<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:
[X] Preliminary Proxy Statement [_] CONFIDENTIAL, FOR USE OF THE
COMMISSION ONLY (AS PERMITTED BY
[_] 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 Inc.
------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
------------------------------------------------------------------------
(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 1996 ANNUAL MEETING OF
SHAREHOLDERS
PROXY STATEMENT
1995 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 28, 1996
Dear Shareholder:
You are cordially invited to attend the Annual Meeting of Shareholders to be
held at 2:00 p.m., Friday, May 3, 1996 at the Company's Executive Offices, 500
Arcola Road, Collegeville, Pennsylvania.
At the Annual Meeting, shareholders will be asked to elect five directors, to
approve an increase in authorized common shares, and to ratify the selection of
independent accountants for 1996.
The Notice of Annual Meeting, combined proxy statement and 1995 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,
Michel de Rosen
President 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 MAY 3, 1996
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 Friday, May 3, 1996 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 five directors to three-year
terms;
2. To amend the Company's Articles of Incorporation to increase the
number of authorized common shares to 600 million.
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, 1996; 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 11, 1996 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
Secretary
Collegeville, Pennsylvania
March 28, 1996
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
NOS.
----
<S> <C>
Notice of Annual Meeting of Shareholders.................................. 4
Proxy Statement........................................................... 5
Voting of Shares........................................................ 5
Ownership of Shares................................................... 7
Control of the Company................................................ 9
Election of Directors................................................... 9
Committees of the Board of Directors.................................... 14
Directors' Compensation................................................. 15
Report on Executive Compensation by the Executive Personnel &
Compensation Committee................................................. 17
Executive Compensation.................................................. 17
Certain Relationships and Related Transactions.......................... 30
Proposal to Amend Articles of Incorporation to Increase Authorized Com-
mon Shares............................................................. 31
Proposal to Ratify the Appointment of Auditors.......................... 32
General and Other Matters............................................... 33
Proposals of Shareholders............................................... 33
Annual Financial Statements and Review of Operations
Management's Discussion and Analysis of Results of Operations and
Financial Condition....................................................
Ten-Year Selected Financial Data (Unaudited)............................
Consolidated Statements of Income.......................................
Consolidated Balance Sheets.............................................
Consolidated Statements of Cash Flows...................................
Notes to Consolidated Financial Statements..............................
Responsibility for Financial Statements.................................
Report of Independent Accountants.......................................
Quarterly Data (Unaudited)..............................................
</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 28, 1996 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 May 3, 1996 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 five directors of the Company for three-year terms
ending in 1999;
2. To amend the Company's Articles of Incorporation to increase the
number of authorized common shares to 600 million.
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, 1996.
The Board of Directors has fixed the close of business on March 11, 1996 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, 138,xxx,xxx 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 amendment of the Articles
of Incorporation to increase to 600 million the number of authorized Common
Shares, and FOR the ratification of the selection of Coopers & Lybrand L.L.P.
as independent accountants for the Company.
Abstentions 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. The proposal
to amend the Articles of Incorporation will be adopted if approved by a
majority of the outstanding shares. The selection of independent accountants
will be ratified if approved by the majority of those votes present and 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
1
<PAGE>
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 amendment of the Articles of Incorporation to increase the
number of authorized Shares, and the ratification of the selection of
independent 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 29, 1996, 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 95,002,147 Direct 68.xx%
- -------------------------------------------------------------------------------
</TABLE>
2
<PAGE>
The following table shows, for each director, for each executive named in
the Summary Compensation Table on page and for all directors and executive
officers of the Company as a group, the total number of Shares beneficially
owned as of February 29, 1996, 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>
Jean-Jacques Bertrand 3,577 82,943
Jean-Marc Bruel -0- 102,000
Robert E. Cawthorn 113,845 373,216
Michel de Rosen 8,629 107,080
Charles-Henri Filippi 4,000 6,000
Prof. Claude Helene -0- 46,000
Michael H. Jordan 1,000 16,000
Manfred E. Karobath 7,189 66,919
Igor Landau 200 146,000
Peter J. Neff -0- 68,000
James S. Riepe 864 10,000
Timothy G. Rothwell 67 4,000
John A. Sedor 1,419 31,298
Edward J. Stemmler, MD 144 -0-
Jean-Pierre Tirouflet -0- 146,000
All Executive Officers and Directors as
a Group
( 22 in number) 173,040 1,514,639
</TABLE>
Pursuant to the terms of the shareholder-approved plan, which was then known
as 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 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"), Mr. Riepe and Dr. Stemmler each surrendered
one-half of his option in exchange for a cash payment representing the
difference between the option price and the tender offer price paid by RP. The
balance of the options remained outstanding and, pursuant to the Acquisition
Agreement, the option price was reduced to $9.67 to reflect the value of the
Contingent Value Right issued by RP and distributed to shareholders of the
Company in 1990.
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.
In the foregoing table, the Number of Shares Subject to Exercisable Options
reflects, for certain directors, not only the exercisable portion of options
granted by the Company to directors or to executives, but also the currently-
exercisable portion of options granted to these directors by RP under the
terms of an RP stock option plan.
The foregoing description reflects a two-for-one split in the Shares,
effective June 7, 1991.
3
<PAGE>
CONTROL OF THE COMPANY
Pursuant to the terms of the Acquisition Agreement between the Company and
RP, dated as of March 12, 1990, 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.
Edward J. Stemmler, M.D., is retiring as a director at the Shareholders'
Meeting, having served as a director for 18 years, the last six as an
Independent Director.
The Board of Directors has nominated Jean-Jacques Bertrand, Michel de Rosen,
Dale F. Frey, Igor Landau, and Jean-Pierre Tirouflet as directors of the
Company for three-year terms ending in 1999. Information about the nominees,
as well as about continuing directors, appears below.
Messrs. Bertrand, Landau, and Tirouflet have previously been elected
directors of the Company by the shareholders.
Mr. Frey would become an Independent Director, succeeding Dr. Stemmler. Mr.
de Rosen is a Rorer Designee. Messrs. Bertrand, Landau and Tirouflet are RP
Designees.
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.
4
<PAGE>
The following table gives the following information about 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 1999
<TABLE>
<CAPTION>
NAME (AND AGE) OF
DIRECTORS, POSITIONS TERM OF
AND OFFICES HELD WITH THE DIRECTOR OFFICE
COMPANY SINCE: EXPIRES: BUSINESS EXPERIENCE
- ------------------------- -------- -------- -------------------------------------------
<S> <C> <C> <C>
Jean-Jacques Bertrand/2/ (56) 1990 1996 Chairman & Chief Executive Officer (effec-
Director tive January 1, 1995) and Vice Chairman &
CEO (in 1994) of Pasteur Merieux Serums
and Vaccines. Executive Vice President of
the Company (1990-1993); President, World-
wide Pharmaceutical Operations of Rhone-
Poulenc Sante (1987-1990).
Michel de Rosen/1/ (45) 1993 1996 President (since 1993) and Chief Executive
Director, President and Officer (since April 1995) of the Company
Chief Executive Officer ; President, Fibers and Polymers Sector,
Rhone-Poulenc S.A. (1988-1993). Mr. de Ro-
sen is also a member of the Executive Com-
mittee of Rhone-Poulenc S.A.
Dale F. Frey/3/ (63) Chairman and President, General Electric
Nominee for Director Investment Corporation (since 1984), Vice
President and Treasurer, General Electric
Corporation (1980-1984, 1986-1994). Mr.
Frey is also a director of USF&G Corpora-
tion, Praxair, Inc. and Doubletree Corp.
Igor Landau/2/ (51) 1990 1996 Group President (since 1992) and Senior Ex-
Director ecutive 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.
Jean-Pierre Tirouflet/2/ 1990 1996 Senior Executive Vice President & Chief Fi-
(45) 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.
CONTINUING DIRECTORS
Jean-Marc Bruel/2/ (60) 1990 1997 Vice-Chairman of Rhone-Poulenc Group (since
Director 1992); President of Rhone-Poulenc Group
(1987--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.
</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 THE DIRECTOR OFFICE
COMPANY SINCE: EXPIRES: BUSINESS EXPERIENCE
- ------------------------- -------- -------- -------------------------------------------
<S> <C> <C> <C>
Manfred E. Karobath, M.D./1/ (55) 1994 1997 Senior Vice President of the Company and
Director, Senior Vice President of RPR Research & Development
President since 1992; Director of Research & Devel-
opment of Sandoz Pharma Ltd. Switzerland
(1989-1992). Dr. Karobath is also a direc-
tor of Pasteur Merieux Serums & Vaccines.
Peter J. Neff/2/ (57) 1990 1997 President and Chief Executive Officer of
Director Rhone-Poulenc Inc. since 1991
James S. Riepe/3/ (52) 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.
Robert E. Cawthorn/1/ (60) 1984 1998 Chairman (since 1986), President (1984-
Director and 1991), Chief Executive Officer (1985-1995)
Chairman and Executive Vice President (1982-1984)
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 Investment
Companies and Westinghouse Electric Corpo-
ration.
Charles-Henri Filippi/2/ (43) 1990 1998 Managing Director in Charge of Investment
Director Banking (since 1995), Senior Executive
Vice President (since 1993) and Executive
Vice President in Charge of Large Enter-
prises (1989-1993), Credit Commercial de
France.
Prof. Claude Helene/2/ (57) 1990 1998 Senior Vice President and Directeur
Director Scientifique of Rhone-Poulenc since 1990.
Professeur at the Museum National
D'Histoire Naturelle (Paris, France) since
1976; Director of a Research Center of
Institut National de la Sante et de la Re-
cherche Medicale (1980-1992). Member of
the French Academy of Sciences.
Michael H. Jordan/3/ (59) 1991 1998 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>
- --------
/1/ Rorer Designee
/2/ RP Designee
/3/ Independent Director
6
<PAGE>
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 Richard T. Collier, 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 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 two meetings in 1995. 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
7
<PAGE>
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 three meetings in 1995. 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
one meeting in 1995. Its members are Messrs. Stemmler (Chairman), Cawthorn and
Neff.
The Board of Directors held nine meetings in 1995. Messrs. Bertrand, Jordan,
Neff, and Tirouflet 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 84%.
DIRECTORS' COMPENSATION
Directors who are not employees of the Company or any of its subsidiaries
were paid in 1995 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.
In addition, the terms of the Company's stock options plans, which have been
approved by the shareholders, provide that each non-employee director receives
upon election to the Board a non-qualified option to purchase 20,000 Shares at
an option price equal to the then-current market value, with such option to
become exercisable, on a cumulative basis, as to 20% of the Shares on each of
the first five anniversary dates of the grant.
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 may defer a portion of fees
payable for service as a director. The Company may purchase life insurance 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.
8
<PAGE>
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. Of the current directors, Dr. Stemmler will
receive benefits pursuant to this plan, commencing in 1996, but the Board of
Directots has determined that thereafter the plan will be terminated and no
further benefit will be accrued or paid.
The Company maintains a Supplemental Benefit and Deferred Compensation
Trust, 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 and upon the change in control in 1990,
the Company, pursuant to the terms of the trust, contributed funds to the
trust fund in an amount sufficient to provide all of the benefits then due.
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.
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. The Committee here reports to the Company's
shareholders about the Company's policies as they are reflected in the
compensation paid for 1995 to the executive officers of the Company (including
the named executive officers) and the factors and criteria used by the Board
of Directors in determining the Chief Executive Officer's compensation for
1995.
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 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
targets and payments are 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 incentive cash bonus tied to both targeted Company and individual
performance; and (3) longer term incentive compensation, consisting of the
Capital Plan and options to purchase Company shares, the amount of which is
tied to individual performance. Individual performance 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. As a result of this structure, company
executives have a greater percentage of total
9
<PAGE>
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 but also carries the potential of reduced or no variable
compensation when Company performance is below targeted levels. Because the
Committee believes that stock ownership by management is beneficial to the
Company in that it, too, links executives' and shareholders' interests, the
Committee utilizes stock-based performance compensation.
SALARY
Base salaries are targeted for comparable positions and experience in the
pharmaceutical industry. The Committee reviews base salaries of executive
officers and recommends 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 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. Increases in salary in 1995 were determined by considering market
data, responsibilities of the position, job performance, and the Company's
overall financial results.
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 to the Board of Directors for approval bonus awards for
executive officers. 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 1995, generally, the Company's EPS modestly exceeded the target while
IBT fell slightly short; and, in most cases, the individual performance met or
exceeded expectations.
LONG-TERM INCENTIVE
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 is valued by a comparison of Company net income
year on year. Payment for a portion of the units is deferred for several
years. The Committee believes that the
10
<PAGE>
Capital Plan will become a valuable tool in providing an incentive which is
consistent with the interests of shareholders while helping to assure that the
Company's executive compensation remains competitive within the industry.
Additional 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 are based on a stock
option multiple which is expressed as a percentage of salary. Stock options
play an important role in the Company's executive compensation structure,
thereby making 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. However, a premium-priced option was granted in 1993 to
certain executives, including several of the named executive officers. Such
options become exercisable, if at all, in 1996 at an exercise price which
reflects a 10% annual increase in stock price, but only if that price is
achieved, thereby assuring that there is no benefit to the executive unless
all shareholders recognize a significant increase in the value of their
shares. 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 1995, grants to executive officers generally reflected the achievement of
individual objectives.
THE CHIEF EXECUTIVE OFFICER'S COMPENSATION
Mr. de Rosen became Chief Executive Officer of the Company in April 1995.
The Chief Executive Officer's compensation for 1995 included the same
components of salary and variable compensation in the form of cash bonus,
Capital Plan payout, 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 basically the
same as for other executives. The Committee, in setting the Chief Executive
Officer's compensation, considered, in addition to market data, such factors
as the Company's financial performance, development and implementation of
Company strategy, management staffing, corporate transactions, internal and
external communications, and cost management efforts.
FEDERAL TAX LEGISLATION
Federal tax legislation, enacted in 1993, limits the deductibility of
compensation in excess of $1 million for named executive officers appearing in
the Summary Compensation Table. However, compensation in excess of $1 million
can generally 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 believes that the Company's exposure is not
material in 1995 or in any foreseeable year 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.
11
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS
Mr. Jordan, a director of the Company, has been Chairman and Chief Executive
Officer of Westinghouse Electric Corporation since 1993 and was a member of
the Company's Executive Compensation and Personnel Committee in 1995 and in
prior years. Mr. Cawthorn, Chairman of the Company, was elected a director of
Westinghouse in April 1995.
James S. Riepe, Chairman Michael H. Jordan Igor Landau
12
<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, 1990 to December 31, 1995 with the cumulative total return of the Standard
& Poor's 500 Stock Index (which does not include the Company), the Dow Jones
Pharmaceutical Index and a peer group consisting of the companies in the
pharmaceutical industry used for compensation comparison which have securities
traded in the United States. 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.
(ART)
- --------
The peer group consists of Abbott Laboratories , American Home Products
Corporation, Bristol-Myers Squibb Company, Eli Lilly & Company, Glaxo Holdings
Plc, Johnson & Johnson, Merck & Co., Inc., Pfizer Inc., Schering-Plough Corp.,
Smithkline Beecham Plc, and Warner-Lambert Company. The Company uses the peer
group for comparisons of executive compensation.
13
<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 1995 (the "named executive officers").
- -------------------------------------------------------------------------------
SUMMARY COMPENSATION TABLE
<TABLE>
- --------------------------------------------------------------------------------------------------------------
<CAPTION>
LONG TERM COMPENSATION
-----------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
- --------------------------------------------------------------------------------------------------------------
(A) (B) (C) (D) (E) (F) (G) (H) (I)
SECURITIES
UNDERLYING
OTHER ANNUAL RESTRICTED OPTIONS/ LTP ALL OTHER
COMPENSATION STOCK SARS/3/ PAYOUTS COMPENSATION
NAME & PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) ($)/1/ AWARD(S)/2/$ (#) ($) ($)/4/
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Michel de Rosen 1995 435,600 275,734 171,120 -0- 19,102 -0- -0-
President and 1994 433,833 252,865 106,100 -0- 34,080 -0- -0-
Chief Executive Officer* 1993 132,812 68,162 42,361 -0- -0- -0- -0-
Timothy G. Rothwell 1995 383,609 252,217 435,916 -0- 12,000 -0- 3,000
Executive Vice -0-
President**
R.E. Cawthorn, 1995 593,750 -0- 102,400 -0- 50,490 -0- 3,000
Chairman 1994 761,667 531,484 -0- -0- 51,511 -0- 3,000
1993 733,430 448,490 -0- -0- 102,479 -0- 53,553
M.E. Karobath M.D. 1995 396,958 227,800 81,920 -0- 24,079 -0- 3,000
Senior Vice 1994 336,397 211,724 -0- -0- 28,011 -0- 3,000
President, and President 1993 332,957 175,656 -0- -0- 62,219 -0- 3,000
RPR Research and
Development
J.A. Sedor, 1995 335,833 268,983 51,200 -0- 34,371 -0- 3,000
President-- 1994 252,950 180,815 -0- -0- 6,587 -0- 3,000
Armour Pharmaceutical 1993 236,583 132,870 -0- -0- 36,132 -0- 3,000
Company
</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 1995 for Mr. de Rosen represents (a)
$81,920 short-term payout, made in 1996, of a 1995 grant under the terms of
the Capital Plan and $89,200 representing personal benefits in connection
with the Company's expatriate program; in 1995, the individual benefits
which exceeded 25% of Mr. de Rosen's personal benefits were; housing
allowance ($45,600) and home leave, ($23,600); for 1994 and 1993, the
amounts shown for Mr. de Rosen represent personal benefits in connection
with the Company's expatriate program: the individual personal benefits
which exceeded 25% of the total reported were, for 1994, housing allowance
($19,000), relocation allowance ($40,000) and home leave ($35,299) and, for
1993, children's tuition ($12,714). For Mr. Rothwell, the amount shown is
the aggregate of a sign-on bonus of $140,000 and an advance of $160,000
(which would be repaid to the Company in the event Mr. Rothwell's employment
terminates prior to January 30, 1999), increased to cover income taxes. For
the other named executives, the amount shown for 1995 represents the short-
term payout, made in 1996, of a 1995 grant under the terms of the Capital
Plan.
14
<PAGE>
/2/ The Company did not issue restricted shares in 1993 ,1994 or 1995 and does
not currently intend to do so in future years. On December 31, 1995, 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 the supplemental grant
made to certain executives, including Messrs. Cawthorn, Karobath, and Sedor,
in September 1993 which becomes exercisable in 1996 at an option price of
$64.00 representing a 10% annual compound increase over market value at time
of grant. (See table entitled Option/SAR Grants in Last Fiscal Year on page
26.)
/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; 1993
payment to Mr. Cawthorn includes $50,553 cash value in an executive life
insurance program paid out upon termination of the plan.
* Mr. de Rosen was employed by the Company on September 9, 1993.
** Mr. Rothwell was employed by the Company on January 25, 1995.
- -------------------------------------------------------------------------------
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 PERIOD
NAME OR OTHER RIGHTS (#) UNTIL MATURATION OR PAYOUT
- ----------------------------------------------------------------------------------
<S> <C> <C>
M. de Rosen 4,000 3 years
T.G. Rothwell 5,750 2 and 3 years
2,581/2/
R.E. Cawthorn -0-
M.E. Karobath 4,000 3 years
J.A. Sedor 2,500 3 years
</TABLE>
- --------
/1/ Represents long-term award, payable three years after grant, under the terms
of the Capital Plan. The Capital Plan provides for annual performance unit
awards, one-half of which is generally a short-term benefit payable in cash
to the named executive officer one year after grant and is reported in the
Summary Compensation Table on page , and one-half of which is a long-term
benefit payable in cash three years after grant. The annual performance unit
awards were first made in 1995 at a value of $20 per unit. 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 in 1996 and in subsequent years will be determined each year with
reference to the Company's net income change from the previous year compared
to the average change 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. One-half of the award of 5,750 performance units for Mr.
Rothwell will vest in 1997 and one-half in 1998; otherwise, the units
awarded to the other named executive officers will vest in 1998. In order to
continue to participate in the Capital Plan, the named executive officers
must, within two to four 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
initial, long-term "kick-off" award in the Capital Plan, as well as shares
owned outright and in the Company's Employee Savings Plan.
/2/ Represents the initial value of the "kick-off" award to Mr. Rothwell of
notional shares of the Company, based on a then-current market value of
$38.75 and equal, in aggregate, to 25% of his then-current annual salary,
under the terms of the Company's Capital Plan. The kick-off award vests
during continued employment at the annual rate of 16 2/3% over a six-year
period commencing on the date of the award. The notional shares track and
reflect the value of the Company's shares over time and are payable in cash
upon death, disability, retirement, or reaching age 60.
15
<PAGE>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE AT ASSUMED
ANNUAL RATES OF STOCK PRICE
INDIVIDUAL GRANTS APPRECIATION FOR OPTION TERM ($)/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>
M. de Rosen 19,102 1.02 40.00 2/25/05 --0-- 480,606 1,217,752
T.G. Rothwell 12,000 .64 38.75 1/28/05 --0-- 292,440 741,120
R.E. Cawthorn 50,490 2.69 40.00 2/25/05 --0-- 1,270,328 3,218,738
M.E. Karobath 24,079 1.28 40.00 2/25/05 --0-- 605,828 1,535,036
J.A. Sedor 18,371 1.83 40.00 2/25/05 --0-- 462,214 1,171,151
16,000 45.88 9/30/05 --0-- 461,600 1.169,920
</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
$65.16 and $103.75 per share, respectively, for options bearing an exercise
price of $40). 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 11, 1996 was $62.25 per
share.
/2/ Options granted in 1995 become exercisable during continued employment at
the rate of one-third of the total grant on each of the first three
anniversaries of the date of grant and remain exercisable during continued
employment until ten years after date of grant.
- -------------------------------------------------------------------------------
AGGREGATED OPTION/SAR EXERCISES IN 1995 & 1995 YEAR-END OPTIONS/SAR VALUES
<TABLE>
- -------------------------------------------------------------------------------------------
<CAPTION>
(A) (B) (C) (D) (E)
NUMBER OF SECURITIES VALUE OF UNEXERCISED,
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT OPTIONS/SARS AT
FY-END (#) FY-END ($)/1/
------------------------- -------------------------
SHARES ACQUIRED VALUE
NAME ON EXERCISE (#) REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
M. de Rosen - 0 - - 0 - 11,360 91,822 207,320 667,742
T.G. Rothwell - 0 - - 0 - - 0 - 12,000 - 0 - 174,000
R.E. Cawthorn - 0 - - 0 - 365,784 158,991 3,618,679 1,295,716
M.E. Karobath - 0 - - 0 - 42,149 102,160 305,560 727,437
J.A. Sedor - 0 - - 0 - 26,464 67,654 234,929 478,718
</TABLE>
- --------
/1/ Calculated on the difference between the December 31, 1995 market value of
$53.25 and the option price.
16
<PAGE>
PENSION PLAN TABLE
ESTIMATED ANNUAL RETIREMENT BENEFITS
<TABLE>
<CAPTION>
YEARS OF CREDITED SERVICE
---------------------------------------------------------------------
FINAL AVERAGE
ANNUAL
COMPENSATION 10 15 20 25 30 35
- ------------- ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
$300,000 25,574 38,362 51,149 63,936 76,723 80,473
$350,000 25,574 38,362 51,149 63,936 76,723 80,473
$400,000 25,574 38,362 51,149 63,936 76,723 80,473
$450,000 25,574 38,362 51,149 63,936 76,723 80,473
$500,000 25,574 38,362 51,149 63,936 76,723 80,473
$550,000 25,574 38,362 51,149 63,936 76,723 80,473
$600,000 25,574 38,362 51,149 63,936 76,723 80,473
$650,000 25,574 38,362 51,149 63,936 76,723 80,473
</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").
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, subject to a $150,000 (indexed) limitation on eligible
compensation. The Company's contribution to the Pension Plan in 1995
represented approximately 4.5% of the aggregate base annual compensation of
all Pension Plan participants as of January 1, 1995. The years of credited
service for the named executive officers who participate in the Pension Plan
are Mr. Rothwell, 1 year; Mr. Cawthorn, 13 years; Dr. Karobath, 3 years;
andMr. Sedor, 24 years.
The Company adopted, effective January 1, 1988, the Rorer Group Inc.
Supplemental Executive Retirement Plan ("SERP") for the benefit of executives
designated by the Board of Directors. The plan, provides for an annual
supplemental retirement benefit equal to the sum of up to 4% of the
participant's average annual compensation received during his final three 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. Mr. Cawthorn participates in the SERP. His benefits under
the Pension Plan and SERP as a single life annuity upon normal retirement at
age 65 would be $645,660 per year.
The compensation as specified in the table above includes salary as reported
in the Summary Compensation Table on page .
Mr. de Rosen participates in a legally-required retirement plan provided
through Rhone-Poulenc S.A. for the benefit of substantially all employees, in
France, of Rhone-Poulenc S.A. and the Company and their respective
subsidiaries. The plan is mandated by French law, involves a partial employee
contribution and is funded independently of the employer. The basis for
calculation of the retirement benefit is capped by law at an annual
compensation level of approximately $250,000.
17
<PAGE>
AGREEMENTS WITH CERTAIN EXECUTIVE OFFICERS
Cawthorn Employment Agreement. 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, or
$1,293,151, in the aggregate. In addition, he will have a period of five years
following termination of employment to exercise stock 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.
Rothwell Employment Agreement. In connection with his employment by the
Company in 1995, the Company agreed to provide Mr. Rothwell, in addition to
payments reported in the Summary Compensation Table on page , accelerated
service credit, for purposes of calculating pension benefits, of two years for
each year worked, provided he is employed by the Company for a minimum of five
years.
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 1995,
sales by the Company to RP and its affiliates amounted to $31.1 million. The
Company purchased materials in 1995 from RP and its affiliates at a cost of
$41.4 million.
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 amount of annual fees paid to RP in 1995 pursuant to such
arrangements was approximately $23.6 million.
The Company paid RP cash and preferred stock of a subsidiary of the Company
aggregating approximately $273.2 million for the purchase from RP of
Cooperation Pharmaceutique Francais and a pharmaceutical business in Brazil.
As of December 31, 1995, RP had loans outstanding to the Company of $653
million. In 1995, the maximum principal amount of such loans was $653 million
and net interest accruals in 1995 for such loans amounted to $12.4 million. RP
has guaranteed certain debt obligations of the Company and certain of its
subsidiaries and received fees in consideration therefor of approximately
$136,300 for 1995. As of December 31, 1995, the aggregate principal amount of
loans so guaranteed was $65.2 million. In addition, the Company paid RP in
1995 fees totaling $146,250 for a Support Agreement in connection with an
issue of Preferred Shares which was redeemed in full during 1995.
18
<PAGE>
In December 1995, the Company issued $500 million of undated capital equity
notes to a subsidiary of RP. The notes have a liquidation preference that
ranks senior to all RPR common stock, but junior to all existing and future
RPR preferred stock. Semiannual remuneration on the unpaid principal balance
of the equity notes is based on a floating rate. The capital equity notes are
redeemable only at the Company's option, but not earlier than five years after
issuance, subject to certain exceptions.
Pursuant to an agreement reached with respect to activities in 1995, RP paid
to Patrick Langlois, Senior Vice President and Chief Financial Officer, for
consulting services rendered to RP, fees totaling $40,000. 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 AMEND ARTICLES OF INCORPORATION TO INCREASEAUTHORIZED COMMON
SHARES
The Board of Directors has recommended amendment of the Company's Articles
of Incorporation to increase the number of authorized Common Shares from 200
million, without par value, to 600 million, without par value. The currently
authorized capital stock of the Company is 200 million Common Shares and three
million Preferred Shares, both without par value.
On March 11, 1996, xxx,xxx,xxx Common Shares were outstanding. An additional
6,551,000 Common Shares have been reserved for issuance under the Company's
stock option plans.
While there is no current intention to issue the additional authorized
Common Shares, the proposed increase in the number of authorized Common Shares
will insure that shares will be available, if needed, for issuance in
connection with stock splits, acquisitions and other corporate purposes. If
the holders of a majority of the outstanding Shares approve the recommended
amendment to the Articles of Incorporation, the Board of Directors will have
the authority to issue the additional authorized shares or any part thereof
without further action by the shareholders except as required by law or
applicable stock exchange requirement. For example, the New York Stock
Exchange, on which the Company's Common Shares are listed, currently specifies
shareholder approval as a prerequisite for listing shares in several
instances, including acquisition transactions where the present or potential
issuance of shares could result in an increase in the number of shares
outstanding by 18.5% or more. The Board of Directors believes that the
availability of the additional shares for the purposes stated without delay or
the necessity for a special shareholders' meeting would be beneficial to the
Company. Except as set forth above with respect to shares reserved for
issuance pursuant to the stock option plans, the Company does not now
contemplate any such transaction or have any commitments, arrangements or
understandings which would require the issuance of additional shares.
Each additional Common Share authorized by the proposed amendment will have
the same rights and privileges as each Common Share currently authorized and
outstanding. Shareholders of Common Shares have no preemptive rights to
receive or purchase any of the Common Shares authorized by this proposed
amendment. Shareholders do not have cumulative voting rights in the election
of directors.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR THIS PROPOSAL.
19
<PAGE>
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 1996. 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 1995 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 $6,500, 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 1997 Annual
Meeting must be received in writing no later than November 30, 1996 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, 1995 AS FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION. REQUESTS SHOULD BE SENT TO RHNE-POULENC RORER INC., 500 ARCOLA
ROAD, COLLEGEVILLE, PENNSYLVANIA 19426, ATTENTION: VICE PRESIDENT OF INVESTOR
RELATIONS.
20
<PAGE>
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,
------------------------------------------------------------------------------------------
RESTATED
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales............... $5,142.1 $4,486.6 $4,019.4 $4,095.9 $3,824.3 $2,917.4 $1,182.2 $1,041.6 $ 928.8 $ 844.6
Operating income........ 639.3 597.7 675.3 675.0 558.5 88.9 125.5 144.1 122.7 52.9
Income from continuing
operations............. 356.5 367.1 421.1 423.3 326.5 1.0 86.5 61.8 54.3 3.5
Discontinued operations,
net of tax:
Gain on sale........... -- -- -- -- -- -- -- -- -- 122.1
Cumulative effect of
change in accounting
for income taxes....... -- -- -- 15.0 -- -- -- -- (35.5) --
Net income available to
common shareholders.... 337.8 347.9 408.7 428.2 326.1 1.0 85.0 61.8 18.8 125.6
Primary earnings per
common share:
Continuing operations.. 2.50 2.50 2.96 2.99 2.37 .01 1.33 .98 .84 .05
Discontinued
operations:
Gain on sale........... -- -- -- -- -- -- -- -- -- 1.88
Cumulative effect of
change in accounting
for income taxes...... -- -- -- .11 -- -- -- -- (0.55) --
Primary earnings per
common share........... 2.50 2.50 2.96 3.10 2.37 .01 1.33 .98 .29 1.93
Fully diluted earnings
per common share....... 2.50 2.50 2.96 3.10 2.37 .01 1.21 .97 .29 1.93
Cash dividends per
common share........... 1.20 1.12 1.00 .68 .445 .42 .405 .40 .386 .376
Research and development
expenses............... 766.2 606.1 561.2 521.3 444.5 350.1 121.8 104.0 82.7 69.7
BALANCE SHEET DATA:
Working capital......... 384.5 591.7 446.6 667.1 407.0 391.3 436.9 312.4 226.6 155.7
Property, plant &
equipment, at cost..... 2,876.5 2,310.9 1,958.6 1,855.9 2,027.8 1,930.7 488.2 395.7 363.5 333.0
Capital expenditures:
U.S. corporate offices,
research center and
site.................. -- -- -- 63.1 102.1 92.1 29.3 10.8 -- --
Other.................. 281.5 229.9 250.4 221.2 181.6 124.8 82.1 59.9 45.1 36.7
Total assets............ 8,987.1 4,652.3 4,050.2 3,858.3 4,115.5 4,085.0 1,791.7 1,388.0 1,240.5 1,110.1
Long-term debt
(including payable
to RP)................. 2,684.4 439.9 432.2 779.7 960.5 1,634.3 882.5 564.6 509.7 444.3
Shareholders' equity.... 2,357.2 2,110.4 1,821.2 1,568.3 1,298.6 693.5 439.9 414.2 368.8 390.4
Common shares
outstanding at
year-end............... 134.5 134.1 137.0 138.3 137.9 137.4 63.1 63.6 62.9 65.4
Book value per common
share.................. 12.50 12.75 10.37 9.17 7.24 5.05 6.97 6.51 5.86 5.97
OTHER DATA:
Employees............... 28,000 25,000 22,300 22,900 22,500 23,500 8,500 8,400 7,400 7,500
Sales per employee (in
thousands)............. 186 180 180 180 170 150 140 132 124 103
</TABLE>
- -------
Results for the first quarter of 1995 and for the full year 1994 have been
restated to include the accounts of Cooperation Pharmaceutique Francaise
("Cooper") and a pharmaceutical business in Brazil from April 1, 1994 and
January 1, 1994, respectively. Both businesses were acquired from Rhone-
Poulenc S.A. ("RP") in 1995.
Results for 1995 include the operations of Fisons plc ("Fisons") from November
1, 1995.
Results include the accounts of the Human Pharmaceutical Business ("HPB") of
RP from May 5, 1990.
Pretax restructuring and other charges totaled $60.0 million in 1995, $121.2
million in 1994, $93.8 million in 1993, $73.6 million in 1991 and $289.3
million in 1990 and $10.0 million in 1989. Results for 1995 also include $22.9
million of Fisons-related integration and other costs. Results for 1993
include $105.0 million proceeds from litigation settlement.
Acquired research and development expense charged to operations associated
with the acquisitions of Fisons and Applied Immune Sciences, Inc. ("AIS")
totaled $43.6 million in 1995. Acquired research and development expense
included in equity losses of affiliates associated with AIS totaled $13.0
million, $11.0 million, and $27.0 million in 1995, 1994 and 1993,
respectively.
Pretax gains on sales of product rights and investments totaled $49.5 million
in 1995, $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.
Pretax charges included in other expense, net related to the reassessment of
the carrying values of certain investments totaled $25.4 million in 1995 and
$30.6 million in 1994.
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. Prior years reflect the application of SFAS 96,
"Accounting For Income Taxes," effective January 1, 1987.
Sales per employee for the years 1995 and 1990 have been restated on a pro
forma basis to include Fisons and HPB, respectively, as if they were part of
the Company from the beginning of the year reported.
Earnings per share for 1994 and 1995 reflect pro forma adjustments giving
effect to interest and preferred dividends relative to the Cooper and
Brazilian business acquisitions.
All share and per share data have been adjusted to reflect a two-for-one
common stock split effective June 7, 1991.
21
<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.
STRATEGIC BUSINESS DEVELOPMENTS
Through recent selected acquisitions and alliances, the Company has sought
to solidify its position in targeted therapeutic areas and to strengthen its
geographic presence in strategic markets:
In the second quarter of 1995, the Company acquired from RP the businesses
of Cooperation Pharmaceutique Francaise ("Cooper") and Rhodia Farma, a
pharmaceutical business in Brazil. Cooper has an extensive pharmacy
distribution network in France and promotes the Company's self-medication
products. Rhodia Farma strengthens the Company's presence in Brazil and
increases access to other South American markets. The acquisitions of entities
under common control were treated for accounting purposes on an "as-if
pooling" basis and, accordingly, RPR 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. 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.
In September 1995, the Company's Armour Pharmaceutical Company subsidiary
("Armour") completed the formation of a 50/50 global joint venture ("Centeon")
with Behringwerke AG ("Behring"), a subsidiary of Germany's Hoechst AG, in the
plasma proteins business. Armour and Behring have complementary plasma
proteins offerings and geographic strengths which position the joint venture
as a global market leader. The joint venture's Board of Directors was formally
established on January 1, 1996 at which time joint control and profit-sharing
provisions took effect.
In the fourth quarter of 1995, the Company acquired the U.K.-based
pharmaceutical company Fisons plc ("Fisons"). Fisons has a strong respiratory
product portfolio with established positions in the U.S., Europe and Japan.
The combination of Fisons with RPR creates the fourth largest company
worldwide in asthma/allergy with a comprehensive range of complementary
products, expanded presence in major geographic markets and innovative
inhalation delivery technologies. Two months of Fisons pharmaceutical
operations are included the Company's 1995 results. Management anticipates
that the impact of Fisons will be earnings-neutral in 1996 and accretive in
1997.
In the fourth quarter of 1995, the Company also acquired the remaining
outstanding shares that it did not own of Applied Immune Sciences, Inc.
("AIS"), a pioneer in cell therapy. The acquisition of AIS enhances the
Company's ability, through its Gencell Division, to develop and commercialize
ex-vivo cell and gene therapies and provides increased access to vector
research.
INDUSTRY TRENDS
In recent years, the worldwide pharmaceutical industry has been 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.
22
<PAGE>
In the U.S., payment of rebates to state Medicaid programs, as required by
existing legislation, reduced the Company's sales by $47 million in 1995, $40
million in 1994 and $34 million in 1993. Even without major government-
mandated health care reform and 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. RPR, along with
most pharmaceutical manufacturers, has reorganized its sales and marketing
organizations to adapt to managed-care initiatives.
In France, the Company's largest market, the government has continued its
efforts to reduce the nation's health care deficit through such initiatives as
special levies on pharmaceutical manufacturers coupled with compliance with
individual three-year convention agreements and encouragement of more
widespread generics offerings.
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, government
reimbursement or by limiting overall profitability levels. In Germany, a two-
year government moratorium on price increases was lifted in 1995. Elsewhere,
in Japan, a government-imposed biannual price reduction takes effect in April
1996.
Whether initiated by governments or by private payors, the above measures
tend to restrict future revenue and profit 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; mergers or strategic
alliances with others and creative marketing solutions to meet the needs of
payors.
RESULTS OF OPERATIONS
1995 Compared with 1994
At $338 million, net income available to common shareholders was comparable
with the prior year ($2.50 per share in both years). Results for 1995 included
$127 million ($.75 per share) of charges associated with acquisitions,
including pretax restructuring charges totaling $60 million, acquired research
and development of $44 million and $23 million of integration and other costs.
Results for 1994 included pretax restructuring charges of $121 million ($.58
per share).
Sales
At $5,142 million, reported sales for the full year 1995 increased 15%. The
favorable effects of currency fluctuations due to a weaker U.S. dollar (+5%)
were partially offset by product divestitures (-4%), principally the Company's
U.S. and Canadian over-the-counter businesses. Operational sales growth of 14%
resulted from volume increases (+12%), including new product introductions
(+1%) and two months of Fisons' sales (+3%), and net higher prices in Europe
and in the U.S. prescription pharmaceuticals and plasma proteins businesses
(+2%). No single product or offering contributed more than 6% of worldwide
sales in 1995 and the ten largest products contributed approximately 35%.
In the tables and discussion which follow, percentage comparisons of sales
are presented excluding the effects of currency fluctuations unless otherwise
noted. Certain reclassifications have been made from amounts shown in prior
periods for therapeutic area totals to conform to classifications now used by
the Company.
23
<PAGE>
Sales by geographic area were as follows (% change excludes the effects of
product divestitures and currency fluctuations):
<TABLE>
<CAPTION>
1995 % 1994 % 1993
SALES CHANGE SALES CHANGE SALES
------ ------ ------ ------ ------
($ IN MILLIONS)
<S> <C> <C> <C> <C> <C>
U.S.......................................... $1,314 +17% $1,262 +13% $1,120
------ --- ------ --- ------
France....................................... 1,820 + 9% 1,507 +10% 1,375
Other Europe................................. 1,207 +11% 1,016 + 3% 978
Rest of World................................ 801 +24% 702 +30% 546
------ --- ------ --- ------
Total Non-U.S................................ 3,828 +13% 3,225 +11% 2,899
------ --- ------ --- ------
Total Sales.................................. $5,142 +14% $4,487 +12% $4,019
====== === ====== === ======
</TABLE>
In the United States, sales of prescription pharmaceuticals (Azmacort(R),
Lovenox(R), Dilacor(R) XR and DDAVP(R)) grew at double-digit rates from 1994
which was affected by trade inventory reductions in the first half of the
year. Sales of plasma proteins (Albuminar(R) and recombinant Factor VIII
offerings) also performed well, although growth rates were somewhat reduced
from those recorded in the prior year. Fisons products also contributed to
U.S. sales growth in the fourth quarter. Sales in France reflected improved
performance of the analgesic Doliprane(R) and higher sales of Clexane(R),
Maalox(R) and Granocyte(R). Sales also benefitted from inclusion of a full
year of Cooper sales compared with nine months in 1994. In Other European
markets, before the impact of Fisons sales, sales of prescription
pharmaceuticals increased in Germany (+12%) and in Italy (+8%) where
Granocyte(R) was launched in the second quarter. Sales of ethical products,
particularly Frumil(R) and Orudis(R), continued to be impacted by generic
competition in the U.K. (-3%). Expansion in Central and Eastern European
markets added to regional sales results. Two months of Fisons product sales
contributed approximately five percentage points to sales growth in Other
European countries, primarily in the U.K., Germany and Italy. Sales growth in
the Rest of World area reflected continued expansion in South American
markets, particularly Brazil and Argentina, and increased sales in Japan
(+14%). Growth in Japan in 1996 will be affected by government price
reductions to be imposed in April.
24
<PAGE>
Sales by therapeutic area were as follows:
<TABLE>
<CAPTION>
1995 % 1994 % 1993
THERAPEUTIC AREA/PRINCIPAL OFFERINGS SALES CHANGE* SALES CHANGE SALES
------------------------------------ ----- ------- ----- ------ -----
($ IN MILLIONS)
<S> <C> <C> <C> <C> <C>
TOTAL CARDIOVASCULAR/THROMBOSIS................ $979 +7% $866 +15% $743
Clexane(R)/Lovenox(R).......................... 300 +30% 214 +38% 153
Dilacor(R) XR.................................. 146 +15% 128 +150% 51
Lozol(R)/Indapamide............................ 91 -12% 104 -12% 118
Selectol(R)/Selecor(R)......................... 70 +18% 55 +8% 50
- --------------------------------------------------------------------------------
TOTAL ANTI-INFECTIVES/ONCOLOGY................. 686 +13% 572 +4% 542
Flagyl(R)...................................... 118 +24% 97 +28% 77
Granocyte(R)................................... 47 +134% 18 N/A --
- --------------------------------------------------------------------------------
TOTAL CENTRAL NERVOUS SYSTEM/ANALGESICS........ 608 +16% 488 +5% 457
Doliprane(R)................................... 143 +21% 107 +2% 102
Imovane(R)/Amoban(R)........................... 125 +24% 94 +7% 85
- --------------------------------------------------------------------------------
TOTAL PLASMA PROTEINS.......................... 592 +13% 510 +26% 400
Albuminar(R)................................... 199 +9% 179 +14% 154
Factor VIII.................................... 205 +25% 158 +37% 114
- --------------------------------------------------------------------------------
TOTAL RESPIRATORY.............................. 578 +31% 433 +6% 407
Azmacort(R).................................... 208 +42% 147 +3% 143
Nasacort(R).................................... 87 -4% 90 +14% 79
- --------------------------------------------------------------------------------
TOTAL GASTROINTESTINAL......................... 397 -20% 474 -4% 490
Maalox(R)...................................... 170 -34% 249 +4% 239
- --------------------------------------------------------------------------------
TOTAL BONE METABOLISM/RHEUMATOLOGY............. 369 +2% 344 -10% 381
Orudis(R)/Profenid(R)/Oruvail(R)............... 204 +2% 192 +10% 173
Calcitonins.................................... 102 -2% 98 -39% 163
- --------------------------------------------------------------------------------
OTHER THERAPEUTIC AREAS........................ 933 +9% 800 +33% 600
DDAVP(R)....................................... 96 +14% 84 +16% 73
- --------------------------------------------------------------------------------
</TABLE>
* Percentage change calculation excludes effects of currency fluctuations.
Sales of the thrombosis product Clexane(R)/Lovenox(R), a low molecular
weight heparin, reached $300 million in 1995, fueled by continued strong
performance in the U.S., France and Germany. In 1995, Lovenox(R), available in
the U.S. since 1993 for the prevention of deep vein thrombosis following hip
replacement surgery, was approved by the U.S. Food and Drug Administration
("FDA") for use following knee replacement surgery. The cardiovascular product
Dilacor(R) XR, a once-daily calcium channel blocker, recorded good growth
despite the loss of FDA exclusivity in midyear. Management does not anticipate
that sales of Dilacor(R) XR will be affected by generic competition before
1997. Dilacor(R) XR, available in the U.S. since 1992 for the treatment of
hypertension, received FDA approval in 1995 for the management of chronic
stable angina. Although brand sales of Lozol(R), a diuretic for treatment of
hypertension, were up slightly from 1994, total indapamide product sales
declined due to reduced sales of the Company's generic form.
Increased sales of anti-infectives reflected continued expansion in South
American markets, particularly of the antiparasitic Flagyl(R). While overall
performance of anti-infectives in France improved from 1994, the French
antibiotics market has become increasingly competitive. Sales in France were
also negatively impacted by the loss of sales of the quinolone antibiotic
Zagam(R) in the second half of the year due to labeling restrictions following
photosensitivity concerns. Zagam(R) remains a second line therapy in France
for community-acquired pneumonia.
25
<PAGE>
The Company's portfolio of oncological products grew significantly during
1995. As a result of additional approvals received during the year,
Granocyte(R), a recombinant GCSF for chemotherapy-induced neutropenia, is now
available in all European Union countries. Taxotere(R), a semi-synthetic
taxoid for solid tumors, was approved in more than 20 countries for the
treatment of advanced metastatic breast cancer and in six countries for the
treatment of non-small cell lung cancer. In October 1995, the Company received
an approvable letter from the FDA with respect to Taxotere(R) for use in the
treatment of advanced breast cancer. Campto(R), a topoisimerase-1 inhibitor
for colorectal cancer, was approved in France for second-line therapy; the
Company has the rights to Campto(R) in over 120 countries excluding the U.S.
and Japan.
Sales of each of the Company's principal central nervous system/analgesic
products, Doliprane(R) and Imovane(R)/Amoban(R), exceeded $100 million in
1995. Doliprane(R), which is marketed in France, performed favorably compared
with the prior year which was affected by weak demand. Imovane(R)/Amoban(R), a
non-benzodiazepine sleeping agent registered sales increases in Europe
(France, Germany, and the U.K.) and in Japan. In the fourth quarter, the FDA
approved the Company's product Rilutek(R) (riluzole) for treatment of
Amyotrophic Lateral Sclerosis ("ALS"). Rilutek(R) is the first approved drug
shown to be effective in the treatment of ALS.
The major plasma proteins (Factor VIII offerings and Albuminar(R)) marketed
by Armour Pharmaceutical Company performed consistently well throughout the
year. Albuminar(R) registered double-digit growth in the U.S. with sales also
above prior year levels in Japan. Sales of Monoclate(R) increased modestly as
higher sales in Europe were partially offset by slight declines in the U.S.
due to increased sales of the recombinant brands, Bioclate(R) and Helixate(R).
Sales of Armour's U.S. immune globulin offerings (Gammar(R) IV) experienced
shortfalls as a result of a voluntary withdrawal in the first half of the year
in response to the FDA's industry-wide request that such products undergo a
new testing technique. In the second half of the year, Armour received FDA
approval for Gammar(R) IV-P pasteurized immunoglobulin which replaces
Gammar(R) IV. Joint control provisions of the Centeon joint venture took
effect on January 1, 1996 at which time Armour sales were no longer reflected
in the Company's reported sales.
Sales of Azmacort(R), an inhaled steroid for asthma sold in North America,
surpassed $200 million and registered growth over the prior year which was
negatively affected by trade inventory reductions. The impact of a competitive
entry kept North American sales of Nasacort(R), an inhaled steroid for
allegeric rhinitis, below prior year levels. The fourth quarter acquisition of
Fisons enhances the Company's global respiratory franchise, providing a more
comprehensive respiratory product portfolio and an improved geographic
presence. Two months of Fisons respiratory products sales included in the
Company's reported sales approximated $89 million, a significant portion of
which represented sales of sodium cromoglycate-based products, principally the
bronchial asthma product Intal(R) and nedocromil sodium-based products,
principally the bronchial asthma product Tilade(R).
The antacid Maalox(R) performed well in Europe (France, Poland and Germany).
In Japan, Maalox(R) sales, fueled by the late 1994 launch of Maalox(R)
granules, grew at a rate that exceeded that of the overall antacid market. In
January 1995, the Company completed the transfer of its Canadian Maalox(R)
product rights to Ciba-Geigy Ltd. ("Ciba"); the Company's U.S. rights were
tranferred to Ciba in December 1994. Reported sales for 1994 included
approximately $114 million of U.S. and Canadian Maalox(R) sales.
Increased sales of Orudis(R)/Profenid(R)/Oruvail(R), a ketoprofen-based
anti-inflammatory agent, resulted principally from growth in South American
countries. Elsewhere, Orudis(R) experienced declines in the U.K. and in
France. Sales of calcitonin products for bone disorders were slightly below
1994 levels as higher sales in Japan and Brazil were offset by overall
declines in the U.S. due to generic competition and in European markets,
particularly Italy, where calcitonins continue to be affected by governmental
programs. In 1995, the Company received approval in more than ten
26
<PAGE>
countries for Menorest(R), a hormone replacement skin patch for treatment of
postmenopausal symptoms and the prevention of osteoporosis.
Sales increases in other therapeutic areas were partially attributable to
sales of the Cooper and Rhodia Farma subsidiaries in addition to increased
sales of dermatological products. Other therapeutic area sales included
U.S. sales of DDAVP(R) for nocturnal enuresis. In 1995, DDAVP(R) tablets for
the treatment of central diabetes insipidus received FDA approval.
Operating Income
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
1995 1994
VS. VS.
1995 1994 1994 1993 1993
------------ ------------ ------ ------------ ------
% OF % OF % % OF %
$ SALES $ SALES CHANGE $ SALES CHANGE
($ IN MILLIONS) ------ ----- ------ ----- ------ ------ ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Gross margin............ $3,396 66.0% $2,931 65.3% 16% $2,693 67.0% 9%
Selling, delivery and
administrative
expenses............... 1,864 36.2% 1,606 35.8% 16% 1,468 36.5% 9%
Research and development
expenses............... 766 14.9% 606 13.5% 26% 561 14.0% 8%
Operating income........ 639 12.4% 598 13.3% 7% 675 16.8% (11.5)%
</TABLE>
Increased gross profit as a percentage of sales in 1995 reflected the
favorable impact of price and benefits of plant rationalization and
productivity improvement programs, partially offset by the impact of the
lower-margin Cooper business and unfavorable product mix. The Company hopes to
achieve further margin improvements in 1996 and beyond through continued cost
containment efforts coupled with the favorable margins associated with
internally developed global new products.
Commercial expenses increased as a percentage of sales as a result of higher
selling and promotional costs in the U.S. pharmaceuticals business associated
with new products, sales force expansions in support of South American
markets, and increased selling expenses due to volume improvements in Japan,
Germany and Italy. Commercial expense ratios in 1995 benefitted from the
absence of the higher advertising and promotional costs associated with the
Company's North American over-the-counter business in 1994. Administrative
expenses declined slightly as a percentage of sales in 1995 as a result of the
Company's ongoing cost containment programs. Amortization of goodwill and
intangibles related to the Fisons acquisition contributed to higher 1995
selling, delivery and administrative expense ratios. Management anticipates
that selling, delivery and administrative expenses as a percentage of sales
before the effect of amortization will be favorably impacted in 1996 and
thereafter as the synergies from the integration of the Fisons business and
further benefits of cost structure improvement programs are realized.
The Company's investment in research and development approached 15% of sales
in 1995, reflecting the higher costs associated with bringing late-stage
projects (Taxotere(R), Campto(R), Rilutek(R), Menorest(R), Lovenox(R) new
indications) to market. The Company anticipates that research and development
expenses will stabilize as a percentage of sales over the next two years.
Among the Company's more significant Phase III projects are Synercid(TM), an
injectable streptogramin antibiotic for serious bacterial infections and
Combi-patch, an estrogen/progestin combination transdermal patch for relief of
postmenopausal symptoms.
In 1995, the Company recorded $44 million of acquired research and
development expense in connection with the Fisons and AIS acquisitions,
representing research and development activities of the acquired companies for
which technological feasibility has not yet been established and for which no
alternative future use exists.
27
<PAGE>
In December 1995, the Company recorded a $60 million pretax charge related
to the restructuring of RPR operations as a direct result of the Fisons
acquisition. As part of the Fisons purchase price allocation, the Company has
also recorded an estimated $100 million liability for the restructuring of
Fisons operations; management is in the process of finalizing the programs
specific to the Fisons business. The combined $160 million liability
represents expected cash outlays, which will be principally severance-related,
associated with eliminating approximately 1,900 positions primarily in the
marketing, administrative and manufacturing functions. Many of these positions
are based in the U.S. and the U.K., although other locations will also be
affected. Additional workforce reductions associated with selected
divestitures are also expected, bringing the total number of positions
affected to approximately 2,900 by the end of 1997. Average annual cost
savings and sales synergies associated with the Fisons acquisition are
expected to approximate $200 million, with an estimated 65% of that amount
expected to be realized in 1996.
In 1994, the Company recorded a $121 million charge related to a global
restructuring plan. Current year cash outlays associated with the plan
approached $48 million; asset writeoffs were not significant. Pretax savings
as a result of the restructuring program approximated $34 million in 1995 and
over 1,070 positions have been affected by the 1994 plan. In 1993, the Company
recorded pretax charges of $94 million for the cost of certain restructurings,
principally in Europe, and increased provisions for certain litigation. The
1993 program was substantially completed in 1995 with current year cash
outlays totaling $10 million. Over 800 positions were affected by the 1993
plan.
Excluding restructuring in both years and other acquisition-related items in
1995, operating income margin declined approximately one percentage point from
1994 as a result of significant investment in research and development
activities and increased marketing efforts associated with the introduction of
new products.
Interest, Other Expense, and Taxes
Net interest expense increased 80% to $85 million in 1995, primarily as a
result of increased borrowings principally in support of the fourth quarter
acquisition of Fisons. Interest expense in 1996 will be significantly higher
due to higher average net debt balances throughout the year. At December 31,
1995, approximately 85% of the Company's debt was at variable rates of
interest after the effect of interest rate swap contracts as compared to year-
end 1994 when substantially all the Company's debt was variable-rate. The
Company has increasingly used interest rate swaps to fix certain pieces of
U.S. dollar-denominated debt due to the attractive U.S. interest rate
environment.
In December 1995, the Company issued $500 million of undated capital equity
notes to RP. Semiannual remuneration on the unpaid principal balance of the
notes is based on the London Interbank Offering Rate plus a margin.
Despite higher short-term interest rates in the U.S. in early 1995, year-on-
year preferred dividends declined slightly due to the third quarter redemption
of the Company's outstanding Market Auction Preferred Shares.
Gains on sales of assets, including the sale of assets related to the
Company's Canadian over-the-counter business and certain European product
rights, totaled $50 million in 1995. Similar gains, including the sale of the
Company's U.S. over-the-counter business, totaled $46 million in 1994.
Other expense-net included $13 million of first quarter acquired research
and development expense related to an additional investment in AIS and charges
of $25 million 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. In 1994, the Company recorded $11 million of AIS-
related acquired research and development and $31 million for asset carrying
value reassessments.
28
<PAGE>
The Company's reported effective income tax rate was 33.7% in 1995 compared
with 28.4% in 1994 as a result of certain one-time items in 1995 including
non-deductible acquired research and development expense and the estimated
impact of a special levy in France. The impact of the French levy on the
effective income tax rate was moderated to approximately one percentage point
by other favorable changes resulting from corporate tax planning strategies.
1994 Compared with 1993
On sales of $4,487 million, net income available to common shareholders in
1994 was $348 million ($2.50 per share on a pro forma basis), 15% below the
prior year. Results included pretax restructuring charges of $121 million
($.58 per share) in 1994 and pretax income of $11 million ($.03 per share) in
1993 from the net effects of settlement of litigation less restructuring and
other charges.
Full year 1994 reported sales increased 12% primarily due to volume gains;
approximately 8 percentage points of growth was due to the effect of acquired
businesses. The impact of favorable currency fluctuations (+1%) was offset by
product divestitures (-1%); price changes had no material effect on sales
growth.
Sales increases in the United States reflected growth of the Company's
prescription pharmaceuticals (Dilacor(R) XR, Lovenox(R), DDAVP(R) and
Nasacort(R)) following trade inventory adjustments in the first half of the
year. Sales growth in France reflected the inclusion of nine months of Cooper
sales in 1994; on a basis before contributions from Cooper, sales in France
declined 3%, largely as a result of lower sales of anti-infectives. In Other
European markets, sales of prescription pharmaceuticals in Germany recovered
14% from depressed prior year levels while ethical product sales in Italy (-
16%) and the U.K. (-11%) continued to be impacted by restrictive government
programs. Higher sales in Eastern Europe and sales of generics in the U.K.
contributed to the modest sales improvement in the Other Europe region. The
Rest of World area benefited from the inclusion in 1994 of nine months of
sales from a Cooper subsidiary and a full year of Rhodia Farma sales. On a
basis before sales of the acquired businesses, regional sales increased 6% as
declines in Japan stemming primarily from government-imposed price reductions
were more than offset by sales growth in South America and the rest of Asia.
Cardiovascular/thrombosis product sales were led by Clexane(R)/Lovenox(R)
and Dilacor(R) XR. Sales of Clexane(R)/Lovenox(R) exceeded $200 million in
1994, with solid performance in the U.S. and Europe. Sales of Dilacor(R) XR
more than doubled from the prior year. Despite higher sales of the Company's
generic indapamide which partially mitigated the impact of reduced Lozol(R)
brand sales, total indapamide product sales were below prior year levels as
anticipated.
Sales of anti-infectives were below prior year levels in France due to an
increasingly competitive antibiotics market and comparison with strong prior
year sales related to a high incidence of influenza. Sales of anti-infectives
increased in South American countries, including contributions from Rhodia
Farma, and in Asian markets.
Sales of oncology products increased over the prior year driven by the 1994
launch of Granocyte(R) in France, Germany and other European markets. In 1994,
the Company also acquired the U.S. and Canadian marketing rights to
Oncaspar(TM) for use in the treatment of acute lymphoblastic leukemia.
The major plasma proteins (Albuminar(R), Monoclate-P(R), Gammar(R) IV and
Mononine(TM)) achieved double-digit sales growth, 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) 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
29
<PAGE>
Imovane(R)/Amoban(R) were partially offset by reduced sales in the U.K. due to
government-imposed price reductions.
Respiratory product sales improved as U.S. ex-factory sales of the inhaled
steroids 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.
A decline in sales of bone metabolism/rheumatology products included lower
1994 sales of calcitonin products in Italy, Spain and Japan. Generic
competition in the United States also contributed to reduced calcitonin sales.
Sales of Orudis(R)/Profenid(R)/Oruvail(R) improved on higher sales in Italy
and South America offset by sales declines in Japan.
Despite lower sales and declining market share in the U.S., worldwide sales
of the antacid Maalox(R) increased modestly with good performance in European
markets, particularly Germany, and Japan, where Maalox(R) granules were
launched at the end of 1994. Reduced sales of Zoltum(R), a peptic ulcer
medication co-marketed in France, and the daily fiber therapy product
Perdiem(R) contributed to an overall sales decline of gastrointestinal
products.
Sales in other therapeutic categories included higher sales of DDAVP(R) and
of dermatological products. The increase in other therapeutic area sales also
reflected the integration of the Cooper business.
Gross profit as a percentage of sales declined as the effect of
manufacturing expense reductions was offset by the integration of the lower
margin Cooper business. Despite increased spending in support of new products
and in certain markets (Germany, Japan and South America), selling, delivery
and administrative expenses decreased as a percentage of sales due to benefits
of cost reduction initiatives. Selling, delivery and administrative expenses
also reflected the lower commercial expense ratios of the Cooper business.
Net interest expense declined 23% to $47 million in 1994 due to lower
average worldwide net debt balances and lower average interest rates in
Europe. 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.
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, including acquired research and development, were $29 million. Other
expense, net also reflected higher 1994 foreign exchange losses, including the
effects of translation and financing in high inflation economies.
The Company's reported effective tax rate was 28.4% in 1994 compared with
28.7% in 1993.
FINANCIAL CONDITION
Cash Flows
Net cash provided by operating activities was $502 million in 1995 compared
with $685 million in 1994 and $721 million in 1993. The reduction in 1995
operating cash flows reflects increased working capital needs and higher
payments for income taxes, including a $42 million tax payment related to the
sale of the Company's over-the-counter business to Ciba. Prior year cash flows
also benefited from the prepayment of a royalty associated with the Ciba
transaction. The reduction in 1994 operating cash flows compared with 1993
reflected lower earnings and higher cash outlays for income taxes due to the
1993 deferral of tax payments. Operating cash flows in 1993 included the
receipt of $105 million proceeds from the settlement of litigation.
30
<PAGE>
Net cash outflows of $3,093 million for 1995 investing activities included
outlays of $3,238 million, before the effect of cash acquired, related to the
acquisitions of Fisons, AIS, Rhodia Farma and Biogalenique. Of the $3,238
million, $2,961 million represented 1995 cash outflows associated with the
acquisition of Fisons. Investments in technologies totaled $80 million and
included the purchase of two million common shares of AIS in the first half of
1995 for $43 million. Proceeds from the sales of assets totaled $120 million
and $163 million in 1995 and 1994, respectively, and included the transfers of
the Company's Canadian (1995) and U.S. (1994) over-the-counter businesses to
Ciba. Proceeds in 1995 also reflected the fourth quarter sale of a portion of
Fisons' Laboratory Supplies Division for $35 million. The Company expects to
complete the sale of a substantial portion of Fisons' Scientific Instruments
Division in the first half of 1996. Capital expenditures totaled $281 million
in 1995 as compared with $230 million in 1994 and $250 million in 1993.
Outlays for capital expenditures in 1996 are expected to exceed 1995 levels
due, in part, to investments in support of new products. Net cash outflows
associated with net investment hedging totaled $15 million in 1995, of which
$10 million related to settlement of hedging activities initiated by Fisons;
net investment hedging cash outflows totaled $30 million in 1994.
Financing activities provided cash of $2,588 million, reflecting a net cash
inflow of $2,479 million provided by borrowings to finance the acquisition of
Fisons and other businesses and the redemption of preferred shares. Cash
inflows also included the issuance of $500 million of capital equity notes to
RP. Financing cash outlays in 1994 and 1993 included the open market purchases
of the Company's common shares for the Employee Benefits Trust totaling $110
million and $76 million, respectively. Cash dividends paid to common
shareholders were $161 million ($1.20 per share) in 1995, $152 million ($1.12
per share) in 1994 and $138 million ($1.00 per share) in 1993. In February
1996, the Company paid shareholders a first quarter cash dividend of $.30 per
share.
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 .56 to 1 at December 31, 1995
compared with .16 to 1 at December 31, 1994 as a result of increased
borrowings principally in support of the Fisons acquisition. The ratio of
current assets to current liabilities was 1.16 to 1 compared with 1.40 to 1 a
year ago primarily as a result of an increase in short-term borrowings. In
1996 and further into 1997, the Company expects to achieve net debt reduction
using cash flows from operations which should benefit from synergistic cost
savings, and proceeds from selected divestitures.
At December 31, 1995, the Company had total committed lines of credit of
$4,145 million. Of this amount, $1,820 million represented short-term
facilities with borrowings of $137 million outstanding; these facilities
expired in February 1996. Of the remaining $2,325 million, $1,825 million
represented multicurrency medium-term facilities with fourteen banks expiring
in the year 2000. An additional $500 million represented two medium-term
credit agreements with Rhone-Poulenc S.A. expiring in 2000 and 2002. At
December 31, 1995, borrowings outstanding under the Company's medium-term
arrangements totaled $1,930 million at a weighted average annual effective
interest rate of 6.0%. These borrowings plus an additional $395 million of
short-term borrowings were classified as long-term debt at December 31, 1995
as the Company had the ability and intent to finance these amounts on a long-
term basis under the above medium-term facilities.
In 1995, the Company issued $500 million of undated capital equity notes to
RP. Pursuant to the remaining portion of a $500 million shelf registration,
the Company has the ability to issue $325 million in public debt securities
and/or preferred shares.
In October 1995, Moody's Investors Service ("Moody's") and Standard & Poor's
("S&P") lowered the Company's senior unsecured debt and preferred share credit
ratings, attributing the change to
31
<PAGE>
the acquisition of Fisons. The Company's senior unsecured debt is now rated
Baa1 by Moody's and BBB by S&P. The Company's preferred shares are now rated
Baa2 by Moody's and BBB- by S&P.
Management believes that cash flows from operations, supplemented by
proceeds from selected divestitures and 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, build leadership positions in targeted therapeutic areas
and maximize the benefits of business acquisitions and alliances. In 1995, the
important new products Taxotere(R), Rilutek(R) and Campto(R) as well as new
indications for Lovenox(R) received approvals in certain markets. With the
acquisition of Fisons, the Company has established a strong respiratory
franchise with increased geographic presence and the Centeon joint venture is
positioned to become a global market leader in the plasma proteins business.
The Company believes that the combination of these, as well as other,
innovative products and business alliances will contribute to the Company's
long-term liquidity.
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 429 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 certain proposed class action lawsuits filed on behalf of HIV-infected
hemophiliacs and their families. None of these cases involve Armour's
currently distributed AHF concentrates; (2) legal actions pending against one
or more subsidiaries of the Company and various groupings of more than one
hundred pharmaceutical companies, in which it is generally alleged that
certain individuals were injured as a result of the development of various
reproductive tract abnormalities because of in utero exposure to
diethylstilbestrol ("DES") (typically, two former operating subsidiaries of
the Company are named as defendants, along with numerous other DES
manufacturers, when the claimant is unable to identify the manufacturer); (3)
antitrust actions alleging that certain pharmaceutical companies, including
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 a bisphosphonate compound and Lozol(R); and (5) potential
responsibility relating to past waste disposal practices, including potential
involvement at three 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 ("SFAS") 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. If a contingent loss is not probable but is reasonably
possible, the Company discloses this contingency in the notes to its
consolidated
32
<PAGE>
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.
Recently Issued Accounting Standards
In March 1995, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to Be Disposed Of", effective for fiscal years beginning after
December 15, 1995. The Statement requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of the asset may not be
recoverable. The Company adopted SFAS No. 121 effective January 1, 1996, and
is not aware of any events or circumstances which indicate the existence of an
impairment which would be material to the Company's quarterly or annual
financial statements.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation", effective for fiscal years beginning after December 15, 1995.
The Statement encourages employers to account for stock compensation awards
based on their fair value on the date of grant. Entities may choose not to
apply the new accounting method but instead, disclose in the notes to the
financial statements the effects on net income and earnings per share as if
the new method had been applied. The Company adopted the disclosure-only
approach of the Standard effective January 1, 1996.
33
<PAGE>
RHONE-POULENC RORER INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
RESTATED
1995 1994 1993
---------- ----------------------
<S> <C> <C> <C>
Net sales.................................. $ 5,142.1 $ 4,486.6 $ 4,019.4
Cost of products sold...................... 1,746.4 1,555.8 1,326.3
Selling, delivery and administrative ex-
penses.................................... 1,863.7 1,605.8 1,467.8
Research and development expenses.......... 766.2 606.1 561.2
Restructuring and other charges............ 126.5 121.2 93.8
Proceeds from litigation settlement........ -- -- 105.0
---------- ---------- ----------
Operating income......................... 639.3 597.7 675.3
Interest expense........................... 105.2 55.3 71.2
Interest income............................ (20.3) (8.2) (10.4)
Gain on sales of assets.................... (49.5) (46.2) (30.2)
Other expense, net......................... 65.9 83.9 54.2
---------- ---------- ----------
Income before income taxes............... 538.0 512.9 590.5
Provision for income taxes................. 181.5 145.8 169.4
---------- ---------- ----------
Net income............................... 356.5 367.1 421.1
Dividends on preferred stock............... 18.7 19.2 12.4
---------- ---------- ----------
Net income available to common sharehold-
ers..................................... $ 337.8 $ 347.9 $ 408.7
========== ========== ==========
Primary earnings per common share:
Net income available to common sharehold-
ers..................................... $ 2.96
==========
Net income available to common sharehold-
ers, pro forma.......................... $ 2.50 $ 2.50
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
34
<PAGE>
RHONE-POULENC RORER INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
RESTATED
1995 1994
-------- --------
<S> <C> <C>
ASSETS
Current:
Cash and cash equivalents................................... $ 115.4 $ 118.8
Trade accounts receivable less reserves of $87.3 (1994:
$78.6)..................................................... 956.8 812.1
Inventories................................................. 765.6 612.5
Assets held for sale........................................ 228.8 --
Other current assets........................................ 723.0 543.3
-------- --------
Total current assets.................................... 2,789.6 2,086.7
Time deposits, at cost...................................... 83.0 55.8
Property, plant and equipment, net.......................... 1,621.0 1,199.8
Goodwill, net............................................... 2,953.5 705.9
Intangibles, net............................................ 866.8 170.5
Other assets................................................ 673.2 433.6
-------- --------
Total assets............................................ $8,987.1 $4,652.3
======== ========
LIABILITIES
Current:
Short-term debt............................................. $ 384.2 $ 90.5
Notes payable to Rhone-Poulenc S.A. & affiliates............ 127.6 37.3
Accounts payable............................................ 601.8 470.5
Income taxes payable........................................ 91.0 70.6
Accrued employee compensation............................... 137.8 150.9
Other current liabilities................................... 1,062.7 675.2
-------- --------
Total current liabilities............................... 2,405.1 1,495.0
Long-term debt.............................................. 2,159.0 408.6
Notes payable to Rhone-Poulenc S.A. & affiliates............ 525.4 31.3
Deferred income taxes....................................... 365.5 31.6
Other liabilities........................................... 1,174.9 575.4
-------- --------
Total liabilities....................................... 6,629.9 2,541.9
-------- --------
Contingencies...............................................
SHAREHOLDERS' EQUITY
Market Auction Preferred Shares, without par value
(liquidation preference $1,000 per share); authorized,
issued and outstanding in 1994: 225,000 shares............ -- 225.0
Money market preferred stock, without par value
(liquidation preference $100,000 per share); issued and
outstanding: 1,750 shares................................. 175.0 175.0
Capital equity notes....................................... 500.0 --
Common stock, without par value; stated value $1 per share;
authorized 200,000,000 shares; issued and outstanding:
134,528,487 shares (1994: 134,095,649 shares)............. 139.5 139.1
Capital in excess of stated value.......................... 153.2 412.2
Retained earnings.......................................... 1,580.3 1,403.7
Employee Benefits Trust.................................... (185.7) (185.7)
Cumulative translation adjustments......................... (5.1) (58.9)
-------- --------
Total shareholders' equity............................. 2,357.2 2,110.4
-------- --------
Total liabilities and shareholders' equity............. $8,987.1 $4,652.3
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
35
<PAGE>
RHONE-POULENC RORER INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------
RESTATED
1995 1994 1993
------------ -----------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................. $ 356.5 $ 367.1 $ 421.1
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization........ 225.2 193.2 167.9
Provision for deferred income taxes.. (15.8) (67.5) (40.8)
Gain on sales of assets.............. (49.5) (46.2) (30.2)
Deferred royalty income.............. -- 24.0 --
Equity losses of unconsolidated
affiliates, net..................... 35.4 21.1 26.6
(Increase) decrease in trade accounts
receivable, net..................... (35.2) 47.3 (33.0)
(Increase) decrease in inventories... (104.1) (37.6) 2.5
Increase in accounts payable......... 83.5 19.6 39.4
Increase (decrease) in income taxes
payable............................. (81.4) 13.3 83.7
Restructuring charges, net........... 3.5 68.3 44.6
Other items, net..................... 83.8 82.8 39.0
------------ ---------- ----------
Net cash provided by operating
activities........................ 501.9 685.4 720.8
------------ ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures................... (281.5) (229.9) (250.4)
Businesses acquired, net of cash
acquired of $474.7.................... (2,763.3) -- --
Equity investment in Applied Immune
Sciences, Inc. ....................... (42.5) -- (117.3)
Investment in time deposits, net....... (29.9) 8.5 (13.8)
Proceeds from sales of assets.......... 120.4 162.6 52.0
Purchase of assets and investments..... (81.6) (35.3) (15.0)
Net investment hedging, net............ (14.8) (29.8) (1.1)
------------ ---------- ----------
Net cash used in investing
activities........................ (3,093.2) (123.9) (345.6)
------------ ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term borrowings, net............. 420.3 (223.1) (240.0)
Proceeds from issuance of long-term
debt.................................. 2,231.3 67.9 108.2
Repayment of long-term debt............ (173.0) (47.4) (133.0)
Shares repurchased for Employee
Benefits Trust........................ -- (109.9) (75.8)
Dividends paid......................... (179.9) (170.7) (149.2)
Issuance of money market preferred
stock................................. -- -- 171.9
Redemption of Market Auction Preferred
Shares................................ (225.0) -- (75.0)
Issuance of capital equity notes....... 500.0 -- --
Issuances of common stock.............. 14.0 2.6 17.8
------------ ---------- ----------
Net cash provided by (used in)
financing activities.............. 2,587.7 (480.6) (375.1)
------------ ---------- ----------
Effect of exchange rate changes on
cash.................................. .2 2.5 (4.2)
------------ ---------- ----------
Net increase (decrease) in cash and
cash equivalents...................... (3.4) 83.4 (4.1)
Cash and cash equivalents at beginning
of year............................... 118.8 35.4 39.5
------------ ---------- ----------
Cash and cash equivalents at end of
year.................................. $ 115.4 $ 118.8 $ 35.4
============ ========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS
INFORMATION:
CASH PAID DURING YEAR FOR:
Interest, net of amounts
capitalized......................... $ 99.2 $ 61.7 $ 82.4
Income taxes......................... $ 259.3 $ 201.0 $ 133.0
RECONCILIATION OF ASSETS ACQUIRED AND
LIABILITIES ASSUMED:
Fair value of assets acquired........ $ 4,505.2 $ 280.1 --
Liabilities assumed.................. (1,348.2) (173.0) --
------------ ---------- ----------
Net assets acquired................ $ 3,157.0 $ 107.1 --
============ ========== ==========
Cash paid for acquisitions........... $ 3,238.0 -- --
Capital contribution from RP S.A. ... (273.2) $ 107.1 --
Preferred stock of subsidiary
issued.............................. 131.6 -- --
Other non-cash items................. 60.6 -- --
------------ ---------- ----------
Total consideration................ $ 3,157.0 $ 107.1 --
============ ========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
36
<PAGE>
RHONE-POULENC RORER INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ACCOUNTING POLICIES
Principles of Accounting
The Company's consolidated financial statements are prepared on a basis in
conformity with U.S. generally accepted accounting principles ("U.S. GAAP").
The preparation of the financial statements in conformity with U.S. GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent liabilities at
the dates of the financial statements and the reported amounts of revenues and
expenses during the reporting periods. Actual results could differ from those
estimates.
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.
Cash and Cash Equivalents, Time Deposits and Restricted Cash
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. At December 31, 1995, the Company has $109.6 million of restricted
cash, of which approximately $53.7 million is classified as a current asset,
representing funds on deposit with a bank in an interest-bearing escrow
account for payment of future operating lease obligations.
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.
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 $241.6 million in 1995 and $210.2 million in 1994. The
37
<PAGE>
RHONE-POULENC RORER INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 $106.3 million in 1995 and $121.2 million in 1994.
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. The
Company follows Statement of Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes."
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.
Advertising expenses primarily associated with the use of public media,
medical publications and symposia totaled $200.3 million for the year ended
December 31, 1995.
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.
Recently Issued Accounting Standards
SFAS No. 121
In March 1995, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to Be Disposed Of," effective for fiscal years beginning after
December 15, 1995. The Statement requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of the asset may not be
recoverable. The Company adopted SFAS No. 121 effective January 1, 1996, and
is not aware of any events or circumstances which indicate the existence of an
impairment which would be material to the Company's quarterly or annual
financial statements.
SFAS No. 123
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation," effective for fiscal years beginning after December 15, 1995.
The Statement encourages employers to account for stock compensation awards
based on their fair value on the date of grant. Entities may choose not to
apply the new accounting method but instead, disclose in the notes to the
financial statements the pro forma effects on net income and earnings per
share as if the new method had been applied. The Company adopted the
disclosure-only approach of the Standard effective January 1, 1996.
38
<PAGE>
RHONE-POULENC RORER INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 2. ACQUISITIONS FROM RHONE-POULENC S.A.
In 1995, the Company acquired from Rhone-Poulenc S.A. ("RP") the businesses
of Cooperation Pharmaceutique Francaise ("Cooper"), primarily in France, and a
pharmaceutical business in Brazil for cash and preferred stock of a French
subsidiary aggregating approximately $273.2 million. The preferred shares,
accounted for as minority interest in other liabilities at December 31, 1994,
have a liquidation preference approximating 645.0 million French francs and
pay dividends of 7.5% per annum on a stated value of 145.0 million French
francs. The acquisition agreements call for potential adjustments to the
purchase price of the businesses based on several factors, including earnings
performance.
For accounting purposes, the acquisitions of these entities under common
control were treated on an "as-if pooling" basis and, accordingly, the Company
restated its 1994 results to include the accounts of Cooper and the Brazilian
business as of April 1, 1994 (the date that Cooper was acquired by RP) and
January 1, 1994, respectively. The effect of restatements in periods prior to
1994 was not material. The assets and liabilities of the acquired businesses
were recorded by the Company at the carrying values used by RP as of the
restatement dates. Earnings per share for the restated periods reflect pro
forma adjustments giving effect to interest on indebtedness and preferred
dividends relative to the acquisition transactions.
NOTE 3. FISONS
On October 20, 1995, the Company acquired the outstanding shares of Fisons
plc ("Fisons"), a U.K.-based pharmaceutical company, for a total purchase
price, including expenses, approximating $3.0 billion. The acquisition was
accounted for under the purchase method and, accordingly, the purchase price
will be allocated based upon the fair values of the assets and liabilities
acquired. Preliminary purchase price allocations have resulted in goodwill of
approximately $2.3 billion and intangibles of approximately $600.0 million
that will be amortized on a straight-line basis over lives of 40 years and 15
to 30 years, respectively. The purchase price allocation also includes $562.0
million related to estimated net deferred tax and other liabilities, including
restructuring of the Fisons business. In connection with the acquisition, the
Company also recorded in 1995 a charge of $21.0 million for acquired research
and development related to Fisons research and development activities for
which technological feasibility has not yet been established and no
alternative future use exists.
In addition to its pharmaceutical operations, the Fisons business included
certain discontinued operations, namely the Laboratory Supplies Division, a
distributor of laboratory equipment and supplies and clinical diagnostic
products, and the Scientific Instruments Division, a manufacturer of
instruments used in surface science and in elemental spectrometry and
analysis. Substantially all of the Laboratory Supplies Division was sold prior
to completion of the acquisition with related proceeds of $336.2 million. A
smaller unit of the Division was sold in November 1995 for approximately $35.0
million. The sale of a substantial portion of the Scientific Instruments
Division to Thermo Instrument Systems Inc. has received clearance from the
Federal Trade Commission and is expected to be completed in the first quarter
of 1996. The net assets of the Scientific Instruments Division are recorded at
their estimated net realizable value and classified as assets held for sale at
December 31, 1995. Results of operations of the Scientific Instruments
Division from the date of acquisition to the date of sale are not expected to
be material.
39
<PAGE>
RHONE-POULENC RORER INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 4. 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. The companies also established joint
ventures related to cell therapy products and services. In connection with the
acquisition, the Company recorded a pretax charge for acquired research and
development expense in equity losses of affiliates totaling $27.0 million in
1993. In both 1994 and 1995, AIS achieved a development milestone, each
requiring RPR to purchase an additional one million AIS shares approximately
equal to an additional 5% interest. In connection therewith, in the fourth
quarter of 1994 and in the first quarter of 1995, the Company recorded pretax
charges for acquired research and development expense of $11.0 million and
$13.0 million, respectively.
In the fourth quarter of 1995, the Company purchased for a cash price of
$91.6 million, including expenses, the remaining 53%, or 7.2 million
outstanding shares, of AIS not previously owned by RPR. Under the step-
purchase method, the Company recorded additional intangible assets of
approximately $73.5 million, to be amortized on a straight-line basis over
eight years. The Company also recorded a charge to operations of $22.6 million
for acquired research and development related to research and development
activities for which technological feasibility has not yet been established
and no alternative future use exists.
The Company's 1995 reported research and development expenses include
approximately $5.6 million representing December 1995 operations of AIS.
Equity losses recorded prior to the acquisition of AIS' remaining outstanding
shares totaled $25.3 million in 1995 and $17.6 million in 1994.
NOTE 5. JOINT VENTURE
Under terms of a September 28, 1995 Amendment to the Joint Venture Agreement
(the "Amendment"), the Company's Armour Pharmaceutical Company subsidiary
("Armour") and Behringwerke AG ("Behring"), a subsidiary of Germany's Hoechst
AG, completed the formation of Centeon, a 50/50 global joint venture in the
plasma proteins business. The joint venture's Board of Directors was formally
established on January 1, 1996, at which time joint control and profit-sharing
provisions also took effect. Accordingly, the Company deconsolidated Armour's
net assets at December 31, 1995. The operations of the Armour plasma
businesses are included in the Company's reported results for the twelve
months ended December 31, 1995.
NOTE 6. PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
The following unaudited pro forma financial information has been prepared as
if the acquisitions of Fisons and AIS and the formation of Centeon had
occurred at the beginning of the periods presented. The results of operations
of Fisons' Laboratory Supplies Division and Scientific Instruments Division
are not included in the pro forma results for 1995 and 1994. The pro forma
information presents the results of the Armour businesses contributed to
Centeon as non-operating income from equity affiliates; sales recorded by
these businesses approximated $489.0 million and $415.1 million in 1995 and
1994, respectively. The pro forma information also reflects 100% of the
operating results of AIS as research and development expenses and eliminates
the equity losses associated with the Company's prior equity investment in
AIS. The pro forma information does not purport to be indicative of the
Company's results of operations had the transactions actually occurred on the
dates presented nor is it necessarily indicative of future operating results.
40
<PAGE>
RHONE-POULENC RORER INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
-------------------------------
1995 1994
--------------- ---------------
(IN MILLIONS, EXCEPT PER SHARE)
<S> <C> <C>
Net sales.................................. $ 5,316.1 $ 4,799.3
Operating income........................... 607.5 162.0
Net income (loss) from continuing
operations before
nonrecurring charges available to common
shareholders.............................. 341.6 (66.4)
Earnings (loss) per common share, restated
pro forma................................. $ 2.53 $ (.56)
Average common shares outstanding.......... 134.2 135.3
</TABLE>
Pro forma operating income for the year ended December 31, 1995 excludes
$126.5 million of acquisition-related charges recorded by the Company
including pretax restructuring charges of $60.0 million, acquired research and
development expense of $43.6 million, and integration and other costs related
to the Fisons acquisition of $22.9 million.
Pro forma operating income for the year ended December 31, 1994 includes
charges of $259.3 million recorded by Fisons in connection with the
restructuring of its pharmaceutical operations and charges of $121.2 million
for an RPR global restructuring plan.
Pro forma net income (loss) from continuing operations before nonrecurring
charges excludes a $133.4 million pretax gain on Fisons' sale of the greater
portion of its research and development operations in the second quarter of
1995. Research and development expenses associated with the activities sold
approximating $23.9 million are also excluded from the 1995 pro forma results.
Pro forma net income (loss) from continuing operations before nonrecurring
charges also excludes one-time charges related to the Company's investments in
AIS, including acquired research and development expense and the reassessment
of call option values, totaling $13.0 million and $31.4 million in 1995 and
1994, respectively.
NOTE 7. RESTRUCTURING AND OTHER CHARGES
In December 1995, the Company recorded a $60.0 million pretax charge related
to the restructuring of RPR operations as a direct result of the Fisons
acquisition. As part of the Fisons purchase price allocation, the Company has
also recorded an estimated $100.0 million liability for the restructuring of
Fisons operations; management is in the process of finalizing the programs
specific to the Fisons business. The combined $160.0 million liability
represents expected cash outlays, which will be principally severance-related,
associated with eliminating approximately 1,900 positions primarily in the
marketing, administrative and manufacturing functions. Many of these positions
are based in the U.S. and the U.K., although other locations will also be
affected. Additional workforce reductions associated with selected
divestitures are also expected, bringing the total number of positions
affected to approximately 2,900 by the end of 1997. Workforce reductions and
associated cash outlays related to the program were not significant in 1995.
In 1994, the Company recorded a $121.2 million pretax charge in connection
with a global restructuring plan that was substantially completed in 1995.
Workforce reductions approximated 1,100 positions and were primarily from
manufacturing, sales/marketing and administrative functions in North America
and in France, although other locations in Europe and elsewhere were also
affected. Total cash outlays related to the plan through December 31, 1995
exceeded $81.7 million, of which $47.6 million pertained to 1995. Asset
writeoffs in conjunction with certain production facilities totaled $26.9
million, of which $7.5 million occurred in 1995.
41
<PAGE>
RHONE-POULENC RORER INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A rollforward of the remaining 1994 restructuring provision is as follows:
<TABLE>
<CAPTION>
PAYMENTS/ TRANSLATION
JANUARY 1, ASSET ADJUSTMENTS/ DECEMBER 31,
1995 WRITEOFFS OTHER 1995
---------- --------- ------------ ------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Social costs.................. $ 52.8 $ (41.6) $ 2.4 $ 13.6
Third parties................. 8.4 (6.0) .5 2.9
Asset writeoffs............... 8.2 (7.5) -- .7
------ ------- ----- ------
Total....................... $ 69.4 $ (55.1) $ 2.9 $ 17.2
====== ======= ===== ======
</TABLE>
In 1993, the Company recorded a pretax charge of $93.8 million for the cost
of certain restructuring and manufacturing streamlining programs and increased
provisions for certain litigation. The 1993 restructuring programs,
principally in Europe, included 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 included the divestment of a
portion of a manufacturing facility in Monts, France which was completed in
1995. Total workforce reductions associated with the plan exceeded 800
positions.
A rollforward of the remaining 1993 restructuring provision from January 1,
1995 is as follows:
<TABLE>
<CAPTION>
PAYMENTS/ TRANSLATION
JANUARY 1, ASSET ADJUSTMENTS/ DECEMBER 31,
1995 WRITEOFFS OTHER 1995
---------- --------- ------------ ------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Social costs.................. $12.2 $ (9.9) $ .7 $3.0
Asset writeoffs............... 9.0 (8.6) .7 1.1
----- ------ ---- ----
Total....................... $21.2 $(18.5) $1.4 $4.1
===== ====== ==== ====
</TABLE>
NOTE 8. GAIN ON SALES OF ASSETS AND PROCEEDS FROM LITIGATION SETTLEMENT
In 1995, the Company recorded pretax gains of $49.5 million on sales of
assets, principally the transfer of the Company's Canadian over-the-counter
business to Ciba Geigy Ltd. ("Ciba"), and the sale of certain European product
rights.
In 1994, similar gains, including the gain on the sale of certain assets
related to the Company's U.S. over-the-counter business to Ciba, totaled $46.2
million. Under terms of the U.S. transfer agreement with Ciba, 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.
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.
42
<PAGE>
RHONE-POULENC RORER INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 9. OTHER EXPENSE, NET
<TABLE>
<CAPTION>
1995 1994 1993
------- ------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Equity losses of affiliates........................ $ 44.4 $ 46.5 $ 50.0
Minority interest.................................. 4.9 3.3 3.8
Foreign exchange (gains) losses.................... (4.7) 10.5 (2.5)
Other, net......................................... 21.3 23.6 2.9
------- ------- -------
$ 65.9 $ 83.9 $ 54.2
======= ======= =======
</TABLE>
Other, net for 1995 and 1994 includes charges of $25.4 million and $30.6
million, respectively, 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 (1995) and AIS call options (1994).
NOTE 10. EARNINGS PER SHARE
Earnings per common share were computed by dividing net income available to
common shareholders by the weighted average number of shares of common stock
outstanding. For purposes of earnings per share calculations, net income
available to common shareholders in 1995 and 1994 was adjusted for the pro
forma effects of interest on indebtedness and preferred dividends relative to
the acquisitions of businesses from RP totaling $1.6 million and $9.1 million,
respectively. The weighted average number of shares used to compute primary
earnings per common share was 134,228,677; 135,254,692 and 138,168,739 for the
years 1995, 1994 and 1993, respectively. Common share equivalents in the form
of stock options were excluded from the calculation as their dilutive effect
was not material.
NOTE 11. INVENTORIES
<TABLE>
<CAPTION>
1995 1994
---------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Finished goods........................................ $ 346.2 $ 323.2
Work in process....................................... 140.6 125.0
Raw materials and supplies............................ 278.8 164.3
---------- ----------
$ 765.6 $ 612.5
========== ==========
</TABLE>
NOTE 12. PROPERTY, PLANT AND EQUIPMENT, NET
<TABLE>
<CAPTION>
1995 1994
---------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Land.................................................. $ 62.2 $ 66.3
Buildings............................................. 880.0 658.2
Machinery and equipment............................... 1,604.0 1,416.6
Construction in progress.............................. 330.3 169.8
---------- ----------
2,876.5 2,310.9
Less accumulated depreciation......................... 1,255.5 1,111.1
---------- ----------
Property, plant and equipment, net.................... $ 1,621.0 $ 1,199.8
========== ==========
</TABLE>
43
<PAGE>
RHONE-POULENC RORER INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company incurred $109.9 million and $58.7 million in interest cost in
1995 and 1994, respectively, of which $4.7 million and $3.4 million,
respectively, was capitalized as part of the cost of additions to property,
plant and equipment.
NOTE 13. DEBT
Short-term debt consisted of the following:
<TABLE>
<CAPTION>
1995 1994
----------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Notes payable to banks............................... $ 354.7 $ 68.5
Current portion of long-term debt.................... 29.5 22.0
----------- ----------
$ 384.2 $ 90.5
=========== ==========
Notes payable to Rhone-Poulenc S.A. and affiliates... $ 127.6 $ 37.3
=========== ==========
</TABLE>
The weighted average interest rate of total outstanding short-term debt was
7.9% at December 31, 1995 (1994: 9.3%).
Long-term debt, net of current portion, consisted of the following:
<TABLE>
<CAPTION>
1995 1994
----------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Notes payable at variable rates averaging 5.9% at 1995
year-end (expected to be refinanced long-term)....... $ 1,825.0 $ 233.3
9.15% Series A Senior Notes due 2004, with interest
payable quarterly (guaranteed by Rhone-Poulenc
S.A.)................................................ 52.7 56.6
8.95% Series B Senior Notes due 1997, with interest
payable quarterly (guaranteed by Rhone-Poulenc
S.A.)................................................ 4.3 8.6
Yen-denominated variable rate notes (1994 year-end
rate 2.8%)........................................... -- 28.0
Notes, mortgages and capitalized lease obligations at
rates averaging 8.1% (1994: 8.1%).................... 277.0 82.1
----------- ---------
2,159.0 408.6
Notes payable to Rhone-Poulenc S.A. at rates averaging
6.0% at 1995 year-end (expected to be refinanced
long-term)........................................... 500.0 --
Notes payable to Rhone-Poulenc S.A. and affiliates
principally due in 2000 at rates averaging 8.4%
(1994: 6.2%)......................................... 25.4 31.3
----------- ---------
$ 2,684.4 $ 439.9
=========== =========
</TABLE>
At December 31, 1995, the Company had total committed lines of credit of
$4,145.0 million. Of this amount, $1,820.0 million represented short-term
facilities with borrowings of $137.0 million outstanding; these facilities
expired in February 1996. Of the remaining $2,325.0 million, $1,825.0 million
represented multicurrency medium-term facilities with fourteen banks expiring
in the year 2000. An additional $500.0 million represented two medium-term
credit agreements with Rhone-Poulenc S.A. expiring in 2000 and 2002.
Borrowings under the $2,325.0 million medium-term credit facilities bear
interest at the London Interbank Offering Rate ("LIBOR"), plus any applicable
margin and commitment fee. At December 31, 1995, borrowings outstanding under
the Company's medium-term arrangements totaled $1,930.0 million. These
borrowings plus an additional $395.0 million of short-term borrowings were
classified as long-term debt at December 31, 1995 as the Company had
44
<PAGE>
RHONE-POULENC RORER INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
the ability and intent to finance these amounts on a long-term basis under the
above medium-term facilities. The $2,325.0 million of borrowings were in
various currencies with interest rates as follows: $2,185.0 million in U.S.
dollars at 6.0%, $69.0 million in French francs at 5.0%, $41.1 million in
German marks at 4.4%, $16.6 million in Japanese yen at .9% and $13.3 million
in British pounds at 7.2%. Amounts available under unused uncommitted lines of
credit approximated $624.0 million at December 31, 1995.
The aggregate maturities of all long-term debt at December 31, 1995,
including related party debt, were: $29.5 million in 1996, $40.8 million in
1997, $38.6 million in 1998, $190.9 million in 1999, $2,347.3 million in 2000
and $66.8 million thereafter.
The weighted average interest rate of total debt outstanding at December 31,
1995 was 6.4% (1994: 7.0%). At December 31, 1995, approximately 85% of the
Company's debt was at variable rates of interest after the effect of interest
rate swap contracts as compared to year-end 1994 when substantially all the
Company's debt was variable-rate.
Pursuant to the remaining portion of a U.S. shelf registration for $500.0
million, the Company has the ability to issue $325.0 million in public debt
securities and/or preferred shares.
NOTE 14. LEASE COMMITMENTS
The Company's capital lease arrangements pertain primarily to certain
administrative and research facilities. The Company also occupies certain
facilities and leases certain equipment and large-load vehicles under
operating lease agreements. In 1992, the Company sold its U.S. corporate
offices and research facility to a third party 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. Related average annual
accounting rent is $22.5 million.
Rent expense under operating leases was $104.2 million, $55.0 million and
$49.4 million in 1995, 1994 and 1993, respectively. Related rental income
totaled $37.7 million in 1995. Future minimum lease commitments under all
leases with initial or remaining noncancelable lease terms in excess of one
year at December 31, 1995 and related rental income under operating leases are
as follows:
<TABLE>
<CAPTION>
OPERATING LEASES
------------------
CAPITAL LEASE RENTAL
LEASES COMMITMENTS INCOME
------- ----------- ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
1996............................................ $ 6.2 $128.8 $ 55.4
1997............................................ 5.9 115.5 41.4
1998............................................ 4.1 73.2 19.7
1999............................................ 3.8 58.3 11.0
2000............................................ 3.8 44.5 --
Thereafter...................................... 20.5 557.1 --
------ ------ ------
Minimum lease payments.......................... 44.3 $977.4 $127.5
====== ======
Less imputed interest........................... (13.3)
------
Present value of minimum lease payments
(current--$3.9, noncurrent--$27.1)............. $ 31.0
======
</TABLE>
45
<PAGE>
RHONE-POULENC RORER INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 15. INCOME TAXES
The components of income before income taxes are:
<TABLE>
<CAPTION>
1995 1994 1993
------- ------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
United States........................................ $ 241.3 $ 241.0 $ 289.1
Non-U.S.............................................. 296.7 271.9 301.4
------- ------- -------
$ 538.0 $ 512.9 $ 590.5
======= ======= =======
</TABLE>
The provisions for income taxes are:
<TABLE>
<CAPTION>
1995 1994 1993
------- ------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Current:
United States................................... $ 96.9 $ 103.4 $ 100.2
Non-U.S......................................... 100.4 109.9 110.0
------- ------- -------
197.3 213.3 210.2
------- ------- -------
Deferred:
United States................................... (22.6) (51.7) (31.0)
Non-U.S......................................... 6.8 (15.8) (9.8)
------- ------- -------
(15.8) (67.5) (40.8)
------- ------- -------
$ 181.5 $ 145.8 $ 169.4
======= ======= =======
</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>
1995 1994
----------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Assets (liabilities):
Depreciation and amortization.................... $ (328.2) $ (64.5)
Pension.......................................... 69.2 50.2
Distributable earnings........................... (66.9) (26.2)
Intercompany profit in ending inventory.......... 60.8 36.2
Net operating loss carryforwards................. 57.5 15.4
Restructuring.................................... 35.8 36.4
Cost and equity investments...................... 10.6 30.9
Other, including nondeductible accruals.......... 178.0 108.7
----------- ----------
16.8 187.1
Less valuation allowance......................... (91.9) (11.2)
----------- ----------
Deferred income taxes, net....................... $ (75.1) $ 175.9
=========== ==========
</TABLE>
The portion of the above net deferred tax assets (liabilities) classified as
current was $211.1 million and $161.7 million at December 31, 1995 and 1994,
respectively. At December 31, 1995, total deferred tax assets were $587.0
million and total deferred tax liabilities were $570.2 million before netting.
At December 31, 1994, similar temporary differences gave rise to total
deferred tax assets of
46
<PAGE>
RHONE-POULENC RORER INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
$364.9 million and total deferred tax liabilities of $177.8 million. The
increase in the valuation allowance at December 31, 1995 as compared with
December 31, 1994 was primarily related to the Fisons acquisition.
The differences between the U.S. statutory income tax rate and the Company's
effective income tax rate are:
<TABLE>
<CAPTION>
1995 1994 1993
------ ------ ------
(PERCENT OF INCOME
BEFORE INCOME TAXES)
<S> <C> <C> <C>
U.S. statutory income tax rate....................... 35.0% 35.0% 35.0%
Puerto Rico operations............................... (3.1) (5.0) (3.6)
Acquired research and development.................... 2.8 -- --
Non-U.S. tax rate differential....................... (2.2) (1.8) (1.7)
Research and development tax credits................. (1.0) (1.4) (1.8)
Other, net........................................... 2.2 1.6 0.8
------ ------ ------
Effective income tax rate............................ 33.7% 28.4% 28.7%
====== ====== ======
</TABLE>
The Company has subsidiaries in Ireland, Puerto Rico and Singapore, 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 net operating loss carryforwards of $156.6 million for tax
return purposes which expire principally through the years 1996-2010.
The Company's U.S. tax return has been audited through 1989. The Company
believes that potential adjustments from any open years would not have a
material impact on the Company's financial position.
Unremitted earnings of subsidiaries which are intended to be indefinitely
reinvested were $1,122.0 million at December 31, 1995. Withholding taxes
payable if the entire amount of these earnings were remitted would be $67.5
million. U.S. income taxes payable if these earnings were remitted would be
substantially offset by available foreign tax credits.
NOTE 16. 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.
47
<PAGE>
RHONE-POULENC RORER INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The funded status of the Company's plans at December 31 was as follows:
<TABLE>
<CAPTION>
1995 1994
--------------------------- ---------------------------
PLANS WHOSE PLANS WHOSE PLANS WHOSE PLANS WHOSE
ASSETS EXCEED ACCUMULATED ASSETS EXCEED ACCUMULATED
ACCUMULATED BENEFITS ACCUMULATED BENEFITS
BENEFITS EXCEED ASSETS BENEFITS EXCEED ASSETS
------------- ------------- ------------- -------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Vested benefit
obligations............ $(716.5) $(428.6) $(141.7) $(330.7)
Nonvested benefits...... (3.5) (87.8) (4.2) (71.1)
------- ------- ------- -------
Accumulated benefit
obligation............. (720.0) (516.4) (145.9) (401.8)
Projected future salary
increases.............. (6.8) (65.5) (12.2) (55.1)
------- ------- ------- -------
Projected benefit
obligation............. (726.8) (581.9) (158.1) (456.9)
Fair value of plan
assets (invested
primarily in equities
and bonds)............. 782.0 184.3 186.1 122.4
------- ------- ------- -------
Plan assets in excess of
(less than) projected
benefit obligation..... 55.2 (397.6) 28.0 (334.5)
Unrecognized net
transition (asset)
liability.............. (.8) 2.5 .7 1.6
Unrecognized net (gain)
loss................... (27.1) 86.6 (30.3) 59.9
Unrecognized prior
service cost........... 20.1 (3.8) 20.7 6.7
Adjustment required to
recognize minimum
liability.............. -- (63.5) -- (52.4)
------- ------- ------- -------
Prepaid (accrued)
pension cost........... $ 47.4 $(375.8) $ 19.1 $(318.7)
======= ======= ======= =======
</TABLE>
The accumulated benefit obligation of U.S. plans included in the above table
was $186.1 million in 1995 and $132.8 million in 1994. U.S. plan assets were
$165.4 million and $122.7 million at December 31, 1995 and 1994, respectively.
Of the net accrued pension cost, $359.4 million and $306.2 million are
included in other noncurrent liabilities in 1995 and 1994, respectively.
The following items are the components of net periodic pension cost for the
years ended December 31:
<TABLE>
<CAPTION>
1995 1994 1993
------- ------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Service cost...................................... $ 21.3 $ 19.5 $ 16.9
Interest cost..................................... 56.7 46.2 42.7
Actual return on plan assets...................... (39.7) (26.6) (49.9)
Amortization and deferral......................... 8.2 5.7 27.2
------- ------- -------
Net periodic pension cost......................... $ 46.5 $ 44.8 $ 36.9
======= ======= =======
</TABLE>
Net periodic pension cost for U.S. plans included in the above amounts is
$9.0 million, $12.2 million and $8.5 million for 1995, 1994 and 1993,
respectively.
The following weighted average assumptions, which are based on the economic
environment of each applicable country, were used to determine the return on
plan assets and benefit obligations:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Discount rate.............................................. 8.1% 7.9% 7.7%
Expected return on plan assets............................. 9.1% 9.6% 10.4%
Rate of future compensation increases...................... 4.7% 3.8% 4.6%
</TABLE>
48
<PAGE>
RHONE-POULENC RORER INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
For U.S. plans, the discount rate was 7.75% in 1995, 8.5% in 1994 and 7.5%
in 1993. The expected return on plan assets of 9.5% remained constant from
1993 through 1995. The rate of future compensation increases was 4.5% in 1995
and 1994 and 5% in 1993.
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
$7.1 million, $7.3 million and $6.2 million in 1995, 1994 and 1993,
respectively.
Postretirement Benefits Other Than Pensions
Effective January 1, 1993, the Company adopted SFAS 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 SFAS No. 112, "Employers'
Accounting for Postemployment Benefits." The new standard did not materially
affect the Company's financial position or results of operations.
NOTE 17. STOCK PLANS
Stock options and restricted shares have been granted to employees under
plans approved by the shareholders in 1982 and 1985, as amended and restated
in 1988 and 1990 ("the 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 Stock Plan, as amended and
restated, permits the Company to grant stock appreciation rights in tandem
with stock options. As of December 31, 1995, 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. The 1995 Equity
Compensation Plan adopted in 1995 supplements the Stock Plan by providing for
an additional 5,000,000 shares that may be issued to participants after all
shares authorized pursuant to the terms of the Stock Plan and Equity
Compensation Plan have been utilized. The terms of the 1995 Equity
Compensation Plan are substantially the same as those of the Stock Plan and
the Equity Compensation Plan.
49
<PAGE>
RHONE-POULENC RORER INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Effective January 1, 1993, the Company substantially curtailed the granting
of restricted shares to employees. Due to employee terminations 1,678 and 2,228
restricted shares were returned to the Company in 1995 and 1994, respectively.
Stock option activity is shown below:
<TABLE>
<CAPTION>
1995 1994 1993
-------------- -------------- --------------
(IN THOUSANDS, EXCEPT PRICE PER SHARE DATA)
<S> <C> <C> <C>
Shares under option at Jan-
uary 1.................... 7,147 5,815 4,999
Additions (deductions):
Granted.................. 1,702 1,898 2,342
Exercised................ (433) (116) (662)
Canceled................. (425) (450) (864)
-------------- -------------- --------------
Shares under option at
year-end.................. 7,991 7,147 5,815
============== ============== ==============
Options exercisable at De-
cember 31................. 4,693 3,443 2,455
============== ============== ==============
Shares reserved for future
grants.................... 6,551 2,862 4,272
============== ============== ==============
Price range of options ex-
ercised................... $ 4.67-46.38 $ 8.24-30.18 $ 7.92-41.63
Price range for all options
outstanding............... $ 4.67-64.00 $ 4.67-64.00 $ 4.67-64.00
Price range for all options
exercisable............... $ 4.67-64.00 $ 4.67-64.00 $ 4.67-63.00
</TABLE>
50
<PAGE>
RHONE-POULENC RORER INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 18. SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
MARKET MONEY COMMON CAPITAL IN
AUCTION MARKET CAPITAL STOCK AT EXCESS OF EMPLOYEE CUMULATIVE
PREFERRED PREFERRED EQUITY STATED STATED RETAINED BENEFITS TRANSLATION
SHARES STOCK NOTES VALUE VALUE EARNINGS TRUST ADJUSTMENT
--------- --------- ------- -------- ---------- -------- -------- -----------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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 million tax
effect)................ -- -- -- -- -- -- -- (63.4)
------- ------ ------ ------ ------ -------- ------- -------
Balance, December 31,
1993................... 225.0 175.0 -- 139.0 290.0 1,207.3 (75.8) (139.3)
Net income--1994........ -- -- -- -- -- 367.1 -- --
Cash dividends, $1.12
per common share....... -- -- -- -- -- (151.5) -- --
Dividends on preferred
shares................. -- -- -- -- -- (19.2) -- --
Capital contributions
from Rhone-Poulenc
S.A.................... -- -- -- -- 107.1 -- -- --
Shares repurchased for
Employee Benefits
Trust.................. -- -- -- -- -- -- (109.9) --
Issuance of shares under
employee benefit
plans.................. -- -- -- .1 15.1 -- -- --
Translation adjustments,
including hedging (net
of $1.0 million tax
effect)................ -- -- -- -- -- -- -- 80.4
------- ------ ------ ------ ------ -------- ------- -------
Balance, December 31,
1994................... 225.0 175.0 -- 139.1 412.2 1,403.7 (185.7) (58.9)
Net income--1995........ -- -- -- -- -- 356.5 -- --
Cash dividends, $1.20
per common share....... -- -- -- -- -- (161.2) -- --
Dividends on preferred
shares................. -- -- -- -- -- (18.7) -- --
Redemption of Market
Auction Preferred
Shares................. (225.0) -- -- -- -- -- -- --
Issuance of capital
equity notes to Rhone-
Poulenc S.A............ -- -- 500.0 -- -- -- -- --
Adjustment of capital
contributions for
acquisition
liabilities............ -- -- -- -- (273.2) -- -- --
Issuance of shares under
employer benefit
plans.................. -- -- -- .4 14.2 -- -- --
Translation adjustments,
including hedging (net
of $2.5 million tax
effect)................ -- -- -- -- -- -- -- 53.8
------- ------ ------ ------ ------ -------- ------- -------
Balance, December 31,
1995................... $ -- $175.0 $500.0 $139.5 $153.2 $1,580.3 $(185.7) $ (5.1)
======= ====== ====== ====== ====== ======== ======= =======
</TABLE>
In 1991, the Company issued $300.0 million of Market Auction Preferred
Shares ("MAPS") represented by four series, each consisting of 75,000 shares.
Dividend rates, determined at separate auctions for each series, averaged
5.98% during 1995 (1994: 4.63%, 1993: 3.01%). In 1993, $75.0 million of MAPS
Series B was redeemed with a portion of the proceeds from the issuance of
money market preferred stock (see discussion below). In the third quarter of
1995, the Company redeemed the remaining outstanding MAPS Series A, C and D
for $225.0 million plus accrued dividends.
In 1993, the Company issued $175.0 million of money market preferred stock.
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
51
<PAGE>
RHONE-POULENC RORER INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
expire, dividends are determined at separate auctions for each series. The
average dividend rate in 1995 on the Series 1 stock was 5.11% per annum. The
money market preferred stock ranks prior to common shares of the Company as to
dividends. Holders 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 preferred shares may elect these
additional directors. The preferred stock is 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 stock at the Company's option, holders would be
entitled to a liquidation preference of $100,000 per share plus any
accumulated and unpaid dividends thereon.
In December 1995, the Company issued $500.0 million of undated capital
equity notes to Rhone-Poulenc S.A. The notes have a liquidation preference
that ranks senior to all RPR common stock, but junior to all existing and
future RPR preferred stock. Semiannual remuneration on the unpaid principal
balance of the equity notes is based on LIBOR plus a margin. If the Company is
unable to meet statutory standards for dividend payments on outstanding common
or preferred stock, the Company may satisfy the equity note remuneration
requirements with the issuance of additional capital equity notes
("remuneration notes"). Terms of the remuneration notes would be similar to
the equity notes except for a higher rate of remuneration. The capital equity
notes are redeemable only at the Company's option, but not earlier than five
years after issuance, subject to certain exceptions.
At December 31, 1995, there were 2,676,800 preferred shares without par
value authorized and unissued (1994: 2,451,800). In 1994, the Company
completed the open market repurchase of five million of its common shares as
authorized by the Board of Directors in March 1993. During 1994, the Company
acquired 3.1 million shares at a cost of $109.9 million; share repurchases
during 1993 were 1.9 million shares at a cost of $75.8 million. These shares
are being held in an Employee Benefits Trust to fund future benefits in the
United States.
In 1995, the Company acquired Cooper and a pharmaceutical business in Brazil
from Rhone-Poulenc S.A. For accounting purposes, the acquisitions of these
entities under common control were treated on an "as-if pooling" basis and,
accordingly, the Company restated its 1994 results to include the accounts of
Cooper and the Brazilian business as of April 1, 1994 and January 1, 1994,
respectively. The assets and liabilities of the acquired businesses were
recorded by the Company at the carrying values used by RP as of the
restatement dates and the value of net assets acquired was reflected in the
1994 capital in excess of stated value account as a capital contribution from
RP. The Company subsequently reduced capital in excess of stated value to
reflect the purchase obligations related to the acquisition transactions of
approximately $273.2 million.
52
<PAGE>
RHONE-POULENC RORER INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 19. FINANCIAL INSTRUMENTS
The Company's financial instruments consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1994
--------------------- -------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
--------- --------- ---------- --------
[ASSET (LIABILITY) IN MILLIONS]
<S> <C> <C> <C> <C>
Cash and cash equivalents...... $ 115.4 $ 115.4 $ 118.8 $ 118.8
Time deposits, generally matur-
ing in 1-5 years.............. 83.0 83.0 55.8 55.8
Cost investments:
Practical to estimate........ 9.0 13.6 17.9 13.0
Not practical to estimate.... 19.9 N/A 17.5 N/A
Other investments, including
restricted cash............... 112.6 118.7 9.8 12.9
Long-term debt................. (2,713.9) (2,722.7) (461.9) (465.4)
Foreign exchange contracts..... (7.6)* (7.6) 4.0* 4.0
Interest rate swap contracts... (3.7)* (3.8) 2.0* (0.7)
</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 or best estimates of 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.
53
<PAGE>
RHONE-POULENC RORER INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Foreign exchange contracts
The fair value of foreign exchange contracts was estimated by valuing the
contracts at current exchange rates.
Interest rate swap contracts
The fair value of interest rate swap contracts reflects the amount at which
they could be settled based on bank pricing models.
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
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 and
limit the volatility of reported equity. 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, 1995, the reduction to shareholders' equity, net of tax effects,
associated with net investment hedging contracts totaled $5.2 million (1994:
$21.7 million).
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. In 1994, the French franc net investment
approximated one-third of shareholders' equity. The Company therefore hedged a
portion of its net investment in France and at December 31, 1994 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. The Company is currently assessing the impact of recent
acquisitions on its net investment exposures and had no net investment hedging
contracts outstanding at December 31, 1995.
54
<PAGE>
RHONE-POULENC RORER INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Foreign Exchange Contracts--Foreign Currency Transaction Hedges
The Company also enters into foreign exchange contracts to minimize exposure
of foreign currency transactions (such as export sales, raw materials
purchases, and short-term intercompany financing) and firm commitments to
fluctuating exchange rates. Gains or losses from these contracts are
recognized in the basis of the transaction being hedged. Cash flows from these
contracts are classified in the same category as the hedged transactions.
The Company's principal net transactional exposures by major currency before
the effects of foreign exchange contracts were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1994
--------------------- ---------------------
LOCAL U.S. DOLLAR LOCAL U.S. DOLLAR
CURRENCY EQUIVALENT CURRENCY EQUIVALENT
-------- ----------- -------- -----------
[ASSET (LIABILITY) IN MILLIONS]
<S> <C> <C> <C> <C>
U.S. dollars*...................... 139 $ 139 52 $ 52
FF................................. (332) (68) 1,679 310
GBP................................ (158) (246) 1 2
DEM................................ 73 51 (24) (15)
Yen................................ 4,312 42 1,408 14
All other (each <$40 million)...... various 40 various 39
------- ----- ------- ----
Total.......................... N/A $ (42) N/A $402
======= ===== ======= ====
</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, 1995, the Company had entered into
multiple forward contracts maturing in the first quarter of 1996 to buy and
sell various currencies with notional amounts totaling $478.3 million and
$445.7 million, respectively. Similar contracts which matured in the first
quarter of 1995 totaled $112.6 million and $508.4 million, respectively, at
December 31, 1994. At the acquisition date, Fisons had certain foreign
exchange contracts in place that were speculative in nature to sell various
currencies totaling $238.0 million. These contracts were effectively closed
out at December 31, 1995 through the purchase of opposite contracts and the
$9.2 million cost of settlement was fully accrued. A substantial portion of
the contracts were settled in January 1996.
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. In
1995 and 1994, the Company was party to contracts to convert certain floating
rate obligations into fixed rate instruments and contracts to convert certain
fixed rate debt into floating rate debt as determined by the interest rate
environment of the currency in which the underlying obligation was
denominated. The Company's weighted average interest rate for the year ended
December 31, 1995 was reduced by six basis points or approximately $.5 million
(1994: 17 basis points or $1.3 million; 1994: 45 basis points or $3.5 million)
as a result of interest rate swap contracts.
55
<PAGE>
RHONE-POULENC RORER INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Interest rate swap contracts outstanding at December 31, 1995 were as
follows:
<TABLE>
<CAPTION>
NOTIONAL U.S. DOLLAR FIXED OR CARRYING FAIR MARKET
AMOUNT EQUIVALENT VARIABLE AMOUNT VALUE TERM AVERAGE RATE
-------- ----------- -------- -------- ----------- ----------- ------------
[RECEIVABLE (PAYABLE) IN MILLIONS]
<S> <C> <C> <C> <C> <C> <C> <C>
$80(/1/) $ 80 Variable $ .2 $ 4.6 7/92- 7/99 Pay LIBOR 3 months; Receive 7.1%
$300 300 Fixed -- (5.1) 11/95-11/00 Pay 5.81%; Receive LIBOR 3 months
(Pounds)100 155 Variable (4.0) (3.4) 1/94- 1/00 Pay LIBOR 6 months; Receive 7.5%
FF250(/1/) 51 Variable .2 .9 10/94-10/96 Pay TAM(/2/); Receive 7.04%
(Yen)3,000 29 Fixed (.1) (.8) 4/95- 4/98 Pay 2.01%; Receive LIBOR 3 months
</TABLE>
- --------
(/1/The)Company was party to similar contracts at December 31, 1994.
(/2/French)money market rate.
NOTE 20. INDUSTRY SEGMENT AND OPERATIONS BY GEOGRAPHIC AREA
The Company is primarily engaged in the discovery, development, manufacture
and marketing of a broad line of pharmaceutical products for human use. Among
the Company's principal markets are France, currently the Company's largest
market, the United States, Germany, the United Kingdom and Italy. The Company
also has an expanding presence in Japan and South American countries. The
Company has twelve pharmaceutical plants in France, four in the U.S., fourteen
in Other Europe and twenty-nine in the Rest of World region.
The principal markets in which the Company conducts its business are subject
to various governmental regulations with respect to the approval, manufacture
and marketing of pharmaceutical products. In many markets, governments have
instituted programs that impact pharmaceutical prices, reimbursement levels or
prescription volumes. The nature of these regulations and their effect vary
greatly from country to country. It is not possible to predict the extent to
which the Company or the pharmaceutical industry might be affected by future
legislative or regulatory developments.
Information about the Company's operations for the years 1995, 1994 and 1993
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.
56
<PAGE>
RHONE-POULENC RORER INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Net sales:
United States................................ $1,314.2 $1,261.9 $1,119.9
France....................................... 1,819.6 1,506.7 1,374.8
Other Europe................................. 1,207.4 1,015.5 977.8
Rest of World................................ 800.9 702.5 546.9
-------- -------- --------
Total net sales............................ $5,142.1 $4,486.6 $4,019.4
======== ======== ========
Income before income taxes:
United States................................ $ 351.9 $ 356.9 $ 385.2
France....................................... 245.9 172.6 280.7
Other Europe................................. 132.0 92.8 64.6
Rest of World................................ 62.5 77.6 62.1
Corporate.................................... (254.3) (187.0) (202.1)
-------- -------- --------
Total income before income taxes........... $ 538.0 $ 512.9 $ 590.5
======== ======== ========
Identifiable assets:
United States................................ $4,105.9 $1,107.2 $1,148.3
France....................................... 1,928.9 1,519.6 1,290.2
Other Europe................................. 1,140.4 1,001.7 875.6
Rest of World................................ 787.4 518.6 405.9
Corporate.................................... 1,024.5 505.2 330.2
-------- -------- --------
Total identifiable assets.................. $8,987.1 $4,652.3 $4,050.2
======== ======== ========
</TABLE>
In 1995, U.S. income before income taxes ("IBT") includes $13.1 million of
restructuring charges and $35.6 million of AIS-related acquired research and
development. France IBT includes $22.8 million from gains on sales of certain
product rights. Other Europe IBT includes $46.9 million of restructuring
charges and $37.3 million of other charges related to the Fisons plc
acquisition, including acquired research and development expense.
In 1994, U.S. IBT for the U.S. includes gains on asset sales, net of
restructuring charges, of $15.1 million. France and Other Europe IBT includes
$49.0 million and $28.8 million, respectively, of restructuring charges, net
of gains on sales of assets. The Rest of World area IBT includes restructuring
charges of $13.2 million.
In 1993, U.S. IBT includes income of $68.0 million from litigation
settlement proceeds and gains on asset sales, net of restructuring charges.
France IBT includes $19.5 million of restructuring charges, net of gains on
asset sales. Other Europe IBT includes restructuring charges, net of gains on
asset sales, totaling $30.2 million.
For presentation purposes, goodwill and intangibles totaling $2.9 billion
and related amortization expense recorded in connection with the acquisition
of Fisons have been allocated to the U.S. at December 31, 1995.
NOTE 21. 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
57
<PAGE>
RHONE-POULENC RORER INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
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 $61.3 million and $67.3
million at December 31, 1995 and 1994, respectively. The 1995 balance included
$8.5 million of accounts receivable from sales of products and services to RP
(1994: $6.8 million) and $52.8 million classified as other current assets
(1994: $60.5 million).
Accounts payable related to purchase of materials and services from RP and
affiliates were $12.2 million at December 31, 1995 (1994: $7.0 million);
accrued and other liabilities due to RP at December 31, 1995 were $20.9
million (1994: $30.5 million). In 1995, sales to RP and affiliates were $31.1
million (1994: $29.7 million; 1993: $34.5 million). Materials purchased from
RP totaled $41.4 million in 1995 (1994: $36.8 million; 1993: $44.4 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, 1995, debt with RP and affiliates totaled $653.0 million
(1994: $68.6 million). Interest expense incurred with respect to RP
indebtedness in 1995 was $12.4 million (1994: $15.8 million; 1993: $24.9
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 $23.6 million in 1995 (1994: $24.5
million; 1993: $20.2 million). Management believes that the expenses so
charged are representative of amounts that the Company would have incurred if
it had been operated as an unaffiliated entity.
In 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 $273.2 million. The preferred shares, accounted for
as minority interest in other liabilities, have a liquidation preference
approximating 645.0 million French francs (approximately $131.6 million) and
pay dividends of 7.5% per annum of a stated value of 145.0 million French
francs. The acquisition agreements call for potential adjustments to the
purchase price of the businesses based on several factors, including earnings
performance.
In December 1995, the Company issued $500.0 million of undated capital
equity notes to RP. Semiannual remuneration on the unpaid principal balance of
the equity notes is based on LIBOR plus a margin.
NOTE 22. CONTINGENCIES
The Company is involved in litigation incidental to its business including,
but not limited to: (1) approximately 429 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 certain 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
58
<PAGE>
RHONE-POULENC RORER INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
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 certain pharmaceutical companies, including
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 a bisphosphonate compound and Lozol(R); and (5) potential
responsibility relating to past waste disposal practices, including potential
involvement at three 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. 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, 1995, the Company had unused standby letters of credit
outstanding of $86.8 million. The letters of credit are issued primarily in
the form of guarantees or performance bonds.
59
<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 two times in 1995.
/s/ Robert E. Cawthorn
- -------------------------------------
ROBERT E. CAWTHORN
CHAIRMAN
/s/ Michel de Rosen
- -------------------------------------
MICHEL DE ROSEN
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
/s/ Patrick Langlois
- -------------------------------------
PATRICK LANGLOIS
SENIOR VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
60
<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, 1995 and 1994, and the
related consolidated statements of income and cash flows for each of the three
years in the period ended December 31, 1995. 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, 1995 and 1994, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1995, in conformity with
generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
- -------------------------------------
COOPERS & LYBRAND L.L.P.
Philadelphia, Pennsylvania
January 26, 1996
61
<PAGE>
RHONE-POULENC RORER INC. AND SUBSIDIARIES
QUARTERLY DATA (UNAUDITED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
QUARTER ENDED 1995 QUARTER ENDED 1994
------------------------------------------- -----------------------------------------
RESTATED RESTATED
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............... $1,098.4 $1,241.3 $1,212.7 $1,589.7 $882.0 $1,064.6 $1,137.3 $1,402.7
Gross profit............ 694.4 813.6 792.8 1,094.9 583.9 688.9 740.9 917.1
Net income (loss) avail-
able to common share-
holders................ 89.5 85.7 107.3 55.3 74.5 (4.0) 109.6 167.8
Earnings (loss) per com-
mon share, pro forma... .66 .64 .80 .41 .53 (.05) .80 1.23
Market price per common
share:
High................... 43.500 43.125 45.875 54.500 37.000 39.500 39.125 42.625
Low.................... 36.250 40.375 40.500 43.750 32.000 30.500 30.500 35.250
Common dividends paid... .30 .30 .30 .30 .28 .28 .28 .28
</TABLE>
- --------
Results for the first quarter of 1995 and for each quarter of 1994 are
restated to include the results of Cooperation Pharmaceutique Francaise and a
pharmaceutical business in Brazil as of April 1, 1994 and January 1, 1994,
respectively.
Results for the first quarter of 1995 include pretax income of $11.1 million
($.04 per share) from gains on sales of certain assets and product rights
($49.5 million), including the Company's U.S. and Canadian over-the-counter
businesses, net of charges for acquired research and development expense
($13.0 million) and the reassessment of certain asset carrying values ($25.4
million).
Results for the fourth quarter of 1995 include $126.5 million ($.75 per share)
of acquisition-related restructuring and other charges, including $60.0
million of pretax restructuring charges, $43.6 million of acquired research
and development charged to operations and $22.9 million of integration and
other costs.
Results for the second quarter of 1994 include pretax restructuring charges of
$121.2 million ($.58 per share) related to a global restructuring plan.
Results for the fourth quarter of 1994 include pretax income of $4.0 million
($.02 per share) from gains on sales of assets ($37.6 million), including the
Company's U.S. over-the-counter business, net of charges for acquired research
and development ($11.0 million) and the reassessment of certain asset carrying
values ($30.6 million).
Earnings per common share for restated periods reflect pro forma adjustments
giving effect to interest and preferred dividends relative to acquisitions
from Rhone-Poulenc S.A. of Cooperation Pharmaceutique Francaise and a
pharmaceutical business in Brazil.
Earnings per common 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, 1996, there were
6,712 holders of record of RPR common shares.
62
<PAGE>
RHONE-POULENC RORER INC.
500 Arcola Road
Collegeville, PA 19426-0107
The Proxy is Solicited on Behalf of the Board of Directors of
Rhone-Poulenc Rorer Inc.
The undersigned hereby appoints, Michel de Rosen, Richard T. Collier, 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 May 3, 1996 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, the proxy will be voted FOR
the election of the nominees for director, FOR proposal 2 and FOR proposal 3.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR THE ELECTION OF
THE NOMINEES FOR DIRECTOR, FOR PROPOSAL 2 AND FOR PROPOSAL 3.
(Continued, and to be dated and signed, on the other side.)
<PAGE>
Please mark boxes [_] x in blue or black ink.
1. Election of five directors to three-year terms.
[_] VOTE FOR ALL NOMINEES (except as noted to the contrary below)
[_] WITHHOLD AUTHORITY to vote for all nominees listed
[_] NOMINEES FOR THREE-YEAR TERMS: Jean-Jacques Bertland, Michel de Rosen,
Dale F. Frey, Igor Landau, and Jean-Pierre Tirouflet
INSTRUCTION: To withhold authority to vote for any individual nominee, write
that nominee's name in the space provided at right.
---------------------
2. Proposal to amend the Articles of Incorporation of Rhone-Poulenc Rorer
Inc. to increase the number of authorized shares of common stock to 600
million.
[_] 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, 1996.
[_] FOR [_] AGAINST [_] ABSTAIN
In their discretion, the attorneys are authorized to vote upon such other
matters as may properly come before the meeting.
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 that 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: ___________________________________________________________________, 1996
_________________________________________________________________________
Signature
_________________________________________________________________________
Title
(Please sign, date and return this proxy in the enclosed postage prepaid
envelope.)
