<PAGE>
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES EXCHANGE ACT OF 1934
(AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement [_] CONFIDENTIAL, FOR USE OF THE
COMMISSION ONLY (AS PERMITTED BY
[X] Definitive Proxy Statement RULE 14C-5(D)(2))
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to (S)240.14a-11(c) or (S)240.14a-12
Rhone-Poulenc Rorer
------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
Rhone-Poulenc Rorer
------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), 14a-6(i)(2) or
Item 22(a)(2) of Schedule 14A.
[_] $500 per each party to the controversy pursuant to Exchange Act Rule 14a-
6(i)(3).
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
Notes:
<PAGE>
[LOGO OF RHONE-POULENC RORER APPEARS HERE]
NOTICE OF 1995 ANNUAL MEETING OF
SHAREHOLDERS
PROXY STATEMENT
ANNUAL FINANCIAL STATEMENTS AND REVIEW OF
OPERATIONS
<PAGE>
[LOGO OF RHONE-POULENC RORER APPEARS HERE]
RHONE-POULENC RORER INC.
500 ARCOLA ROAD
COLLEGEVILLE, PA 19426
MARCH 21, 1995
Dear Shareholder:
You are cordially invited to attend the Annual Meeting of Shareholders to be
held at 2:00 p.m., Tuesday, April 25, 1995 at the Company's Executive Offices,
500 Arcola Road, Collegeville, Pennsylvania.
At the Annual Meeting, shareholders will be asked to elect four directors, to
approve the adoption of a new equity compensation plan and to ratify the
selection of independent accountants for 1995.
The Notice of Annual Meeting, combined proxy statement and 1994 financial
statements, form of proxy and report to shareholders are included with this
letter.
Whether or not you expect to attend the meeting in person, please sign, date
and return the accompanying proxy in the enclosed postage prepaid envelope.
I look forward to welcoming you at the Annual Meeting this year.
Very truly yours,
/s/ Robert E. Cawthorn
Robert E. Cawthorn
Chairman of the Board and Chief Executive
Officer
<PAGE>
RHONE-POULENC RORER INC.
500 ARCOLA ROAD
COLLEGEVILLE, PA 19426
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON APRIL 25, 1995
To the Shareholders
of Rhone-Poulenc Rorer Inc.:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders (the "Annual
Meeting") of Rhone-Poulenc Rorer Inc., a Pennsylvania corporation (the
"Company"), will be held on Tuesday, April 25, 1995 at 2:00 p.m., local time,
at the Company's Executive Offices, 500 Arcola Road, Collegeville, Pennsylvania
for the following purposes:
(1) To consider and vote upon the election of four directors to three-
year terms;
(2) To consider and vote upon the adoption of the 1995 Rhone-Poulenc
Rorer Equity Compensation Plan;
(3) To ratify the selection of Coopers & Lybrand L.L.P. as independent
accountants for the Company and its subsidiaries for the fiscal year ending
December 31, 1995; and
(4) To transact such other business as may properly come before the
Annual Meeting or any adjournment or postponement thereof.
Only the holders of record of Common Shares at the close of business on March
10, 1995 will be entitled to notice of and to vote at the Annual Meeting. Such
holders may vote in person or by proxy.
Whether or not you expect to attend the Annual Meeting in person, please
complete, sign, date and return the accompanying proxy in the enclosed prepaid
envelope to ensure that your vote will be counted. Your proxy may be revoked in
the manner described in the accompanying proxy statement at any time before it
has been voted at the Annual Meeting.
BY ORDER OF THE BOARD OF DIRECTORS.
/s/ Richard B. Young
Richard B. Young
Vice President and Secretary
Collegeville, Pennsylvania
March 21, 1995
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
NOS.
----
<S> <C>
Notice of Annual Meeting of Shareholders..................................
Proxy Statement........................................................... 1
Voting of Shares........................................................ 1
Ownership of Shares..................................................... 2
Control of the Company.................................................. 3
Election of Directors................................................... 3
Committees of the Board of Directors.................................... 6
Directors' Compensation................................................. 7
Report on Executive Compensation by the Executive Personnel &
Compensation Committee................................................. 8
Compensation of Executive Officers...................................... 13
Certain Relationships and Related Transactions.......................... 18
Proposal to Approve the 1995 Rhone-Poulenc Rorer Inc. Equity Compensa-
tion Plan.............................................................. 19
Proposal to Ratify the Appointment of Independent Accountants........... 25
General and Other Matters............................................... 25
Proposals of Shareholders............................................... 25
Appendix A: 1995 Rhone-Poulenc Rorer Equity Compensation Plan........... 26
Annual Financial Statements and Review of Operations...................... 35
Ten-Year Selected Financial Data (Unaudited)............................ 35
Management's Discussion and Analysis of Results of Operations and Finan-
cial Condition......................................................... 36
Consolidated Statements of Income....................................... 46
Consolidated Balance Sheets............................................. 47
Consolidated Statements of Cash Flows................................... 48
Notes to Consolidated Financial Statements.............................. 49
Responsibility for Financial Statements................................. 67
Report of Independent Accountants....................................... 68
Quarterly Data (Unaudited).............................................. 69
</TABLE>
<PAGE>
RHONE-POULENC RORER INC.
500 ARCOLA ROAD
COLLEGEVILLE, PENNSYLVANIA 19426
PROXY STATEMENT
VOTING OF SHARES
This proxy statement and the accompanying proxy card are being mailed on or
about March 21, 1995 to holders of Common Shares of Rhone-Poulenc Rorer Inc.
(the "Company"). These materials are being furnished in connection with the
solicitation by the Board of Directors of the Company of proxies to be voted at
the Annual Meeting of Shareholders of the Company ("Annual Meeting") scheduled
to be held on April 25, 1995 and at any adjournment or postponement thereof.
At the Annual Meeting, holders of Shares will consider and vote upon the
following proposals:
1. The election of four directors of the Company for three-year terms
ending in 1998;
2. The adoption of the 1995 Rhone-Poulenc Rorer Equity Compensation Plan;
and
3. The ratification of the selection of Coopers & Lybrand L.L.P. as
independent accountants for the Company and its subsidiaries for the fiscal
year ending December 31, 1995.
The Board of Directors has fixed the close of business on March 10, 1995 as
the record date ("Record Date") for determining the holders of Shares who will
be entitled to notice of and to vote at the Annual Meeting.
Only the holders of record of Common Shares of the Company ("Shares") on the
Record Date will be entitled to vote at the Annual Meeting. On the Record Date,
139,115,541 Shares were outstanding for voting purposes. Shareholders are
entitled to one vote per Share on each matter to be voted upon. The presence,
in person or by properly executed proxy, of the holders of a majority of the
Shares outstanding shall constitute a quorum at the Annual Meeting.
All Shares that are represented at the Annual Meeting by properly executed
proxies received prior to or at the Annual Meeting and not revoked will be
voted at the Annual Meeting in accordance with the instructions indicated on
such proxies. If no instructions are indicated, such proxies will be voted for
the election of the nominees for director, for the adoption of the 1995 Equity
Compensation Plan and for the ratification of the selection of Coopers &
Lybrand L.L.P. as independent accountants for the Company.
Abstention and Shares held of record by a broker or its nominee which are
voted on any matter are included in determining the number of votes present,
but such Shares not voted on any matter will not be included in determining
whether a quorum is present. A nominee for election as a director will be
elected if he receives an affirmative vote of a majority of the votes cast by
all shareholders entitled to vote at a meeting of shareholders. Approval of the
1995 Rhone-Poulenc Rorer Equity Compensation Plan requires the affirmative vote
of a majority of the votes cast at the meeting of shareholders.
Proxies representing Shares held of record will also represent Shares held
under the Company's Dividend Reinvestment Plan. Proxies will also be considered
to be voting instructions to the Trustee with respect to Shares held in
accounts under the Rhone-Poulenc Rorer Savings Plan. If participants in those
plans also are shareholders of record with the same account information, they
will receive a single proxy which will represent all Shares held of record and
in one or both such plans. If the account information is different, then the
participants will receive separate proxies. The number printed on the proxy
card reflects the total number of Shares represented by that proxy.
The Board of Directors does not know of any matters, other than the election
of directors, the approval of the 1995 Equity Compensation Plan and the
ratification of the selection of independent
1
<PAGE>
accountants, that are to come before the Annual Meeting. If any other matters
are properly presented at the Annual Meeting for consideration, the persons
named in the enclosed form of proxy and acting thereunder will have discretion
to vote on such matters in accordance with their best judgment.
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before it is voted. Proxies may be revoked by (i) filing
with the Secretary of the Company, at or before the taking of the vote at the
Annual Meeting, a written notice of revocation bearing a later date than the
proxy, (ii) duly executing a subsequent proxy relating to the same Shares and
delivering it to the Secretary of the Company before the Annual Meeting or
(iii) attending the Annual Meeting and voting in person (although attendance at
the Annual Meeting will not in and of itself constitute a revocation of a
proxy). Any written notice of revocation or any subsequent proxy should be sent
so as to be delivered to: Rhone-Poulenc Rorer Inc., 500 Arcola Road,
Collegeville, Pennsylvania 19426, Attention: Secretary at or before the taking
of the vote at the Annual Meeting.
On the Record Date, Rhone-Poulenc S.A. ("RP") owned approximately 68.30% of
the Company's outstanding shares. RP has the right to vote sufficient Shares to
cause each of the proposals to be presented at the Annual Meeting to be
approved, without any other Shares being voted in favor thereof.
OWNERSHIP OF SHARES
The following table presents information provided to the Company as to the
beneficial ownership of the Company's Shares, as of February 28, 1995, by
persons holding 5% or more of such Shares:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------
NAME AND ADDRESS NUMBER OF SHARES NATURE OF OWNERSHIP PERCENTAGE OF CLASS
-------------------------------------------------------------------------------
<S> <C> <C> <C>
Rhone-Poulenc S.A.
25, Quai Paul Doumer
92408 Courbevoie,
France 95,027,962 Direct 68.30%
-------------------------------------------------------------------------------
</TABLE>
The following table shows, for each director, for each executive named in the
Summary Compensation Table on page 13 and for all directors and executive
officers of the Company as a group, the total number of Shares beneficially
owned as of February 28, 1995, and the nature of such beneficial ownership.
Beneficial ownership includes, among other things, the right to acquire shares
within sixty (60) days through the exercise of an option. Total ownership
represents less than two percent of the outstanding shares.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
NUMBER OF SHARES
NUMBER OF SHARES SUBJECT TO EXERCISABLE
NAME OF BENEFICIAL OWNER OWNED DIRECTLY OPTIONS
--------------------------------------------------------------------------------
<S> <C> <C>
John B. Bartlett 6,582 38,836
Jean-Jacques Bertrand 3,267 107,388
Jean-Marc Bruel -0- 64,000
Robert E. Cawthorn 117,698 365,784
Charles-Henri Filippi -0- 16,000
Prof. Claude Helene -0- 31,000
Michael H. Jordan -0- 16,000
Manfred E. Karobath 6,911 42,149
Igor Landau 200 76,000
Peter J. Neff -0- 46,000
James S. Riepe 864 10,000
Michel de Rosen 8,629 11,360
John A. Sedor 2,211 26,464
Edward J. Stemmler, MD 144 5,500
Jean-Pierre Tirouflet -0- 74,000
All Executive Officers and Directors as
a Group
(20 in number) 171,946 1,483,262
</TABLE>
2
<PAGE>
Under the terms of a shareholder-approved plan which was then called the
Rorer Group Inc. Stock Plan and is now known as the Rhone-Poulenc Rorer Amended
and Restated Stock Plan ("Stock Plan"), Messrs. Riepe and Stemmler were each
awarded on April 26, 1988, options to purchase 20,000 Shares at a price of
$16.00 per Share, the market value on that date. Under the terms of the Stock
Plan, these options became fully exercisable upon the change in control of the
Company (described below) on May 5, 1990. Pursuant to the terms of the
Acquisition Agreement between the Company and RP dated as of March 12, 1990
(the "Acquisition Agreement"), each of these directors in August 1990
surrendered one-half of the Shares in the option in exchange for a cash payment
of $230,000 (representing the difference between the Tender Offer price of $39
and the option price) and the Company reduced the option price of the Shares
remaining in the option to reflect the then-current market value of the
Contingent Value Rights issued by RP as provided in the Acquisition Agreement.
Dr. Stemmler has exercised his option to purchase 4,500 Shares; Mr. Riepe has
not exercised any of his option.
Pursuant to terms of the Stock Plan, Mr. Landau and Mr. Helene were each
awarded, on July 31, 1990, options to purchase 20,000 Shares at a price of
$32.3125 per share, the market value on that date. Messrs. Bruel, Filippi,
Jordan, Neff and Tirouflet were each awarded, on May 7, 1991, options to
purchase 20,000 shares at $41.125 per share, the market value on that date.
These options become exercisable during service as director at the rate of 20%
of the Shares on each of the first five anniversaries of the date of grant.
The foregoing description reflects a two-for-one split in the Shares,
effective June 7, 1991.
CONTROL OF THE COMPANY
Pursuant to the terms of the Acquisition Agreement, RP acquired Shares of the
Company in two transactions in 1990: (1) upon expiration on May 5, 1990 of its
tender offer for Shares, RP purchased 21,629,061 of the Shares tendered to it
(representing approximately 50.1% of Shares then outstanding on a fully-diluted
pre-split basis) and (2) on July 31, 1990, the Company issued 24,205,670 Shares
to RP in consideration of the contribution to the Company by RP of its Human
Pharmaceutical Business. As a result of these transactions, RP acquired Shares
constituting approximately 68% of the Shares outstanding on a fully-diluted
basis. RP now owns approximately 68% of the Shares and thereby controls the
Company.
ELECTION OF DIRECTORS
The Acquisition Agreement provides that for a standstill period extending
until July 31, 1997, during which RP cannot acquire additional Shares except
under certain conditions provided therein, the Board of Directors shall consist
of 13 directors. The parties to the Acquisition Agreement agreed that RP would
vote all Shares owned by it directly or indirectly to elect, and the Company
would use its best efforts to cause to be elected, seven individuals selected
by RP ("RP Designees"), three executive officers of the Company ("Rorer
Designees") and three individuals who are Independent Persons selected by the
Nominating Committee of the Board of Directors of the Company (the "Independent
Directors"). "Independent Person" is defined as a person who (1) is in fact
independent, (2) does not have any direct financial interest or any material
indirect interest in either RP or the Company (other than by reason of
ownership of not more than 1% of any class of securities thereof) and (3) is
not connected with RP, the Company or any of their respective affiliates as an
officer, employee, consultant, agent, advisor, representative, trustee,
partner, director (other than of the Company) or person performing similar
functions.
The Board of Directors has nominated Robert E. Cawthorn, Charles-Henri
Filippi, Prof. Claude Helene, and Michael H. Jordan as directors of the Company
for three-year terms ending in 1998.
3
<PAGE>
Messrs. Cawthorn, Filippi, Helene, and Jordan have previously been elected
directors of the Company by the shareholders.
Mr. Jordan is an Independent Director. Mr. Cawthorn is a Rorer Designee. Mr.
Filippi and Prof. Helene are RP Designees.
Mr. Cawthorn announced in January 1995 that he will step down as Chief
Executive Officer of the Company at the Annual Meeting this year and that
Michel de Rosen, currently President and Chief Operating Officer, will become
Chief Executive Officer at that time. Mr. Cawthorn will remain as Chairman.
All of the nominees have consented to be named and to serve if elected. If
any of the nominees should become unavailable for election, it is intended that
the Shares represented by proxies will be voted with discretionary authority
for a substitute designated by the Board.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR ALL OF THE NOMINEES
FOR DIRECTORS.
The following table gives the following information for each nominee and each
continuing director: age, all positions with the Company, the first year
elected a director, the year in which his current term of office expires,
principal occupation or employment during the past five years and other
directorships.
NOMINEES FOR ELECTION FOR TERMS ENDING IN 1998
<TABLE>
<CAPTION>
NAME (AND AGE) OF
DIRECTORS, POSITIONS TERM OF
AND OFFICES HELD WITH DIRECTOR OFFICE
THE COMPANY SINCE: EXPIRES: BUSINESS EXPERIENCE
--------------------- -------- -------- -------------------------------------------
<S> <C> <C> <C>
Robert E. Cawthorn/1/ 1984 1995 Chairman (since 1986), President (1984-
(59) 1991) and Chief Executive Officer (since
Chairman and Chief 1985), Executive Vice President (1982-
Executive Officer 1984) of the Company. Mr. Cawthorn is a
member of the Executive Committee of
Rhone-Poulenc S.A. and is also a director
of Sun Company, the Vanguard Group of In-
vestment Companies, and Applied Immune
Sciences, Inc.
Charles-Henri Filippi/2/ 1990 1995 Senior Executive Vice President (since
(42) 1993) and Executive Vice President in
Director Charge of Large Enterprises (1989-1993),
Credit Commercial de France.
Prof. Claude Helene/2/ 1990 1995 Directeur Scientifique of Rhone-Poulenc
(56) since 1990. Professeur at the Museum Na-
Director tional D'Histoire Naturelle (Paris,
France) since 1976; Director of a Research
Center of Institut National de la Sante et
de la Recherche Medicale (1980-1992). Mem-
ber of the French Academy of Sciences.
Michael H. Jordan/3/ (58) 1991 1995 Chairman & Chief Executive Officer, West-
Director inghouse Electric Corporation (since
1993); Principal of Clayton, Dubilier and
Rice, Inc. 1992-1993. President and Chief
Executive Officer (1986-1992) of PepsiCo
Worldwide Foods, Inc. Mr. Jordan is a di-
rector of Aetna Life & Casualty Company,
Dell Computer, Melville Corporation and
Westinghouse Electric.
</TABLE>
--------
/1Rorer/Designee
/2RP/Designee
/3Independent/Director
4
<PAGE>
<TABLE>
<CAPTION>
CONTINUING DIRECTORS
NAME (AND AGE) OF
DIRECTORS, POSITIONS TERM OF
AND OFFICES HELD WITH DIRECTOR OFFICE
THE COMPANY SINCE: EXPIRES: BUSINESS EXPERIENCE
--------------------- -------- -------- -------------------------------------------
<S> <C> <C> <C>
Jean-Jacques Bertrand/2/ 1990 1996 Chairman & CEO (effective January 1, 1995)
(55) and Vice Chairman & CEO (in 1994) of
Director Pasteur Merieux Serums and Vaccines. Exec-
utive Vice President of the Company (1990-
1993); President, Worldwide Pharmaceutical
Operations of Rhone-Poulenc Sante (1987-
1990).
Igor Landau/2/ (50) 1990 1996 Group President (since 1992) and Senior
Director Executive Vice President (1990-1992) of
Rhone-Poulenc S.A. and Chairman of the
Rhone-Poulenc Health Sector (since 1990).
Mr. Landau is a member of the Executive
Committee of Rhone-Poulenc S.A.
Edward J. Stemmler, 1978 1996 Senior Advisor to the President (since
M.D./3/ (66) 1994) and Executive Vice President (1990-
Director 1994) of the Association of American Medi-
cal Colleges; Dean Emeritus of the School
of Medicine of the University of Pennsyl-
vania since 1989; Executive Vice President
of the University of Pennsylvania Medical
Center (1986-1989)
Michel de Rosen/1/ (44) 1993 1996 President and Chief Operating Officer of
Director, President and the Company since 1993; President, Fibers
Chief Operating Officer and Polymers Sector, Rhone-Poulenc S.A.
(1988-1993). Mr. de Rosen is also a member
of the Executive Committee of Rhone-
Poulenc S.A.
Jean-Pierre Tirouflet/2/ 1990 1996 Senior Executive Vice President & Chief Fi-
(44) nancial Officer (since 1992); Group Chief
Director Financial Officer (1990-1992); and member
of the Executive Committee (since 1990) of
Rhone-Poulenc S.A. Mr. Tirouflet is also a
director of Banque Indosuez and Pechiney
S.A.
Jean-Marc Bruel/2/ (59) 1990 1997 Vice-Chairman of Rhone-Poulenc Group (since
Director 1992); President of Rhone-Poulenc Group
(1990-1992); and member of the Executive
Committee of Rhone-Poulenc S.A. Mr. Bruel
is also a director of Rhone-Poulenc S.A.
and a member of the Supervisory Board of
Banque Paribas.
Manfred E. Karobath, 1994 1997 Senior Vice President of the Company and
M.D./1/ (54) President of RPR Research & Development
Director since 1992; Director of Research & Devel-
opment of Sandoz Pharma Ltd. (1989-1992).
Dr. Karobath is also a director of Applied
Immune Sciences, Inc. and Pasteur Merieux
Serums & Vaccines.
</TABLE>
--------
/1/ Rorer Designee
/2/ RP Designee
/3/ Independent Director
5
<PAGE>
<TABLE>
<CAPTION>
NAME (AND AGE) OF
DIRECTORS, POSITIONS TERM OF
AND OFFICES HELD WITH DIRECTOR OFFICE
THE COMPANY SINCE: EXPIRES: BUSINESS EXPERIENCE
--------------------- -------- -------- -------------------------------------------
<S> <C> <C> <C>
Peter J. Neff/2/ (56) 1990 1997 President and Chief Executive Officer of
Director Rhone-Poulenc Inc.
James S. Riepe/3/ (51) 1982 1997 Managing Director (since 1989) of T. Rowe
Director Price Associates, Inc., an investment man-
agement firm. Mr. Riepe is also a director
of T. Rowe Price Associates, Inc. and var-
ious T. Rowe Price-sponsored mutual funds.
</TABLE>
--------
/2/ RP Designee
/3/ Independent Director
NOMINATIONS BY SHAREHOLDERS
The Company's By-laws provide that nominations for election of directors may
be made by any shareholder entitled to vote for the election of directors, if
written notice (the "Notice") of the shareholder's intent to nominate a
director at the meeting is given by the shareholder and received by the
Secretary of the Company in the specified manner and within a specified time
limit. The Notice shall be delivered to the Secretary of the Company not less
than 14 days nor more than 50 days prior to any meeting of the shareholders
called for the election of directors. If less than 21 days' notice of the
meeting is given to shareholders, the notice shall be delivered to the
Secretary of the Company not later than the earlier of the seventh day
following the day on which notice of the meeting was first mailed to
shareholders or the fourth day prior to the meeting. The Notice may be
delivered to the Secretary or mailed to the Secretary by certified mail, return
receipt requested, but shall be deemed to have been given only upon actual
receipt by the Secretary. The Notice shall be in writing and contain (1) the
name and address of the nominating shareholder; (2) a representation that the
shareholder is a shareholder of record and intends to appear in person to
nominate the person or persons specified in the Notice; (3) such information
about such nominee as would be required to be included in the proxy statement
filed pursuant to Section 14A of the rules and regulations established by the
Securities and Exchange Commission under the Securities Exchange Act of 1934;
(4) a description of all arrangements or understandings among the shareholder
and each nominee and any other person pursuant to which the nomination is made
and (5) the consent of each nominee to serve as a director if elected.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT
Based on an examination of Forms 3, 4, and 5 filed with the Securities and
Exchange Commission, the Company is aware that Alain Audubert, Senior Vice
President of the Company, filed late a Form 3. The Company is unaware of any
failure by an officer or director to file a required form.
COMMITTEES OF THE BOARD OF DIRECTORS
The Company has an Audit Committee appointed by the Board of Directors and
composed of directors who are not employees of the Company. The Audit
Committee's function is to conduct such review as may be necessary or desirable
with respect to: the selection of independent accountants and compensation paid
to them; the scope of audit activities and related work programs of the
Company's independent accountants and internal audit and accounting staffs; the
results and findings of audits, quarterly reviews and other reporting by the
Company's independent accountants and internal audit staff; the policies and
practices of the Company for the proper maintenance of the accounts of the
Company and for insuring reliability and integrity of the financial statements;
the accounting controls, practices and policies of the Company and its
subsidiaries; special investigations and studies to insure adherence to
6
<PAGE>
the Company's policies and procedures relating to accounting, financial control
and audit matters; and the responsibilities, authority and duties of the
Company's chief financial officer, chief accounting officer and director of
internal audit and the performance by each of them of his respective duties.
The Audit Committee held three meetings in 1994. Its members are Messrs. Riepe
(Chairman), Filippi and Stemmler.
The Company has an Executive Personnel and Compensation Committee appointed
by the Board of Directors and composed of directors who are not employees of
the Company. Pursuant to the Acquisition Agreement, one member is an RP
Designee and the balance are Independent Directors. The Executive Personnel and
Compensation Committee reviews the administration of the Company's stock option
and incentive compensation plans and reviews with the Board of Directors, for
approval, the compensation, including the amount of any incentive compensation
or bonus, to be paid to any officer of the Company or Division president and
reviews the compensation, including incentive compensation or bonus, paid to
each other employee of the Company or any of its domestic subsidiaries or
General Manger of an international subsidiary whose annual rate of salary
exceeds $200,000 and any other employee or class or group of employees as the
Committee shall determine. The Committee also reviews the recommendations of
the Company's chief executive officer, including planning for executive
development and management succession, with regard to management personnel of
the Company and its subsidiaries, whose annual rate of salary exceeds $200,000.
The Executive Personnel and Compensation Committee held seven meetings in 1994.
Its members are Messrs. Riepe (Chairman), Jordan and Landau.
The Company has a Nominating Committee appointed by the Board of Directors
and composed of three directors: the Chief Executive Officer of the Company,
one RP Designee and one Independent Director who is the chairman of the
committee. The Nominating Committee proposes to the Board of Directors
candidates for Board membership as Independent Directors to stand for election
or to fill vacancies on the Board as they occur. The Nominating Committee held
two meetings in 1994. Its members are Messrs. Stemmler (Chairman), Cawthorn and
Neff.
The Company has an Executive Committee appointed by the Board of Directors to
act in an advisory capacity to management of the Company in respect of any
event or matter of business where a quorum of the Board of Directors cannot, in
the judgment of the Chairman, be convened in a timely manner and, in addition,
to have and exercise the authority of the Board of Directors in connection with
such event or matter about which the Board of Directors specifically delegates
such authority prior to its exercise. The Board of Directors has specifically
authorized the Executive Committee to approve investments, capital expenditures
and asset dispositions by the Company and its subsidiaries in an amount up to
$10 million. The Executive Committee held no meetings in 1994. Its members are
Messrs. Landau (Chairman), Bruel, Cawthorn, de Rosen, Jordan, Karobath, and
Tirouflet.
The Board of Directors had ten meetings in 1994. Messrs. Filippi and Jordan
attended fewer than 75% of the aggregate of the number of meetings of the Board
of Directors and the total number of meetings held by all committees of the
Board on which each served. Individual director attendance at meetings of the
Board of Directors and its committees during the year averaged 88%.
DIRECTORS' COMPENSATION
Directors who are not employees of the Company or any of its subsidiaries
were paid in 1994 an annual retainer of $25,000. An additional annual retainer
of $2,000 was paid for committee participation and an additional $2,000 for
committee chairmanship. Directors also received a fee of $1,000 per Board
meeting attended and $500 per committee meeting. The directors are paid an
additional $500, or a total of $1,000, per committee meeting which is not held
in conjunction with a meeting of the Board of Directors.
7
<PAGE>
Directors who are employees of the Company or any of its subsidiaries do not
receive compensation for service as directors.
In 1987, the Board of Directors adopted a Deferred Compensation Plan for
Directors, by which a non-employee director could defer not less than $10,000
nor more than $15,000 of directors' fees to be paid in any year. The deferred
fees are deemed to be used to purchase a life insurance policy on the life of
the participating director. The Company has no obligation to purchase such life
insurance although it may choose to do so to provide the funding for its
deferred obligation. The deferred benefits are a general unsecured obligation
of the Company payable to the director over a 15 year period upon reaching age
65 or at an earlier time upon termination as a director if permitted by the
Executive Personnel and Compensation Committee. The amount of deferred benefits
will be determined by the Committee at the time of commencement of such
payments and will be an annual amount which can be provided by the Company at
no cost to it on an after-tax basis considering the potential death benefit
which would be payable under the life insurance policy deemed purchased on the
life of the participating director. Mr. Riepe and Dr. Stemmler participate in
this Plan, although, currently, only Mr. Riepe defers director's fees under the
terms of the Plan.
In 1988, the Company adopted a Retirement Plan for Outside Directors,
effective March 1, 1988 with respect to then-eligible directors, by which a
director with at least five years of service as a director would receive, after
retirement as a director and beginning at age 65, five annual payments equal to
the annual retainer received in the last year of service as a director and an
additional annual payment for each year of service beyond five years, to a
maximum of ten. Messrs. Jordan, Riepe and Stemmler participate in this Plan.
The Company in 1988 entered into a Supplemental Benefit and Deferred
Compensation Trust Agreement ("Trust Agreement") with CoreStates Bank, N.A., as
Trustee, which established an irrevocable grantor trust to which certain
contributions may be made by the Company in its discretion to fund its
obligations with respect to various non-qualified benefit plans. A trust fund
has been established under the Trust Agreement for each participant in the
Company's Deferred Compensation Plan for Directors, Outside Directors'
Retirement Plan and the Supplemental Executive Retirement Plan. The Company may
fund other benefit plans pursuant to the Trust Agreement. The assets of the
trust fund established pursuant to the Agreement will, nevertheless, be subject
to the claims of general creditors of the Company. Upon the change in control
of the Company by virtue of the consummation of RP's tender offer for Shares in
1990, the Company was obligated to contribute funds to the trust fund, and did
so, in an amount sufficient to provide all of the benefits then due.
REPORT ON EXECUTIVE COMPENSATION BY THE EXECUTIVE PERSONNEL AND COMPENSATION
COMMITTEE
The Executive Personnel and Compensation Committee of the Board of Directors
makes compensation decisions with respect to the Company's executive officers.
Each member of the Committee is a non-employee director. All decisions of the
Committee relating to the compensation of the Company's executive officers,
including the named executive officers, are reviewed by the full Board, except
for decisions about awards under the Company's stock plans, which are made by a
subcommittee of the Committee.
EXECUTIVE COMPENSATION
The Company's executive compensation policies are designed to provide levels
of compensation that are competitive within its industry and to pay executives
for performance consistent with the
8
<PAGE>
Company's annual and long-term goals. By relating a meaningful part of
executive compensation to the results achieved, compensation is linked to the
interests of all shareholders. Compensation is tied to the achievement of
objectives in Company earnings per share, business unit performance and
individual performance.
There are three elements of the executive compensation package: (1) base
salary which is typically targeted to approach the average salary of the
pharmaceutical industry for a comparable executive's position; (2) an annual
variable cash bonus tied to targeted Company, as well as individual,
performance; and (3) options to purchase Company shares, the aggregate amount
of which is tied to individual performance. Individual performance, in turn, is
judged against the attainment of individual objectives which include financial
results for business units (where appropriate) and other factors qualitative in
nature, such as contributions to other business units, staffing, financial
management and controls, business strategies, etc. Company executives have a
greater percentage of compensation tied to results achieved than most other
executives in the industry and, by design, this may result in higher
compensation when Company performance warrants it, but it also carries the
potential of reduced or no variable compensation when Company performance is
below targeted levels. The Committee believes that stock ownership by
management and stock-based performance compensation are beneficial to the
Company in that they, too, link executives' and shareholders' interests; the
Committee has therefore increasingly relied on these elements in program
design.
SALARY
The Company surveys peer companies in the pharmaceutical industry which the
Committee believes are appropriate for comparison of salary levels for its
executives. The data gathered through those surveys comprise one factor
considered in the salary management for Company executives. These surveyed
companies comprise the peer group index, which is used for the performance
graph below. In 1994, the Committee reviewed base salaries of the executive
officers and recommended increases to the Board of Directors on the basis of
the Company's and the individual's performance in the previous year, as well as
the movement of salaries for comparable positions in the pharmaceutical
industry and changes in the cost of living. The salaries paid to Company
executives in 1994 generally approached the average of those paid by the
surveyed companies for comparable positions.
INCENTIVE BONUS
The Company pays variable incentive compensation to executives in the form of
an annual cash bonus which is based on the attainment of predetermined
objectives for: (1) Company earnings per share; (2) income before income tax
or, if it is not a profit center, another appropriate measure of the
executive's business unit or function; and (3) the individual's performance,
measured against predetermined objectives for the year. Generally, half of a
target award is attributed to attainment of individual objectives and half to
the financial goals. Company financial objectives and the individual target
awards (calculated and expressed as a percentage of salary) are reviewed and
approved by the Committee at the beginning of each fiscal year. The variable
incentive is designed to be a short-term award for specific results and
performance in a given year and to be competitive within the pharmaceutical
industry. The performance against objectives is reviewed by the Committee which
recommends bonus awards for executive officers to the Board of Directors.
Achievement of an acceptable level of Company earnings per share, against the
objectives set annually by the Board of Directors, must be attained before a
significant portion of the bonus can be paid.
For 1994, generally, the Company's EPS and IBT fell slightly short of the
objectives and in most cases the individual performance met expectations.
9
<PAGE>
CAPITAL PLAN
In 1994, the Company implemented the Capital Plan which provides an
additional performance incentive to certain designated senior executives of the
Company who have made and are expected to continue to make contributions that
are instrumental to the management, growth and success of the Company. The
Committee deemed it appropriate for the Company to adopt the Capital Plan to
remain competitive with its peer companies and to address a need for a short-
to medium-term performance-based incentive in the Company's executive
compensation. The Capital Plan provides, for a select group of executives, an
annual performance unit award payable in cash. The number of units awarded will
vary depending upon Company net income performance compared with that of peer
companies and the unit before payment is valued by a comparison of Company net
income year on year. The Committee believes that the Capital Plan will become a
valuable tool in providing an incentive which is consistent with the building
of shareholder value, while helping to assure that the Company's executive
compensation remains competitive within the industry.
LONG-TERM INCENTIVE
Long-term incentives are provided to executives in the form of options for
the purchase of Company common stock. As with incentive bonus payments, annual
stock option grants made by the Committee are variable, based upon achievement
of predetermined goals for the previous year. The number of shares in target
option awards for executive officers is based on a stock option multiple which
is expressed as a percentage of salary. Granting stock options as an element of
total compensation is again consistent with the Company's strategy to link the
interests of executives to the interests of all other shareholders. The
compensation package for Company executives is intentionally weighted in favor
of stock options, thereby making the executive's long-term compensation more
dependent on the long-term performance of the Company.
In granting its stock option awards, the Committee does not consider either
how many stock options have been granted in prior years or how many remain
unexercised, but rather determines each year's grants on the basis of the
previous year's individual performance and the total number of options
available for grant.
Generally, the option price is the market value of the shares on the date of
grant of the option. Options have a term not to exceed ten years and, in the
case of annual grants, the option as to one-third of the grant becomes
exercisable on each of the first three anniversaries of the grant.
In 1994, grants to executive officers generally reflected the achievement of
individual objectives.
THE CHIEF EXECUTIVE OFFICER'S COMPENSATION
The Chief Executive Officer's compensation for 1994 included the same
components of salary and variable compensation in the form of cash bonus and
stock options as apply to other executives of the Company and the methodology
employed by the Committee in setting objective and target performance goals for
the Chief Executive Officer was the same as for other executives. The
Committee, in setting the Chief Executive Officer's compensation, considered
such factors as the Company's financial results, his management of the
transition to the new Chief Executive Officer in April 1995, reductions in the
Company's cost structure, the results of certain of key strategic decisions,
personnel management, and the worldwide environment for international
pharmaceutical companies.
10
<PAGE>
FEDERAL TAX LEGISLATION
Federal tax legislation, enacted in 1993, limits the deductibility of
compensation in excess of $1 million paid in 1994 and subsequent years to the
named executive officers appearing that year in the Summary Compensation Table.
Generally, compensation in excess of $1 million can nonetheless be deducted if
it results from benefit plans which have been approved by the shareholders and
which have only quantitative measures of performance. The Committee advises
that the Company's exposure is not material in 1995 and that it will continue
to follow the situation and take such measures as it deems appropriate if the
loss of deductibility requires further action.
James S. Riepe, Chairman Igor Landau Michael H. Jordan
11
<PAGE>
PERFORMANCE GRAPH
The following Performance Graph compares the Company's cumulative total
shareholder return on the Company's Shares for the five-year period December
31, 1989 to December 31, 1994 with the cumulative total return of the Standard
& Poor's 500 Stock Index (which includes the Company), the Dow Jones
Pharmaceutical Index and a peer group consisting of the companies in the
pharmaceutical industry used for compensation comparison. Dividend reinvestment
has been assumed and, with respect to companies in the peer group, the returns
of each such company have been weighted to reflect relative stock market
capitalization as of the beginning of each measurement period. The Company's
performance has assumed (1) purchase by Rhone-Poulenc S.A. of 50.1% of the
outstanding Shares pursuant to its tender offer in May 1990, (2) subsequent
purchase of Shares with the proceeds of the tender offer at the then-current
market price, and (3) retention of Contingent Value Rights (CVRs) issued by
Rhone-Poulenc in August 1990 on the basis of one CVR for each common share
owned and the investment in Shares of the payment by Rhone-Poulenc of $.13 per
CVR upon maturity of the CVRs in July 1993.
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Measurement period Peer
(Fiscal Year Covered) S&P 500 DJ Pharm Group RPR
--------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
1989 $ 100 $ 100 $ 100 $ 100
1990 $ 97 $ 117 $ 121 $ 189
1991 $ 126 $ 183 $ 193 $ 321
1992 $ 136 $ 150 $ 162 $ 248
1993 $ 150 $ 139 $ 145 $ 183
1994 $ 152 $ 159 $ 165 $ 192
</TABLE>
--------
The peer group consists of Abbott Laboratories , American Home Products
Corporation, Bristol-Myers Squibb Company, Eli Lilly & Company, Glaxo Holdings
Plc, Johnson & Johnson, Marion Merrell Dow Inc., Merck & Co., Inc., Pfizer
Inc., Schering-Plough Corp., Smithkline Beecham Plc, The Upjohn Company and
Warner-Lambert Company. The Company uses the peer group for comparisons of
executive compensation.
12
<PAGE>
COMPENSATION OF EXECUTIVE OFFICERS
The following tables and notes show the compensation provided by the Company
to each of the Company's five most highly compensated executive officers,
including the Chief Executive Officer, who served as executive officers of the
Company at the end of 1994 (the "named executive officers").
--------------------------------------------------------------------------------
SUMMARY COMPENSATION TABLE
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
-----------------------
ANNUAL COMPENSATION AWARDS
-----------------------------------------------------------------------------------------------------------
(A) (B) (C) (D) (E) (F) (G) (H)
SECURITIES
UNDERLYING
OTHER ANNUAL RESTRICTED OPTIONS/
NAME & PRINCIPAL COMPENSATION STOCK SARS/3/ ALL OTHER
POSITION YEAR SALARY ($) BONUS ($) ($) AWARD(S)/2/$ (#) COMPENSATION ($)/4/
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
R.E. Cawthorn, 1994 761,667 531,484 -0- 51,511 3,000
Chairman of the 1993 733,430 448,490 -0- 102, 479 53,553
Board and Chief 1992 699,667 523,093 -0- 57,573 14,764
Executive Officer
Michel de Rosen 1994 433,833 252,865 106,100 -0- 34,080 -0-
President and Chief 1993 132,812 68,162 42,361 -0- -0- -0-
Operating Officer*
M.E. Karobath M.D., 1994 336,397 211,724 -0- 28,011 3,000
Senior Vice President, 1993 332,957 175,656 -0- 62,219 3,000
and President 1992 251,250 196,032 -0- 30,000 1,950
RPR Research and
Development
J.A. Sedor, 1994 252,950 180,815 -0- 6,857 3,000
President--Armour 1993 236,583 132,870 -0- 36,132 3,000
Pharmaceutical Company 1992 224,167 128,505 -0- 9,057 3,000
J.B. Bartlett, 1994 272,600 122,050 -0- -0- 3,000
Senior Vice President, 1993 262,100 108,581 -0- 39,031 25,209
Secretary and General 1992 257,050 129,875 -0- 11,935 8,160
Counsel**
</TABLE>
--------
/1/If no amount is shown, the aggregate of other annual compensation does not
exceed the lesser of $50,000 or 10% of the combined salary and bonus of the
named executive officer and therefore is not required to be reported.
The amount shown in this column for Mr. de Rosen represents personal benefits
in connection with the Company's expatriate program. In 1994, the individual
benefits which exceeded 25% of Mr. de Rosen's personal benefits reported
were: housing allowance ($19,000), relocation allowance in connection with a
household move from France to the U.S. ($40,000) and home leave ($35,298). In
1993, the only individual benefit which exceeded 25% of the total personal
benefit paid to Mr. de Rosen was tuition for his children ($12,714).
/2/The Company did not issue restricted shares to senior executives in 1992 or
to any employee in 1993 or 1994 and does not currently intend to do so in
future years. On December 31, 1994, no named executive officers held
restricted shares.
/3/Stock options are granted with option price equal to current market value
and become exercisable as to one-third of the grant on each of the first
three anniversaries of the date of grant, except for supplemental grant made
in September 1993 which becomes exercisable in 1996. (See table entitled
Option/SAR Grants in Last Fiscal Year.)
13
<PAGE>
/4/ Represents (a) employer matching contributions to Rhone-Poulenc Rorer
Employee Savings Plan (401(k)) of up to the first $3,000 in each year and,
for 1992, premiums on policies for the executive's benefit under an
executive life insurance program; and, for 1993, payment to Mr. Cawthorn and
Mr. Bartlett of policy cash value upon termination of the plan.
* Employment effective September 9, 1993.
** Mr. Bartlett retired from the Company on December 31, 1994.
--------------------------------------------------------------------------------
LONG-TERM INCENTIVE PLAN AWARDS TABLE
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
LONG-TERM INCENTIVE PLAN AWARDS IN LAST FISCAL YEAR/1/
---------------------------------------------------------------------------------------
(A) (B) (C)
NUMBER OF
SHARES, UNITS, PERFORMANCE OR OTHER
OR OTHER RIGHTS PERIOD UNTIL MATURATION
NAME (#) OR PAYOUT/2/
---------------------------------------------------------------------------------------
<S> <C> <C>
R.E. Cawthorn 5,192
M. de Rosen 2,962
M.E. Karobath 2,345
J.A. Sedor 1,662
J.B. Bartlett 1,868
</TABLE>
--------
/1/ Represents the initial "kick-off" award to certain executive officers of
notional shares of the Company, based on a then-current market value of
$35.875 and equal, in aggregate, to 25% of the named executive officer's
then-current salary, under the terms of the Company's Capital Plan,
established for the benefit of selected senior executives including the
named executive officers. The kick-off award vests during continued
employment at the annual rate of 16 2/3% over a six-year period commencing
on the date of the award. The notional shares track and reflect the value of
the Company's shares over time and are payable in cash upon death,
disability, retirement, or reaching age 60. The Capital Plan otherwise
provides for annual performance unit awards, one-half of which is payable in
cash to the named executive officer one year, and one-half of which is
payable in cash three years after grant. The annual performance unit awards
were first made in 1995. The value of the performance unit will depend upon
the Company's increase or decrease in net income compared to the previous
year's net income and can change from 50% to 150% from the previous year's
baseline. The number of performance units awarded will be determined each
year with reference to the Company's net income in the previous year
compared to the average increase or decrease in net income of peer
companies. The size of the performance award may range from 50% to 150% of a
target for each named executive officer. In order to continue to
participate, the named executive officers must, within two or three years
after initially being selected to participate, own that number of the
Company's common shares equal in market value to at least one year's base
salary on January 1st of any year. For purposes of this calculation, the
named executive officer shall be deemed to own common shares equal to the
number of notional shares represented by the kick-off award, as well as
shares owned outright and in the Company's Employee Savings Plan.
/2/ Awards vest during continued employment at the rate of one-sixth of the
award on each of the first six anniversaries of the award.
14
<PAGE>
--------------------------------------------------------------------------------
OPTION/SAR GRANTS IN LAST FISCAL YEAR
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE AT ASSUMED
ANNUAL RATES OF STOCK PRICE
INDIVIDUAL GRANTS APPRECIATION FOR OPTION TERM ($)/1/
--------------------------------------------------------------- --------------------------------------
(A) (B) (C) (D) (E) (F) (G)
NUMBER OF % OF TOTAL
SECURITIES OPTIONS/SARS
UNDERLYING GRANTED TO
OPTIONS/SARS EMPLOYEES EXERCISE OR
GRANTED IN FISCAL BASE PRICE EXPIRATION 0% 5% 10%
NAME/GROUP (#)/2/ YEAR ($/SH) DATE APPRECIATION APPRECIATION APPRECIATION
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
R.E. Cawthorn 51,511 2.80 35.00 2/23/04 -0- 1,133,860 2,873,438
M. de Rosen 34,080 1.85 35.00 2/23/04 -0- 750,169 1,901,085
M.E. Karobath 28,011 1.52 35.00 2/23/04 -0- 616,578 1,562,538
J.B. Bartlett -0-
J.A. Sedor 6,857 .37 35.00 2/23/04 -0- 150,936 382,504
</TABLE>
--------
/1/ "Potential Realizable Value" has been calculated assuming an aggregate ten-
year appreciation of the market value of the Company's common stock at
annual compounded rates of 5% and 10%, respectively (or aggregate ten-year
appreciation of approximately 63% and 159%, respectively, to stock prices of
$57.01 and $90.73 per share, respectively). There can be no assurance that
the market value of the Company's common stock will appreciate in the
assumed manner. The column reflecting no appreciation is included for
illustrative purposes only; the market value of the Company's common stock
on March 10, 1995 was $40.625 per share.
/2/ Options granted in 1994 become exercisable during continued employment at
the rate of one-third of the total grant on each of the first three
anniversaries of the date of grant and remain exercisable during continued
employment until ten years after date of grant.
--------------------------------------------------------------------------------
AGGREGATED OPTION/SAR EXERCISES IN 1994 & 1994 YEAR-END OPTION/SAR VALUES
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(A) (B) (C) (D) (E)
NUMBER OF SECURITIES VALUE OF UNEXERCISED,
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT OPTIONS/SARS AT
FY-END (#) FY-END ($)/1/
------------------------- -------------------------
SHARES ACQUIRED VALUE
NAME ON EXERCISE (#) REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
R.E. Cawthorn -0- -0- 316,883 157,402 3,016,856 -0-
M. de Rosen -0- -0- -0- 84,080 -0- -0-
M.E. Karobath -0- -0- 19,406 100,824 -0- -0-
J.A. Sedor -0- -0- 17,449 42,298 17,767 -0-
J.B. Bartlett -0- -0- 31,014 38,166 64,490 -0-
</TABLE>
--------
/1/ Calculated on the difference between the December 30, 1994 market value of
$36.50 and the option price.
15
<PAGE>
PENSION TABLE
ESTIMATED ANNUAL RETIREMENT BENEFITS
<TABLE>
<CAPTION>
FINAL AVERAGE YEARS OF CREDITED SERVICE
ANNUAL ----------------------------------------------------------------------------------------
COMPENSATION 10 15 20
------------- ------- ------- -------
<S> <C> <C> <C>
$300,000 91,056 136,056 136,056
$400,000 126,056 186,056 186,056
$500,000 161,056 236,056 236,056
$600,000 196,056 286,056 286,056
$700,000 231,056 336,056 336,056
$800,000 266,056 386,056 386,056
$900,000 301,056 436,056 436,056
$1,000,000 336,056 486,056 486,056
$1,100,000 371,056 536,056 536,056
$1,200,000 406,056 586,056 586,056
</TABLE>
The foregoing table shows the estimated annual benefits payable to certain of
the named executive officers of the Company upon retirement, in specified
remuneration classes and years of credited service, under the Pension Plan of
Rhone-Poulenc Rorer Inc. (the "Pension Plan") and the Supplemental Executive
Retirement Plan.
The Pension Plan covers substantially all of the salaried employees of the
Company and most of its United States subsidiaries. Annual retirement benefits
under the Pension Plan are based upon age, credited service and final average
compensation calculated on the basis of the participant's highest consecutive
five years of base salary (not including any bonuses earned or paid) earned in
the last ten consecutive years of employment. The Pension Plan is indirectly
integrated with Social Security and provides benefits which vary according to
salary level. The Company's contribution to the Pension Plan in 1994
represented approximately 3% of the aggregate base annual compensation of all
Pension Plan participants as of January 1, 1994. The years of service for the
named executive officers who participate in the Pension Plan are Mr. Cawthorn,
13 years; Dr. Karobath, 2 years; Mr. Bartlett, 9 years and Mr. Sedor, 23 years.
The Company adopted, effective January 1, 1988, the Rorer Group Inc.
Supplemental Executive Retirement Plan for the benefit of executives designated
by the Board of Directors. The plan, whose current participants are Messrs.
Cawthorn and Bartlett who are named executive officers, provides for an annual
supplemental retirement benefit equal to the sum of up to 4% of the
participant's average annual compensation received during either his final
three years or five years of service for each of his first five years of
service, plus up to 3% of such compensation for each of his next ten years of
service, reduced by the amount of Social Security retirement benefits and by
the annual retirement benefit payable under the Company's Pension Plan and
under any other defined benefit plan in which the participant participated
prior to his employment with the Company. The compensation as specified in the
table includes salary and bonus as reported in the Summary Compensation Table
on page 13.
AGREEMENTS WITH CERTAIN EXECUTIVE OFFICERS
Cawthorn Employment Agreement. On March 12, 1990, the Company and Mr.
Cawthorn entered into the Cawthorn Employment Agreement, which became effective
on May 5, 1990, the date RP acquired Shares pursuant to the Tender Offer (the
"Commencement Date").
The Cawthorn Employment Agreement originally provided, among other things,
for an initial term ending on the fourth anniversary of the Commencement Date,
subject to certain extensions (the "Employment Term"). On March 18, 1994, the
Company and Mr. Cawthorn extended the term of the
16
<PAGE>
Cawthorn Employment Agreement for an additional year, to May 5, 1995, and made
certain amendments to the Cawthorn Employment Agreement. In January 1995, Mr.
Cawthorn announced that, effective at the Annual Meeting of Shareholders in
April, he will step down as Chief Executive Officer of the Company, while
remaining as Chairman and an employee of the Company. Mr. Cawthorn's
resignation as Chief Executive Officer will terminate the Cawthorn Employment
Agreement.
The Cawthorn Employment Agreement provides guidelines for the determination
of Mr. Cawthorn's annual rate of salary for the Employment Term (the "Base
Salary"). In addition, Mr. Cawthorn has received annual bonuses during the
Employment Term in accordance with the Company's annual bonus plan (the "Annual
Bonus").
During the Employment Term, Mr. Cawthorn has also received annual grants (the
"Annual Grants") of restricted Shares and of options to purchase Shares. The
amount of Shares covered by each such grant have been determined in accordance
with the methodology of the Company's Long Term Incentive Plan as in effect in
March 1989. The first such grant occurred as of August 21, 1990 and a
subsequent grant was made in March 1991. In 1992, Mr. Cawthorn voluntarily took
a stock option grant offered to senior executives in lieu of a restricted stock
grant in keeping with the Company's elimination of restricted stock as a means
of compensation.
In addition, Mr. Cawthorn received as of August 21, 1990, a grant (the "One
Time Grant") of an option to purchase 200,000 Shares at an option price of
$30.175, the market value of the Shares during a ten-day trading period in
August 1990 (all figures restated to reflect a two-for-one split in the Shares
in June 1991), which option was to become exercisable upon the fulfillment of
certain conditions, including the maturity of the Contingent Value Rights
("CVRs"), without payment by RP, in 1993 or 1994. In 1991, the One Time Grant
was amended to provide that 35% of the Shares would become exercisable in the
event of the maturity of the CVRs without payment by RP and 65% of the Shares
would become exercisable if certain income targets were met, provided the CVRs
matured without payment by RP and further that the options would become
exercisable in the year 2000 or earlier, assuming continued employment. The
CVRs expired in July 1993 and pursuant to their terms, RP paid CVR holders for
each CVR the sum of $.13, representing the difference between the average
market value of RPR common shares for a 90-day period prior to expiration
($49.00) and the CVR Target Price of $49.13. In light of the substantial
performance of the CVR Target, the terms of the One-Time Grant (and similar
grants to certain other executives) were modified to provide for immediate
vesting of 35% of the grant and cancellation of the remainder of the option.
Mr. Cawthorn may exercise the vested portion at any time prior its expiration
in the year 2000.
Under the Annual Grants, the options become exercisable to purchase one-third
of the Shares covered by the option on each of the first three anniversaries of
the date of grant; upon termination of Mr. Cawthorn's employment (a) by reason
of death or (b) by reason of total and permanent disability, then effective
upon such Termination Date, all options shall be fully exercisable and,
notwithstanding the foregoing, all options to the extent not then exercisable
shall become fully exercisable as of the date of a Change in Control of the
Company.
Furthermore, during the Employment Term, Mr. Cawthorn has been entitled to
receive medical, death and disability benefits at least equivalent to those
provided by the Company to its senior management.
The Cawthorn Employment Agreement provides for certain benefits upon the
termination of Mr. Cawthorn's employment. If Mr. Cawthorn's employment
terminates on account of his death or total and permanent disability, then Mr.
Cawthorn (or his estate) would receive (i) in the event of death, a lump-sum
payment equal to the Base Salary in effect at the time of death, (ii) in the
event of total and permanent disability, amounts in lieu of Base Salary at the
annual Base Salary in effect on the Termination Date, payable semi-monthly, for
a period of 12
17
<PAGE>
months following the Termination Date. In addition, Mr. Cawthorn (or his
estate) would receive his compensation accrued through the Termination Date and
any options held by him that are subject to vesting would become fully vested.
Upon termination of Mr. Cawthorn's employment with the Company, Mr. Cawthorn
will receive a lump sum payment amounting to the aggregate of his 1994 salary
and the Annual Bonus paid for 1994. In addition, all outstanding stock options
will immediately vest and he will have a period of five years following
termination of employment to exercise options which have vested at that time.
For a one-year period following termination of his employment, Mr. Cawthorn
has agreed not to engage, directly or indirectly, and whether in an employment,
management or ownership capacity (other than through the ownership of 5% or
less of a company's voting stock), in any business which competes with the
business of the Company or any group, division or subsidiary of the Company.
The Company has entered into an indemnification agreement with Mr. Cawthorn
dated as of March 12, 1990 (the "Indemnification Agreement"), pursuant to which
Mr. Cawthorn shall be indemnified against any liabilities, penalties, costs and
expenses of any nature arising out of his past, present, or future employment
with the Company and incurred by him in connection with any threatened, pending
or completed action, suit, appeal or other proceeding of any nature. However,
the Company shall not be liable under the Indemnification Agreement to make any
payment to the extent that, among other things, payment is made under an
insurance policy provided by the Company or Mr. Cawthorn is indemnified by the
Company under its Articles of Incorporation or By-Laws or under the
Pennsylvania Business Corporation Law.
Karobath Employment Agreement. In connection with his employment with the
Company in 1992, Dr. Karobath entered into a contract with the Company which
provides for accelerated pension benefits and for the payment of salary and
target bonus for the remainder of the period in the event the Company
terminates his employment other than for cause during the first three years of
employment.
Bartlett Consultantcy Agreement. In connection with his retirement from the
Company, Mr. Bartlett entered into an agreement which provides that he will
consult with the Company for a period of two years. For this consultantcy, Mr.
Bartlett will receive consideration at the rate of his 1994 salary, together
with medical insurance coverage for this period. In addition, stock option
grants will continue to vest for this term and Mr. Bartlett will have up to six
months following this period to exercise his options. In addition, Mr.
Bartlett's Supplementary Executive Retirement Plan benefit will be calculated
on the basis of the average of the compensation received for the period 1992
through 1996.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Following the combination of the Company and HPB, RP and the Company have
continued to provide services and to sell products to each other. In 1994,
sales by the Company to RP and its affiliates amounted to $123 million. The
Company purchased materials from RP in 1994 at a cost of $40 million.
Pursuant to a service contract (the "Service Contract") with the Company, a
subsidiary of RP provides services to the Company in certain areas, including
general administration, finance, human relations, information services and
communications. RP and the Company, acting through their respective
subsidiaries, have also entered into two research contracts (the "Research
Contracts") pursuant to which RP provides the Company with access to research
results likely to be applicable in the field of human pharmaceuticals. The
Service Contract and the Research Contracts were renewed as of August 1, 1991
for additional terms ending on December 31, 1994. The amount of annual fees
paid to RP in 1994 pursuant to such agreements approximated FF60 million and
FF58 million, respectively.
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In addition, RP paid RPR in 1994 a fee of $7.4 million for RPR's management
of Cooperation Pharmaceutique Francais, acquired by RP in 1994.
As of December 31, 1994, RP had loans outstanding to the Company of $69
million. In 1994, the maximum principal amount of such loans was $175 million
and net interest payments for such loans amounted to $16 million. RP has
guaranteed certain debt obligations of the Company and certain of its
subsidiaries and received fees in consideration therefor of approximately
$200,000 for 1994. As of December 31, 1994, the aggregate principal amount of
loans so guaranteed was $73 million.
In 1992, the Company and RP entered into an agreement which provided for the
payment to RP of an annual fee of 15 basis points or approximately $450,000 in
consideration of the Support Agreement between the Company and RP dated
December 18, 1991 by which RP undertook certain contingent obligations with
respect to the Market Auction Preferred Shares issued by the Company. The fee
paid in 1994 was approximately $344,000 due to the redemption, in 1993, of one-
quarter of the Market Auction Preferred Shares.
Pursuant to an agreement reached with respect to activities in 1994, RP paid
to Patrick Langlois, Senior Vice President and Chief Financial Officer, for
consulting services rendered to RP, fees totaling $50,000. The Company believes
that, although these services are essentially incidental to the performance of
Mr. Langlois' ordinary duties and do not present a conflict of interest, it
should be compensated for making its executives available and thus reduced Mr.
Langlois' compensation by the amount of fees received.
PROPOSAL TO APPROVE THE 1995 RHONE-POULENC RORER INC.
EQUITY COMPENSATION PLAN
THE PROPOSAL
At the Annual Meeting, there will be presented to the shareholders a proposal
to approve and ratify the adoption of the 1995 Rhone-Poulenc Rorer Inc. Equity
Compensation Plan (the "Plan"). The Plan was created to assist the Company in
retaining and attracting officers, other employees, directors and principals of
organizations involved with the Company on significant projects ("Key
Advisors") by offering those individuals a proprietary interest in the Company.
The Board adopted the Plan subject to shareholder approval at the Annual
Meeting. The Plan will not be effective unless and until shareholder approval
is obtained.
The Omnibus Reconciliation Act of 1993 added Section 162(m) to the Internal
Revenue Code of 1986, as amended (the "Code"). Effective January 1, 1994, this
provision disallows a public company's deductions for employee remuneration
exceeding $1,000,000 per year for the CEO and the other four most highly
compensated officers, but contains an exception for qualified "performance-
based compensation." In December 1993, the Internal Revenue Service issued
proposed regulations interpreting this provision and has since issued
amendments to such regulations. The new law requires that certain actions be
taken by a compensation committee of two or more outside directors and the
material terms of such remuneration be approved by the shareholders to qualify
the remuneration as "performance-based compensation."
The Plan is intended to qualify grants of options and stock appreciation
rights made under the Plan as "performance-based compensation" pursuant to
Section 162(m) of the Code, as discussed above. However, until proposed
regulations interpreting Section 162(m) are finalized, there can be no
assurance that all applicable requirements will be met by the Plan.
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VOTE REQUIRED FOR APPROVAL
The proposal to approve the adoption of the Plan requires for its approval
the affirmative vote of a majority of Shares present in person or represented
by proxy at the Annual Meeting. Abstentions may be specified on the proposal
and will be considered present at the Annual Meeting, but will not be counted
as affirmative votes. Abstentions, therefore, will have the practical effect of
voting against the proposal because the affirmative vote of a majority of the
shares present at the Annual Meeting is required to approve the proposal.
Broker non-votes are considered not present at the Annual Meeting and,
therefore, will not be voted or have any effect on the proposal.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR THE PROPOSAL.
DESCRIPTION OF THE PLAN
The Plan is set forth as Appendix A to this Proxy Statement, and the
description of the Plan contained herein is qualified in its entirety by
reference to Appendix A.
General. Subject to adjustment in certain circumstances as discussed below,
the Plan authorizes up to 5,000,000 shares of Common Stock for issuance
pursuant to the terms of the Plan. If and to the extent options granted under
the Plan terminate, expire or cancel without being exercised, or if any shares
of restricted stock are forfeited, the shares subject to such option or award
again will be available for purposes of the Plan.
Administration of the Plan. The Plan will be administered and interpreted by
a Committee of the Board (the "Committee") consisting of not less than two
persons appointed by the Board from among its members who are not employees of
the Company, and who are not entitled to participate in the Plan, other than as
recipients of nondiscretionary grants of stock options due to their status as
non-employee directors. The Committee will also consist of not less that two
persons who are "outside directors" under Section 162(m) of the Code. The
Committee, as constituted on March 10, 1995, met and continues to meet the
requirements under Section 162(m) of the Code and has approved the Plan and
will approve grants made thereunder. The Committee has the sole authority to
determine (i) the employees and Key Advisors to whom options and/or awards are
to be granted under the Plan, (ii) the type, size and terms of the options,
(iii) the time when the options and/or awards are to be granted and the
duration of the exercise period and (iv) any other matters arising under the
Plan.
Grants. Incentives under the Plan consist of incentive stock options, non-
qualified stock options, restricted stock grants and stock appreciation rights
(hereinafter collectively referred to as "Grants"). All Grants are subject to
the terms and conditions set forth in the Plan and to those other terms and
conditions consistent with the Plan as the Committee deems appropriate and as
are specified in writing by the Committee to the designated individual (the
"Grant Letter"). The Committee must approve the form and provisions of each
Grant Letter to an individual.
Eligibility for Participation. Officers and other employees of the Company
and Key Advisors designated by the Company and non-employee directors are
eligible to participate in the Plan (hereinafter referred to individually as
the "Participant" and collectively as the "Participants"). Approximately 25
officers and 3,900 other employees and an as-yet undetermined number of Key
Advisors (estimated to be fewer than 25) will be eligible to participate. The
Committee selects the employees and Key Advisors to receive Grants (together
with non-employee directors, the "Grantees") from among the Participants and
determines the number of shares of Common Stock subject to a particular Grant.
During the term of the Plan, a Grantee may only receive options, stock
appreciation rights or restricted stock awards for up to a total of 500,000
shares of Common Stock.
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The Plan provides that all individuals who become non-employee directors
after the effective date of the Plan, May 1, 1995, will receive a one-time
grant of options for the purchase of 20,000 shares of Common Stock as of the
date of the first meeting of shareholders at which he or she is elected to the
Board or at the first meeting of shareholders after he or she becomes a
director (whether or not he or she is a candidate for election). The exercise
price of stock options will be based on the fair market value of Common Stock
on the date of grant. The stock options become exercisable at the rate of 20%
per year. Non-employee directors may not sell the shares of Company Stock after
exercise of the stock options for six months after the date they are granted.
Granting of Options. The Committee may grant options qualifying as incentive
stock options ("ISOs") within the meaning of section 422 of the Code and/or
other stock options ("NQSOs") in accordance with the terms and conditions set
forth in the Plan or any combination of ISOs or NQSOs (hereinafter referred to
collective as "Stock Options").
Term, Purchase Price, Vesting and Method of Exercise. The exercise price of
Common Stock subject to an ISO or NQSO is the fair market value of such stock
on the date the Stock Option is granted. Notwithstanding the foregoing, with
respect to an NQSO, the exercise price may be equal to either (i) the fair
market value of Common Stock as of a date subsequent to the date of grant as
specified by the Committee in the Grant Letter or (ii) the average of such fair
market value over a period of time as specified by the Committee in the Grant
Letter. However, no exercise price will be given effect that would result in
the loss of a deduction under Section 162(m) of the Code. On March 1, 1995, the
fair market value of a share of Common Stock was $40.75 per share.
The Committee determines the option exercise period for each Stock Option;
provided, however, that the exercise period may not exceed ten years from the
date of grant. The vesting period for Stock Options commences on the date of
grant and ends on the third anniversary of such date, with one-third of the
shares becoming purchasable on each anniversary date or as is determined by the
Committee, in its sole discretion, and is specified in a Grant Letter. A
Grantee may exercise a Stock Option by delivering notice of exercise to the
Committee with accompanying payment of the option price. The Grantee may pay
the option price in cash, by delivering shares of Common Stock already owned by
the Grantee and having a fair market value on the date of exercise equal to the
option price or with a combination of cash and shares. The Grantee must pay the
option price and the amount of any withholding tax due, if any, at the time of
exercise. Shares of Common Stock will not be issued or transferred upon
exercise of the Stock Option until the option price and the withholding
obligation are fully paid.
Restricted Stock Grants. The Committee may issue or transfer shares of Common
Stock under a Grant (a "Restricted Stock Grant") pursuant to the Plan. Shares
of Common Stock issued pursuant to a Restricted Stock Grant are issued for no
consideration, and the Committee grants to each Grantee a number of shares of
Common Stock determined in its sole discretion, but no greater than the maximum
limit described above. If a Grantee's employment terminates during the period,
if any, designated in the Grant Letter as the period during which the transfer
of the shares is restricted (the "Restriction Period"), the Restricted Stock
Grant terminates with respect to all shares covered by the Grant as to which
the restrictions on transfer have not lapsed, and those shares of Common Stock
must be immediately returned to the Company. During the Restriction Period, a
Grantee may not sell, assign, transfer, pledge or otherwise dispose of the
shares of Common Stock to which such Restriction Period applies, except to a
successor grantee in the event of the Grantee's death. All restrictions imposed
under the Restricted Stock Grant lapse upon the expiration of the applicable
Restriction Period. In addition, the Committee may determine as to any or all
Restricted Grants that all restrictions will lapse under such other
circumstances as it deems equitable.
Stock Appreciation Rights. The Committee may grant stock appreciation rights
("SARs") to any Grantee in tandem with any Stock Option, for all or a portion
of the applicable Stock Option, either at the
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time the Stock Option is granted or at any time thereafter while the Stock
Option remains outstanding. Any number of SARs granted to a Grantee which are
exercisable during any given period of time may not exceed the number of shares
of Common Stock which the Grantee may purchase upon the exercise of the related
Stock Option during such period of time. Upon the exercise of a Stock Option,
the SARs relating to the Common Stock covered by such Stock Option terminate.
Upon the exercise of SARs, the related Stock Option terminates as to the extent
of an equal number of shares of Common Stock.
Upon a Grantee's exercise of some or all of his SARs, the Grantee receives in
settlement of such SARs an amount equal to the value of the stock appreciation
for the number of SARs exercised, payable in cash, Common Stock or a
combination thereof. The stock appreciation for an SAR is the difference
between the option price specified for the related Stock Option and the fair
market value of the underlying Common Stock on the date of exercise of the SAR.
The Plan provides that the exercise price of an SAR is the (i) exercise price
or option price of the related Stock Option or (ii) the fair market value of a
share of Common Stock as of the date of grant of the SAR, if the SAR is granted
after the Stock Option and the option price under (i) would result in the
disallowance of the Company's expense deduction upon exercise of the SAR under
Section 162(m) of the Code.
An SAR is exercisable only during the period when the Stock Option to which
it relates is also exercisable; provided, however, that in no event may an SAR
be exercisable during the first six months after being granted, except in the
event of the death or disability of the Grantee (if the related Stock Option is
then exercisable).
Amendment and Termination of the Plan. The Board may amend or terminate the
Plan at any time; provided, however, that any amendment that materially
increases the benefits accruing to Participants under the Plan, increases the
aggregate number (or individual limit for any Grantee) of shares of Common
Stock that may be issued or transferred under the Plan or materially modifies
the requirements as to eligibility for participation will be subject to
approval by the shareholders of the Company. The Plan will terminate on April
30, 2005 unless terminated earlier by the Board or extended by the Board with
approval of the shareholders.
Amendment and Termination of Outstanding Grants. A termination or amendment
of the Plan that occurs after a Grant is made will not result in the
termination or amendment of the Grant unless the Grantee consents or unless the
Committee revokes a Grant the terms of which are contrary to applicable law.
The termination of the Plan will not impair the power and authority of the
Committee with respect to outstanding Grants.
Adjustment Provisions; Change of Control of the Company. If there is any
change in the number or kind of shares of Common Stock through the declaration
of stock dividends, or through a recapitalization, stock split, or combinations
or exchanges of such shares, or merger, recapitalization or consolidation of
the Company, reclassification or change in the par value or by reason of any
other extraordinary or unusual event without the Company's receipt of
consideration, the number of shares of Common Stock available for Grants, the
maximum number of shares of Common Stock subject to Grants that a Participant
may receive during the term of the Plan, the number of shares subject to
automatic option grants to non-employee directors to be made after such event
and the number of such shares covered by outstanding Grants, and the price per
share or the applicable market value of such Grants, will be proportionately
adjusted by the Committee to reflect any increase or decrease in the number or
kind of issued shares of Common Stock.
In the event of a Change of Control of the Company, (i) all outstanding Stock
Options will become immediately exercisable and (ii) all restrictions on the
transfer of shares with respect to a Restricted Stock Grant which have not,
prior to such date, been forfeited will immediately lapse. A Change of Control
of
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the Company will be deemed to have taken place if Rhone-Poulenc S.A. and its
affiliates cease to be the beneficial owners of more than 50% of the combined
voting power of the Company's then outstanding securities.
Other Plan Provisions. A Grant under the Plan will not be construed as
conferring upon any Grantee a contract of employment or service, and such Grant
will not confer upon the Grantee any rights upon termination of employment or
service, other than certain limited rights as to the exercise of a Stock Option
for a designated period of time following such termination.
Federal Income Tax Consequences. Set forth below is a general description of
the federal income tax consequences relating to Grants under the Plan. Grantees
are urged to consult with their personal tax advisors concerning the
application of the principles discussed below to their own situations and the
application of state and local tax laws.
Non-Qualified Stock Options. There are no federal income tax consequences to
Grantees or to the Company upon the grant of an NQSO under the Plan. Upon the
exercise of NQSOs, Grantees will recognize ordinary compensation income in an
amount equal to the excess of the fair market value of the shares at the time
of exercise over the exercise price of the NQSO, and the Company generally will
be entitled to a corresponding federal income tax deduction. Upon the sale of
shares acquired by exercise of an NQSO, a Grantee will have a capital gain or
loss (long-term or short-term depending upon the length of time the shares were
held) in an amount equal to the difference between the amount realized upon the
sale and the Grantee's adjusted tax basis in the shares (the exercise price
plus the amount of ordinary income recognized by the Grantee at the time of
exercise of the NQSO).
Incentive Stock Options. Grantees will not be subject to federal income
taxation upon the grant or exercise of ISOs granted under the Plan, and the
Company will not be entitled to a federal income tax deduction by reason of
such grant or exercise. However, the amount by which the fair market value of
the shares at the time of exercise exceeds the Stock Option price (or the
Grantee's other tax basis in the shares) is an item of tax preference subject
to the alternative minimum tax applicable to the person exercising the ISO. A
sale of shares acquired by exercise of an ISO that does not occur within one
year after the exercise or within two years after the grant of the ISO
generally will result in the recognition of long-term capital gain or loss in
the amount of the difference between the amount realized on the sale and the
Stock Option price (or the Grantee's other tax basis in the shares), and the
Company will not be entitled to any tax deduction in connection therewith.
If such sale occurs within one year from the date of exercise of the ISO or
within two years from the date of grant (a "disqualifying disposition") and is
a transaction in which a loss, if sustained, would be recognized, the Grantee
generally will recognize ordinary compensation income equal to the lesser of
(i) the excess of the fair market value of the shares on the date of exercise
over the exercise price (or the Grantee's other tax basis in the shares), or
(ii) the excess of the amount realized on the sale of the shares over the
exercise price (or the Grantee's other tax basis in the shares). In the case of
a disqualifying disposition where a loss, if sustained, would not be
recognized, the Grantee will recognize ordinary income equal to the excess of
the fair market value of the shares on the date of exercise over the Stock
Option price (or the Grantee's other tax basis in the shares). Any amount
realized on a disqualifying disposition in excess of the amount treated as
ordinary compensation income (or any loss realized) will be a long-term or a
short-term capital gain (or loss), depending upon the length of time the shares
were held. The Company generally will be entitled to a tax deduction on a
disqualifying disposition corresponding to the ordinary compensation income
recognized by the Grantee.
Generally, where previously acquired Common Stock is used to exercise an
outstanding ISO or NQSO, appreciation on such stock will not be recognized as
income. However, if such Common Stock
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was acquired pursuant to the exercise of an ISO, a disqualifying disposition
will be deemed to have occurred if such stock is used to exercise another ISO
prior to the expiration of the applicable holding periods.
Restricted Stock. A Grantee normally will not recognize taxable income upon
the award of a Restricted Stock Grant, and the Company will not be entitled to
a deduction, until such stock is transferable by the Grantee or no longer
subject to a substantial risk of forfeiture for federal tax purposes, whichever
occurs earlier. When the Common Stock is either transferable or is no longer
subject to a substantial risk of forfeiture, the Grantee will recognize
ordinary compensation income in an amount equal to the fair market value of the
Common Stock at that time and the Company will be entitled to a deduction in
the same amount. A Participant may, however, elect to recognize ordinary
compensation income in the year the Restricted Stock Grant is awarded in an
amount equal to the fair market value of the Common Stock at that time,
determined without regard to the restrictions. In this event, the Company will
be entitled to a deduction in the same year. Any gain or loss recognized by the
Grantee upon subsequent disposition of the Common Stock will be capital gain or
loss. If, after making the election, any Common Stock subject to a Restricted
Stock Grant is forfeited, or if the market value declines during the
Restriction Period, the Grantee is not entitled to any tax deduction or tax
refund.
Stock Appreciation Rights. The Grantee will not recognize any income upon the
grant of an SAR. Upon the exercise of an SAR, the Grantee will recognize
ordinary compensation income in the amount of both the cash and the fair market
value of the shares of Common Stock received upon such exercise, and the
Company is entitled to a corresponding deduction. In the event that the Grantee
receives shares of Common Stock upon the exercise of an SAR, the shares so
acquired will have a tax basis equal to their fair market value on the date of
transfer, and the holding period of the shares will commence on that date for
purposes of determining whether a subsequent disposition of the shares will
result in long-term or short-term capital gain or loss.
Tax Withholding. The acceptance, exercise or surrender of a Grant will
constitute a Grantee's full consent to whatever action the Committee deems
necessary to satisfy any federal, state and local income and employment
withholding tax obligations arising under the Plan. Grantees who exercise NQSOs
or who possess shares of Common Stock as to which the restrictions on transfer
have lapsed are required to remit an amount sufficient to cover the Grantee's
federal, state and local withholding tax obligations associated with the
exercise of such Grants. Grantees, upon the receipt of shares following the
exercise of ISOs, are obligated to (i) immediately notify the Company of the
disposition of any or all ISO shares within two years of the date of grant of
the ISO or one year of the date of such exercise, and (ii) remit to the Company
an amount sufficient to satisfy any withholding obligation arising from such
disposition.
Section 162(m). Under Section 162(m) of the Code, enacted in August 1993, the
Company may be precluded from claiming a federal income tax deduction for total
remuneration in excess of $1,000,000 paid to the chief executive officer or to
any of the other four most highly compensated officers in any one year
beginning in 1994. An exception does exist, however, for "performance-based
compensation," including amounts received upon the exercise of stock options
pursuant to a plan approved by shareholders that meets certain requirements.
The Plan, when approved by shareholders, is intended to make grants of Stock
Options and SARs thereunder meet the requirements of "performance-based
compensation."
No Grants will be made under the Plan until after shareholder approval of the
Plan is obtained during the Annual Meeting. Grants to employees and Key
Advisors are made at the discretion of the Committee who have no intention to
make grants under the Plan until 1996. It is therefore unlikely that employees
or Key Advisors will receive Grants under the Plan in the current fiscal year.
For information with respect to the grant of options to certain executive
officers during the year ended December 31, 1994, similar to those which may be
granted under the Plan, see the table captioned "Option/SAR Grants in Last
Fiscal Year" on page 15 above.
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PROPOSAL TO RATIFY THE APPOINTMENT OF AUDITORS
Upon the recommendation of the Audit Committee, the Board of Directors has
appointed Coopers & Lybrand L.L.P. as independent accountants for the Company
for the year 1995. Although shareholder action on this matter is not required,
this appointment is being recommended to the shareholders for ratification.
Coopers & Lybrand audited the accounts of the Company in 1994 and in prior
years. Representatives of that firm will be present at the Annual Meeting with
the opportunity to make a statement if they so desire, and will be available to
respond to appropriate questions from shareholders.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR THIS PROPOSAL.
GENERAL AND OTHER MATTERS
The cost of soliciting proxies will be borne by the Company. Employees of the
Company, personally or by telephone, may solicit the return of proxies. The
Company has retained D.F. King & Co., Inc. to assist in soliciting proxies at a
fee estimated to be $6,000, plus out-of-pocket expenses. In addition,
arrangements have been made with brokerage houses and other custodians,
nominees and fiduciaries to send proxies and proxy material to their principals
and the Company may reimburse them for their expenses in so doing.
You are urged to sign and return your proxy promptly to make certain your
shares will be voted at the meeting. For your convenience, a return envelope is
enclosed, requiring no additional postage if mailed in the United States.
PROPOSALS OF SHAREHOLDERS
Proposals of shareholders intended to be presented at the 1996 Annual Meeting
must be received in writing no later than November 30, 1995 at the Office of
the Secretary, Rhone-Poulenc Rorer Inc., 500 Arcola Road, Collegeville,
Pennsylvania 19426.
UPON WRITTEN REQUEST, THE COMPANY WILL FURNISH TO EACH HOLDER OF THE
COMPANY'S COMMON SHARES A COPY OF ITS ANNUAL REPORT ON FORM 10-K FOR THE FISCAL
YEAR ENDED DECEMBER 31, 1994 AS FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION. REQUESTS SHOULD BE SENT TO RHONE-POULENC RORER INC., 500 ARCOLA
ROAD, COLLEGEVILLE, PENNSYLVANIA 19426, ATTENTION: DIRECTOR OF INVESTOR
RELATIONS.
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APPENDIX A
1995 RHONE-POULENC RORER EQUITY COMPENSATION PLAN
The purpose of the Rhone-Poulenc Rorer Inc. 1995 Equity Compensation Plan
(the "Plan") is (i) to authorize the Executive Personnel and Compensation
Committee (the "Committee") of the Board of Directors to provide designated
officers (including officers who are also directors), other employees and
directors who are not employees ("Non-Employee Directors") of Rhone-Poulenc
Rorer Inc. and its subsidiaries (hereinafter collectively referred to as the
"Company") and principals of organizations involved with the Company on
significant projects ("Key Advisors") with certain rights to acquire common
stock of the Company and (ii) to provide for the grant of incentive stock
options, nonqualified stock options and stock appreciation rights. The Company
believes that the Plan will cause the participants to contribute materially to
the growth of the Company, thereby benefitting the Company's shareholders and
will align the economic interests of the participants with those of the
shareholders. This Plan shall serve as the successor equity incentive program
to the Rorer Group Inc. Equity Compensation Plan.
ADMINISTRATION
The Plan shall be administered and interpreted by a committee (the
"Committee") consisting of not less than two persons appointed by the Board of
Directors of the Company from among its members who are Non-Employee Directors
of the Company, all of whom shall be "disinterested persons" as defined under
Rule 16b-3 under the Securities Exchange Act of 1934 (the "Exchange Act") and
"outside directors" as defined under Section 162(m) of the Internal Revenue
Code of 1986, as amended (the "Code") and related Treasury regulations. The
Committee shall have the sole authority to determine (i) the employees and Key
Advisors to whom options and awards shall be granted under the Plan, (ii) the
type, size and terms of the awards to be made to each such individual, (iii)
the time when the awards will be granted and the duration of the exercise
period and (iv) any other matters arising under the Plan. Non-Employee
Directors shall receive grants only pursuant to the provisions of Section 6.
The Committee shall have full power and authority to administer and interpret
the Plan, to make factual determinations and to adopt or amend such rules,
regulations, agreements and instruments for implementing the Plan and for
conduct of its business as it deems necessary or advisable, in its sole
discretion. The Committee's interpretations of the Plan and all determinations
made by the Committee pursuant to the powers vested in it hereunder shall be
conclusive and binding on all persons having any interests in the Plan or in
any awards granted hereunder. Notwithstanding the foregoing, administration of
Section 6 with respect to nondiscretionary grants to Non-Employee Directors is
intended to be self-executing in accordance with the express terms and
conditions of Section 6. However, to the extent that administrative
determinations are required with respect to Section 6, such determinations
shall be made by the members of the Board who are not eligible to receive
grants under Section 6, but in no event shall such determinations affect the
eligibility of optionees, the determination of the exercise price, the timing
of the grants or the number of shares subject to such grants.
Grants
Incentives under the Plan shall consist of incentive stock options,
nonqualified stock options, restricted stock grants and stock appreciation
rights (hereinafter collectively referred to as "Grants"). All Grants shall be
subject to the terms and conditions set forth herein and to those other terms
and conditions consistent with this Plan as the Committee deems appropriate and
as are specified in writing by the Committee to the employee (the "Grant
Letter"). The Committee shall approve the form and provisions of each Grant
Letter to an employee or Key Advisor. Grants under a particular Section of the
Plan need not be uniform as among the employees or Key Advisors and Grants
under two or more Sections of the Plan may be combined in one instrument;
provided, however, that Grants to Non-Employee Directors shall be made only in
accordance with the provisions of Section 6.
26
<PAGE>
Shares Subject to the Plan
(a) Subject to the adjustment specified below, the aggregate number of shares
of common stock of the Company ("Company Stock") that have been or may be
issued or transferred under the Plan is [5,000,000] shares. During the term of
the Plan, the maximum aggregate number of shares of Company Stock that shall be
subject to options or awards under the Plan to any single individual shall be
500,000 shares. The shares may be authorized but unissued shares of Company
Stock or reacquired shares of Company Stock, including shares repurchased by
the Company on the open market. If and to the extent options granted under the
Plan terminate, expire, or cancel without having been exercised, or if any
shares of restricted stock are forfeited, the shares subject to such option or
such award shall again be available for purposes of the Plan.
(b) If there is any change in the number or kind of shares of Company Stock
issuable under the Plan through the declaration of stock dividends, or through
a recapitalization, stock splits, or combinations or exchanges of such shares,
or merger, reorganization or consolidation of the Company, reclassification or
change in par value or by reason of any other extraordinary or unusual events
affecting the outstanding Company Stock as a class without the Company's
receipt of consideration, the maximum number of shares of Company Stock
available for Grants, the maximum number of shares of Company Stock for which
any one individual participating in the Plan may be granted over the term of
the Plan, the number of shares of Company Stock for which automatic grants are
to be subsequently made to Non-Employee Directors under Section 6 and the
number of such shares covered by outstanding Grants, and the price per share or
the applicable market value of such Grants, shall be proportionately adjusted
by the Committee to reflect any increase or decrease in the number or kind of
issued shares of Company Stock to preclude the enlargement or dilution of
rights and benefits under such Grants; provided, however, that any fractional
shares resulting from such adjustment shall be eliminated. The adjustments
determined by the Committee shall be final, binding and conclusive.
Eligibility for Participation
Officers and other employees of the Company and Key Advisors designated by
the Committee and Non-Employee Directors shall be eligible to participate in
the Plan (hereinafter referred to individually as the "Participant" and
collectively as the "Participants"). The Committee shall select the employees
and Key Advisors to receive Grants (together with Non-Employee Directors
receiving Grants under Section 6, the "Grantees") from among the Participants
and determine the number of shares of Company Stock subject to a particular
Grant in such manner as the Committee determines; provided, however, that Non-
Employee Directors shall only receive Grants pursuant to Section 6. Nothing
contained in this Plan shall be construed to limit the right of the Company to
grant options otherwise in connection with the acquisition, by purchase, lease,
merger, consolidation or otherwise, of the business or assets of any
corporation, firm or association, including options granted to employees
thereof who become employees of the Company, or for other proper corporate
purpose.
Granting of Options
(a) Number of Shares. The Committee shall grant to each Grantee who is an
employee or Key Advisor a number of stock options as the Committee shall
determine.
(b) Type of Option and Price. The Committee may grant options qualifying as
incentive stock options ("Incentive Stock Options") within the meaning of
Section 422 of the Code and/or other stock options ("Nonqualified Stock
Options") in accordance with the terms and conditions set forth herein or any
combination of Incentive Stock Options and Nonqualified Stock Options
(hereinafter referred to collectively as "Stock Options"); provided, however,
that Key Advisors shall not be eligible to receive grants of Incentive Stock
Options. The purchase price of Company Stock subject to an Incentive Stock
Option or a Nonqualified Stock Option shall be the fair market value of a share
of such Stock on the date
27
<PAGE>
such Stock Option is granted. Notwithstanding the foregoing, with respect to a
Stock Option other than an Incentive Stock Option, the price at which Company
Stock may be purchased may be equal to either (i) the fair market value of
Company Stock as of a date subsequent to the date of grant as specified by the
Committee in the Grant Letter or (ii) the average of such fair market value
over a period of time as specified by the Committee in the Grant Letter, but
only when the price so established would not result in the disallowance of the
Company's expense deduction pursuant to Section 162(m) of the Code. The "fair
market value" of Company Stock shall be the closing price of a share of Company
Stock on the New York Stock Exchange; provided, however, that if shares of
Company Stock shall not be listed on the New York Stock Exchange, then the fair
market value will be the closing price of a share of Company Stock on the
principal stock exchange on which such shares are listed for trading, or if no
sale takes place on such day on any such exchange, the average of the closing
bid and asked prices on such day as officially quoted on any such stock
exchange or if the Company Stock is not admitted to trading on any stock
exchange the fair market price shall be the last sale reported on the NASDAQ
National Market System published in the Wall Street Journal or, if no such sale
is so reported, the average of the reported closing bid and asked prices on
such day in the over-the-counter market, as furnished by the National
Association of Security Dealers Automated System, or, if such price at the time
is not available from such system, as furnished by any similar system then
engaged in the business of reporting such prices and selected by the Company
or, if there is no such system, as furnished by any member of the National
Association of Security Dealers, selected by the Company.
(c) Exercise Period. The Committee shall determine the option exercise period
of each Stock Option. The exercise period shall not exceed ten years from the
date of grant. Notwithstanding any determinations by the Committee regarding
the exercise period of any Stock Option, all outstanding Stock Options shall
become immediately exercisable upon a Change in Control of the Company (as
defined herein).
(d) Vesting of Options. The vesting period for Stock Options shall commence
on the date of grant and shall end on the third anniversary thereof, with one-
third of the shares of Company Stock subject to each Grant becoming purchasable
on each anniversary date of the grant, on a cumulative basis (except as
otherwise provided herein or in the Grant Letter or as otherwise determined by
the Committee). Notwithstanding any determinations by the Committee regarding
the vesting period of any Stock Option, all outstanding Stock Options shall
become immediately exercisable upon a Change in Control of the Company (as
defined herein).
(e) Manner of Exercise. A Grantee may exercise a Stock Option by delivering a
notice of exercise to the Committee with accompanying payment of the option
price. Such notice may instruct the Company to deliver shares of Company Stock
due upon the exercise of the Stock Option to any registered broker or dealer
designated by the Company ("Designated Broker") in lieu of delivery to the
Grantee. Such instructions must designate the account into which the shares are
to be deposited. The Grantee may tender this notice of exercise, which has been
properly executed by the Grantee, and the aforementioned delivery instructions
to any Designated Broker.
(f) Termination of Employment, Disability or Death.
(1) In the event the Grantee during his lifetime ceases to be an employee
of the Company or Key Advisor for any reason other than death, any Stock
Option which is otherwise exercisable by the Grantee shall terminate unless
exercised within six months and one day of the date on which he ceases to
be an employee or Key Advisor (or within such other period of time as may
be specified in the Grant Letter), but in any event no later than the date
of expiration of the option exercise period; provided, however, that in the
case of a Grantee who is disabled within the meaning of Section 105(d)(4)
of the Code, such period shall be one year rather than six months and one
day (except as the Committee may otherwise provide in the Grant Letter) and
that in the case of Incentive Stock Options, such period shall be 90 days
rather than six months and provided further that in the case of a Grantee
who takes normal or early retirement under the terms of a Company pension
plan, such
28
<PAGE>
period shall be five years rather than six months and one day (except as
the Committee may otherwise provide in the Grant Letter).
(2) In the event of the death of the Grantee while he is an employee or
Key Advisor of the Company or within not more than three months of the date
on which he ceases to be an employee or Key Advisor (or within such other
period of time as may be specified in the Grant Letter), any Stock Option
which was otherwise exercisable by the Grantee at the date of death may be
exercised by his personal representative at any time prior to the
expiration of one year from the date of death, but in any event no later
than the date of expiration of the option exercise period.
(g) Satisfaction of Option Price. The Grantee shall pay the option price in
cash or by delivering shares of Company Stock already owned by the Grantee for
the period necessary to avoid a charge to the Company's earnings for financial
reporting purposes and having a fair market value on the date of exercise equal
to the option price or with a combination of cash and shares. The Grantee shall
pay the option price and the amount of withholding tax due, if any, at the time
of exercise. Shares of Company Stock shall not be issued or transferred upon
exercise of a Stock Option until the option price is fully paid.
(h) Rule 16b-3 Restrictions. Unless a Grantee could otherwise transfer
Company Stock issued pursuant to a Stock Option granted hereunder without
incurring liability under Section 16(b) of the Exchange Act, at least six
months must elapse from the date of acquisition of a Stock Option to the date
of disposition of the Company Stock issued upon exercise of such option.
(i) Limits on Incentive Stock Options. Each Grant of an Incentive Stock
Option shall provide that the aggregate fair market value of the Company Stock
on the date of the Grant with respect to which Incentive Stock Options are
exercisable for the first time by a Grantee during any calendar year under the
Plan or any other stock option plan of the Company shall not exceed $100,000.
An Incentive Stock Option shall not be granted to any Participant who, at the
time of grant, owns stock possessing more than 10 percent of the total combined
voting power of all classes of stock of the Company or parent of the Company,
unless the option price per share is not less than 110% of the fair market
value of Company Stock on the date of grant and the option exercise period is
not more than five years from the date of grant.
6. STOCK OPTION GRANTS TO NON-EMPLOYEE DIRECTORS
(a) Number of Shares. Each individual who becomes a Non-Employee Director
after the effective date of this Plan as set forth in Section 18 shall receive
a grant of a Non-qualified Stock Option to purchase 20,000 shares of Company
Stock as of the date of the first meeting of shareholders at which he or she is
first elected to the Board of Directors or the first meeting of shareholders
after he or she becomes a director (whether or not he or she is a candidate for
election).
(b) Option Price and Exercise Period. The purchase price of Company Stock
subject to such grants shall be the fair market value of a share of such stock
as of the date such Stock Option is granted. "Fair Market Value" shall be
determined pursuant to Section 5(b). Each Stock Option granted pursuant to this
Section shall have an exercise period of ten years from the date of grant.
(c) Vesting of Options. The vesting period for such Stock Options shall
commence on the date of grant and shall end on the fifth anniversary thereof,
with 20% of the shares of Company Stock subject to each grant becoming
exercisable on each anniversary date of the grant, on a cumulative basis.
Notwithstanding the foregoing, all outstanding Stock Options granted pursuant
to this Section shall become immediately exercisable upon a Change in Control
of the Company (as defined herein).
(d) Manner of Exercise and Satisfaction of Option Price. A Non-Employee
Director may exercise and satisfy the option price of Stock Options granted
pursuant to this Section in accordance with the provisions of Section 5(e) and
(g) respectively.
29
<PAGE>
(e) Termination of Relationship With the Company, Disability or Death.
(1) In the event a Non-Employee Director during his lifetime ceases to
serve as a Non-Employee Director for any reason other than on account of
becoming an employee of the Company or death, any Stock Option granted
pursuant to this Section which is otherwise exercisable by the Non-Employee
Director shall terminate unless exercised within six months of the date on
which he ceases to serve as a Non-Employee Director, but in any event no
later than the date of expiration of the option exercise period; provided,
however, that in the case of a Non-Employee Director who is disabled within
the meaning of Section 105(d)(4) of the Code, such period shall be one year
rather than six months.
(2) In the event of the death of the Non-Employee Director while he is
serving as a Non-Employee Director or within not more than three months of
the date on which he ceases to be a Non-Employee Director, any Stock Option
granted pursuant to this Section which was otherwise exercisable by the
Non-Employee Director at the date of death may be exercised by his personal
representative at any time prior to the expiration of one year from the
date of death, but in any event no later than the date of expiration of the
option exercise period.
(f) Rule 16b-3 Restrictions. Unless a Non-Employee Director could otherwise
transfer Company Stock issued pursuant to a Stock Option granted pursuant to
this Section without incurring liability under Section 16(b) of the Exchange
Act, at least six months must elapse from the date of acquisition of the Stock
Option to the date of disposition of the Company Stock issued upon exercise of
such Stock Option. Notwithstanding any other provision of the Plan, this
Section may not be amended more than once every six months, except for
amendments necessary to conform the Plan to changes of the provisions of, or
the regulations relating to, the Code.
7. RESTRICTED STOCK GRANTS
The Committee may issue or transfer shares of Company Stock to a Participant
under a grant (a "Restricted Stock Grant") pursuant to an incentive or long
range compensation plan or program approved by the Committee and adopted by the
Board of Directors of the Company. Key Advisors shall not be eligible to
receive Restricted Stock Grants. The following provisions are applicable to
Restricted Stock Grants:
(a) General Requirements. Shares of Company Stock issued pursuant to
Restricted Stock Grants will be issued for no consideration. Subject to any
other restrictions by the Committee as provided pursuant to this Section,
restrictions on the transfer of shares of Company Stock set forth in
Section 7(d) shall lapse as to up to one-third of the shares covered by a
Restricted Stock Grant on each anniversary of the date of the grant or such
other date as the Committee may approve until the restrictions have lapsed
on 100% of the shares; provided, however, that upon a Change in Control of
the Company (as defined herein), all restrictions on the transfer of the
shares which have not, prior to such date, been forfeited shall immediately
lapse. The period of years during which the Restricted Stock Grant will
remain subject to restrictions will be designated in the Grant Letter as
the "Restriction Period."
(b) Number of Shares. The Committee shall grant to each Grantee a number
of shares of Company Stock pursuant to a Restricted Stock Grant in such
manner as the Committee determines.
(c) Requirement of Employment. If the Grantee's employment terminates
during a period designated in the Grant Letter as the Restriction Period,
the Restricted Stock Grant terminates as to all shares covered by the Grant
as to which restrictions on transfer have not lapsed, and those shares of
Company Stock must be immediately returned to the Company. The Committee
may, however, provide for complete or partial exceptions to this
requirement as it deems equitable.
(d) Restrictions on Transfer and Legend on Stock Certificate. During the
Restriction Period, a Grantee may not sell, assign, transfer, pledge, or
otherwise dispose of the shares of Company Stock
30
<PAGE>
to which such Restriction Period applies except to a Successor Grantee
under Section 9. Each certificate for a share issued or transferred under a
Restricted Stock Grant shall contain a legend giving appropriate notice of
the restrictions in the Grant. The Grantee shall be entitled to have the
legend removed from the stock certificate or certificates covering any of
the shares subject to restrictions when all restrictions on such shares
have lapsed.
(e) During the Restriction Period, the Grantee shall have the right to
vote shares subject to the Restricted Stock Grant and to receive any
regular cash dividends paid on such shares.
(f) Lapse of Restrictions. All restrictions imposed under the Restricted
Stock Grant shall lapse upon the expiration of the applicable Restriction
Period; provided, however, that upon a Change in Control of the Company (as
defined herein), all restrictions on the transfer of the shares which have
not, prior to such date, been forfeited shall immediately lapse. In
addition, the Committee may determine as to any or all Restricted Stock
Grants, that all the restrictions shall lapse, without regard to any
Restriction Period, under such circumstances as it deems equitable.
8. STOCK APPRECIATION RIGHTS
(a) The Committee may grant stock appreciation rights ("SARs") to any Grantee
in tandem with any Stock Option, for all or a portion of the applicable Stock
Option, either at the time the Stock Option is granted or at any time
thereafter while the Stock Option remains outstanding; provided, however, that
in the case of an Incentive Stock Option, such rights may be granted only at
the time of the grant of such Stock Option. The exercise price of each SAR
shall be equal to (i) the exercise price or option price of the related Stock
Option or (ii) the fair market value of a share of Company Stock as of the date
of grant of such SAR, but only in such circumstances where the SAR is granted
subsequent to the date of grant of the related Stock Option and an exercise
price established in accordance with clause (i) above would result in the
disallowance of the Company's expense deduction pursuant to Section 162(m) of
the Code and related Treasury regulations.
(b) The number of SARs granted to a Grantee which shall be exercisable during
any given period of time shall not exceed the number of shares of Company Stock
which the Grantee may purchase upon the exercise of the related Stock Option or
Stock Options during such period of time. Upon the exercise of a Stock Option,
the SARs relating to the Company Stock covered by such Stock Option shall
terminate. Upon the exercise of SARs, the related Stock Option shall terminate
to the extent of an equal number of shares of Company Stock.
(c) Upon a Grantee's exercise of some or all of his SARs, the Grantee shall
receive in settlement of such SARs an amount equal to the value of the stock
appreciation for the number of SARs exercised, payable in cash, Company Stock
or a combination thereof. Subject to adjustments required pursuant to
Subsection (a)(ii), the stock appreciation for an SAR is the difference between
the option price specified for the related Stock Option and the fair market
value of the underlying Company Stock on the date of exercise of such SAR.
(d) At the time of such exercise, the Grantee shall have the right to elect
the portion of the amount to be received that shall consist of cash and the
portion that shall consist of Common Stock, which for purposes of calculating
the number of shares of Company Stock to be received, shall be valued at their
fair market value on the date of exercise of such SARs. The Committee shall
have the right to disapprove a Grantee's election to receive cash in full or
partial settlement of the SARs exercised, and to require that shares of Company
Stock be delivered in lieu of cash. If shares of Company Stock are to be
received upon exercise of an SAR, cash shall be delivered in lieu of any
fractional share.
(e) An SAR is exercisable only during the period when the Stock Option to
which it is related is also exercisable. However, in no event shall an SAR be
exercisable during the first six months after being granted, except that an SAR
shall be exercisable at the time of death or disability of the Grantee if the
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<PAGE>
related Stock Option is then exercisable. No SAR may be exercised for cash by
an officer or director of the Company subject to Section 16 of the Exchange
Act, in whole or in part, except in accordance with Rule 16b-3(e) under the
Exchange Act.
9. TRANSFERABILITY OF OPTIONS AND GRANTS
Only a Participant or his or her authorized legal representative may exercise
rights under a Grant. Such persons may not transfer those rights except by will
or by the laws of descent and distribution or, if permitted under Rule 16b-3 of
the Exchange Act and if permitted in any specific case by the Committee in
their sole discretion, pursuant to a qualified domestic relations order as
defined under the Code or Title I of ERISA or the regulations thereunder. When
a Participant dies, the personal representative or other person entitled to
succeed to the rights of the Participant ("Successor Grantee") may exercise
such rights. A Successor Grantee must furnish proof satisfactory to the Company
of his or her right to receive the Grant under the Participant's will or under
the applicable laws of descent and distribution.
10. CHANGE IN CONTROL OF THE COMPANY
As used herein, a "Change in Control" shall be deemed to have occurred if
Rhone-Poulenc S.A. and its Affiliates (as used herein, the term "Affiliates"
shall be deemed to include any corporation, joint venture, or other business
enterprise, whether incorporated or unincorporated, which Rhone-Poulenc S.A.
directly, or indirectly through one or more intermediaries, controls or is
controlled by, or is under common control with) cease to be the beneficial
owners (as such term is used in Sections 13(d) and 14(d) of the Securities
Exchange Act of 1934, as amended) of securities of the Company representing
more than fifty percent (50%) of the combined voting power of the Company's
then outstanding securities.
11. AMENDMENT AND TERMINATION OF THE PLAN
(a) Amendment. The Board of Directors of the Company, by written resolution,
may amend or terminate the Plan at any time; provided, however, that any
amendment that materially increases the benefits accruing to Participants under
the Plan, increases the aggregate number (or individual limit for any single
Grantee) of shares of Company Stock that may be issued or transferred under the
Plan (other than by operation of Section 3(b)), or materially modifies the
requirements as to eligibility for participation in the Plan, shall be subject
to approval by the shareholders of the Company, and provided, further, that the
Board of Directors shall not amend the Plan if such amendment would cause the
Plan or any Grant, or the exercise of any right under the Plan to fail to
comply with the requirements of Rule 16b-3 under the Exchange Act or if such
amendment would cause the Plan or the Grant or exercise of an Incentive Stock
Option under the Plan to fail to comply with the requirements of Section 422 of
the Code including, without limitation, a reduction of the option price set
forth in Section 5(b) or an extension of the period during which an Incentive
Stock Option may be exercised as set forth in Section 5(c).
(b) Termination of Plan. The Plan shall terminate on the tenth anniversary of
its effective date unless terminated earlier by the Board of Directors of the
Company or unless extended by the Board with the approval of the shareholders.
(c) Termination and Amendment of Outstanding Grants. A termination or
amendment of the Plan that occurs after a Grant is made shall not result in the
termination or amendment of the Grant unless the Grantee consents or unless the
Committee acts under Section 19(b). The termination of the Plan shall not
impair the power and authority of the Committee with respect to an outstanding
Grant. Whether or not the Plan has terminated, an outstanding Grant may be
terminated or amended under Section 19(b) or may be amended by agreement of the
Company and the Grantee consistent with the Plan.
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<PAGE>
12. FUNDING OF THE PLAN
This Plan shall be unfunded. The Company shall not be required to establish
any special or separate fund or to make any other segregation of assets to
assure the payment of any Grants under this Plan. In no event shall interest be
paid or accrued on any Grant, including unpaid installments of Grants.
13. RIGHTS OF PARTICIPANTS
Nothing in this Plan shall entitle any Participant or other person to any
claim or right to be granted an award under this Plan. Neither this Plan nor
any action taken hereunder shall be construed as giving any Participant any
rights to be retained by or in the employ of the Company.
14. WITHHOLDING OF TAXES
The Company shall have the right to deduct from all Grants paid in cash, or
from other wages paid to the employee of the Company, any federal, state or
local taxes required by law to be withheld with respect to such cash awards
and, in the case of Grants paid in Company Stock, the Participant or other
person receiving such shares shall be required to pay to the Company the amount
of any such taxes which the Company is required to withhold with respect to
such Grants or the Company shall have the right to deduct from other wages paid
to the employee by the Company the amount of any withholding due with respect
to such Grants.
15. AGREEMENTS WITH PARTICIPANTS
Each Grant made under this Plan shall be evidenced by a Grant Letter
containing such terms and conditions as the Committee shall approve.
16. REQUIREMENTS FOR ISSUANCE OF SHARES
No Company Stock shall be issued or transferred upon payment of any Grant
hereunder unless and until all legal requirements applicable to the issuance or
transfer of such Company Stock have been complied with to the satisfaction of
the Committee. The Committee shall have the right to condition any Restricted
Stock Grant or Stock Option made to any Participant hereunder on such
Participant's undertaking in writing to comply with such restrictions on his
subsequent disposition of such shares of Company Stock as the Committee shall
deem necessary or advisable as a result of any applicable law, regulation or
official interpretation thereof, and certificates representing such shares may
be legended to reflect any such restrictions.
17. HEADINGS
Section headings are for reference only. In the event of a conflict between a
title and the content of a Section, the content of the Section shall control.
18. EFFECTIVE DATE AND DESIGNATION OF THE BOARD
Subject to the approval of the Company's shareholders, this Plan shall be
effective as of May 1, 1995.
19. MISCELLANEOUS
(a) Substitute Grants. The Committee may make a Grant to an employee of
another corporation who becomes a Participant by reason of a corporate merger,
consolidation, acquisition of stock or property, reorganization or liquidation
involving the Company or any of its subsidiaries in substitution for a stock
option or restricted stock grant granted by such corporation ("Substituted
Stock Incentives"). The terms and conditions of the substitute Grant may vary
from the terms and conditions required by the Plan and from those of the
Substituted Stock Incentives. The Committee shall prescribe the provisions of
the substitute Grants.
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<PAGE>
(b) Compliance with Law. The Plan, the exercise of Grants and the obligations
of the Company to issue or transfer shares of Company Stock under Grants shall
be subject to all applicable laws and to approvals by a governmental or
regulatory agency as may be required. With respect to persons subject to
Section 16 of the Exchange Act, it is the intent of the Company that the Plan
and all transactions under the Plan comply with all applicable provisions of
Rule 16b-3 or its successors under the Exchange Act. The Committee may revoke
any Grant if it is contrary to law or modify a Grant to bring it into
compliance with any valid and mandatory government regulation. The Committee
may also adopt rules regarding the withholding of taxes on payments to
Grantees. The Committee may, in its sole discretion, agree to limit its
authority under this Section.
(c) Ownership of Stock. A Grantee or Successor Grantee shall have no rights
as a shareholder with respect to any shares of Company Stock covered by a Grant
until the shares are issued or transferred to the Grantee or Successor Grantee
on the stock transfer records of the Company; provided, however, that such
individuals shall have the right to vote shares of Company Stock subject to a
Restricted Stock Grant and to the payment of cash dividends on such shares
during the Restriction Period.
34
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ANNUAL FINANCIAL STATEMENTS AND REVIEW OF OPERATIONS
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............... $4,174.6 $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........ 570.2 675.3 675.0 558.5 88.9 125.5 144.1 122.7 52.9 59.9
Income from continuing
operations............. 351.0 421.1 423.3 326.5 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.... 331.8 408.7 428.2 326.1 1.0 85.0 61.8 18.8 125.6 36.8
Primary earnings per
common share:
Continuing operations.. 2.45 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.......... 2.45 2.96 3.10 2.37 .01 1.33 .98 .29 1.93 .57
Fully diluted earnings
per common share....... 2.45 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............... 600.1 561.2 521.3 444.5 350.1 121.8 104.0 82.7 69.7 17.9
BALANCE SHEET DATA:
Working capital......... 525.1 446.6 667.1 407.0 391.3 436.9 312.4 226.6 155.7 53.9
Property, plant &
equipment, at cost..... 2,172.8 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.................. 220.9 250.4 221.2 181.6 124.8 82.1 59.9 45.1 36.7 14.5
Total assets............ 4,362.5 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.... 1,981.1 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.................. 11.79 10.37 9.17 7.24 5.05 6.97 6.51 5.86 5.97 4.09
OTHER DATA:
Employees............... 22,100 22,300 22,900 22,500 23,500 8,500 8,400 7,400 7,500 8,900
Sales per employee
(thousands)............ 189 180 180 170 150 140 132 124 103 84
</TABLE>
--------
Results include the accounts of the Human Pharmaceutical Business ("HPB") of
Rhone-Poulenc S.A. 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.
All share and per share data have been adjusted to reflect a two-for-one
common stock split effective June 7, 1991.
35
<PAGE>
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.
36
<PAGE>
RESULTS OF OPERATIONS
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............ 540 - 1% 542 + 11% 530
Flagyl (R)............................... 84 + 11% 77 + 3% 82
Rovamycine (R)........................... 83 - 13% 94 + 26% 82
Peflacine (R)............................ 74 - 4% 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.... 472 + 2% 457 - 5% 519
Doliprane (R)............................ 105 + 1% 102 + 23% 88
Sermion (R).............................. 96 + 8% 87 + 1% 92
Imovane (R)/Amoban (R)................... 93 + 6% 85 + 9% 84
--------------------------------------------------------------------------------
TOTAL RESPIRATORY......................... 422 + 3% 407 + 5% 396
Azmacort (R)............................. 147 + 3% 143 + 13% 127
Nasacort (R)............................. 90 + 14% 79 + 37% 58
--------------------------------------------------------------------------------
TOTAL BONE METABOLISM/RHEUMATOLOGY........ 326 - 15% 381 - 1% 424
Orudis (R)/Profenid (R)/Oruvail (R)...... 180 + 3% 173 + 3% 186
Calcitonins.............................. 98 - 39% 163 - 10% 198
--------------------------------------------------------------------------------
TOTAL GASTROENTEROLOGY.................... 473 - 4% 490 + 10% 471
Maalox (R)............................... 249 + 4% 239 + 4% 240
--------------------------------------------------------------------------------
OTHER THERAPEUTIC AREAS................... 566 - 6% 600 - 5% 675
DDAVP (R)................................ 84 + 16% 73 - 4% 76
--------------------------------------------------------------------------------
</TABLE>
*% change excludes currency translation effects.
1994 Compared with 1993
On sales of $4,175 million in 1994, net income available to common
shareholders was $332 million ($2.45 per share), 19% below $409 million
reported in 1993. Current year results included pretax 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 4%, primarily due to volume gains.
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 37%.
37
<PAGE>
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..................................... 1,332 - 3% 1,375 + 8% 1,388
Other Europe............................... 1,009 + 3% 978 - 8% 1,218
Rest of World.............................. 572 + 6% 546 +13% 490
------ ---- ------ ---- ------
Total Non-U.S.............................. 2,913 -- 2,899 + 2% 3,096
------ ---- ------ ---- ------
Total Sales................................ $4,175 + 4% $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 declines in France, the Company's largest market, were largely 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. In the
Rest of World, sales 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. and Other Europe
but fell in France and the Rest of World; the decline in the Rest of World
area is due principally to market conditions in Japan and expansion in
emerging markets.
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 principally 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 reduced sales of other anti-infective
products; 1994 sales of Zagam (TM) exceeded $20 million. Elsewhere, anti-
infectives, particularly the antiparasitic Flagyl (R), experienced sales
growth in South American and Asian countries.
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.
38
<PAGE>
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 marginally 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
steroids 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 slightly 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.
Gross profit as a percentage of sales improved slightly to 67.2% as compared
with 67.0% in 1993, primarily due to manufacturing expense reductions.
Selling, delivery and administrative expenses decreased slightly as a
percentage of sales to 36.2% 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). As the benefits of the Company's restructuring programs,
discussed below, are realized, management expects to achieve further
improvements in the Company's current underlying cost base; a portion of such
savings will be redirected to the development and promotion of new products.
At $600 million, research and development expense grew to 14.4% 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
39
<PAGE>
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
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.
40
<PAGE>
The Company's effective tax rate was 27.7% in 1994 compared with 28.7% in
1993 as a result of tax benefits from Puerto Rico operations. 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 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.
41
<PAGE>
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 $676 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 occupancy costs at the U.S. corporate offices. Cash outflows
for income taxes increased by $57 millon in 1994 due to the prior year deferral
of tax payments. Net cash provided by
42
<PAGE>
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 $115 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 $221 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 .17 to
1 at December 31, 1994 from .26 to 1 at December 31, 1993. The ratio of current
assets to current liabilities was 1.38 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
43
<PAGE>
RP. The 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.
Cooperation Pharmaceutique Francaise ("Cooper"), which has an extensive
pharmacy distribution network in France, was acquired by RP during 1994. Cooper
is currently managed by RPR for a fee and it is expected that it will be
integrated with RPR's operations during the first half of 1995. 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, if combined, would position the
resulting joint venture to become a global market leader. The arrangement,
which is subject to U.S. and European regulatory approvals, will also provide
for increased investment in research and development activities. 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
44
<PAGE>
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.
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.
45
<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,
----------------------------------
1994 1993 1992
---------- ---------- ----------
<S> <C> <C> <C>
Net sales.................................. $4,174.6 $4,019.4 $4,095.9
Cost of products sold...................... 1,371.2 1,326.3 1,394.6
Selling, delivery and administrative ex-
penses.................................... 1,511.9 1,467.8 1,505.0
Research and development expenses.......... 600.1 561.2 521.3
Restructuring and other charges............ 121.2 93.8 --
Proceeds from litigation settlement........ -- 105.0 --
---------- ---------- ----------
Operating income.......................... 570.2 675.3 675.0
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......................... 84.1 54.2 11.5
---------- ---------- ----------
Income before income taxes................ 485.2 590.5 581.7
Provision for income taxes................. 134.2 169.4 158.4
---------- ---------- ----------
Net income before accounting change....... 351.0 421.1 423.3
Cumulative effect of accounting change..... -- -- 15.0
---------- ---------- ----------
Net income................................ 351.0 421.1 438.3
Dividends on preferred stock............... 19.2 12.4 10.1
---------- ---------- ----------
Net income available to common sharehold-
ers...................................... $ 331.8 $ 408.7 $ 428.2
========== ========== ==========
Primary earnings per common share:
Net income before cumulative effect of ac-
counting change.......................... $ 2.45 $ 2.96 $ 2.99
Cumulative effect of accounting change.... -- -- .11
---------- ---------- ----------
Net income available to common sharehold-
ers...................................... $ 2.45 $ 2.96 $ 3.10
========== ========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
46
<PAGE>
RHONE-POULENC RORER INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1994 1993
-------- --------
<S> <C> <C>
ASSETS
Current:
Cash and cash equivalents................................. $ 118.8 $ 35.4
Trade accounts receivable less reserves of $74.6 (1993:
$68.3)................................................... 730.1 746.6
Inventories............................................... 546.9 504.1
Other current assets...................................... 496.5 382.7
-------- --------
Total current assets.................................. 1,892.3 1,668.8
Time deposits, at cost.................................... 55.8 64.3
Property, plant and equipment, net........................ 1,123.0 1,032.0
Goodwill, net............................................. 705.9 676.5
Intangibles, net.......................................... 167.2 206.1
Other assets.............................................. 418.3 402.5
-------- --------
Total assets.......................................... $4,362.5 $4,050.2
======== ========
LIABILITIES
Current:
Short-term debt........................................... $ 89.0 $ 108.6
Notes payable to Rhone-Poulenc S.A. & affiliates.......... 37.3 201.3
Accounts payable.......................................... 420.2 365.6
Income taxes payable...................................... 65.5 55.8
Accrued employee compensation............................. 138.6 121.0
Other current liabilities................................. 616.6 369.9
-------- --------
Total current liabilities............................. 1,367.2 1,222.2
Long-term debt............................................ 439.9 432.2
Deferred income taxes..................................... 28.6 29.5
Other liabilities......................................... 545.7 545.1
-------- --------
Total liabilities..................................... 2,381.4 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......................... 305.1 290.0
Retained earnings......................................... 1,387.6 1,207.3
Employee Benefits Trust................................... (185.7) (75.8)
Cumulative translation adjustments........................ (65.0) (139.3)
-------- --------
Total shareholders' equity............................ 1,981.1 1,821.2
-------- --------
Total liabilities and shareholders' equity............ $4,362.5 $4,050.2
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
47
<PAGE>
RHONE-POULENC RORER INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
1994 1993 1992
---------- ---------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................ $ 351.0 $ 421.1 $ 438.3
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization........... 186.9 167.9 197.7
Provision for deferred income taxes..... (69.4) (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 pay-
able................................... 13.3 83.7 (67.7)
Restructuring charges, net.............. 68.3 44.6 (64.2)
Other items, net........................ 98.1 39.0 (48.0)
---------- ---------- ----------
Net cash provided by operating activi-
ties................................. 676.4 720.8 357.3
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures...................... (220.9) (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) invest-
ing activities....................... (114.9) (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 activities. (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............................ $ 190.4 $ 133.0 $ 247.0
</TABLE>
See Notes to Consolidated Financial Statements.
48
<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
$115.7 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
49
<PAGE>
RHONE-POULENC RORER INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
109"), "Accounting for Income Taxes," and recorded a cumulative effect
adjustment increasing 1992 net income by $15.0 million ($.11 per share).
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. 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>
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.
50
<PAGE>
RHONE-POULENC RORER INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 3. 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 4. 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.
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.
51
<PAGE>
RHONE-POULENC RORER INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 5. 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.................................. 3.0 3.8 2.0
Foreign exchange (gains) losses.................... 10.0 (2.5) (8.1)
Other, net......................................... 24.6 2.9 1.8
------- ------- -------
$84.1 $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 6. 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. 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 7. INVENTORIES
<TABLE>
<CAPTION>
1994 1993
-------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Finished goods....................................... $282.9 $235.3
Work in process...................................... 119.1 111.5
Raw materials and supplies........................... 144.9 157.3
-------- --------
$546.9 $504.1
======== ========
</TABLE>
NOTE 8. PROPERTY, PLANT AND EQUIPMENT, NET
<TABLE>
<CAPTION>
1994 1993
-------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Land............................................... $ 57.3 $ 58.0
Buildings.......................................... 599.6 568.7
Machinery and equipment............................ 1,355.3 1,197.2
Construction in progress........................... 160.6 134.7
-------- --------
2,172.8 1,958.6
Less accumulated depreciation...................... 1,049.8 926.6
-------- --------
Property, plant and equipment, net................. $1,123.0 $1,032.0
======== ========
</TABLE>
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.
52
<PAGE>
RHONE-POULENC RORER INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 9. DEBT
Short-term debt consisted of the following:
<TABLE>
<CAPTION>
1994 1993
----- ------
(DOLLARS IN
MILLIONS)
<S> <C> <C>
Notes payable to banks......................................... $67.0 $ 86.6
Current portion of long-term debt.............................. 22.0 22.0
----- ------
$89.0 $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.
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
53
<PAGE>
RHONE-POULENC RORER INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
guaranteed by Rhone-Poulenc S.A. ("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 10. 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.
NOTE 11. 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................................................. 244.2 301.4 322.8
------ ------ ------
$485.2 $590.5 $581.7
====== ====== ======
</TABLE>
54
<PAGE>
RHONE-POULENC RORER INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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............................................ 100.2 110.0 116.4
------ ------ ------
203.6 210.2 179.3
------ ------ ------
Deferred:
United States...................................... (51.7) (31.0) 2.2
Non-U.S............................................ (17.7) (9.8) (23.1)
------ ------ ------
(69.4) (40.8) (20.9)
------ ------ ------
$134.2 $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.............................. $(61.8) $(65.0)
Pension.................................................... 49.0 51.8
Intercompany profit in ending inventory.................... 33.0 30.5
Cost and equity investments................................ 30.9 10.7
Distributable earnings..................................... (26.2) (14.7)
Restructuring.............................................. 22.9 15.8
Net operating loss carryforwards........................... 15.4 13.2
Other, including nondeductible accruals.................... 97.4 52.7
------ ------
160.6 95.0
Less valuation allowance................................... (11.2) (8.9)
------ ------
Deferred income taxes, net................................. $149.4 $ 86.1
====== ======
</TABLE>
The portion of the above net deferred tax assets classified as current was
$143.8 million and $60.3 million at December 31, 1994 and 1993, respectively.
At December 31, 1994, total deferred tax assets were $335.3 million and total
deferred tax liabilities were $174.7 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.
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..................... 0.9 0.8 (1.8)
------------- ------------- -------------
Effective income tax rate...... 27.7% 28.7% 27.2%
============= ============= =============
</TABLE>
55
<PAGE>
RHONE-POULENC RORER INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 $926.3 million at December 31, 1994. Withholding taxes payable
if the entire amount of these earnings were remitted would be $56.8 million.
U.S. income taxes payable if these earnings were remitted would be
substantially offset by available foreign tax credits.
NOTE 12. 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.
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 obliga-
tions.................. $(141.7) $(330.7) $(128.7) $(317.9)
Nonvested benefits...... (4.2) (64.3) (4.1) (54.4)
------- ------- ------- -------
Accumulated benefit ob-
ligation............... (145.9) (395.0) (132.8) (372.3)
Projected future salary
increases.............. (12.2) (54.2) (9.0) (62.3)
------- ------- ------- -------
Projected benefit obli-
gation................. (158.1) (449.2) (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 (326.8) 17.0 (302.4)
Unrecognized net transi-
tion (asset) liability. 0.7 -- (0.9) 5.9
Unrecognized net (gain)
loss................... (30.3) 59.9 (4.9) 78.3
Unrecognized prior serv-
ice cost............... 20.7 6.7 7.5 3.6
Adjustment required to
recognize minimum
liability.............. -- (52.4) -- (52.7)
------- ------- ------- -------
Prepaid (accrued) pen-
sion cost.............. $ 19.1 $(312.6) $ 18.7 $(267.3)
======= ======= ======= =======
</TABLE>
56
<PAGE>
RHONE-POULENC RORER INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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, $297.1 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...................................... $ 19.3 $ 16.9 $ 17.0
Interest cost..................................... 45.9 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......................... $ 44.3 $ 36.9 $ 35.0
======= ======= =======
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:
<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>
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.
57
<PAGE>
RHONE-POULENC RORER INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 13. 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.
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 beginning 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 December 31.. 3,443 2,455 2,165
Shares reserved for future grants... 2,862 4,272 5,738
Price range of options exercised.... $8.24-30.18 $7.92-41.63 $4.67-45.63
Price range for all options out-
standing........................... $4.67-63.00 $4.67-63.00 $4.67-63.00
Price range for all options exercis-
able............................... $4.67-63.00 $4.67-63.00 $4.67-58.50
</TABLE>
58
<PAGE>
RHONE-POULENC RORER INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 14. 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....... -- -- -- -- 351.0 -- --
Cash dividends, $1.12
per common share...... -- -- -- -- (151.5) -- --
Dividends on preferred
shares................ -- -- -- -- (19.2) -- --
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)........... -- -- -- -- -- -- 74.3
------ ------ ------ ------ -------- ------- -------
Balance, December 31,
1994: $225.0 $175.0 $139.1 $305.1 $1,387.6 $(185.7) $ (65.0)
====== ====== ====== ====== ======== ======= =======
</TABLE>
59
<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.
60
<PAGE>
RHONE-POULENC RORER INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 15. FINANCIAL INSTRUMENTS
The Company's financial instruments consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1994 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.............. 15.0 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.
61
<PAGE>
RHONE-POULENC RORER INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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
62
<PAGE>
RHONE-POULENC RORER INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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 $3.5 million for the year ended December 31, 1993) as a result of interest
rate swap contracts.
At December 31, 1994, the Company was party to contracts to convert certain
floating rate obligations into fixed rate instruments and contracts to convert
certain fixed rate debt into floating rate
63
<PAGE>
RHONE-POULENC RORER INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
debt as determined by the interest rate environment of the currency in which
the underlying obligation was denominated. Interest rate swap contracts
outstanding at December 31, 1994 were as follows:
<TABLE>
<CAPTION>
FIXED OR NOTIONAL CARRYING ESTIMATED FAIR
CURRENCY VARIABLE AMOUNT AMOUNT MKT. VALUE TERM AVERAGE RATE
-------- -------- -------- -------- -------------- --------- ------------------------
(RECEIVABLE (PAYABLE) IN MILLIONS)
<C> <C> <C> <C> <C> <C> <S>
U.S.$ V $80 $ .3 $(1.4) 7/92-7/99 Pay Libor 3 mos; Rec 7.1%
FF F FF400 (0.8) (1.1) 2/93-2/95 Pay 6.7%; Rec Pibor 6
mos
FF V FF650 2.5 1.8 6/93-6/95 Pay Pibor 3 mos; Rec 6.4%
</TABLE>
The Company was party to similar contracts at December 31, 1993.
NOTE 16. 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....................................... 1,332.1 1,374.8 1,388.1
Other Europe................................. 1,008.7 977.8 1,218.4
Rest of World................................ 571.9 546.9 489.7
-------- -------- --------
Total net sales............................. $4,174.6 $4,019.4 $4,095.9
======== ======== ========
Income before income taxes:
United States................................ $ 356.9 $ 385.2 $ 268.0
France....................................... 173.9 280.7 274.6
Other Europe................................. 92.0 64.6 216.5
Rest of World................................ 49.4 62.1 44.2
Corporate.................................... (187.0) (202.1) (221.6)
-------- -------- --------
Total income before income taxes............ $ 485.2 $ 590.5 $ 581.7
======== ======== ========
Identifiable assets:
United States................................ $1,107.2 $1,148.3 $1,031.6
France....................................... 1,309.7 1,290.2 1,340.5
Other Europe................................. 999.4 875.6 986.2
Rest of World................................ 441.0 405.9 362.5
Corporate.................................... 505.2 330.2 137.5
-------- -------- --------
Total identifiable assets................... $4,362.5 $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.
64
<PAGE>
RHONE-POULENC RORER INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 17. 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.
Amounts receivable from RP and affiliates totaled $84.9 million and $35.8
million at December 31, 1994 and 1993, respectively. The 1994 balance includes
$41.4 million of accounts receivable from sales of products and services to RP
(1993: $11.3 million) and $43.5 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 $26.1 million (1993:
$12.9 million). In 1994, sales to RP and affiliates were $122.6 million (1993:
$34.5 million; 1992: $37.2 million). Materials purchased from RP totaled $39.5
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).
In 1994, the Company performed services with respect to an RP affiliate
totaling $7.4 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 $33.6 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.
NOTE 18. 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
65
<PAGE>
RHONE-POULENC RORER INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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, 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 19. 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 is subject to U.S. and
European regulatory approvals.
66
<PAGE>
RESPONSIBILITY FOR FINANCIAL STATEMENTS
The management of Rhone-Poulenc Rorer Inc. is responsible for the information
and representations contained in this report. Management believes that the
financial statements have been prepared in conformity with generally accepted
accounting principles and that the other information in this annual report is
consistent with those statements. In preparing the financial statements,
management is required to include amounts based on estimates and judgments
which it believes are reasonable under the circumstances.
In fulfilling its responsibilities for the integrity of the data presented
and to safeguard the Company's assets, management employs a system of internal
accounting controls designed to provide reasonable assurance, at appropriate
cost, that the Company's assets are protected and that transactions are
appropriately authorized, recorded and summarized. This system of control is
supported by the selection of qualified personnel, by organizational
assignments that provide appropriate delegation of authority and division of
responsibilities, and by the dissemination of written policies and procedures.
This control structure is further reinforced by a program of internal audits
including a policy that requires responsive action by management.
Coopers & Lybrand L.L.P., the Company's independent accountants, performs
audits in accordance with generally accepted auditing standards. The
independent accountants conduct a review of internal accounting controls to the
extent required by generally accepted auditing standards and perform such tests
and procedures as they deem necessary to arrive at an opinion on the fairness
of the financial statements presented herein.
The Board of Directors, through the Audit Committee comprised solely of
directors who are not employees of the Company, meets with management, the
internal auditors and the independent accountants to ensure that each is
properly discharging its respective responsibilities. Both the independent
accountants and the internal auditors have free access to the Audit Committee,
without management present, to discuss the results of their work, including
internal accounting controls and the quality of financial reporting. The Audit
Committee met four times in 1994.
/s/ Robert E. Cawthorn /s/ Patrick Langlois
By___________________________________ By___________________________________
Robert E. Cawthorn Patrick Langlois
Chairman and Senior Vice President and
Chief Executive Officer Chief Financial Officer
67
<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. 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.
As discussed in Note 1 to the consolidated financial statements, the Company
changed its method of accounting for income taxes in 1992.
By /s/ Coopers & Lybrand L.L.P.
-----------------------------------
Coopers & Lybrand L.L.P.
Philadelphia, Pennsylvania
January 20, 1995
68
<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............... $870.6 $973.0 $1,040.7 $1,290.3 $916.3 $1,008.1 $960.1 $1,134.9
Gross profit............ 577.3 650.3 697.3 878.5 607.5 681.7 637.5 766.4
Net income (loss) avail-
able to common share-
holders................ 73.7 (7.4) 102.5 163.0 94.2 119.6 71.0 123.9
Earnings (loss) per com-
mon share.............. .54 (0.05) .76 1.22 .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 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.
69
<PAGE>
[ ]
1. Election of four directors to FOR all nominees [_]
three-year terms. listed below
WITHHOLD AUTHORITY to vote [_] *EXCEPTIONS [_]
for all nominees listed below
NOMINEES FOR THREE-YEAR TERMS: Robert E. Cawthorn, Charles-Henri Filippi,
Claude Helene, and Michael H. Jordan
(INSTRUCTIONS: To withhold authority to vote for any individual nominee, mark
the "Exceptions" box and write that nominee's name in the space provided below.)
*Exceptions ____________________________________________________________________
2. Proposal to approve the 1995 Rhone-Poulenc Rorer Equity Compensation Plan.
FOR [_] AGAINST [_] ABSTAIN [_]
3. Proposal to ratify the selection of Coopers & Lybrand L.L.P. as independent
certified public accountants for Rhone-Poulenc Rorer Inc. and its subsidiaries
for the fiscal year ending December 31, 1995.
FOR [_] AGAINST [_] ABSTAIN [_]
In their discretion, the attorneys are authorized to vote upon such other
matters as may properly come before the meeting or any adjournment thereof.
+
+
+++++
(Please sign, date and return this proxy in the enclosed postage prepaid
envelope.)
Address Change and/or
Comments Mark Here [_]
Your signature should appear exactly as your name appears in the space at the
left. When signing in a fiduciary or representative capacity, please sign your
full title as such. If shares are held in more than one capacity, this proxy
will be deemed to vote all shares held in all capacities. If your imprinted name
is incorrect, please print your correct name in the space below.
Date: ____________________________________________, 1995
________________________________________________________
Signature
________________________________________________________
Title
Votes MUST be indicated [_]
(x) in Black or Blue ink.
<PAGE>
RHONE-POULENC RORER INC.
500 Arcola Road
Collegeville, PA 19426-0107
This Proxy is Solicited on Behalf of the Board of Directors of
Rhone-Poulenc Rorer Inc.
The undersigned hereby appoints Robert E. Cawthorn, Michel de Rosen, and
Patrick Langlois and each of them, with the power of substitution, attorneys to
vote the number of shares the undersigned would be entitled to vote if
personally present at the Annual Meeting of Shareholders of Rhone-Poulenc Rorer
Inc., in Collegeville, Pennsylvania, at 2:00 p.m. on April 25, 1995 and any
adjournment or postponement thereof, for the transaction of such business as
may come before the meeting.
This proxy when properly executed will be voted in the manner directed
herein by the undersigned. If no direction is given, this proxy will be voted
FOR the election of the nominees for director and FOR proposals 2 and 3.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR THE ELECTION OF
THE NOMINEES FOR DIRECTOR AND FOR PROPOSALS 2 AND 3.
(Continued, and to be dated and signed, on the other side.)
RHONE-POULENC RORER INC.
P.O. BOX 114P4
NEW YORK N.Y. 10203-0494
