial dividend rates of 4.7%
per annum for a two-year period for Series 1; 5.125% per annum for a three-
year period for Series 2; and 5.84% per annum for a five-year period for
Series 3. After the initial dividend periods expire, dividends will be
determined at separate auctions for each series.
The MAPS and money market preferred stock (collectively, "the Preferred
Shares") rank prior to common shares of the Company as to dividends. Holders
of Preferred Shares have no voting rights except in the event that preferred
dividends are in arrears for at least 180 consecutive days. In such event, the
authorized number of the Company's Board of Directors would be increased by
two and the holders of record of the respective Preferred Shares may elect
these additional directors. The Preferred Shares are not convertible into
common stock or other shares of the Company and holders thereof have no
preemptive rights. Upon the liquidation, dissolution, or winding up of the
Company, or upon redemption of the Preferred Shares at the Company's option,
holders would be entitled to a liquidation preference of $1,000 per share for
MAPS or $100,000 per share for money market preferred stock, plus any
accumulated and unpaid dividends thereon.
In connection with the issuance of MAPS, the Company entered into a support
agreement with RP pursuant to which both parties agreed that 1) RP will own a
majority of the outstanding common stock of the Company entitled to elect
directors; 2) RP will make a capital contribution to the Company if certain
debt-to-capitalization or tangible net worth ratios do not meet specified
levels or if the Company fails to pay a declared dividend on MAPS on a timely
basis; and 3) RP, as guarantor of the Revolving Credit Facility Agreement
dated April 30, 1990, will maintain such facility in full force, and the
Company will maintain, as of any date, the unused portion of such facility in
an amount equal to all principal, interest and premium amounts payable in the
next twelve months with respect to short- and long-term debt other than
amounts owed to RP or guaranteed by RP, subject to certain requirements and
exceptions. In connection with the support agreement, the Company pays RP an
annual fee which approximated $.3 million in 1994. The support agreement does
not constitute a guarantee by RP of any obligation of the Company, including
MAPS, and is not enforceable by any holder of MAPS. The units of each series
of MAPS must be redeemed in the event of breach of certain covenants in the
support agreement.
At December 31, 1994 and 1993, there were 2,451,800 preferred shares without
par value authorized and unissued. In 1994, the Company completed the open
market repurchase of five million of its common shares as authorized by the
Board of Directors in March 1993. During 1994, the Company acquired 3.1
million shares at a cost of $109.9 million; share repurchases during 1993 were
1.9 million shares at a cost of $75.8 million. These shares are being held in
an Employee Benefits Trust to fund future benefits in the United States.
In 1995, the Company acquired Cooper and a pharmaceutical business in Brazil
from Rhone-Poulenc. For accounting purposes, the acquisitions of these
entities under common control were treated on an "as-if pooling" basis and,
accordingly, the Company restated its 1994 results to include the accounts of
Cooper and the Brazilian business as of April 1, 1994 and January 1, 1994,
respectively. The assets and liabilities of the acquired businesses were
recorded by the Company at the carrying values used by RP as of the
restatement dates and the value of net assets acquired was reflected in
capital in excess of stated value as a capital contribution from RP.
28
<PAGE>
RHONE-POULENC RORER INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 16. FINANCIAL INSTRUMENTS
The Company's financial instruments consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1994 DECEMBER 31, 1993
------------------- -------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
---------- -------- ---------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Cash and cash equivalents........... $ 118.8 $ 118.8 $ 35.4 $ 35.4
Time deposits, generally maturing in
1-5 years.......................... 55.8 55.8 64.3 64.3
Cost investments:
Practical to estimate............. 17.9 13.0 21.2 18.8
Not practical to estimate......... 17.5 N/A 13.5 N/A
Other investments, including call
options and warrants............... 9.8 12.9 36.0 44.7
Long-term debt...................... (461.9) (465.4) (454.2) (470.5)
Foreign exchange contracts.......... 4.0* 4.0 2.6* 2.6
Interest rate swap contracts........ 2.0* (0.7) 2.0* 11.8
</TABLE>
--------
* The carrying amount represents the net unrealized gain/loss or net interest
receivable/payable associated with the contracts at the end of the period.
None of the Company's financial instruments are held for trading purposes.
The following methods and assumptions were used to estimate the fair value
of each class of financial instrument:
Cash and cash equivalents
The carrying amount approximates the fair value due to the short-term
maturity of these instruments.
Time deposits
The carrying amount approximates the fair value due to the variable rate
nature of the long-term deposits.
Cost and other investments
For those investments for which it was practicable, fair value was estimated
using quoted market prices or pricing models. An estimate of fair market value
could not be reasonably made for certain cost investments for which there are
no quoted market prices.
Long-term debt
The majority of the Company's long-term debt is at variable rates of
interest and therefore the Company believes that the carrying amount
approximates fair value. For long-term debt at fixed interest rates, fair
value was determined by discounting future cash flows based on interest rates
currently available to the Company for debt with similar terms and maturities.
Foreign exchange contracts
The fair value of foreign exchange contracts was estimated by valuing the
contracts at current exchange rates.
Interest rate swap contracts
The fair value of interest rate swap contracts reflects the amount at which
they could be settled based on bank pricing models.
29
<PAGE>
RHONE-POULENC RORER INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Credit Risk
The Company places its cash investments and time deposits with credit-
worthy, high quality financial institutions and, by policy, limits the amount
of credit exposure to any one institution. The Company therefore does not
anticipate nonperformance by any of the counterparties to these financial
instruments.
Concentrations of credit risk with respect to trade receivables is limited
due to a large customer base in a wide geographic area.
Foreign exchange contracts do not expose the Company to accounting risk due
to exchange rate movements as gains and losses on the contracts offset gains
and losses on the transactions being hedged. Management believes that the risk
of incurring losses on these contracts due to default by the other party is
remote as the contracts are entered into with major financial institutions.
As interest rate swap contracts involve exchanges of fixed and floating
interest payment obligations without exchanges of underlying principal
amounts, the Company's exposure to credit loss is significantly less than the
notional amounts of the contracts. Management believes that the risk of
incurring losses due to default by the other party is remote as the contracts
are entered into with major financial institutions.
Financial Instruments with Off-Balance Sheet Risk
Foreign Exchange Contracts--Net Investment Hedges
The Company's principal foreign currency net investment exposures before the
effects of foreign exchange contracts were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1994 DECEMBER 31, 1993
-------------------- --------------------
LOCAL U.S. DOLLAR LOCAL U.S. DOLLAR
CURRENCY EQUIVALENT CURRENCY EQUIVALENT
(IN MILLIONS) -------- ----------- -------- -----------
<S> <C> <C> <C> <C>
France............................. FF 2,622 $490 FF 3,996 $678
Germany............................ DEM 229 148 DEM 268 155
United Kingdom..................... GBP 45 71 GBP 54 80
</TABLE>
Unhedged net investment positions fluctuate with currency movements with
corresponding translation adjustments recorded in shareholders' equity. The
Company may enter into foreign exchange contracts to limit the exposure of its
net investments in foreign subsidiaries to such currency fluctuations. Gains
and losses from these contracts which are designated as hedges of the
Company's net foreign investments are recorded as translation adjustments in
shareholders' equity and offset the gains and losses on the related net
investments. For the year ended December 31, 1994, the reduction to
shareholders' equity, net of tax effects, associated with net investment
hedging contracts totaled $21.7 million. Effects of similar net investment
hedging contracts increased shareholder's equity by $1.8 million for the year
ended December 31, 1993.
In determining which, if any, net investment positions to hedge, the Company
considers such factors as the magnitude of the exposed position and the cost
of financing hedging instruments. At approximately one-fourth of total
shareholders' equity at December 31, 1994, the French franc net investment
represents the largest single exposure to the Company; accordingly, the
Company has hedged a portion of its net investment in France. At December 31,
1994, the Company was a party to foreign currency exchange contracts maturing
in the first quarter of 1995 with a combined notional amount of FF 179.5
million ($33.1 million) to sell French francs. Similar contracts which matured
in January 1994 totaled FF 1.5 billion ($248.4 million) at December 31, 1993.
30
<PAGE>
RHONE-POULENC RORER INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Foreign Exchange Contracts--Foreign Currency Transaction Hedges
The Company also enters into foreign exchange contracts to minimize exposure
of foreign currency transactions (such as export sales, raw materials
purchases, and short-term intercompany financing) and firm commitments to
fluctuating exchange rates. Gains or losses from these contracts are
recognized in the basis of the transaction being hedged. Cash flows from these
contracts are classified in the same category as the hedged transactions.
The Company's principal net transactional exposures by major currency before
the effects of foreign exchange contracts were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1994 DECEMBER 31, 1993
--------------------- ---------------------
LOCAL U.S. DOLLAR LOCAL U.S. DOLLAR
CURRENCY EQUIVALENT CURRENCY EQUIVALENT
-------- ----------- -------- -----------
(ASSET [LIABILITY] IN MILLIONS)
<S> <C> <C> <C> <C>
U.S. dollars*...................... 52 $ 52 18 $ 18
FF................................. 1,679 310 (97) (16)
DEM................................ (24) (15) (2) (1)
GBP................................ 1 2 (22) (32)
Yen................................ 1,408 14 556 5
All other (each <$25 million)...... various 39 various 46
------- ---- ------- ----
Total............................ N/A $402 N/A $ 20
======= ==== ======= ====
</TABLE>
--------
* Represents U.S. dollar-denominated transactions of affiliates with
functional currencies other than the U.S. dollar.
The Company's policy is to hedge substantially all of its foreign currency
transactional exposures. At December 31, 1994, the Company had entered into
multiple forward contracts maturing in the first quarter of 1995 to buy and
sell various currencies with notional amounts totaling $112.6 million and
$508.4 million, respectively. Similar contracts, which matured in the first
quarter of 1994, totaled $105.8 million and $125.3 million at December 31,
1993, respectively.
Interest Rate Swaps
The Company enters into interest rate swap contracts to manage its interest
rate exposures and minimize its overall cost of borrowings. The net receivable
or payable under the interest rate swap arrangements is recognized as an
adjustment to interest expense over the life of the underlying contracts. The
Company's weighted average interest rate for the year ended December 31, 1994
was reduced by 17 basis points or approximately $1.3 million (45 basis points
or $3.5 million for the year ended December 31, 1993) as a result of interest
rate swap contracts.
At December 31, 1994, the Company was party to contracts to convert certain
floating rate obligations into fixed rate instruments and contracts to convert
certain fixed rate debt into floating rate debt as determined by the interest
rate environment of the currency in which the underlying obligation was
denominated. Interest rate swap contracts outstanding at December 31, 1994
were as follows:
<TABLE>
<CAPTION>
FIXED OR NOTIONAL CARRYING ESTIMATED FAIR
CURRENCY VARIABLE AMOUNT AMOUNT MKT. VALUE TERM AVERAGE RATE
-------- -------- -------- -------- -------------- --------- -----------------------------
(RECEIVABLE [PAYABLE] IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
U.S.$ V $80 $ .3 $(1.4) 7/92-7/99 Pay Libor 3 mos; Receive 7.1%
FF F FF400 (0.8) (1.1) 2/93-2/95 Pay 6.7%; Receive Pibor 6 mos
FF V FF650 2.5 1.8 6/93-6/95 Pay Pibor 3 mos; Receive 6.4%
</TABLE>
The Company was party to similar contracts at December 31, 1993.
31
<PAGE>
RHONE-POULENC RORER INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 17. INDUSTRY SEGMENT AND OPERATIONS BY GEOGRAPHIC AREA
The Company's operations are conducted in one industry segment which
involves the production and sale of pharmaceuticals.
Information about the Company's operations for the years 1994, 1993 and 1992
by geographic area is shown below. Inter-area affiliated sales are not
significant. Corporate loss before income taxes includes corporate
administrative expenses incurred in the U.S., worldwide net interest expense,
and worldwide equity losses from unconsolidated affiliates.
<TABLE>
<CAPTION>
1994 1993 1992
-------- -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Net sales:
United States................................ $1,261.9 $1,119.9 $ 999.7
France....................................... 1,506.7 1,374.8 1,388.1
Other Europe................................. 1,015.5 977.8 1,218.4
Rest of World................................ 702.5 546.9 489.7
-------- -------- --------
Total net sales............................. $4,486.6 $4,019.4 $4,095.9
======== ======== ========
Income before income taxes:
United States................................ $ 356.9 $ 385.2 $ 268.0
France....................................... 172.6 280.7 274.6
Other Europe................................. 92.8 64.6 216.5
Rest of World................................ 77.6 62.1 44.2
Corporate.................................... (187.0) (202.1) (221.6)
-------- -------- --------
Total income before income taxes............ $ 512.9 $ 590.5 $ 581.7
======== ======== ========
Identifiable assets:
United States................................ $1,107.2 $1,148.3 $1,031.6
France....................................... 1,519.6 1,290.2 1,340.5
Other Europe................................. 1,001.7 875.6 986.2
Rest of World................................ 518.6 405.9 362.5
Corporate.................................... 505.2 330.2 137.5
-------- -------- --------
Total identifiable assets................... $4,652.3 $4,050.2 $3,858.3
======== ======== ========
</TABLE>
In 1994, income before income taxes ("IBT") for the U.S. includes gains on
asset sales, net of restructuring charges, of $15.1 million. IBT for France
and Other Europe includes $49.0 million and $28.8 million, respectively, of
restructuring charges, net of gains on sales of assets. The Rest of World area
IBT includes restructuring charges of $13.2 million.
In 1993, U.S. IBT includes income of $68.0 million from litigation
settlement proceeds and gains on asset sales, net of restructuring charges.
France IBT includes $19.5 million of restructuring charges, net of gains on
asset sales. Other Europe IBT includes restructuring charges, net of gains on
asset sales, totaling $30.2 million.
NOTE 18. RELATED PARTY TRANSACTIONS
The entities comprising the Company manage their cash separately. In the
largest countries such as the U.S., France, the U.K. and Germany, the local
entities have access to RP cash pooling arrangements whereby they can, at
their own request, lend to or borrow from RP at market terms and conditions.
32
<PAGE>
RHONE-POULENC RORER INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Amounts receivable from RP and affiliates totaled $67.3 million and $35.8
million at December 31, 1994 and 1993, respectively. The 1994 balance included
$6.8 million of accounts receivable from sales of products and services to RP
(1993: $11.3 million) and $60.5 million classified as other current assets
(1993: $24.5 million).
Accounts payable related to purchase of materials and services from RP and
affiliates were $7.0 million at December 31, 1994 (1993: $6.3 million);
accrued and other liabilities due to RP at December 31, 1994 were $30.5
million (1993: $12.9 million). In 1994, sales to RP and affiliates were $29.7
million (1993: $34.5 million; 1992: $37.2 million). Materials purchased from
RP totaled $36.8 million in 1994 (1993: $44.4 million; 1992: $53.1 million).
In 1993, RP also compensated the Company $1.7 million in cost of products sold
related to the transfer of certain production activities.
At December 31, 1994, debt with RP and affiliates totaled $68.6 million
(1993: $230.8 million). Interest expense accrued with respect to RP
indebtedness in 1994 was $15.8 million (1993: $24.9 million; 1992: $46.6
million).
RP charges the Company for expenses incurred on its behalf, including
research, data processing, insurance, legal, tax, advertising, public
relations and management fees. Such charges are reflected in the financial
statements and amounted to approximately $24.5 million in 1994 (1993: $20.2
million; 1992: $19.6 million). Management believes that the expenses so
charged are representative of amounts that the Company would have incurred if
it had been operated as an unaffiliated entity.
In 1995, the Company acquired Cooper and a pharmaceutical business in Brazil
from RP. At December 31, 1994, the value of net assets acquired was reflected
in capital in excess of stated value as a capital contribution from RP.
NOTE 19. CONTINGENCIES
The Company is involved in litigation incidental to its business including,
but not limited to: (1) approximately 321 pending lawsuits in the United
States, Canada and Ireland against the Company and its Armour Pharmaceutical
Company subsidiary ("Armour"), in which it is claimed by individuals infected
with the Human Immunodeficiency Virus ("HIV") that their infection with HIV
and, in some cases, resulting illnesses, including Acquired Immune Deficiency
Syndrome-related conditions or death therefrom, may have been caused by
administration of anti-hemophilic factor ("AHF") concentrates processed by
Armour in the early and mid-1980's. Armour has also been named as a defendant
in five proposed class action lawsuits filed on behalf of HIV-infected
hemophiliacs and their families. None of these cases involve Armour's
currently distributed AHF concentrates; (2) legal actions pending against one
or more subsidiaries of the Company and various groupings of more than one
hundred pharmaceutical companies, in which it is generally alleged that
certain individuals were injured as a result of the development of various
reproductive tract abnormalities because of in utero exposure to
diethylstilbestrol ("DES") (typically, two former operating subsidiaries of
the Company are named as defendants, along with numerous other DES
manufacturers, when the claimant is unable to identify the manufacturer); (3)
antitrust actions alleging that the Company engaged in price discrimination
practices to the detriment of certain independent community pharmacists; (4)
alleged breach of contract by a subsidiary of the Company with respect to
agreements involving a bisphosphonate compound and Lozol(R); and (5) potential
responsibility relating to past waste disposal practices, including potential
involvement, for which the Company believes its share of liability, if any, to
be negligible, at four sites on the U.S. National Priority List created by
Superfund legislation.
The eventual outcomes of the above matters of pending litigation cannot be
predicted with certainty. The defense of these matters and the defense of
expected additional lawsuits related to these matters may require
33
<PAGE>
RHONE-POULENC RORER INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
substantial legal defense expenditures. The Company follows Statement of
Financial Accounting Standards No. 5 in determining whether to recognize
losses and accrue liabilities relating to such matters. Accordingly, the
Company recognizes a loss if available information indicates that a loss or
range of losses is probable and reasonably estimable. The Company estimates
such losses on the basis of current facts and circumstances, prior experience
with similar matters, the number of claims and the anticipated cost of
administering, defending and, in some cases, settling such claims. The Company
has also recorded as an asset certain insurance recoveries which are
determined to be probable of occurrence on the basis of the status of current
discussions with its insurance carriers. If a contingent loss is not probable
but is reasonably possible, the Company discloses this contingency in the
notes to its consolidated financial statements if it is material. Based on the
information available, the Company does not believe that reasonably possible
uninsured losses in excess of amounts recorded for the above matters of
litigation would have a material adverse impact on the Company's financial
position, results of operations or cash flows.
As of December 31, 1994 the Company had unused standby letters of credit
outstanding of $67.7 million. The letters of credit are issued primarily in
the form of guarantees or performance bonds.
NOTE 20. JOINT VENTURE AGREEMENT (UNAUDITED)
In February 1995, the Company's Armour Pharmaceutical Company subsidiary
signed an agreement with Behringwerke AG, a subsidiary of Germany's Hoechst
AG, to form a global joint venture dedicated to the plasma proteins business.
Under the terms of the agreement, both companies will contribute to the joint
venture all the assets of their respective plasma operations in exchange for a
50% equity interest in the new entity. The agreement received U.S. and
European regulatory approvals in the first half of 1995.
34
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders of Rhone-Poulenc Rorer Inc.:
We have audited the accompanying consolidated balance sheets of Rhone-Poulenc
Rorer Inc. and subsidiaries as of December 31, 1994 and 1993, and the related
consolidated statements of income and cash flows for each of the three years
in the period ended December 31, 1994. Our audits also included the financial
statement schedule listed in the index on page 13 of this Form 8-K. These
financial statements and financial statement schedule have been prepared to
give effect to the acquisitions from Rhone-Poulenc S.A. of Cooperation
Pharmaceutique Francaise and a Brazilian pharmaceutical business in the second
quarter of 1995. The acquisitions of these entities under common control were
treated for accounting purposes in a manner similiar to a pooling of
interests. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Rhone-Poulenc
Rorer Inc. and subsidiaries as of December 31, 1994 and 1993, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1994, in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
As discussed in Note 1 to the consolidated financial statements, the Company
changed its method of accounting for income taxes in 1992.
/s/ Coopers & Lybrand L.L.P.
_____________________________________
Coopers & Lybrand L.L.P.
Philadelphia, Pennsylvania
January 20, 1995, except for the
transactions described in Note 2
for which the date is August 14,
1995.
35
<PAGE>
RHONE-POULENC RORER INC. AND SUBSIDIARIES
QUARTERLY DATA (UNAUDITED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
QUARTER ENDED 1994 QUARTER ENDED 1993
----------------------------------------- ---------------------------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31 MARCH 31 JUNE 30 SEPT. 30 DEC. 31
-------- ---------- ---------- ---------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............... $882.0 $1,064.6 $1,137.3 $1,402.7 $916.3 $1,008.1 $960.1 $1,134.9
Gross profit............ 583.9 688.9 740.9 917.1 607.5 681.7 637.5 766.4
Net income (loss) avail-
able to common share-
holders................ 74.5 (4.0) 109.6 167.8 94.2 119.6 71.0 123.9
Earnings (loss) per com-
mon share.............. .53 (0.05) .80 1.23 .68 .87 .51 .90
Market price per common
share:
High................... 37.000 39.500 39.125 42.625 48.000 54.000 48.875 48.500
Low.................... 32.000 30.500 30.500 35.250 42.500 46.375 43.000 32.620
Common dividends paid... .28 .28 .28 .28 .22 .24 .26 .28
</TABLE>
--------
Results for 1994 are restated to include the results of Cooperation
Pharmaceutique Francaise and a pharmaceutical business in Brazil as of April
1, 1994 and January 1, 1994, respectively. Both businesses were acquired from
Rhone-Poulenc S.A. in 1995. Earnings (loss) per common share for the restated
periods reflect pro forma adjustments giving effect to interest and preferred
dividends relative to the acquisitions.
Results for 1994 include a $121.2 million pretax charge recorded in the second
quarter related to a global restructuring program. Results also include fourth
quarter pretax charges of $30.6 million related to the reassessment of the
carrying value of certain investments and $11.0 million for acquired research
and development expense. Fourth quarter results also include pretax gains of
$37.6 million on the sales of assets, including the transfer of the Company's
U.S. over-the-counter business to Ciba.
Results for 1993 include pretax income of $105.0 million proceeds from
litigation settlement in the second quarter. Results also include $77.2
million and $16.6 million of restructuring and other charges recorded in the
second and fourth quarter, respectively and a $27.0 million pretax charge for
acquired research and development expense in the third quarter. Gains from
sales of product rights and certain investments totaled $10.2 million and
$14.8 million in the first and fourth quarter, respectively.
Earnings per share amounts for each quarter are required to be computed
independently and, therefore, the sum of the four quarters does not
necessarily equal the amount computed for the total year.
Rhone-Poulenc Rorer Inc. (RPR) common shares are listed and traded on the New
York and Paris Stock Exchanges, and are traded, unlisted, on the Philadelphia,
Boston, Pacific and Midwest Stock Exchanges. On January 31, 1995, there were
7,138 holders of record of RPR common shares.
36
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1943, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
Rhone-Poulenc Rorer Inc.
(Registrant)
August 14, 1995 /s/ Patrick Langlois
_____________________________________
PATRICK LANGLOIS
SENIOR VICE PRESIDENT AND CHIEF
FINANCIAL OFFICER
37
<PAGE>
SCHEDULE II
RHONE-POULENC RORER INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS 1994, 1993 AND 1992
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO
BEGINNING COSTS AND BALANCE AT
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS(/1/) END OF PERIOD
----------- ---------- ---------- --------------- -------------
<S> <C> <C> <C> <C>
Year ended December 31,
1994
Accounts receivable
reserves................ $68.3 182.3 172.0 $78.6
Year ended December 31,
1993
Accounts receivable
reserves................ $66.6 129.7 128.0 $68.3
Year ended December 31,
1992
Accounts receivable
reserves................ $56.6 104.1 94.1 $66.6
</TABLE>
--------
(1) Accounts charged off, net of recoveries and the effect of foreign currency
rate changes.
38
<PAGE>
EXHIBIT INDEX
(11) Statement re: Computation of Earnings per Share.
(12) Statement re: Computation of Ratios.
(23) Consent of Independent Accountants.
(27) Financial Data Schedule.
39
<PAGE>
EXHIBIT 11
Rhone-Poulenc Rorer Inc.
Computation of Earnings Per Common Share
(Dollars and shares in millions except per share data)
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------------------
Restated
1994 1993 1992
------------------ ------------------ -------------------
Pro Forma Dollars Per Share
Dollars Per Share Dollars Per Share ------- ---------
------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net income per common share, primary:
Net income before preferred dividends and cumulative effect of
accounting change............................................ $ 367.1 $ 421.1 $ 423.3
Less: Preferred dividends....................................... 19.2 12.4 10.1
------- ------- -------
Net income before cumulative effect of accounting change......... 347.9 408.7 $ 2.96 413.2 $ 2.99
Cumulative effect of accounting change........................... -- -- -- 15.0 .11
------- ------- ------ ------- ------
Net income available to common shareholders...................... 347.9 $ 408.7 $ 2.96 $ 428.2 $ 3.10
======= ====== ======= ======
Pro forma adjustments for interest and preferred dividends,
net of tax effects........................................... (9.1)
-------
Net income available to common shareholders,
pro forma.................................................... $ 338.8 $ 2.50
======= ======
Average shares outstanding....................................... 135.3 138.2 138.1
======= ======= ======
Net income per common share, fully diluted:
Net income before preferred dividends and cumulative effect of
accounting change............................................ $ 367.1 $ 421.1 $ 423.3
Less: Preferred dividends....................................... 19.2 12.4 10.1
------- ------- -------
Net income before cumulative effect of accounting change......... 347.9 408.7 $ 2.94 413.2 $ 2.96
Cumulative effect of accounting change........................... -- -- -- 15.0 .11
------- ------- ------ ------- ------
Net income available to common shareholders...................... 347.9 $ 408.7 $ 2.94 $ 428.2 $ 3.07
======= ====== ======= ======
Pro forma adjustments for interest and preferred dividends,
net of tax effects........................................... (9.1)
-------
Net income available to common shareholders,
pro forma.................................................... $ 338.8 $ 2.50
======= ======
Average shares outstanding....................................... 135.3 138.2 138.1
Shares contingently issuable for stock plan...................... .3 .7 1.4
------- ------- ------
Average shares outstanding, assuming full dilution............... 135.6 138.9 139.5
======= ======= ======
</TABLE>
This calculation is submitted in accordance with the regulations of the
Securities and Exchange Commission although not required by APB Opinion No. 15
because it results in dilution of less than 3 percent in all years presented.
<PAGE>
EXHIBIT 12
Rhone-Poulenc Rorer Inc.
Computation of Ratio of Earnings to Fixed Charges and
Ratio of Earnings to Fixed Charges and Preferred Dividends
(In millions except for ratios)
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------------------------------------------
Pro
Restated Actual Forma
1994 1993 1992 1991 1990 1990
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Income before income taxes and
minority interest................... $ 516 $ 594 $ 584 $ 486 $ 17 $ 232
Add:
Portion of rents representative of
the interest factor................... 18 16 9 9 7 8
Interest on indebtedness............... 55 71 125 165 183 247
Amortization of capitalized interest... 9 6 3 2 2 2
------------------------------------------------------------------------------------
Income as adjusted..................... $ 598 $ 687 $ 721 $ 662 $ 209 $ 489
====================================================================================
Interest on indebtedness............... 55 71 125 165 183 247
Capitalized interest................... 3 4 15 21 8 9
Portion of rents representative of the
interest factor..................... 18 16 9 9 7 8
------------------------------------------------------------------------------------
Fixed charges.......................... 76 91 149 195 198 264
Preferred dividends.................... 25 16 14 -- -- --
------------------------------------------------------------------------------------
Fixed charges and preferred dividends.. $ 101 $ 107 $ 163 $ 195 $ 198 $ 264
====================================================================================
Ratio of earnings to fixed charges..... 7.9 7.5 4.8 3.4 1.1 1.9
====================================================================================
Ratio of earnings to fixed charges and
preferred dividends................. 5.9 6.4 4.4 3.4 1.1 1.9
====================================================================================
</TABLE>
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements
of Rhone-Poulenc Rorer Inc. (formerly Rorer Group Inc.) on Form S-3
(Registration No. 33-62052, Registration No. 33-36558, Registration
No. 33-30795, Registration No. 33-23754, Registration No. 15671, Registration
No. 33-43941, Registration No. 33-53378 and Registration No. 33-55694) and on
Form S-8 (Registration No. 33-58998, Registration No. 33-24537, Registration
No.2-61635, Registration No. 2-78374 and Registration No. 33-21902) of our
report dated January 20, 1995 except for the transactions described in Note 2
for which the date is August 14, 1995, on our audits of the consolidated
financial statements of Rhone-Poulenc Rorer Inc. and subsidiaries as of
December 31, 1994 and 1993, and for the years ended December 31, 1994, 1993 and
1992, which report is included in this Current Report on Form 8-K.
/s/ Coopers & Lybrand L.L.P.
-----------------------------
Coopers & Lybrand L.L.P.
Philadelphia, Pennsylvania
August 14, 1995
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONDENSED
CONSOLIDATED BALANCE SHEET AND THE RELATED CONDENSED CONSOLIDATED STATEMENT OF
INCOME FOR THE YEAR ENDED DECEMBER 31, 1994 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> DEC-31-1994
<CASH> 119
<SECURITIES> 0
<RECEIVABLES> 891
<ALLOWANCES> 79
<INVENTORY> 613
<CURRENT-ASSETS> 2,087
<PP&E> 2,311
<DEPRECIATION> 1,111
<TOTAL-ASSETS> 4,652
<CURRENT-LIABILITIES> 1,495
<BONDS> 0
<COMMON> 139
0
400
<OTHER-SE> 1,571
<TOTAL-LIABILITY-AND-EQUITY> 4,652
<SALES> 4,487
<TOTAL-REVENUES> 4,487
<CGS> 1,556
<TOTAL-COSTS> 3,889
<OTHER-EXPENSES> 38
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 47
<INCOME-PRETAX> 513
<INCOME-TAX> 146
<INCOME-CONTINUING> 348
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 348
<EPS-PRIMARY> 2.50
<EPS-DILUTED> 2.50
</TABLE>
