<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
---- SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1995
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
---- SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______________ TO _______________
COMMISSION FILE NUMBER 1-5851
RHONE-POULENC RORER INC.
--------------------------------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
COMMONWEALTH OF PENNSYLVANIA 23-1699163
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
500 ARCOLA ROAD
COLLEGEVILLE, PENNSYLVANIA 19426-0107
--------------------------------------------------------------------------------
(ADDRESS OF PRINCIPAL (ZIP CODE)
EXECUTIVE OFFICES)
(610)454-8000
--------------------------------------------------------------------------------
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
(FORMER NAME, ADDRESS AND FISCAL YEAR,
IF CHANGED SINCE LAST REPORT.)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934
DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT
WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO
--- ---
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF
COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE.
139,212,012 SHARES AS OF JULY 31, 1995.
THE EXHIBIT INDEX IS LOCATED ON PAGE 27.
<PAGE>
RHONE-POULENC RORER INC.
TABLE OF CONTENTS
------------------------
<TABLE>
<CAPTION>
Page
PART I. FINANCIAL INFORMATION
<S> <C>
Item 1. Financial statements:
Report of Independent Accountants 3
Condensed Consolidated Statements of Income (Loss) 4
Condensed Consolidated Balance Sheets 5
Condensed Consolidated Statements of Cash Flows 6
Notes to Condensed Consolidated Financial Statements 7-12
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition 13-19
<CAPTION>
PART II. OTHER INFORMATION
<S> <C>
Item 1. Legal Proceedings 20-24
Item 6. Exhibits 25
</TABLE>
2
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders of Rhone-Poulenc Rorer Inc.:
We have reviewed the accompanying condensed consolidated balance sheet of Rhone-
Poulenc Rorer Inc. and subsidiaries as of June 30, 1995, and the related
condensed consolidated statements of income (loss) and cash flows for the three
and six month periods ended June 30, 1995 and 1994. These financial statements
are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit in accordance with
generally accepted auditing standards, the objective of which is the expression
of an opinion regarding the financial statements taken as a whole. Accordingly,
we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the condensed consolidated financial statements referred to above for
them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Rhone-Poulenc Rorer Inc. and
subsidiaries as of December 31, 1994, and the related consolidated statements of
income and cash flows for the year then ended appearing in the Company's Form 8-
K dated August 14, 1995. Those financial statements were prepared to give
effect to the acquisitions from Rhone-Poulenc S.A. of Cooperation Pharmaceutique
Francaise and a Brazilian pharmaceutical business in the second quarter of 1995.
The acquisitions of these entities under common control were treated for
accounting purposes in a manner similar to a pooling of interests as described
in Note 2. In our report, which includes an explanatory paragraph on the
Company's change in its method of accounting for income taxes in 1992, dated
January 20, 1995 except for the transactions described in Note 2 for which date
is August 14, 1995, we expressed an unqualified opinion on those consolidated
financial statements. In our opinion, the information set forth in the
accompanying condensed consolidated balance sheet as of December 31, 1994, is
fairly stated, in all material respects, in relation to the consolidated balance
sheet from which it has been derived.
/s/ COOPERS & LYBRAND L.L.P.
-----------------------------
COOPERS & LYBRAND L.L.P.
Philadelphia, Pennsylvania
August 14, 1995
3
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
--------------------
RHONE-POULENC RORER INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(Unaudited - amounts in millions except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- ----------------------
Restated Restated
1995 1994 1995 1994
--------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Net sales.............................. $1,241.3 $1,064.6 $2,339.7 $ 1,946.6
Cost of products sold.................. 427.7 375.7 831.7 673.8
Selling, delivery and administrative
expenses.............................. 474.8 402.4 861.6 725.9
Research and development expenses...... 184.3 147.5 343.0 276.8
Restructuring and other charges........ -- 121.2 -- 121.2
--------- --------- --------- ---------
Operating income................... 154.5 17.8 303.4 148.9
Interest expense - net................. 12.4 11.5 23.0 23.3
(Gain) loss on sale of assets.......... -- 0.1 (49.5) (4.0)
Other expense - net.................... 10.8 14.1 59.8 26.3
--------- --------- --------- ---------
Income (loss) before income taxes.. 131.3 (7.9) 270.1 103.3
Provision for income taxes............. 39.9 (8.6) 83.5 23.9
--------- --------- --------- ---------
Net income......................... 91.4 0.7 186.6 79.4
Dividends on preferred stock........... (5.7) (4.7) (11.4) (8.9)
========= ========= ========= =========
Net income (loss) available to
common shareholders............... $ 85.7 $ (4.0) $ 175.2 $ 70.5
========= ========= ========= =========
Earnings (loss) per common share... $ 0.64
=========
Earnings (loss) per common share,
pro forma..................... $ (0.05) $ 1.29 $ 0.49
========= ========= =========
Cash dividend per common share......... $ 0.30 $ 0.28 $ 0.60 $ 0.56
Average common shares outstanding...... 134.2 135.6 134.1 136.1
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
4
<PAGE>
RHONE-POULENC RORER INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited - dollars in millions)
<TABLE>
<CAPTION>
Restated
June 30, December 31,
1995 1994
--------- ------------
<S> <C> <C>
ASSETS
Current:
Cash and cash equivalents............................... $ 32.1 $ 118.8
Short-term investments.................................. 11.8 --
Trade accounts and notes receivable, less reserves
of $78.9 (1994: $78.6).................................. 777.4 812.1
Inventories............................................. 699.3 612.5
Other current assets.................................... 616.7 543.3
-------- --------
Total current assets............................... 2,137.3 2,086.7
Time deposits, at cost........................................ 43.6 55.8
Property, plant and equipment, net of accumulated
depreciation of $1,250.5 (1994: $1,111.1).................. 1,279.2 1,199.8
Goodwill, net of accumulated amortization of $223.6
(1994: $210.2).......................................... 766.2 705.9
Intangibles, net of accumulated amortization of $123.7
(1994: $121.2).......................................... 201.8 170.5
Other assets 588.0 433.6
-------- --------
Total assets....................................... $5,016.1 $4,652.3
======== ========
LIABILITIES
Current:
Short-term debt......................................... $ 254.1 $ 127.8
Accounts payable........................................ 484.0 470.5
Other current liabilities............................... 745.8 896.7
-------- --------
Total current liabilities.......................... 1,483.9 1,495.0
Long-term debt................................................ 584.4 439.9
Deferred income taxes......................................... 43.6 31.6
Other liabilities, including minority
interests.................................................... 880.4 575.4
-------- --------
Total liabilities.................................. 2,992.3 2,541.9
Contingencies
SHAREHOLDERS' EQUITY
Market Auction Preferred Shares, without par value
(liquidation preference $1,000 per share); authorized,
issued and outstanding 225,000 shares...................... 225.0 225.0
Money market preferred stock, without par value
(liquidation preference $100,000 per share); authorized,
issued and outstanding 1,750 shares........................ 175.0 175.0
Common stock, without par value; stated value $1 per
share; authorized 200,000,000 shares; issued and
outstanding 134,184,366 shares (1994: 134,095,649 shares).. 139.2 139.1
Capital in excess of stated value............................. 141.4 412.2
Retained earnings............................................. 1,498.4 1,403.7
Employee Benefits Trust....................................... (185.7) (185.7)
Cumulative translation adjustments............................ 30.5 (58.9)
-------- --------
Total shareholders' equity......................... 2,023.8 2,110.4
-------- --------
Total liabilities and shareholders' equity......... $5,016.1 $4,652.3
======== ========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
5
<PAGE>
RHONE-POULENC RORER INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited - dollars in millions)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
---------------------------
Restated
1995 1994
------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash provided by operating activities.. $ 136.3 $ 258.7
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures............................ (122.9) (86.5)
Businesses acquired............................. (185.0) --
Purchase of investments/product rights.......... (110.6) (20.9)
Proceeds from sale of assets.................... 84.0 6.9
Net investment hedging, net..................... (9.2) (23.2)
------- -------
Net cash used in investing activities........... (343.7) (123.7)
CASH FLOWS FROM FINANCING ACTIVITIES:
Debt borrowings (repayments):
Long-term debt, net.......................... 64.4 (16.9)
Short-term debt, net......................... 143.8 30.0
Issuances of common stock....................... 1.8 1.1
Shares repurchased for Employee Benefits Trust.. -- (60.0)
Dividends paid.................................. (91.9) (84.8)
------- -------
Net cash provided by (used in) financing
activities................................... 118.1 (130.6)
Effect of exchange rate changes on cash......... 2.6 2.6
------- -------
Net increase (decrease) in cash
and cash equivalents........................... (86.7) 7.0
Cash and cash equivalents at beginning of year.. 118.8 35.4
------- -------
Cash and cash equivalents at June 30............ $ 32.1 $ 42.4
======= =======
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
6
<PAGE>
RHONE-POULENC RORER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1.- RESULTS FOR INTERIM PERIODS
In the opinion of management, the accompanying unaudited condensed consolidated
financial statements reflect all adjustments, all of which are of a normal
recurring nature, necessary for a fair presentation of financial position, cash
flows and results of operations for the periods presented.
The statements are presented in accordance with the requirements of Form 10-Q
and do not include all disclosures required by generally accepted accounting
principles or those made in the Annual Report on Form 10-K. The Annual Report
on Form 10-K for the year 1994 and the Company's restated financial statements
for the year ended December 31, 1994 as filed on a Current Report on Form 8-K
dated August 14, 1995 are on file with the Securities and Exchange Commission
and should be read in conjunction with these condensed consolidated financial
statements.
NOTE 2.- ACQUISITIONS
In the 1995 second quarter, Rhone-Poulenc Rorer Inc. acquired from Rhone-Poulenc
S.A. ("RP") the businesses of Cooperation Pharmaceutique Francaise ("Cooper"),
primarily in France, and a pharmaceutical business in Brazil for cash and
preferred stock of a French subsidiary aggregating approximately $270 million.
The preferred shares, accounted for as minority interest in other liabilities,
have a liquidation preference approximating 645 million French francs and pay
dividends of 7.5% per annum on a stated value of 145 million French francs. The
acquisition agreements call for potential adjustments to the purchase price of
the businesses based on several factors, including earnings performance.
The acquisitions of these entities under common control were treated for
accounting purposes on an "as-if pooling" basis and, accordingly, the Company
has restated its first quarter 1995 and full year 1994 results to include the
accounts of Cooper and the Brazilian business as of April 1, 1994 and January 1,
1994, respectively. The effect of restatements in periods prior to 1994 was not
material. The assets and liabilities of the acquired businesses were recorded
by the Company at the carrying values used by RP as of the restatement dates.
Earnings per share for the restated periods reflect pro forma adjustments giving
effect to interest on indebtedness and preferred dividends relative to the
acquisition transactions.
NOTE 3.- RESTRUCTURING AND OTHER CHARGES
In June 1994, the Company recorded a $121.2 million pretax charge in connection
with a global restructuring plan that is expected to be completed in 1995.
Annual pretax savings associated with the plan approximated $20.0 million in
1994 and should grow to over $50.0 million in 1996. The restructuring will
reduce the Company's workforce by approximately 1,300 positions, or 6%; as of
June 30, 1995, the Company's workforce had been reduced by more than 850
employees. To-date, cash outlays related to the plan have totaled $61.2 million
and are expected to exceed $90.0 million. Cash outlays for the three and six
month periods ended June 30, 1995 have approximated $13.4
7
<PAGE>
million and $27.1 million, respectively. Asset writeoffs in conjunction with
certain production facilities have totaled $21.9 million, including $2.5 million
during the six months ended June 30, 1995.
A rollforward of the remaining 1994 restructuring provision from December 31,
1994 is as follows:
<TABLE>
<CAPTION>
PAYMENTS/ TRANSLATION
DECEMBER 31, ASSET ADJUSTMENTS/ JUNE 30,
1994 WRITEOFFS OTHER 1995
------------------------------------------------
(Dollars in millions)
<S> <C> <C> <C> <C>
Social costs..... $ 52.8 $ (23.9) $ 6.3 $ 35.2
Third parties.... 8.4 (3.2) 0.4 5.6
Asset writeoffs.. 8.2 (2.5) 0.1 5.8
------------------------------------------------
Total........ $ 69.4 $ (29.6) $ 6.8 $ 46.6
================================================
</TABLE>
In 1993, the Company recorded charges of $93.8 million for the cost of certain
restructuring and manufacturing streamlining programs, principally in Europe,
and increased provisions for certain litigation. The programs 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 June 30, 1995, the Company's workforce had been reduced by over
650 employees relative to these activities.
A rollforward of the remaining 1993 restructuring provision from December 31,
1994 is as follows:
<TABLE>
<CAPTION>
PAYMENTS/ TRANSLATION
DECEMBER 31, ASSET ADJUSTMENTS/ JUNE 30,
1994 WRITEOFFS OTHER 1995
-------------------------------------------------
(Dollars in millions)
<S> <C> <C> <C> <C>
Social costs..... $ 12.2 $ (4.0) $ 0.8 $ 9.0
Asset writeoffs.. 9.0 (1.4) 0.8 8.4
-------------------------------------------------
Total........ $ 21.2 $ (5.4) $ 1.6 $ 17.4
=================================================
</TABLE>
NOTE 4.- GAIN ON SALE OF ASSETS AND OTHER EXPENSE - NET
Pretax gains from the sale of assets totaled $49.5 million ($.25 per share) for
the six months ended June 30, 1995 and included gains on the sale of assets
related to the Company's Canadian over-the-counter business to Ciba-Geigy
Limited and the sale of certain European product rights during the 1995 first
quarter.
Other expense-net for the six months ended June 30, 1995 included $13.0 million
($.06 per share) of acquired research and development expense related to an
additional investment in Applied Immune Sciences, Inc. and pretax charges of
$25.4 million ($.15 per share) related to the reassessment of the carrying value
of certain assets, including those associated with the Company's prior
investment in The Immune Response Corporation, recorded in the first quarter.
8
<PAGE>
NOTE 5.- INCOME TAXES
The Company records income tax expense based on an estimated full year effective
income tax rate. The year-to-date reported effective tax rate approximated 31%
in 1995 compared with 23% in 1994. The current year rate was affected by
reduced tax benefits from Puerto Rico operations and certain asset
sales/writeoffs. The 1994 year-to-date effective tax rate was favorably
impacted by non-recurring restructuring charges.
NOTE 6.- INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, 1994
1995 (RESTATED)
----------- ---------------
(Dollars in millions)
<S> <C> <C>
Finished goods................ $ 293.5 $ 323.2
Work in process............... 169.0 125.0
Raw materials and supplies.... 236.8 164.3
--------- --------
$ 699.3 $ 612.5
========= ========
</TABLE>
9
<PAGE>
NOTE 7.- SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
MARKET MONEY
AUCTION MARKET COMMON CAPITAL IN EMPLOYEE CUMULATIVE
PREFERRED PREFERRED SHARES AT EXCESS OF RETAINED BENEFITS TRANSLATION
SHARES STOCK STATED VALUE STATED VALUE EARNINGS TRUST ADJUSTMENT
--------- --------- ------------ ------------ -------- -------- -----------
(Dollars in millions)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994... $225.0 $175.0 $139.1 $ 412.2 $1,403.7 $(185.7) $(58.9)
Net income................... 186.6
Cash dividends, $.60 per
common share.............. (80.5)
Dividends on preferred
stock..................... (11.4)
Adjustment of capital
contributions for
acquisition liabilities... (273.2)
Issuance of shares under
employee benefit
plans..................... 0.1 2.4
Translation adjustments,
net of $7.5 million
reductions due to
hedging activities........ 89.4
------ ------ ------ ------- -------- ------- ------
Balance, June 30, 1995....... $225.0 $175.0 $139.2 $ 141.4 $1,498.4 $(185.7) $ 30.5
====== ====== ====== ======= ======== ======= ======
</TABLE>
As discussed in Note 2, the Company has restated its 1994 results to include the
accounts of Cooper and the Brazilian business as of April 1, 1994 and January 1,
1994, respectively. The assets and liabilities of the acquired businesses were
recorded by the Company at the carrying values used by RP as of the restatement
dates and the value of net assets acquired was reflected in capital in excess of
stated value as a capital contribution from RP. In 1995, the Company reduced
capital in excess of stated value to reflect the purchase obligation related to
the acquisition transactions of approximately $270 million.
10
<PAGE>
NOTE 8.- RELATED PARTY TRANSACTIONS
Receivables from Rhone-Poulenc S.A. and affiliates at June 30, 1995 included
$10.5 million in accounts receivable from sales of products to RP and $53.6
million classified as other current assets.
Accounts payable related to the purchase of materials and services from RP
were $12.1 million at June 30, 1995; accrued and other liabilities due to RP
totaled $21.8 million.
As of June 30, 1995, the Company had $135.1 million short-term and $60.8
million long-term debt outstanding with RP.
Sales to RP totaled $8.0 million in the second quarter and $ 16.5 million for
the six-month period; services purchased from and interest paid to RP totaled
$9.7 million in the second quarter and $19.2 million for the first half of
1995. For the comparable 1994 periods, sales to RP were $6.5 million and
$14.0 million, respectively. Services purchased from and interest paid to RP
totaled $9.0 million and $18.0 million, respectively.
In the 1995 second quarter, the Company acquired Cooper and a pharmaceutical
business in Brazil from RP for cash and preferred stock of an RPR subsidiary
aggregating approximately $270 million. The preferred shares, accounted for
as minority interest in other liabilities, have a liquidation preference
approximating 645 million French francs (approximately $130 million) and pay
dividends of 7.5% per annum on a stated value of 145 million French francs.
See Note 2.
NOTE 9.- CONTINGENCIES
The Company is involved in litigation incidental to its business, including,
but not limited to: (1) approximately 358 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 antihemophilic factor ("AHF") concentrates processed by
Armour in the early and mid-1980s. Armour has also been named as a defendant
in six proposed class action lawsuits filed on behalf of HIV-infected
hemophiliacs and their families. None of the 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 in the U.S. alleging that the Company engaged in price
discrimination practices to the detriment of certain independent community
pharmacists, retail chains and consumers; (4) alleged breach of contract by a
subsidiary of the Company with respect to agreements involving another
company's bisphosphonate compound and the Company's licensed product 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 three sites on the U.S. National
Priority List created by Superfund legislation.
11
<PAGE>
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.
12
<PAGE>
ITEM 2. 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 1995 second quarter, RPR acquired from RP the businesses of Cooperation
Pharmaceutique Francaise ("Cooper"), with operations primarily in France, and
a pharmaceutical business in Brazil. The acquisitions of entities under
common control were treated for accounting purposes on an "as-if pooling"
basis and, accordingly, RPR has restated its first quarter 1995 results and
full year 1994 results to include the accounts of Cooper and the Brazilian
business as of April 1, 1994 and January 1, 1994, respectively. Earnings per
share for the restated periods reflect pro forma adjustments giving effect to
interest on indebtedness and preferred dividends relative to the acquisition
transactions. The discussion that follows reflects the effect of such
restatements.
RESULTS OF OPERATIONS (THREE AND SIX MONTHS ENDED JUNE 30, 1995 VERSUS
COMPARABLE 1994 PERIODS)
On sales of $1,241 million, net income available to common shareholders for
the second quarter of 1995 was $86 million ($.64 per common share) as compared
with a net loss of $4 million ($.05 per common share) in the 1994 second
quarter. Net income for the first half of 1995 was $175 million ($1.29 per
common share) as compared with $71 million ($.49 per common share) in 1994.
Results for the 1994 three- and six-month periods included pretax
restructuring charges of $121 million ($.58 per common share). Results for
the first six months of 1995 included a $.04 per share benefit from the net
effects of asset sales and certain one-time charges recorded in the first
quarter. The comparable prior year-to-date period included $.02 per share of
gains on sales of assets.
13
<PAGE>
SALES
In the table and discussion which follows, percentage comparisons of sales are
presented excluding the effects of currency fluctuations unless otherwise
noted.
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
THERAPEUTIC AREA/PRINCIPAL OFFERINGS ENDED JUNE 30, ENDED JUNE 30,
---------------- ----------------
RESTATED RESTATED
($ in millions) 1995 1994 % CHANGE* 1995 1994 % CHANGE*
--------------------------------------------- -------- --------- ------ -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Clexane(R)/Lovenox(R)............. $ 76 $ 51 34% $ 142 $ 97 31%
Dilacor(R) XR..................... 25 23 10% 44 38 15%
Lozol(R)/indapamide............... 16 16 -2% 27 29 -7%
Selectol(R)/Selecor(R)............ 18 14 16% 34 25 22%
TOTAL CARDIOVASCULAR.............. 236 198 9% 431 365 8%
Zagam............................. 6 0 -- 17 -- --
Granocyte(R)...................... 12 4 -- 21 5 --
TOTAL ANTI-INFECTIVES/ONCOLOGY.... 170 132 18% 340 261 20%
Albuminar(R)...................... 55 40 29% 98 75 26%
Monoclate-P(R)/Factor VIII........ 53 37 37% 105 73 38%
TOTAL PLASMA PROTEINS............. 150 118 21% 285 227 20%
Doliprane(R)...................... 37 23 37% 66 45 28%
Imovane(R)/Amoban(R).............. 32 21 38% 60 41 30%
TOTAL CNS/ANALGESICS.............. 149 113 19% 279 220 15%
Maalox(R) 45 56 -26% 82 103 -26%
TOTAL GASTROINTESTINAL............ 96 109 -19% 188 210 -17%
Calcitonins....................... 28 23 9% 51 41 14%
Orudis(R)/Profenid(R)/Oruvail(R).. 53 49 3% 101 93 1%
TOTAL BONE METABOLISM/
RHEUMATOLOGY................ 98 85 6% 183 159 5%
Azmacort(R)....................... 51 41 24% 80 55 47%
Nasacort(R)....................... 24 27 -10% 34 37 -7%
TOTAL RESPIRATORY................. 120 109 7% 204 174 13%
DDAVP(R) 23 18 26% 35 31 12%
OTHER THERAPEUTIC AREAS........... 222 201 -- 430 331 18%
</TABLE>
* Percentage change calculation excludes effects of currency fluctuations.
Second quarter 1995 reported sales increased by 17%. Excluding the favorable
effects of currency fluctuations (+9%) due to a weaker U.S. dollar relative to
other currencies and the impact of product divestitures (-4%), consisting
principally of the Company's U.S. and Canadian over-the-counter businesses,
sales increased by 12%. Volume increases (+10%), including new product
presentations, and the net favorable effect of higher prices (+2%) in Europe
and in Japan contributed to underlying quarterly sales growth. For the first
six months of 1995, reported sales increased by 20%. On a basis excluding
currency fluctuations and product divestitures, sales growth was 15%,
including 4% from the inclusion of six months of Cooper sales in 1995 results
as compared with three months in 1994. Net price changes in Europe and in the
U.S. (prescription pharmaceuticals and plasma proteins) contributed 3
percentage points to year-to-date sales growth.
14
<PAGE>
Sales by geographic area were as follows:
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS ENDED
ENDED JUNE 30,
JUNE 30,
------------------ -------------------
RESTATED % RESTATED %
($ in millions) 1995 1994 CHANGE* 1995 1994 CHANGE*
==== ======== ======= ==== ======== =======
<S> <C> <C> <C> <C> <C> <C>
U.S............ $ 292 $ 289 13% $ 500 $ 502 12%
------ ------ ---- ------ ------ -----
France......... 463 358 12% 910 668 19%
Other Europe... 289 241 7% 564 478 6%
Rest of World.. 197 177 16% 366 299 29%
------ ------ ---- ------ ------ ----
Total Non-U.S. 949 776 12% 1,840 1,445 17%
------ ------ ---- ------ ------ ----
Total Sales.... $1,241 $1,065 12% $2,340 $1,947 15%
====== ====== ==== ====== ====== ====
</TABLE>
* Percentage change calculation excludes effects of currency fluctuations
and product divestitures.
On a basis excluding prior year sales of the Company's U.S. over-the-counter
business which was sold at the end of 1994, sales in the U.S. increased during
the second quarter and first half of 1995. U.S. sales increases were due to
growth of the Company's prescription pharmaceuticals (Azmacort(R), Lovenox(R)
and DDAVP(R)) and plasma proteins (Albuminar(R) and recombinant Factor VIII
offerings). Quarterly and year-to-date sales increases in France, the
Company's largest market, reflected improved sales of Doliprane(R) and
Clexane(R)/Lovenox(R) as well as sales of the new products Zagam and
Granocyte(R). Year-to-date 1995 sales in France also benefited from the
inclusion of six months of Cooper sales as compared to three months in 1994.
In Other European markets, sales of prescription pharmaceuticals continued to
recover over the prior year periods in Germany (+13% on a year-to-date basis)
and in Italy (+5%), although second quarter growth was at a somewhat lesser
pace than earlier in the year. Ethical product sales in the U.K. (-7%)
continued to be negatively impacted by generic competition. Sales increases
in Central and Eastern Europe added to Other Europe sales growth on a
quarterly and year-to-date basis. In the Rest of World area, sales gains were
posted for the three- and six-month periods in South American countries,
particularly by contributions from Argentina and Brazil, and in Japan which
was affected by government-imposed price reductions in 1994.
In cardiovasculars, Clexane(R)/Lovenox(R) continued to report sales increases
in the U.S., France and Germany. Higher sales were also recorded by
Dilacor(R) XR in the U.S. and Selectol(R)/Selecor(R) in France. In 1995, both
Lovenox(R) and Dilacor(R) XR were approved by the FDA for new indications.
Although Dilacor(R) XR lost U.S. FDA exclusivity in mid-1995, management does
not anticipate sales erosion in the current year from generic intrusion. On a
quarterly and year-to-date basis, total U.S. indapamide product sales were
below the prior year as higher sales of the Lozol(R) brand were offset by
reduced sales of the generic indapamide.
Second quarter and six-month sales growth of anti-infectives was driven by
continued growth of antibiotics, particularly Flagyl(R), in South America.
Sales increases also reflect sales of the new antibiotic Zagam in France;
second quarter sales of Zagam were slightly below the prior quarter due in
part to a change in labeling resulting from a certain incidence of
photosensitivity. Sales contributions from the Company's oncological product
Granocyte(R) have more than doubled quarter-on-quarter. The product's largest
markets are currently France and Germany although Granocyte(R) has been
launched in all European Union countries including a second quarter 1995
introduction in Italy.
15
<PAGE>
Plasma proteins reported double-digit sales increases for the three- and six-
month periods of 1995, including higher sales of Albuminar(R) in the U.S. and
Japan. Quarterly and year-to-date sales growth of Factor VIII offerings
reflected U.S. sales of the recombinants Helixate(R) and Bioclate(R) and
higher sales of Monoclate-P(R) in Europe; U.S. sales of Monoclate-P(R)
continued to be below the prior year. European and U.S. sales of Mononine
also contributed to plasma proteins' sales growth during the 1995 periods. In
the first quarter of 1995, the Company initiated a voluntary withdrawal of
certain of its immune globulin offerings in U.S. in response to the FDA's
industry-wide request that such products undergo a new testing technique.
This action had a moderate negative impact on first quarter and six-month
Gammar(R) IV sales growth, but is not expected to affect future immune
globulin sales. The Company's Armour Pharmaceutical Company subsidiary has
received U.S. and European regulatory approvals to form a 50/50 joint venture
in the global plasma proteins business with Behringwerke AG, a subsidiary of
Germany's Hoechst AG. The global joint venture is expected to be finalized
later in 1995.
The French analgesic Doliprane(R) registered second quarter and six-month
sales gains over comparable prior year periods which were affected by weak
demand. Imovane(R)/Amoban(R) experienced sales growth during the quarter in
European markets and in Japan; Canada also contributed to higher year-to-date
sales of the sleeping agent.
Respiratory product sales increased over the prior year, although at a
somewhat lesser rate during the second quarter. Three- and six-month
Azmacort(R) sales registered solid improvements over the comparable 1994
periods which were negatively impacted by trade inventory reductions. Current
year Nasacort(R) sales were negatively impacted by a competitive entry and
declined moderately on a quarterly and year-to-date basis.
Sales growth of calcitonin products in 1995 has been driven by increased sales
of the injectable form in Japan and in the United States and U.S. sales of the
generic calcitonin product. Performance in European markets was below the
prior year although sales of intranasal calcitonins in Italy showed some
improvement in the second quarter. Quarterly sales of the anti-inflammatory
Orudis(R)/Profenid(R)/Oruvail(R) were slightly above the prior year period as
increases in South American countries exceeded declines in European markets
and in Japan. Menorest(R), a hormone replacement skin patch for treatment of
post menopausal symptoms and the prevention of osteoporosis, was launched in
several European markets during 1995 and has received marketing approvals in
France, the U.K. and Australia.
Maalox(R) recorded good quarterly and six-month performance in European
markets, particularly in France, Ireland and Germany. Strong sales gains were
also registered in Japan, where Maalox(R) granules were launched at the end of
1994. In January 1995, the Company completed the transfer of its Canadian
Maalox(R) product rights to Ciba-Geigy Limited ("Ciba"); the Company's U.S.
rights were transferred to Ciba in December 1994. Reported sales for 1994
included approximately $36 million and $65 million of U.S. and Canadian
Maalox(R) sales for the quarter and six-month periods, respectively.
16
<PAGE>
OPERATING INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
-------------------------------------------------------------------------------------------------------
1995 1994 (RESTATED) 1995 1994 (RESTATED)
-------------------------------------------------------------------------------------------------------
% OF % OF TOTAL % OF % OF TOTAL
(IN MILLIONS) $ SALES $ SALES CHANGE $ SALES $ SALES CHANGE
------ ----- ------ ----- ------ -------- ----- -------- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Gross margin........... $813.6 65.5% $688.9 64.7% 18% $1,508.0 64.5% $1,272.8 65.4% 18%
Selling, delivery and
administrative.... 474.8 38.3 402.4 37.8 18 861.6 36.8 725.9 37.3 19
Research and
development....... 184.3 14.8 147.5 13.9 25 343.0 14.7 276.8 14.2 24
Operating income....... 154.5 12.4 17.8 NA NA 303.4 13.0 148.9 NA NA
</TABLE>
Quarter-on-quarter, on a basis excluding the effect of the 1994 restructuring
charge, operating income margin declined due to higher selling, delivery and
administrative expenses as a percentage of sales and an increased investment
in research and development, partially offset by improved gross margin. Gross
margin improvements reflected certain cost reductions and the favorable
effects of price. Commercial expenses rose as a percentage of sales as a
result of higher selling and promotional expenses in certain European
countries (Germany, Italy) and South American markets and increased delivery
costs in support of higher volumes.
On a year-to-date basis, excluding prior year restructuring, operating income
margin declined by almost one percentage point due to reduced year-on-year
gross margin and higher research and development expense as a percentage of
sales. Gross margin was negatively affected by unfavorable product mix and
the six-month impact of the lower margin Cooper business; net change in price
had a favorable effect on year-to-date gross margin. Six-month selling,
delivery and administrative expense ratios benefited from the absence in 1995
of higher advertising and promotion costs associated with the Company's North
American over-the-counter businesses.
In June 1994, the Company recorded a $121 million charge related to a global
restructuring plan. For the three- and six-month periods ended June 30, 1995,
cash outlays associated with the plan totaled $13 million and $27 million,
respectively; asset writeoffs were not significant. As of June 30, 1995, the
Company's workforce had been reduced by more than 850 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. Year-to-date cash outlays associated with the 1993
program totaled $4 million. As of June 30, 1995, over 650 positions had been
affected by the 1993 plan.
INTEREST, OTHER EXPENSE, AND TAXES
Net interest expense increased quarter-on-quarter due principally to higher
average interest rates in the United States and the United Kingdom. On a year-
to-date basis, net interest expense remained below the prior year due to lower
worldwide average debt balances; management expects, however, that interest
expense in the second half of 1995 will be slightly above the comparable prior
year period due, in part, to debt incurred in support of acquired new
businesses. Increased preferred dividends for the three and six months of
1995 were due to higher short-term interest rates in the United States.
17
<PAGE>
Six-month gains on sales of assets reflected $50 million ($.25 per common
share) recorded in the first quarter of 1995. These gains included the sale
of assets related to the Company's Canadian over-the-counter business and
certain European product rights. Similar gains totaled $4 million ($.02 per
share) in the comparable 1994 period.
Other expense-net for the first half of 1995 included charges of $38 million
($.21 per share) recorded in the first quarter, including $13 million ($.06
per share) of acquired research and development expense related to an
additional investment in Applied Immune Sciences, Inc. ("AIS") and $25 million
($.15 per share) related to the reassessment of the carrying value of certain
assets, including those associated with the Company's prior investment in The
Immune Response Corporation.
The Company's year-to-date reported effective tax approximated 31% in 1995
compared with 23% in 1994. The current year rate was affected by reduced tax
benefits from Puerto Rico operations and certain asset sales/writeoffs while
the prior year effective tax rate was favorably impacted by non-recurring
restructuring charges.
On a basis excluding gains on sales of assets and one-time items, including
restructuring and certain other charges noted above, six-month earnings per
common share increased approximately 19% over the comparable 1994 period.
Year-on-year growth was due, in part, to a lower first half of 1994 base, and
therefore, management anticipates that earnings growth in the second half of
1995 will not continue at the pace of the first six months of the year.
FINANCIAL CONDITION
CASH FLOWS
Six-month operating activities provided cash of $136 million as compared with
$259 million in the prior year period. Lower 1995 operating cash flows
reflected increased working capital needs and higher cash outlays for
restructuring activities and income taxes. Year-to-date cash outlays related
to restructuring activities totaled $31 million. Income tax payments for the
six months included a $42 million first quarter tax payment related to the
Ciba transaction.
Current year investing activities included cash outflows of $185 million
related to the acquisition of new businesses including the acquisitions of the
Cooper and Brazilian businesses from RP and the purchase of a generics company
in France. Cash outflows also included $80 million associated with certain
investments in technologies, including $43 million for the acquisition of two
million additional common shares of AIS, and payments of $21 million related
to the purchase of certain product rights. Proceeds from sales of assets,
including the sales of the Company's Canadian over-the-counter business and
certain European product rights, totaled $84 million. Six-month capital
expenditures exceeded comparable 1994 spending by $36 million and full year
expenditures will equal or exceed 1994 levels.
Financing activities provided cash inflows of $118 million representing
increased borrowings in support of businesses acquired. Cash outlays of $131
million in 1994 included open market common share repurchases for the Employee
Benefits Trust totaling $60 million. Cash dividends paid to common
shareholders were $80 million ($.60 per share) as compared with $76 million in
18
<PAGE>
1994 ($.56 per share). In July 1995, the Board of Directors declared a third
quarter cash dividend of $. 30 per share payable August 31, 1995 to holders of
record on August 10, 1995.
LIQUIDITY
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 increased to .27 to 1 at June 30, 1995 from .16
to 1 at December 31, 1994 principally as a result of increased borrowings.
The ratio of current assets to current liabilities was 1.44 to 1 compared to
1.40 to 1 at December 31, 1994.
At June 30, 1995, the Company had committed lines of credit totaling $1.5
billion with approximately $38 million of borrowings outstanding under these
lines. Of the $1.5 billion, $400 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. On April 30, $100 million of the facility expired and an
additional $100 million expires in October 1995. 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
has an additional $1.1 billion available under various new or renegotiated
multicurrency line of credit agreements expiring throughout the next five
years. At June 30, 1995, the Company had the ability and intent to renew or
to refinance under such facilities approximately $315 million of short-term
third party borrowings for at least one year. Accordingly, this amount has
been classified as long-term debt.
Pursuant to a shelf registration, the Company has the ability to issue an
additional $325 million in public debt securities and/or preferred shares.
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 new therapies and maximize the
benefits of new business alliances. The Company routinely explores new
strategic business alliances as such opportunities arise.
The Company is involved in litigation incidental to its business. A
discussion of contingencies appears in Note 9 of the Notes to Condensed
Consolidated Financial Statements and in Legal Proceedings in Part II of this
Form 10-Q.
19
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
-----------------
DIETHYLSTILBESTROL ("DES") LITIGATION
There are approximately two hundred and fifty 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 "DES
daughters" and/or their offspring were injured as a result of the development
of various reproductive tract abnormalities in the "DES daughters" because of
their in utero exposure to DES. Typically, William H. Rorer, Inc. ("WHR") and
Kremers-Urban Company ("K-U"), two former operating subsidiaries of the
Company, are named as defendants, along with numerous other former DES
manufacturers, when the claimant is unable to identify the manufacturer of the
DES to which she was exposed. While the aggregate monetary damages sought in
all of these DES actions are substantial, the Company believes that both WHR
and K-U have adequate defenses to DES claims. In May 1994, a proposed class
action was filed on behalf of persons alleging injuries caused by DES and
living in the state of Ohio (Kurczi, et al. v. Eli Lilly, et al., United
--------------------------------------------
States District Court for the Northern District of Illinois). The Company and
------------------------------------------------------------
certain of its current and former subsidiaries were named among the 192
defendants. Class certification was denied in February 1995. All pending
cases are currently being defended by insurance carriers, sometimes under a
reservation of rights. The Company is also responsible for the obligations of
Nattermann & Cie GmbH ("Nattermann") with respect to DES-related legal actions
brought against certain of its former U.S. subsidiaries. Under the terms of
the 1990 Acquisition Agreement with Rhone-Poulenc S.A. ("RP"), RP is obligated
to indemnify the Company for amounts expended on the Nattermann DES claims in
excess of $2 million. The Company believes that the former Nattermann
subsidiaries have adequate defenses to DES claims.
AHF LITIGATION
There are approximately two hundred and ninety-six lawsuits in the United
States, seven in Canada and fifty-five in Ireland pending against the
Company's Armour Pharmaceutical Company ("Armour") subsidiary, and in some
instances, the Company and certain of its other subsidiaries, in which
individuals with hemophilia and infected with the Human Immunodeficiency Virus
("HIV"), or their representatives, claim that such infection 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-1980s; none of these cases involves Armour's currently
distributed AHF concentrates. In most of these suits, Armour is one of a
number of defendants, including other fractionators who supplied AHF during
that period. To date, approximately one hundred and three cases and claims
have been resolved either by dismissal by the plaintiffs or the Court or
through settlement. A majority of the currently pending lawsuits were filed
in 1993, and management expects additional lawsuits will be filed. It is not
possible, however, to predict with
20
<PAGE>
certainty the number of additional lawsuits that may eventually be filed
alleging HIV-related claims.
In January 1993, a jury in Florida held that Armour was liable to the parents
of a deceased HIV-infected hemophiliac for damages of approximately $2
million. Armour believed this verdict to be inconsistent with evidence
specific to the case and, accordingly, filed motions with the trial court
seeking reversal or, alternatively, a new trial. The trial court denied both
motions and Armour appealed the judgment to the United States Court of
Appeals for the Eleventh Circuit. In June 1995, the Court of Appeals issued
an opinion reversing the verdict and remanding the case for a new trial
because of prejudicial error in the district court's instruction concerning
the learned intermediary doctrine. The court affirmed in respect to Armour's
contentions regarding an absence of sufficient evidence of causation. Both
plaintiffs and Armour have filed petitions for rehearing. Regardless of the
ultimate outcome of this case, and because the facts vary widely in such
cases, the Company does not view a possibly adverse verdict as predictive of,
or as precedent for, decisions in any other cases. Juries in other AHF cases
have determined that Armour and the other plasma fractionators acted
responsibly and were not negligent. In October 1993, Armour obtained a
directed verdict dismissing it from a lawsuit pending in Louisiana State Court
on the basis that the plaintiff had not presented evidence sufficient to
maintain an action against Armour. That decision has been appealed by
plaintiff to the state appellate court in Louisiana and was argued in March
1995. Additionally, in November 1993, a jury verdict in favor of Armour and
the other plasma fractionators was obtained in an action pending in the United
States District Court for the Northern District of Illinois. The jury
concluded that the fractionators of Factor VIII concentrate in the early 1980s
were not negligent as alleged and accordingly were not liable to the claimant.
In March 1995, the United States Court of Appeals for the Seventh Circuit
granted the plaintiffs' appeal in this action and remanded the case for a new
trial because of improper closing argument by counsel for one of the
defendants. Subsequent to the issuance of the court's opinion in March,
Armour reached an out of court settlement with the plaintiffs. Armour
reasonably expects that other cases may proceed to trial in the future.
In December 1993, the Federal Multi-District Litigation Panel ("MDL")
authorized the consolidation of all AHF litigation pending in U.S. Federal
Courts for purposes of pre-trial discovery and the transfer of such cases to
the U.S. District Court for the Northern District of Illinois for this
purpose. Four proposed federal class action lawsuits (Wadleigh, et al. v.
--------------------
Armour Pharmaceutical Company, et al., United States District Court, Northern
------------------------------------
District, Illinois; Richard Roe and his mother, Jane Roe v. Armour
----------------------------------------------
Pharmaceutical Company, et al., United States District Court, Idaho District;
-----------------------------
Jose Alvarez, Jr. et al. v. Armour Pharmaceutical Company, et al., United
----------------------------------------------------------------
States District Court for the Eastern District of Louisiana; and Timmy Dale
----------
Martin, et al. v. Armour Pharmaceutical Company, et al., United States
------------------------------------------------------
District Court for the Northern District of Alabama); and two proposed state
class actions (Jeffrey Stanger, et al. v. Armour Pharmaceutical Company, et
-------------------------------------------------------------
al., Superior Court, Pima County, Arizona; Jones v. Bayer Corporation et al,
--- ---------------------------------
Florida), discussed further below, have been filed against several
fractionators, including Armour. The federal actions are part of the MDL
proceeding in Chicago.
In an August 1994 bench ruling and Memorandum Opinion, the Court in Wadleigh
--------
stated that it intended to certify the issue of negligence in that action for
class action treatment, but that it would deny plaintiffs' motion for
certification of an all-purpose class action and plaintiffs' motion for
certification of the issues of strict liability, breach of warranty, proximate
cause, and punitive damages. In September 1994, the Court denied the
defendants' motion for reconsideration, and
21
<PAGE>
also denied defendants' request that it certify the issues for immediate
consideration by the Court of Appeals. In an order entered in October 1994,
the Court ruled that it would not certify plaintiffs' concert of action claim
for class treatment. In November 1994, the Court entered its formal class
certification order, and in December 1994 entered further orders regarding
notice to the class and also denied class certification in the federal actions
other than Wadleigh. Under the issue certification contemplated by the Court
--------
in Wadleigh, only the issue of negligence would be tried on a class-wide
--------
basis. In the event of a defense verdict, all class members would be bound
thereby; in the event of a plaintiffs' verdict, it would be necessary for each
class member to attempt to utilize that favorable outcome in his own separate
litigation. The class trial would not involve any issues of causation or
damages, or a determination as to any defenses such as the statute of
limitations.
As the facts in each individual lawsuit vary widely, Armour does not believe
that class action status is warranted in the Wadleigh action. In December
--------
1994, Armour and the other fractionator/defendants in Wadleigh filed a
--------
petition for a writ of mandamus in the Seventh Circuit Court of Appeals in
Chicago seeking to have the class certification order vacated. In March 1995,
the Court of Appeals granted the writ of mandamus in a two-to-one decision and
directed the District Court to decertify the plaintiff class. The plaintiffs
thereafter filed a petition for rehearing and suggestion for rehearing en banc
-- ----
with the Court of Appeals. Plaintiffs' petition for rehearing was denied in
April 1995. In June 1995, the Court of Appeals on plaintiffs' motion entered
an order staying its mandate so as to permit the plaintiffs to seek a writ of
certiorari from the United States Supreme Court. On July 26, 1995, plaintiffs
filed their petition for a writ of certiorari with the U.S. Supreme Court.
Armour and the other fractionators will oppose this Petition. Absent reversal
of the Seventh Circuit's decision by the Supreme Court, the negligence class
previously certified by the District Court in Wadleigh will be decertified.
--------
As noted above, in May 1995, an additional "nationwide" class action (Jones)
-----
was filed in the Florida state court against the same defendants as in
Wadleigh, together with a Florida plasma provider; plaintiffs' counsel consist
--------
of a subgroup of counsel from Wadleigh. Defendants have removed the action to
--------
federal court, but it is anticipated that the plaintiffs will seek to have the
action remanded to the state court.
In the U.S., Armour and other plasma fractionators have participated in
discussions with representatives of the hemophilia community, including the
National Hemophilia Foundation, concerning the issue of assistance for U.S.
hemophiliacs infected with HIV. Armour and Baxter Healthcare Corporation
("Baxter") reached a tentative settlement with attorneys representing
claimants in the purported class-action lawsuits pending against the
respective companies and submitted a Memorandum of Understanding to the Court
in that regard in August 1994. However, as a result of the Court's
statements with respect to class certification in Wadleigh, plaintiffs'
--------
counsel withdrew their recommendation concerning the settlement. Armour will
continue to vigorously defend its position in all cases and claims brought
against it.
With respect to this litigation, the Company has contractual rights to certain
insurance coverage provided by insurance carriers to Revlon, Inc., the party
from which it purchased the Armour business in 1986 ("Revlon carriers"). The
Company also believes it has certain insurance coverage from an umbrella
insurance carrier and that it has access to "excess" liability insurance
coverage from other carriers, effective in 1986, for certain of these cases if
certain self-insured retention levels from relevant insurable losses are
exceeded. The Company has been involved in
22
<PAGE>
litigation with a principal insurance carrier ("the principal carrier") as
well as with certain of the Revlon carriers, relative to carrier defense and
indemnity obligations associated with AHF litigation. Recently, the Company
settled the dispute being litigated with the principal carrier by entering
into an agreement which defines the principal carrier's obligations with
respect to the underlying AHF litigation. Additionally, the Company and
certain of the other carriers are engaged in extensive discussions aimed
principally at settling the extent and other conditions of coverage of those
carriers. If necessary, a trial in the insurance coverage litigation will
likely take place in the United States District Court for the Eastern District
of Pennsylvania sometime in 1995. Based upon these discussions, the Company
believes that, although not a certainty, a substantial level of coverage
(including substantial coverage for legal defense expenditures) for the
Company's estimated liability determined in accordance with Statement of
Financial Accounting Standards No. 5 ("SFAS 5") is probable of occurrence.
CERTAIN CONTRACT LITIGATION
Rhone-Poulenc Rorer Pharmaceuticals Inc. ("RPRP"), a subsidiary of the
Company, has been named as a defendant in two related breach of contract
lawsuits initiated by Boehringer Mannheim GmbH and its American affiliate,
Boehringer Mannheim Pharmaceuticals Corporation (collectively, "BM"), seeking
compensatory damages. Specifically, BM commenced arbitration proceedings in
Switzerland and litigation in the state court of Maryland alleging that RPRP
breached an agreement related to the development of BM's bisphosphonate
compound and a copromotion agreement pertaining to the Company's licensed
product Lozol(R). RPR filed a counterclaim in the Maryland litigation against
BM for fraud related to representations made by BM and its agents prior to the
execution of the agreements. In March 1995, the parties agreed to dismiss the
Maryland litigation and to transfer all of those claims to final and binding
arbitration in Switzerland. At present, two arbitration proceedings before
the same panel are underway. The Company believes that the claims asserted by
BM are without merit and RPRP intends to vigorously defend its position.
ANTITRUST LITIGATION
The Company has been named as a defendant in 117 antitrust lawsuits. It is
presently a party to seven state court actions pending in California, and one
each in Wisconsin, Alabama, Washington, Minnesota, and Colorado.
Additionally, the Company has been named in 105 antitrust actions brought in
several federal courts which have been coordinated before a judge in the U. S.
District Court for the Northern District of Illinois (Chicago). The cases
brought in California state court have similarly been coordinated before a
judge in the San Francisco Superior Court. The suits allege that certain
pharmaceutical companies (including RPR) and wholesalers, in conjunction with
certain pharmacy benefits managers, discriminated against independent
community pharmacist plaintiffs and/or retail chains with respect to the
prices charged for pharmaceutical products and further conspired to maintain
prices at artificially high levels to the detriment of these pharmacies. One
suit alleges injury to a proposed class of California residents who are
consumers of brand name prescription products. The cases in Colorado and
Washington allege consumer class claims. Many of the federal actions were
brought on behalf of an alleged class of retail pharmacies throughout the
United States; three of the state cases similarly allege classes of
pharmacists within those states. Plaintiffs in these lawsuits seek injunctive
relief and a monetary award for past damages alleged. The federal class
plaintiffs have filed an amended consolidated Complaint so that issues
affecting the class are
23
<PAGE>
pleaded consistently. The coordinating federal court certified the class
alleged in the amended consolidated Complaint in November 1994. Notice to the
class has been given and the opt-out period ended March 10, 1995. The
coordinating California state court certified retail and consumer classes in
June 1995. Notice to the class has not yet been provided.
The Company believes that these claims are without merit and it intends to
vigorously defend these lawsuits.
PATENT AND INTELLECTUAL PROPERTY LITIGATION
In February 1993, Tanabe Seiyaku Company ("Tanabe") of Japan and their U.S.
licensee, Marion Merrell Dow Inc. ("MMD") initiated an action before the
International Trade Commission ("ITC"), the administrative agency responsible
for handling complaints of imports which allegedly infringe U.S. intellectual
property rights. The complaint names ten domestic and foreign respondents,
including the Company, and alleges infringement of a Tanabe U.S. patent,
claiming a process for preparing bulk diltiazem, the active ingredient in the
Company's Dilacor XR product. In January 1995, the ITC Administrative Judge
ruled that Dilacor XR does not infringe the MMD/Tanabe patent under any
circumstances and that the MMD/Tanabe patent is invalid and unenforceable. An
appeal was taken and the Commission effectively affirmed the ITC Judge's
rulings on invalidity, unenforceability and noninfringement findings.
The Company is a plaintiff in a patent infringement lawsuit with Chiron
Corporation filed in the United States District Court in California involving
the patent licensed exclusively to the Company by the Scripps Research
Institute ("Scripps") covering the anti-hemophilic Factor VIII:C. The Court
is considering pending summary judgment motions. If this case goes to trial,
such trial is likely to be scheduled to commence within the six to twelve
months after the Court's decision on the summary judgment motions.
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 SFAS 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, 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.
24
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
a. Exhibits
11 Statement re computation of earnings per common share.
15 Letter re unaudited interim financial information.
27 Financial Data Schedule.
b. Reports on Form 8-K
The Company filed a Current Report on Form 8-K dated August 14, 1995
containing the restated financial statements for the year ended December
31, 1994 resulting from the Cooper and Brazilian business acquisition
transactions.
25
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RHONE-POULENC RORER INC.
------------------------
(Registrant)
August 14, 1995 /s/ PATRICK LANGLOIS
--------------- --------------------
Patrick Langlois
Senior Vice President and
Chief Financial Officer
26
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Page
----------- ----
<C> <S> <C>
11 Statement re computation of earnings (loss)
per common share. 28
15 Letter re unaudited interim financial
information. 30
27 Financial Data Schedule
</TABLE>
27
<PAGE>
EXHIBIT 11
RHONE-POULENC RORER INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS (LOSS) PER COMMON SHARE
(Unaudited-dollars and shares in millions except per share data)
<TABLE>
<CAPTION>
Three Months Ended
June 30,
-------------------
Restated
1995 1994
-------- --------
<S> <C> <C>
NET INCOME (LOSS) PER COMMON SHARE AS
REPORTED:
Net income (loss) before preferred
dividend............................... $ 91.4 $ 0.7
Less: Dividend on preferred stock....... (5.7) (4.7)
------ ------
Net income (loss) available to common
shareholders........................... $ 85.7 (4.0)
======
Pro forma adjustments for interest and
preferred dividends, net of tax effects (2.3)
------
Net income (loss) available to common
shareholders, pro forma................ $ (6.3)
======
Average shares outstanding.............. 134.2 135.6
====== ======
Net income (loss) available to common
shareholders per share................. $ 0.64
======
Net income (loss) available to common
shareholders per share, pro forma...... $ (0.5)
======
NET INCOME (LOSS) PER COMMON SHARE
ASSUMING FULL DILUTION:
Net income (loss) before preferred
dividend............................... $ 91.4 $ 0.7
Less: Dividend on preferred stock....... (5.7) (4.7)
------ ------
Net income (loss) available to common
shareholders........................... $ 85.7 (4.0)
======
Pro forma adjustments for interest and
preferred dividends, net of tax effects (2.3)
------
Net income (loss) available to common
shareholders, pro forma................ $ (6.3)
======
Average shares outstanding.............. 134.2 135.6
Shares contingently issuable for stock
plan................................... 0.5 0.3
------ ------
Average shares outstanding, assuming
full dilution.......................... 134.7 135.9
====== ======
Net income (loss) available to common
shareholders per share,
assuming full dilution................. $ 0.64
======
Net income (loss) available to common
shareholders per share,
pro forma, assuming full dilution...... $(0.05)
======
</TABLE>
This calculation is submitted in accordance with the regulations of the
Securities and Exchange Commission although not required by APB Opinion No. 15
because it results in dilution of less than 3%.
28
<PAGE>
RHONE-POULENC RORER INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS (LOSS) PER COMMON SHARE
(Unaudited-dollars and shares in millions except per share data)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------
Restated
1995 1994
------ --------
<S> <C> <C>
NET INCOME PER COMMON SHARE AS REPORTED:
Net income before preferred dividend..... $186.6 $ 79.4
Less: Dividend on preferred stock........ (11.4) (8.9)
------- -------
Net income available to common
shareholders............................ 175.2 70.5
Pro forma adjustments for interest and
preferred dividends,
net of tax effects.................... (1.6) (4.2)
------- -------
Net income available to common
shareholders, pro forma................. $173.6 $ 66.3
======= =======
Average shares outstanding............... 134.1 136.1
======= =======
Net income available to common
shareholders per share, pro forma....... $ 1.29 $ 0.49
======= =======
NET INCOME PER COMMON SHARE ASSUMING
FULL DILUTION:
Net income before preferred dividend..... $186.6 $ 79.4
Less: Dividend on preferred stock........ (11.4) (8.9)
------- -------
Net income available to common
shareholders............................ 175.2 70.5
Pro forma adjustments for interest and
preferred dividends,
net of tax effects.................... (1.6) (4.2)
------- -------
Net income available to common
shareholders, pro forma................. $173.6 $ 66.3
======= =======
Average shares outstanding............... 134.1 136.1
Shares contingently issuable for
stock plan............................... 0.6 0.3
------- -------
Average shares outstanding, assuming
full dilution........................... 134.7 136.4
======= =======
Net income available to common
shareholders per share,
pro forma, assuming full dilution....... $ 1.29 $ 0.49
======= =======
</TABLE>
This calculation is submitted in accordance with the regulations of the
Securities and Exchange Commission although not required by APB Opinion No. 15
because it results in dilution of less than 3%.
29
<PAGE>
EXHIBIT 15
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549
RE: Rhone-Poulenc Rorer Inc.
Quarterly Report on Form 10-Q
We are aware that our report dated August 14, 1995, on our review of interim
financial information of Rhone-Poulenc Rorer Inc. ("the Company"), for the
period ended June 30, 1995, and included in the Company's quarterly report on
Form 10-Q for the quarter then ended is incorporated by reference in the
registration statements of the Company on Form S-3 (Registration No. 33-58229,
Registration No. 33-62052, Registration No. 33-36558, Registration No. 33-
30795, Registration No. 33-23754, Registration No. 33-15671, Registration No.
33-43941, Registration No. 33-53378 and Registration No. 33-55694) and on Form
S-8 (Registration No. 33-58998, Registration No. 33-24537, Registration No. 2-
61635, Registration No. 2-78374 and Registration No. 33-21902). Pursuant to
Rule 436(c) under the Securities Act of 1933, this report should not be
considered a part of the registration statements prepared or certified by us
within the meaning of Sections 7 and 11 of that Act.
/s/ COOPERS & LYBRAND L.L.P.
-----------------------------
COOPERS & LYBRAND L.L.P.
Philadelphia, Pennsylvania
August 14, 1995
30
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONDENSED
CONSOLIDATED BALANCE SHEET AND THE RELATED CONDENSED CONSOLIDATED STATEMENT OF
INCOME FOR THE SIX-MONTH PERIOD ENDING JUNE 30, 1995 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> JUN-30-1995
<CASH> 32
<SECURITIES> 12
<RECEIVABLES> 856
<ALLOWANCES> 79
<INVENTORY> 699
<CURRENT-ASSETS> 2137
<PP&E> 2530
<DEPRECIATION> 1251
<TOTAL-ASSETS> 5016
<CURRENT-LIABILITIES> 1484
<BONDS> 0
<COMMON> 139
0
400
<OTHER-SE> 1485
<TOTAL-LIABILITY-AND-EQUITY> 5016
<SALES> 2340
<TOTAL-REVENUES> 2340
<CGS> 832
<TOTAL-COSTS> 2037
<OTHER-EXPENSES> 10
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 23
<INCOME-PRETAX> 270
<INCOME-TAX> 84
<INCOME-CONTINUING> 175
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 175
<EPS-PRIMARY> 1.29
<EPS-DILUTED> 1.29
</TABLE>
