<PAGE>
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES EXCHANGE ACT OF 1934
(AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement [_] CONFIDENTIAL, FOR USE OF THE
COMMISSION ONLY (AS PERMITTED BY
[X] Definitive Proxy Statement RULE 14c-5(d)(2))
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Sec.240.14a-11(c) or Sec.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 1997 ANNUAL MEETING OF SHAREHOLDERS
PROXY STATEMENT
1996 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 31, 1997
Dear Shareholder:
You are cordially invited to attend the Annual Meeting of Shareholders to be
held at 2:00 p.m., Wednesday, May 7, 1997 at the Company's Executive Offices,
500 Arcola Road, Collegeville, Pennsylvania.
At the Annual Meeting, shareholders will be asked to elect six directors and
to ratify the selection of independent accountants for 1997.
The Notice of Annual Meeting, combined proxy statement and 1996 financial
statements, form of proxy and report to shareholders are included with this
letter.
Whether or not you expect to attend the meeting in person, please sign, date
and return the accompanying proxy in the enclosed postage prepaid envelope.
I look forward to welcoming you at the Annual Meeting this year.
Very truly yours,
/s/ Michel de Rosen
Michel de Rosen
Chairman 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 7, 1997
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 Wednesday, May 7, 1997 at 2:00 p.m., local time,
at the Company's Executive Offices, 500 Arcola Road, Collegeville,
Pennsylvania for the following purposes:
1. To consider and vote upon the election of four directors for three-
year terms and two directors for one-year terms.
2. 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, 1997; and
3. 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 14, 1997 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 31, 1997
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
NOS.
----
<S> <C>
Notice of Annual Meeting of Shareholders..................................
Proxy Statement........................................................... 1
Voting of Shares........................................................ 1
Ownership of Shares................................................... 2
Control of the Company................................................ 3
Election of Directors................................................... 4
Committees of the Board of Directors.................................... 7
Directors' Compensation................................................. 8
Report on Executive Compensation by the Executive Personnel &
Compensation Committee................................................. 8
Executive Compensation.................................................. 9
Certain Relationships and Related Transactions.......................... 19
Proposal to Ratify the Appointment of Auditors.......................... 19
General and Other Matters............................................... 20
Proposals of Shareholders............................................... 20
Annual Financial Statements and Review of Operations...................... 21
Management's Discussion and Analysis of Results of Operations and
Financial Condition.................................................... 21
Ten-Year Selected Financial Data (Unaudited)............................ 36
Consolidated Statements of Income....................................... 37
Consolidated Balance Sheets............................................. 38
Consolidated Statements of Cash Flows................................... 39
Notes to Consolidated Financial Statements.............................. 40
Responsibility for Financial Statements................................. 65
Report of Independent Accountants....................................... 66
Quarterly Data (Unaudited).............................................. 67
</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 31, 1997 to holders of Common Shares ("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 7, 1997 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 six directors of the Company, four for three-year terms
ending in 2000, and two for one-year terms ending in 1998; and
2. 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, 1997.
The Board of Directors has fixed the close of business on March 14, 1997 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, 141,901,632 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 and FOR the ratification of the
selection of Coopers & Lybrand L.L.P. as independent accountants for the
Company.
Abstention and Shares held of record by a broker or its nominee which are
voted on any matter are included in determining the number of votes present,
but such Shares not voted on any matter will not be included in determining
whether a quorum is present. A nominee for election as a director will be
elected if he receives an affirmative vote of a majority of the votes cast by
all shareholders entitled to vote at a meeting of shareholders. 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 Employee Savings Plan. If
participants in those plans also are shareholders of record with the same
account information, they will receive a single proxy which will represent all
Shares held of record and in one or both such plans. If the account
information is different, then the participants will receive separate proxies.
The number printed on the proxy card reflects the total number of Shares
represented by that proxy.
1
<PAGE>
The Board of Directors does not know of any matters, other than the election
of directors 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 28, 1997, 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 96,806,784 Direct 68.26%
- -------------------------------------------------------------------------------
</TABLE>
2
<PAGE>
The following table shows, for each director, for each executive named in
the Summary Compensation Table on page 13 and for all directors and executive
officers of the Company as a group, the total number of Shares beneficially
owned as of February 28, 1997, 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
NAME OF BENEFICIAL OWNER OWNED DIRECTLY EXERCISABLE OPTIONS
- -------------------------------------------------------------------------------
<S> <C> <C>
Jean-Jacques Bertrand 4,335 90,886
Jean-Marc Bruel -0- 177,000
Robert E. Cawthorn 98,620 326,789
Michel de Rosen 8,629 204,814
Charles-Henri Filippi 2,000 10,000
Richard Forrest -0- 70,256
Dale F. Frey -0- -0-
Claude Helene -0- 57,000
Manfred E. Karobath, M.D. 6,911 134,993
Igor Landau 200 20,000
Patrick Langlois 5,804 139,538
James S. Riepe 864 10,000
Timothy G. Rothwell -0- 19,701
Jean-Pierre Tirouflet -0- 20,000
Eric J. Topol, M.D. -0- -0-
All Executive Officers and Directors as a
Group
(23 in number) 151,886 1,519,652
- -------------------------------------------------------------------------------
</TABLE>
Pursuant to the terms of the Company's various stock option plans which have
been approved by the shareholders, directors upon election to the Board,
receive an option to purchase 20,000 Shares at a price equal to the market
price on the date of grant. These options become exercisable during service as
a 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.
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 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 additional 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.
3
<PAGE>
ELECTION OF DIRECTORS
The Acquisition Agreement provides that for a standstill period extending
until July 31, 1997, during which RP cannot acquire additional Shares except
under certain conditions provided therein, the Board of Directors shall
consist of 13 directors. The parties to the Acquisition Agreement agreed that
RP would vote all Shares owned by it directly or indirectly to elect, and the
Company would use its best efforts to cause to be elected, seven individuals
selected by RP ("RP Designees"), three executive officers of the Company
("Rorer Designees") and three individuals who are Independent Persons selected
by the Nominating Committee of the Board of Directors of the Company (the
"Independent Directors"). "Independent Person" is defined as a person who (1)
is in fact independent, (2) does not have any direct financial interest or any
material indirect interest in either RP or the Company (other than by reason
of ownership of not more than 1% of any class of securities thereof) and (3)
is not connected with RP, the Company or any of their respective affiliates as
an officer, employee, consultant, agent, advisor, representative, trustee,
partner, director (other than of the Company) or person performing similar
functions.
The Board of Directors has nominated Jean-Marc Bruel, Charles-Henri Filippi,
Manfred E. Karobath, M.D. and James S. Riepe as directors of the Company for
three-year terms ending in 2000, and has nominated Timothy G. Rothwell and
Eric J. Topol, M.D. as directors of the Company for one-year terms ending in
1998. Information about the nominees, as well as about continuing directors,
appears below.
Messrs. Bruel, Filippi, Karobath, and Riepe have previously been elected
directors of the Company by the shareholders. Messrs. Rothwell and Topol were
elected since the last Annual Meeting by the Board of Directors to fill
vacancies created by the resignations of Peter J. Neff and Michael H. Jordan,
respectively.
Mr. Riepe and Dr. Topol are Independent Directors. Dr. Karobath and Mr.
Rothwell are Rorer Designees. Messrs. Bruel and Filippi are RP Designees. RP
designated Robert E. Cawthorn, elected by the shareholders as a Rorer
Designee, an RP Designee upon the election to the Board of Mr. Rothwell as a
Rorer Designee.
Mr. Rothwell was elected a director to fill the vacancy created by the
retirement from the Board of Peter J. Neff, effective December 31, 1996. Dr.
Topol was elected a director to fill the vacancy created by the retirement
from the Board of Michael H. Jordan, effective March 1, 1997. Mr. Filippi was
elected by the shareholders in 1995 to a three-year term expiring in 1998;
however, he is standing for election to the Class of 2000, and Mr. Rothwell is
standing for election to the Class of 1998, in order to distribute the three
categories of directors evenly among the three classes so that each class has
at least four directors, of whom at least one is a Rorer Designee and one is
an Independent Director.
The Company's bylaws provide that the directors may fill vacancies in the
Board, with the director so elected to serve a term until the next Annual
Meeting.
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 DIRECTOR.
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 2000
<TABLE>
<CAPTION>
NAME (AND AGE) OF
DIRECTORS, POSITIONS AND TERM OF
OFFICES HELD WITH THE DIRECTOR OFFICE
COMPANY SINCE: EXPIRES: BUSINESS EXPERIENCE
- ------------------------ -------- -------- -------------------------------------------
<S> <C> <C> <C>
Jean-Marc Bruel/1/ (61) 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.
Charles-Henri Filippi/1/ 1990 1998 Managing Director in Charge of Investment
(44) Banking (since 1995), Senior Executive
Director Vice President (since 1993) and Executive
Vice President in Charge of Large Enter-
prises (1989-1993), Credit Commercial de
France.
E. Manfred Karobath, 1994 1997 Executive Vice President (since 1996) and
M.D./2/ (56) Senior Vice President (1992-1996) of the
Director, Executive Company and President of RPR Research &
Vice President Development since 1992; Director of Re-
search & Development Switzerland of Sandoz
Pharma Ltd. (1989-1992). Dr. Karobath is
also a director of Pasteur Merieux Serums
& Vaccines and Centeon L.L.C.
James S. Riepe/3/ (53) 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.
NOMINEES FOR ELECTION FOR TERM ENDING IN 1998
Timothy G. Rothwell/2/ 1996 1997 President (since 1996), Executive Vice
(46) President and President, Pharmaceutical
President and Director Operations (since 1995) of the Company.
Previously, he served as Chief Executive
Officer and President of the US pharmaceu-
tical business of Sandoz Pharmaceuticals
from 1992 to 1994 and then as Senior Vice
President of Worldwide Business Develop-
ment and Licensing.
Eric J. Topol, M.D./3/ 1997 1997 Chairman of the Department of Cardiology,
(42) The Cleveland Clinic Foundation and Co-Di-
Director rector, The Cleveland Clinic Heart Center
since 1991.
</TABLE>
- --------
1 RP Designee
2 Rorer Designee
3 Independent Director
5
<PAGE>
<TABLE>
<CAPTION>
NAME (AND AGE) OF
DIRECTORS, POSITIONS AND TERM OF
OFFICES HELD WITH THE DIRECTOR OFFICE
COMPANY SINCE: EXPIRES: BUSINESS EXPERIENCE
- ------------------------ -------- -------- -------------------------------------------
CONTINUING DIRECTORS
<S> <C> <C> <C>
Robert E. Cawthorn/1/ 1984 1998 Chairman Emeritus (since 1996), Chairman
(61) Director and (1986-1996), Chief Executive Officer
Chairman Emeritus (1985-1995) President (1984-1991), and Ex-
ecutive Vice President (1982-1984) of the
Company. In January 1997, Mr. Cawthorn be-
came managing director, Global Health Care
Partners, a unit of DLJ Merchant Banking
Partners, L.P. Mr. Cawthorn is a director
of Sun Company, the Vanguard Group of In-
vestment Companies and Westinghouse Elec-
tric Corporation.
Prof. Claude Helene/1/ 1990 1998 Senior Vice President and Directeur
(59) Director Scientifique of Rhone-Poulenc since 1990.
Professeur at the Musee 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). Prof. Helene
is a member of the French Academy of Sci-
ences.
Jean-Jacques Bertrand/1/ 1990 1999 Chairman & Chief Executive Officer (since
(57) Director 1995) and Vice Chairman & CEO (in 1994) of
Pasteur Merieux Serums and Vaccines. Exec-
utive Vice President of the Company (1990-
1993); President, Worldwide Pharmaceutical
Operations of Rhone-Poulenc Sante
(1987-1990).
Michel de Rosen/2/ (46) 1993 1999 Chairman (since 1996), President (1993-
Director, Chairman and 1996) and Chief Executive Officer (since
Chief Executive Officer 1995) of the Company; President, Fibers
and Polymers Sector, Rhone-Poulenc S.A.
(1988-1993). Mr. de Rosen is also a member
of the Executive Committee of Rhone-
Poulenc S.A. and a director of Centeon
L.L.C.
Dale F. Frey/3/ (64) 1996 1999 Retired Chairman and Chief Executive Offi-
Director cer, General Electric Investment Corpora-
tion (1984-1996), Vice President and Trea-
surer, General Electric Corporation (1980-
1984, 1986-1994). Mr. Frey is also a di-
rector of USF&G Corporation, Praxair,
Inc., Doubletree Corp., First American Fi-
nancial and Reacon Properties Corporation.
Igor Landau/1/ (52) 1990 1999 President and Chairman, Health Sector
Director (since 1996), Group President (1992-1996)
and Senior Executive Vice President (1990-
1992) of Rhone-Poulenc S.A. and Chairman
of the Rhone-Poulenc Health Sector (since
1990). Mr. Landau is a member of the Exec-
utive Committee of Rhone-Poulenc S.A.
Jean-Pierre Tirouflet/1/ 1990 1999 Executive Vice President & Chief Financial
(46) Director Officer (since 1992); Group Chief Finan-
cial 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.
</TABLE>
- --------
1 RP Designee
2 Rorer Designee
3 Independent Director
6
<PAGE>
Messrs. Bruel, Helene, Landau and Tirouflet are executives of RP and Mr.
Bertrand is an executive of a wholly-owned subsidiary of RP. See Certain
Relationships and Related Transactions on page 19 for a description of various
transactions between the Company and RP in 1996.
NOMINATIONS BY SHAREHOLDERS
The Company's bylaws 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 John A. Bond, Vice President
and Treasurer and Charles-Henri Filippi, director, each filed late a report of
a sale of Shares. 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 three meetings in 1996. Its
members are Messrs. Riepe (Chairman), and Frey.
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
7
<PAGE>
the Acquisition Agreement, one member is an RP Designee and the balance are
Independent Directors. The Executive Personnel and Compensation Committee
reviews the administration of the Company's stock option and incentive
compensation plans and reviews with the Board of Directors, for approval, the
compensation, including the amount of any incentive compensation or bonus, to
be paid to any officer of the Company or Division president and reviews the
compensation, including incentive compensation or bonus, paid to each other
employee of the Company or any of its domestic subsidiaries or General Manger
of an international subsidiary whose annual rate of salary exceeds $200,000
and any other employee or class or group of employees as the Committee shall
determine. The Committee also reviews the recommendations of the Company's
Chief Executive Officer, including planning for executive development and
management succession, with regard to management personnel of the Company and
its subsidiaries, whose annual rate of salary exceeds $200,000. The Executive
Personnel and Compensation Committee held three meetings in 1996. Its members
are Messrs. Riepe (Chairman), 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 1996. Its members are Messrs. Frey (Chairman), and de Rosen.
The Board of Directors held six meetings in 1996. None of the continuing
directors 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 89%.
DIRECTORS' COMPENSATION
Directors who are not employees of the Company or any of its subsidiaries
were paid in 1996 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, in addition,
receive a fee of $500, or a total of $1,000, for attending a committee meeting
not held in conjunction with a meeting of the Board.
The terms of the Company's stock option 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.
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 executive officers named in the Summary
8
<PAGE>
Compensation Table on page 13 (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 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 1996 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 1996.
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 or function performance and individual
performance.
There are three elements of the executive compensation package: (1) base
salary which is generally 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 the results of a business unit or
function and an individual's performance; and (3) longer term incentive
compensation, consisting of the Capital Plan and options to purchase Company
shares, the amount of which is based on 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 compensation tied to results achieved than most other executives in the
pharmaceutical 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
The Committee annually 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, responsibilities of the
position, the level and movement of salaries for comparable positions in the
pharmaceutical industry, and changes in the cost of living.
For market data, the Company surveys peer companies in the pharmaceutical
industry which the Committee believes are appropriate for comparison of salary
levels for its executives. These surveyed companies comprise the peer group
index, which is used for the performance graph on page 12.
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, 40% of a
target award is attributed to attainment of individual objectives and 60% to
financial or functional goals. Company financial objectives and the individual
target bonus 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
9
<PAGE>
designed to be a short-term award for specific results and performance in a
given year and to generate total short-term compensation that is competitive
within the pharmaceutical industry. The performance against objectives of
executive officers is reviewed by the Committee, which recommends bonus awards
to the Board of Directors for approval. 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.
As reported in the Company's financial statements, 1996 EPS was adversely
affected by the Centeon recall and suspension of manufacture and while in most
cases business unit and individual performance met or exceeded expectations,
bonuses for 1996 paid to the Named Executive Officers were materially below
target as a consequence of the EPS performance.
LONG-TERM INCENTIVE
The primary long-term incentives provided to executives are 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.
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. 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 became exercisable in
1996 at an exercise price which required at least a 10% annual increase in
stock price in order to be exercised. This assured that there was no benefit
to the executive unless all shareholders recognized a meaningful increase in
the value of their shares.
In 1996, grants to executive officers generally reflected the achievement of
individual objectives. Special grants were made to Mr. Rothwell and Mr.
Langlois to recognize the performance of specific business objectives in 1996.
The Company also has a Capital Plan which provides an additional performance
incentive to a small group of 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 believes the
Capital Plan helps the Company to remain competitive with its peer companies
and addresses a need for a short- to medium-term performance-based incentive
in the Company's executive compensation. The Capital Plan provides an annual
performance unit award payable in cash, a portion of which is deferred for
several years. 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. The Committee
believes that the Capital Plan is 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.
10
<PAGE>
THE CHIEF EXECUTIVE OFFICER'S COMPENSATION
The Chief Executive Officer's compensation for 1996 included the same
components of salary and variable compensation in the form of cash bonus,
Capital Plan pay-out, and stock options as apply to other executives of the
Company. The methodology employed by the Committee in setting objective and
target performance goals for the Chief Executive Officer also 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 results, development and implementation of
Company strategy, management staffing, divestitures, corporate integration of
Fisons, internal and external communications, research & development results,
and cost management efforts. The Committee viewed the Chief Executive
Officer's performance in 1996 as satisfactory, recognizing that substantial
progress in most business areas was offset by the financial impact of the
Centeon situation.
CHANGE OF CONTROL ARRANGEMENTS
In 1996, the Board of Directors, upon the recommendation of the Committee,
approved change of control arrangements with a number of executives of the
Company, including the Named Executive Officers. The terms of those contracts
are described on page 18. The Committee notes that these agreements are
customary in the pharmaceutical industry and believes that during a period of
consolidation and transition, such as the industry has been experiencing, they
are necessary and appropriate for the retention and recruitment of top-level
executives. Further, the agreements require both a change in control and a
negative change in job responsibilities before the executive receives any
benefit.
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 compensation 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 1996 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.
COMPENSATION COMMITTEE INTERLOCKS
Michael H. Jordan, who has been Chairman and CEO of Westinghouse Electric
Corporation since 1993, was a director of the Company until his resignation,
effective March 1, 1997. He was a member of the Executive Compensation and
Personnel Committee in 1997, 1996 and in prior years. Robert E. Cawthorn,
Chairman Emeritus of the Company, became a director of Westinghouse in 1995
and was, until his retirement as an employee of the Company in April 1996, an
executive officer of the Company.
James S. Riepe, Chairman Igor Landau
11
<PAGE>
PERFORMANCE GRAPH
The following Performance Graph compares the Company's cumulative total
shareholder return on the Company's Shares for the five-year period December
31, 1991 to December 31, 1996 with the cumulative total return of the Standard
& Poor's 500 Stock Index (which does not include the Company) 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.
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
S&P 500 PEER GROUP RPR
<S> <C> <C> <C>
1991 100 100 100
1992 108 83 73
1993 118 77 58
1994 120 87 60
1995 165 137 91
1996 203 172 135
</TABLE>
- --------
The peer group consists of Abbott Laboratories, American Home Products
Corporation, Bristol-Myers Squibb Company, Eli Lilly & Company, Glaxo Wellcome
plc, Johnson & Johnson, Merck & Co., Inc., Pfizer Inc., Pharmacia & Upjohn,
Inc., Schering-Plough Corporation, SmithKline Beecham plc, and Warner-Lambert
Company. The Company uses the peer group for comparisons of executive
compensation. In 1996, the peer group was amended to include Pharmacia &
Upjohn, Inc. which did not have a material impact on the peer group cumulative
total return figures.
12
<PAGE>
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth information concerning the compensation
during the last three fiscal years of the Company's Chief Executive Officer
and its next four most highly compensated executive officers serving at the
end of 1996 (collectively referred to hereafter as the "Named Executive
Officers") for all services rendered by them to the Company.
- -------------------------------------------------------------------------------
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
NAME AND COMPENSATION STOCK SARS/3/ PAYOUTS COMPENSATION
PRINCIPAL POSITION YEAR SALARY ($) BONUS ($)/1/ ($)/2/ AWARD(S)($) (#) ($) ($)/4/
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Michel de Rosen 1996 572,000 298,081 141,748 -0- 30,000 -0- -0-
Chairman and 1995 435,600 275,734 119,600 -0- 19,102 -0- -0-
Chief Executive 1994 433,833 252,865 118,767 -0- 34,080 -0- -0-
Officer
Timothy G. Rothwell* 1996 440,000 224,008 -0- -0- 26,358 -0- 3,000
President and 1995 383,609 252,217 435,916 -0- 12,000 -0- 3,000
President,
Pharmaceutical
Operations
M.E. Karobath M.D. 1996 401,080 209,721 81,920 -0- 14,133 -0- 3,000
Executive Vice 1995 396,958 227,800 -0- -0- 24,079 -0- 3,000
President, and 1994 336,397 211,724 -0- -0- 28,011 -0- 3,000
President, RPR Research
and Development
Patrick Langlois 1996 317,581 100,856 166,578 -0- 21,320 -0- 5,412
Executive Vice 1995 300,000 118,250 137,707 -0- 14,969 -0- 5,412
President and Chief 1994 281,350 101,375 108,284 -0- 16,689 -0- 5,412
Financial Officer
Richard Forrest 1996 271,450 122,718 100,552 -0- 8,675 -0- -0-
Senior Vice 1995 244,983 144,048 95,303 -0- 9,833 -0- -0-
President and 1994 191,669 60,536 66,864 -0- 10,965 -0- -0-
General Manager/Europe
</TABLE>
- --------
/1/ The amount shown in this column represents the annual incentive bonus for
the performance year indicated and paid in the following year, as more fully
described in the report of the Compensation Committee on page 9. The amounts
shown for Mr. Langlois are net of a $40,000 payment made in each year by RP
for services performed for it as described on page 19.
/2/ If no amount is shown, the aggregate of perquisites and other personal
benefits 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 1996 represents (a) the short-term
payout, made in 1996, of the 1995 grant under the terms of the Capital Plan
to each of the Named Executive Officers as follows: Mr. de Rosen; $81,920;
Dr. Karobath, $81,920; Mr. Langlois, $61,440; and Mr. Forrest,
13
<PAGE>
$25,600; and, (b) personal benefits paid to the Named Executive Officers,
some under the terms of the Company's expatriate program, the individual
benefits exceeding 25% of the total for each being: for Mr. de Rosen,
housing allowance of $45,600; for Mr. Langlois, housing allowance of
$70,968, and assignment allowance of $31,770; and for Mr. Forrest, housing
allowance of $56,565. The amounts shown in this column for 1995 represent
(a) for Mr. de Rosen, personal benefits in connection with the Company's
expatriate program, of which individual benefits exceeding 25% of the total
were a housing allowance of $76,000 and home leave of $23,600; (b) for Mr.
Rothwell, the tax grossed-up aggregate of a sign-on bonus of $140,000 and an
advance of $160,000 which would be repaid to the Company on a pro rata basis
in the event Mr. Rothwell's employment terminates prior to January 30, 1999;
(c) for Mr. Langlois, personal benefits in connection with the Company's
expatriate program, of which the individual benefit exceeding 25% of the
total was an assignment allowance of $74,257; and (d) for Mr. Forrest,
personal benefits in connection with the Company's expatriate program, of
which the individual benefit exceeding 25% of the total was a housing
allowance of $62,926. The amounts shown in this column for 1994 represent
payment made to or on behalf of the Named Executive Officers in connection
with the Company's expatriate program; the individual benefits which
exceeded 25% of the total personal benefits for the Named Executive officer
were (a) for Mr. de Rosen, housing allowance ($31,667), relocation allowance
($40,000) and home leave ($35,299); (b) for Mr. Langlois, housing allowance
($34,483) and assignment allowance ($50,082); and (c) for Mr. Forrest,
housing allowance ($64,795).
/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 special grants of
10,000 shares each to Mr. Rothwell and Mr. Langlois in 1996 which became
exercisable as to half immediately upon grant and as to half on December 31,
1996 upon the attainment of certain business objectives for 1996. See table
entitled Stock Option Grants in 1996 on page 16.
/4/ Represents (a) employer matching contributions to the Rhone-Poulenc Rorer
Employee Savings Plan (401(k)) of $3,000 each for Mr. Rothwell and Dr.
Karobath and (2) premium cost of whole life insurance policy for the benefit
of Mr. Langlois.
* Mr. Rothwell was initially employed by the Company on January 25, 1995.
14
<PAGE>
LONG-TERM INCENTIVE PLAN AWARDS IN 1996
The following table shows the long-term award, made in 1996 and payable
three years after grant, under the terms of the Company's Capital Plan. The
Capital Plan provides for annual performance unit awards, one-half of which is
typically a long-term benefit payable in cash three years after grant
(reported in the following table) and one-half of which is payable in cash one
year after grant (reported in the appropriate year's Summary Compensation
Table). The annual performance unit awards were first made in 1995 at a value
of $20 per unit. The value of the performance unit will vary, depending upon
the Company's increase or decrease in its 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 were, and those
awarded 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 represented in the performance
graph on page 12. The number of performance units awarded may range from 50%
to 150% of a target for each Named Executive Officer. One-half of the award
made in 1996 to each Named Executive Officer, except Mr. Langlois, will be
paid out in 1997 and one-half will be paid in 1999; Mr. Langlois will receive
a payout of his entire 1996 award in 1997.
In order to continue to participate in the Capital Plan, the Named Executive
Officers must, within two to four years after being selected to participate,
own that number of the Shares equal in market value to at least one year's
base salary in effect when the Named Executive Officer began to participate;
thereafter, the participant must own, on January 1st of any year, that number
of Shares equal in market value to at least the participant's then-current
base salary.
- -------------------------------------------------------------------------------
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 2,860 3 years
T.G. Rothwell 2,860 3 years
M.E. Karobath 2,860 3 years
R. Forrest 1,430 3 years
</TABLE>
- --------
/1Represents/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 a short-term benefit payable in cash to the
Named Executive Officer one year after grant (reported in the Summary
Compensation Table for the year of payment), and one-half of which is
typically 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 and in 1996 at $20.48 per unit. The value of the performance unit will
depend upon the Company's increase or decrease in net income compared to the
previous year's net income and can change from 50% to 150% from the previous
year's baseline. The number of performance units awarded in 1996 and in
subsequent years will be determined each year with reference to the
Company's net income change from the previous year, compared to the average
change in net income of peer companies. The size of the performance award
may range from 50% to 150% of a target for each participant.
15
<PAGE>
STOCK OPTION GRANTS IN 1996
The following table shows all options to purchase the Company Common Shares
granted to each of the Named Executive Officers of the Company in 1996 and the
potential value of such grants at stock price appreciation rates of 0%, 5% and
10%, compounded annually over the maximum ten-year term of the options. The 5%
and 10% rates of appreciation are required to be disclosed by the rules of the
Securities and Exchange Commission and are not intended to forecast possible
future actual appreciation in the Company's stock prices.
- -------------------------------------------------------------------------------
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
- --------------------------------------------------------------------------------------------------------
<CAPTION>
POTENTIAL REALIZABLE VALUE AT ASSUMED
ANNUAL RATES OF STOCK PRICE
INDIVIDUAL GRANTS APPRECIATION FOR OPTION TERM ($)/1/
- ----------------------------------------------------------------- --------------------------------------
(A) (B) (C) (D) (E) (F) (G)
% OF TOTAL
NUMBER OF OPTIONS/SARS
SECURITIES GRANTED TO
UNDERLYING EMPLOYEES EXERCISE OR
OPTIONS/SARS IN FISCAL BASE PRICE EXPIRATION 0% 5% 10%
NAME/GROUP GRANTED (#)/2/ YEAR ($/SH) DATE APPRECIATION APPRECIATION APPRECIATION
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
M. de Rosen 30,000 2.58 64.00 02/24/06 -0- 1,207,500 3,060,000
T.G. Rothwell 16,358 1.40 64.00 02/24/06 -0- 658,409 1,668,516
10,000 .86 63.875 02/28/06 -0- 401,750 1,018,050
M.E. Karobath 14,133 1.21 64.00 02/24/06 -0- 568,853 1,441,566
P. Langlois 11,320 .97 64.00 02/24/06 -0- 455,630 1,154,640
10,000 .86 63.875 02/28/06 -0- 401,750 1,018,050
R. Forrest 8,675 .74 64.00 02/24/06 -0- 349,168 884,850
</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
$104.25 and $166.00 per share, respectively, for options bearing an exercise
price of $64 and an aggregate ten-year appreciation of 63% and 159%
respectively to stock prices of $104.05 and $165.68 per share, respectively,
for options bearing an option price of $63.875). 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 14, 1997 was $75.875 per share.
/2/ Options granted in 1996 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, except for special grants of
10,000 shares each to Mr. Rothwell and Mr. Langlois which became exercisable
as to half immediately upon grant and as to half on 12/31/96 upon the
attainment of certain business objectives in 1996.
16
<PAGE>
AGGREGATED STOCK OPTION EXERCISED IN 1996 & STOCK OPTION VALUES AT DECEMBER
31, 1996
The following table provides information as to stock options exercised by
any of the Named Executive Officers in 1996 and the value, on December 31,
1996, of the remaining stock options held by each of the Named Executive
Officers, calculated by using the closing price ($78.125) of the Company's
Shares on December 31, 1996.
- -------------------------------------------------------------------------------
AGGREGATED OPTIONS/SAR EXERCISES IN 1996 & 1996 YEAR-END OPTION/SAR VALUES
<TABLE>
- ----------------------------------------------------------------------------------------------------------
<CAPTION>
(A) (B) (C) (D) (E)
VALUE OF UNEXERCISED,
NUMBER OF SECURITIES IN-THE-MONEY
UNDERLYING UNEXERCISED OPTIONS/SARS AT
OPTIONS/SARS AT FY-END (#) FY-END ($)/1/
SHARES ACQUIRED VALUE ------------------------------ -------------------------
NAME ON EXERCISE (#) REALIZED (4) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
<S> <C> <C> <C> <C> <C> <C>
M. de Rosen -0- -0- 85,454 47,728 2,171,533 1,156,430
T.G. Rothwell 3,750 131,344 10,250 24,358 152,343 546,056
M.E. Karobath -0- -0- 112,919 45,522 2,974,753 1,350,018
P. Langlois -0- -0- 125,212 26,863 3,730,995 780,286
R. Forrest -0- -0- 60,432 18,886 1,688,593 530,102
</TABLE>
- --------
/1Calculated/on the difference between the December 31, 1996 market value of
$78.1250 and the option price.
PENSION PLAN
The following 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").
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 25,483 38,225 50,967 63,708 76,450 80,200
$350,000 25,483 38,225 50,967 63,708 76,450 80,200
$400,000 25,483 38,225 50,967 63,708 76,450 80,200
$450,000 25,483 38,225 50,967 63,708 76,450 80,200
$500,000 25,483 38,225 50,967 63,708 76,450 80,200
$550,000 25,483 38,225 50,967 63,708 76,450 80,200
$600,000 25,483 38,225 50,967 63,708 76,450 80,200
$650,000 25,483 38,225 50,967 63,708 76,450 80,200
</TABLE>
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
17
<PAGE>
and provides benefits which vary according to salary level, subject to a
$150,000 limitation (as indexed) on eligible compensation. The Company's
contribution to the Pension Plan in 1996 represented approximately 4.3% of the
aggregate base annual compensation of all Pension Plan participants as of
January 1, 1996. The years of credited service for the Named Executive
Officers who participate in the Pension Plan are: Dr. Karobath, 4 years; Mr.
Rothwell, 2 years.
The compensation as specified in the table above includes salary as reported
in the Summary Compensation Table on page 13.
Mr. de Rosen and Mr. Langlois participate in a legally-required retirement
plan provided through RP for the benefit of substantially all employees, in
France, of RP and the Company and their respective subsidiaries. The plan is
mandated by French law and involves both employer and employee contributions.
Plan assets are held and managed independently of the employer. The basis for
calculation of the retirement benefit is capped by law at an annual
compensation level equivalent to approximately $250,000.
Mr. Forrest participates in a retirement plan provided through the Company's
Italian subsidiary for the employees of that company. The plan is mandated by
Italian law and involves both employer and employee contributions. Plan assets
are held and managed independently of the employer. The basis for calculation
of the retirement benefit is capped by law at an annual compensation level
equivalent to approximately $115,000.
AGREEMENTS WITH CERTAIN EXECUTIVE OFFICERS
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 13, accelerated
service credit, for purposes of calculating retirement benefits, of two years
for each year worked, provided he is employed by the Company for a minimum of
five years.
Change of Control Agreements. Each of the Named Executive Officers has an
agreement with the Company which provides for the payment to the executive of
certain compensation in the event that the executive's employment with the
Company is terminated, either by the Company for other than Cause, or by the
executive for Good Reason, within 18 months following a "Change of Control",
as a cushion against the financial and career impact on the executive of any
such Change of Control.
For purposes of the agreements, a Change of Control means, generally, that
(1) any person, other than the Company or RP, becomes the beneficial owner of
more than 50% of the value of the outstanding equity or voting power of RP's
voting securities or the fair market value of the assets of RP, or (2) at such
time as RP no longer owns more than 50% of the outstanding equity or combined
voting power of the voting securities of the Company, any person becomes the
beneficial owner of more than 50% (if acquired from RP) or 30% or more (if not
acquired from RP nor in a transaction initiated by the Company) of (i) the
value of the outstanding equity or combined voting power of the outstanding
securities of the Company or (ii) the fair market value of the assets of the
Company.
"Cause" means misappropriation of funds, habitual substance abuse,
conviction of a crime involving moral turpitude or gross negligence in the
performance of duties having a material adverse effect on the business or
financial condition of the Company.
"Good Reason" means any failure of the Company to comply with the terms of
the agreement; involuntary reduction of authority, duties, responsibilities or
compensation; or relocation of the executive without his consent by 50 miles
or more.
18
<PAGE>
The compensation payable to a Named Executive Officer upon termination by
the Company for other than Cause or by the executive for Good Reason ranges
from 21 months to 36 months ("Payment Period") of base salary and target bonus
and continuation of health benefits. In addition, all stock options and
Capital Plan awards shall vest and become nonforfeitable and the Company shall
make a cash payment to the executive equal to the present value of the amount
by which the executive's pension benefit would have increased if the Payment
Period had been counted as service under the applicable pension plan.
Each agreement has a term of two years and is thereafter to be renewed for
successive one-year periods only if approved annually by the Executive
Compensation and Personnel Committee.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Since the combination of the Company and the Human Pharmaceutical Business
of RP in 1990, RP and the Company have continued to provide services and to
sell products to each other. In 1996, sales by the Company to RP and its
affiliates amounted to $31.3 million. The Company purchased materials in 1996
from RP and its affiliates at a cost of $38.7 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
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 1996 pursuant to such arrangements was approximately
$24 million.
As of December 31, 1996, RP had loans outstanding to the Company of $259.8
million. In 1996, the maximum principal amount of such loans was approximately
$838 million and net interest accruals in 1996 for such loans amounted to
$22.3 million. RP has guaranteed certain debt obligations of the Company and
certain of its subsidiaries and received fees in consideration therefor of
approximately $86,687 for 1996. As of December 31, 1996, the aggregate
principal amount of loans so guaranteed was $57 million.
In December 1995, the Company issued $500 million of undated capital equity
notes to 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 1996, and
consistent with agreements in previous years, RP paid fees totaling $40,000
for consulting services rendered to RP by Patrick Langlois, Senior Vice
President and Chief Financial Officer. 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 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 1997. 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 1996 and in prior
years. Representatives of that firm will be present at the Annual Meeting with
the opportunity
19
<PAGE>
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 1998 Annual
Meeting must be received in writing no later than December 3, 1997 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, 1996 AS FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION. REQUESTS SHOULD BE SENT TO RHONE-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
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.
BUSINESS DEVELOPMENTS
Through recent selected acquisitions, divestitures and alliances, the
Company has focused its resources to solidify its position in targeted
therapeutic areas and strengthen its presence in strategic geographic markets.
SIGNIFICANT 1996 EVENTS
In 1996, the Company initiated a program of selected divestitures and
refocused its resources on those areas deemed strategic to its future
business. In early 1996, the Company completed the sale of the Scientific
Instruments Division of Fisons plc, acquired in 1995. In mid-1996, the Company
licensed the rights to certain nonstrategic products in the cough and cold,
diuretic and appetite suppressant areas to Medeva plc. In second half of the
year, the Company sold its U.K. generics business, certain European self-
medication products and various nonstrategic assets in France, Belgium, Italy
and Spain. In 1996, the Company also refocused its Gencell resources on in-
vivo therapies and substantially curtailed ex-vivo cell processing projects
which had been mainly initiated by Applied Immune Sciences, Inc. ("AIS").
In October 1996, Centeon, a joint venture in which the Company has a 50%
interest, initiated a voluntary worldwide recall of all in-date lots of
Albuminar(R)/Plasma-Plex(R) products as a precautionary measure in response to
manufacturing concerns with respect to these products at a U.S. production
facility and temporarily suspended the manufacture of plasma-derived products
at the location. In January 1997, Centeon entered into a consent decree with
the U.S. Government which sets conditions for the shipment by Centeon of both
plasma-based products and certain pharmaceutical products manufactured for the
Company by Centeon at the facility. See Other (Income), Net which follows.
SIGNIFICANT 1995 EVENTS
In the fourth quarter of 1995, the Company acquired the U.K.-based
pharmaceutical company Fisons plc ("Fisons"). The combination of Fisons with
RPR created the fourth largest company worldwide in respiratory & allergy with
a comprehensive range of complementary products, expanded presence in major
geographic markets and innovative inhalation delivery technologies. In
November 1995, the Company also acquired the remaining 53% of the outstanding
shares that it did not own of AIS.
In September 1995, the Company's Armour Pharmaceutical Company subsidiary
("Armour") completed the formation of Centeon, a 50/50 global joint venture
with Behringwerke AG, a subsidiary of Germany's Hoechst AG, in the plasma
proteins business. The complementary plasma proteins offerings and geographic
strengths of the partners positioned the joint venture as a global market
leader. The joint control and profit-sharing provisions took effect on January
1, 1996.
In the second quarter of 1995, the Company acquired from RP the businesses
of Cooperation Pharmaceutique Francaise ("Cooper") and Rhodia Farma. 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.
21
<PAGE>
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. The degree to which
pharmaceutical companies are individually affected depends upon each company's
product portfolio and its ability to manage in the environment specific to
each country.
In the U.S., payment of rebates to state Medicaid programs, as required by
existing legislation, reduced the Company's sales by $46 million in 1996, $47
million in 1995 and $40 million in 1994. 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 presence, the government has
continued its efforts to reduce the nation's health care deficit through such
initiatives as individual convention price and volume agreements coupled with
a special levy on pharmaceutical manufacturers paid in 1996, incentives to
restrict physician prescribing practices, 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 directly
by controlling admission to or levels for reimbursement programs, or through
limits on profitability levels. Governments have also increased pressure to
reduce prescription volumes through new prescribing guidelines or, in certain
countries, prescription budgets.
In many markets, national governments continue to review additional measures
to limit the growth of health care expenditures. Whether initiated by
governments or by private payors, these 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
The transactions described under "Business Developments" affect
comparability of the reported operating results of the Company for the years
1996, 1995 and 1994. The Company's first quarter 1995 and full year 1994
results were restated to include the accounts of Cooper and Rhodia Farma as of
April 1, 1994 and January 1, 1994, respectively, reflecting the "as-if
pooling" basis of accounting for the acquisitions of entities under common
control. 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.
Management believes that a more meaningful analysis of the Company's
reported 1996 results can be made by comparison to 1995 unaudited pro forma
information which shows results as if the acquisitions of Fisons and AIS and
the formation of Centeon had occurred on January 1, 1995.
The unaudited pro forma information includes adjustments for financing
charges and goodwill amortization, and income taxes were provided at an
estimated full year effective income tax rate of 36%. The operations of
Fisons' Scientific Instruments Division and Laboratory Supplies Division, sold
in 1996 and 1995, respectively, are not included in the pro forma results. Pro
forma operating income
22
<PAGE>
excludes $127 million of acquisition-related charges recorded by the Company,
including pretax restructuring charges of $60 million, acquired research and
development expense of $44 million, and integration and other costs related to
the Fisons acquisition of $23 million. Pro forma gains on sales of assets
exclude a $133 million pretax gain on Fisons' sale of the greater portion of
its research and development operations in mid-1995; similarly, research and
development expenses approximating $24 million associated with the activities
sold are excluded from pro forma operating income. Pro forma other (income),
net excludes acquired research and development expense totaling $13 million
related to the Company's prior investment in AIS. The pro forma information
does not purport to be indicative of the Company's results of operations had
the transactions actually occurred on the dates presented nor is it
necessarily indicative of future operating results.
<TABLE>
<CAPTION>
PRO FORMA 1995
1996 (UNAUDITED)
----------- ----------------
($ IN MILLIONS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C>
Net sales $ 5,421 $ 5,316
Cost of products sold 1,666 1,692
Selling, delivery and administrative expenses 2,110 2,190
Research and development expenses 882 827
Other charges 103 --
----------- -----------
Operating income 660 607
Interest expense, net 170 184
Gain on sales of assets (111) (50)
Other (income), net (89) (144)
----------- -----------
Income before income taxes 690 617
Provision for income taxes 217 223
----------- -----------
Net income 473 394
Dividends on preferred stock and remuneration
on capital equity notes 44 52
----------- -----------
Net income available to common shareholders $ 429 $ 342
=========== ===========
Earnings per common share $ 3.16 $ 2.53
=========== ===========
Average common shares outstanding 135.8 134.2
=========== ===========
</TABLE>
The analysis of results of operations for the year 1995 versus 1994 compares
reported 1995 results with restated 1994 results. Reported 1995 results
included the operating results of Fisons and AIS from November and December,
respectively, as well as acquisition-related costs, financing charges and
goodwill amortization incurred during the respective periods.
1996 COMPARED WITH PRO FORMA 1995
At $429 million ($3.16 per share), net income available to common
shareholders increased 25% over the prior year. Results for 1996 included $103
million ($.50 per share) of charges related to the reassessment of certain
intangibles and fixed asset values associated with AIS, the impact of which
was substantially offset by gains on the sales of certain European self-
medication and other nonstrategic assets totaling $111 million ($.51 per
share). Net income for 1996 also included charges totaling $44 million ($.20
per share) for the estimated impact of a voluntary recall by Centeon of all
in-date lots of albumin products sold under the trademarks Albuminar(R) and
Plasma-Plex(R). Earnings comparisons were additionally impacted by current
year lost sales of Albuminar(R)/Plasma-Plex(R) in addition to reduced sales of
other plasma-derived products whose production was also temporarily suspended
and/or which are typically marketed with those albumin products. The Company
estimates that the impact of such lost sales approximated $.24 per share in
1996. Pro forma results for 1995 included $.10 per share of asset gains, net
of the effects of the reassessment of certain asset values.
23
<PAGE>
Sales
At $5,421 million, reported sales for the full year 1996 increased 2%. In
1996, the Company licensed the rights to certain nonstrategic former Fisons
products in the cough and cold, diuretic and appetite suppressant areas to
Medeva plc for four-and-one-half years, after which period Medeva will have
the option to purchase the product rights. The Company also sold its U.K.
generics business and a former Fisons nonstrategic business in Spain.
Excluding second half of 1995 sales of the above products (-2%), and the
negative effects of currency fluctuations (-2%), current year sales increased
6% substantially due to volume increases, including new product presentations.
Net higher prices (U.S. and Europe) contributed less than one percentage point
of sales growth. No single product or offering represented more than 8% of
worldwide sales in 1996 and the ten largest products approximated 37% of
sales.
In the tables and discussion which follow, percentage comparisons of sales
are presented excluding the effects of product divestitures and currency
fluctuations unless otherwise noted.
Sales by geographic area were as follows:
<TABLE>
<CAPTION>
PRO FORMA %
1996 1995 CHANGE
------ --------- ------
($ IN MILLIONS)
<S> <C> <C> <C>
U.S. $1,280 $1,192 +13%
------ ------ ----
France 1,795 1,830 +1%
Other Europe 1,417 1,421 +4%
Rest of World 929 873 +11%
------ ------ ----
Total Non-U.S. 4,141 4,124 +4%
------ ------ ----
Total sales $5,421 $5,316 +6%
====== ====== ====
</TABLE>
In the United States, sales growth was led by a doubling in sales of
Lovenox(R), strong performance by Azmacort(R) and contributions from the
innovative new products Taxotere(R) and Rilutek(R). Sales of certain other
major products, principally Dilacor XR(R), Lozol(R)/indapamide and
calcitonins, declined for the year.
In France, sales grew only slightly from prior year levels as contributions
from new oncology products (Taxotere(R), Campto(R) and Granocyte(R)) and
higher sales of Imovane(R)/Amoban(R) and Doliprane(R) were mitigated by lower
anti-infectives sales and declines in sales of the Cooper subsidiary.
Generally, sales in France were affected by a slowdown in market growth due in
part to restricted physician prescribing practices in response to on-going
government initiatives to reduce health care expenditures.
Sales growth in Other Europe was modest as higher sales of strategic
products were partially offset by reduced sales of noncore products in certain
markets. Despite growth in ethical products (Taxotere(R),
Clexane(R)/Lovenox(R)), sales in Germany fell short of prior year levels
principally due to lower sales of self-medication products (Maalox(R) and
nonstrategic products). In December 1996, the Company sold the assets
associated with certain noncore self-medication products in Germany,
principally the Ilja Rogoff(R) and Biovital(R) product lines, to Hoffmann-La
Roche. Governmental pressures to limit growth of health care expenditures
negatively impacted sales in Germany during the fourth quarter of 1996. Sales
growth in the U.K. resulted from higher export sales of Intal(R) to Japan and
increased sales of Imovane(R)/Amoban(R) and oncology products (Taxotere(R)).
Sales in Italy were slightly below prior year levels as the impact of lower
sales of Intal(R) and certain nonstrategic products was partially offset by
contributions from Granocyte(R) and increased sales of Maalox(R). Expansion in
Eastern European markets added to regional sales results.
24
<PAGE>
Sales growth in the Rest of World area reflected higher sales in
Asia/Pacific (Japan and Southeast Asia) and South American markets (Brazil).
Sales growth in Japan (Maalox(R), Imovane(R)/Amoban(R)) was moderated by the
impact of the voluntary recall of Albuminar(R) and the temporary suspension of
the U.S. manufacture of plasma-derived products in the latter part of 1996.
The Company is focusing on innovation and leadership in targeted key
therapeutic areas including respiratory & allergy, thrombosis/cardiology,
anti-infectives and oncology and, in 1996, it realigned its therapeutic
categories accordingly. Certain reclassifications of amounts shown in prior
periods have been made between therapeutic area categories to conform to
classifications now used by the Company. Sales by therapeutic area were as
follows:
<TABLE>
<CAPTION>
PRO FORMA %
THERAPEUTIC AREA/PRINCIPAL OFFERINGS 1996 1995 CHANGE*
------------------------------------ ------ --------- -------
($ IN MILLIONS)
<S> <C> <C> <C>
TOTAL RESPIRATORY & ALLERGY $1,145 $1,070 13%
Azmacort(R) 265 208 27%
Intal(R)/Aarane(R) 297 294 3%
Nasacort(R)/Nasacort(R) AQ 105 87 21%
Tilade(R) 86 75 16%
- ------------------------------------------------------------------------
TOTAL THROMBOSIS/CARDIOLOGY AND CARDIOVASCULAR 1,042 996 8%
Clexane(R)/Lovenox(R) 401 300 36%
Dilacor XR(R) 140 146 -4%
Lozol(R)/indapamide 45 91 -51%
- ------------------------------------------------------------------------
TOTAL CENTRAL NERVOUS SYSTEM 649 615 16%
Doliprane(R) 148 143 6%
Imovane(R)/Amoban(R) 142 125 19%
Rilutek(R) 28 6 N/A
- ------------------------------------------------------------------------
TOTAL ANTI-INFECTIVES 614 597 5%
Flagyl(R) 126 118 10%
- ------------------------------------------------------------------------
TOTAL HORMONE REPLACEMENT THERAPY/BONE 352 369 -2%
Orudis(R)/Profenid(R)/Oruvail(R) 195 204 -3%
Calcitonins 73 102 -26%
- ------------------------------------------------------------------------
TOTAL ONCOLOGY 201 89 129%
Campto(R) 10 -- N/A
Granocyte(R) 67 47 44%
Taxotere(R) 89 2 N/A
- ------------------------------------------------------------------------
OTHER THERAPEUTIC AREAS 1,418 1,580 -7%
Maalox(R) 168 170 3%
DDAVP(R) 121 96 25%
- ------------------------------------------------------------------------
</TABLE>
* Percentage change calculation excludes effects of product divestitures and
currency fluctuations.
Sales growth of respiratory & allergy products was led by strong performance
of Azmacort(R), an inhaled corticosteroid for asthma sold in North America. In
1996, Azmacort(R) experienced good growth in prescriptions written and despite
recent increased market competition, the Company expects that Azmacort(R) will
maintain significant market share and continue to generate good sales
performance. In 1996, the Company received clearance from the U.S. Food and
Drug Administration ("FDA") to market Azmacort(R) as a prophylactic therapy in
the maintenance treatment of asthma with twice-daily dosing. In 1996, the
Company also received two FDA approvals related to the Nasacort(R) product
line: approval to market Nasacort(R), an inhaled corticosteroid for allergic
rhinitis, to children six years of age and older and approval to market
Nasacort(R) AQ, a once-daily, water-based nasally inhaled corticosteroid for
the treatment of allergic rhinitis. For the year, the sales contribution from
25
<PAGE>
Nasacort(R) AQ more than exceeded the shortfall in sales of Nasacort(R)
resulting from increased competition and expansion of the aqueous segment. In
1996, the market positioning of Intal(R), a cromolyn sodium nonsteroidal anti-
inflammatory for asthma, and Tilade(R), a nedocromil sodium-based nonsteroidal
anti-inflammatory for asthma, toward the varying degrees of severity in
asthmatic patients had positive results. Intal(R) posted sales gains in the
U.S. although sales in Europe, particularly the U.K. and Italy, declined.
Sales of Tilade(R) increased in Germany, Italy and the United States.
Sales of the thrombosis product Clexane(R)/Lovenox(R), a low molecular
weight heparin, exceeded $400 million, with a doubling in U.S. sales and good
performance in Other European markets. In France, sales of Lovenox(R)
increased modestly but have generally been affected by increased competition.
Lovenox(R), available in the U.S. since 1993 for the prevention of deep vein
thrombosis following hip replacement surgery, was approved by the FDA in 1995
for use following knee replacement surgery and received an approvable letter
in 1996 for use in abdominal surgery. Sales of Dilacor XR(R), a once-daily
calcium channel blocker, fell below prior year levels due, in part, to trade
buying patterns in anticipation of the entrance of generics into the market in
1997. Dilacor XR(R), available in the U.S. since 1992 for the treatment of
hypertension, received FDA approval in 1995 for the management of chronic
stable angina. Sales of the Company's branded (Lozol(R)) and generic
indapamide diuretics for treatment of hypertension were negatively impacted by
generic competition.
Higher sales of central nervous system products reflected good growth of
Imovane(R)/Amoban(R), a non-benzodiazepine sleeping agent, throughout Europe
and contributions from sales of Rilutek(R), a glutamate-release inhibitor for
treatment of amyotrophic lateral sclerosis approved in the U.S. in late 1995
and in the European Union in mid-1996. Rilutek(R) was launched in several
European markets in the second half of the year, including Germany and the
United Kingdom, and received approval in France in early 1997.
Sales of Doliprane(R), the Company's principal analgesic product sold in
France, reported higher sales in 1996 despite increased competitive pressures
in the second half of the year.
Anti-infectives, particularly the antiparasitic Flagyl(R), recorded sales
growth in South Asian, South American and Eastern European markets. In France,
sales of anti-infectives were affected by restricted physician prescribing
practices and significantly lower sales of the fluoroquinolone antibiotic
Zagam(R) due to labeling restrictions in 1995. Zagam(R) remains a second line
therapy for treatment of community-acquired pneumonia ("CAP") in France and is
approved for treatment of CAP in various Other European markets including the
U.K. and Germany. In the fourth quarter of 1996, the Company received FDA
approval to market Zagam(R) in the U.S. for treatment of community-acquired
pneumonia and acute bacterial exacerbations of chronic bronchitis.
Sales declines in hormone replacement therapy ("HRT")/bone products
reflected substantially reduced sales of calcitonin products for bone
disorders in the U.S. and Japan due to competition. Sales of
Orudis(R)/Profenid(R)/Oruvail(R), a ketoprofen-based anti-inflammatory agent,
were below prior year levels in Japan and the U.K. In mid-1996, the Company
entered into a global co-promotion agreement (excluding Japan) with Novo
Nordisk A/S with respect to strategic HRT products of both companies,
including the Menorest(R) transdermal patch for use in osteoporosis and
postmenopausal symptoms. Menorest(R) was launched by the Company in major
European markets in early 1996.
Expansion of the Company's portfolio of oncological products in 1996 was
driven by the innovative new products Taxotere(R), Granocyte(R) and Campto(R).
Taxotere(R), a tubulin-inhibitor for solid tumors, has been approved in more
than 45 countries for the treatment of advanced or metastatic breast cancer
and in over 20 countries for the treatment of non-small-cell lung cancer
("NSCLC"). Taxotere(R) was launched in the first half of 1996 in major
European markets and the U.S. and has been well received in those markets.
Taxotere(R) is approved in the U.S. for the treatment of patients
26
<PAGE>
with locally advanced or metastatic breast cancer whose disease has progressed
during anthracycline-based therapy or who have relapsed during anthracycline-
based adjuvant therapy. Taxotere(R) received approval in Japan for both breast
cancer and NSCLC and will be the first taxoid sold in that market when it is
launched in the first half of 1997. Granocyte(R), a recombinant G-CSF for
treatment of chemotherapy-induced neutropenia, was introduced in European
markets in 1995 and recorded good sales performance in 1996, particularly in
France and Italy. Campto(R), a topoisomerase-1 inhibitor for treatment of
colorectal cancer, was launched in France in the second quarter of 1996 and
approved in eight additional European markets during the year. The Company has
marketing rights from Yakult Honsha with respect to Campto(R) in over 120
countries excluding the U.S. and Canada. In October 1996, Gliadel(R) Wafer,
polifeprosan 20 with carmustine implant, received approval from the FDA for
use as an adjunct to surgery to prolong survival in patients with recurrent
glioblastoma multiforme for whom surgical resection is indicated. The Company
acquired worldwide rights (excluding Scandinavian countries) to market
Gliadel(R) from Guilford Pharmaceuticals Inc. with whom it has a strategic
agreement to develop oncology products using Guilford's proprietary
biodegradable polymer implant technology. Gliadel(R) was launched in the U.S.
in the first quarter of 1997.
In addition to the impact of the reclassification of certain products to
other categories in the current year, declines in other therapeutic area sales
reflected lower sales of products sold by the Cooper subsidiary, of
nonstrategic products which no longer receive promotional support, and of bulk
chemicals. Sales of plasma derivatives, particularly the human albumin
Albuminar(R), sold through operations not contributed to Centeon, were
significantly reduced in the fourth quarter of 1996 due to the temporary
suspension of the U.S. manufacture of plasma-derived products. The antacid
Maalox(R) registered strong performance in Japan and good growth in France and
Italy although reduced sales in Germany due to competitive pressures limited
overall sales growth. DDAVP(R) for nocturnal enuresis recorded good sales
growth in the U.S. and dermatological products also outperformed the prior
year.
Operating Income
<TABLE>
<CAPTION>
1996 PRO FORMA 1995
----------------- -----------------
$ % OF SALES $ % OF SALES % CHANGE
------ ---------- ------ ---------- --------
($ IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Gross margin $3,755 69.3% $3,624 68.2% +4%
Selling, delivery and
administrative expenses 2,110 38.9% 2,190 41.2% -4%
Research and development expenses 882 16.3% 827 15.5% +7%
Operating income 660 12.2% 607 11.4% +9%
</TABLE>
Gross margin improvement reflected the favorable impact of new products,
productivity initiatives and changes in business structure, including
recognition of royalty income from the Medeva transaction. The Company expects
favorable gross margin progression to continue as contributions from higher-
margin new products become more significant.
Selling, delivery and administrative expenses decreased as a percentage of
sales as a result of the realization of synergies from the integration of the
Fisons business and benefits from the Company's cost containment efforts. In
1996, the Company reduced promotional support for certain nonstrategic
products while increasing the sales force and promotional investment related
to new strategic products. The Company expects the realization of additional
Fisons-related synergies in 1997 coupled with ongoing cost containment and
resource reallocation strategies to result in further selling, delivery and
administrative expense reduction as a percentage of sales over the next
several years.
27
<PAGE>
Higher research and development expenses as a percentage of sales reflected
increased investment in later stage development projects including
Synercid(R), an intravenous antibiotic for treatment of severe Gram-positive
infections, new indications for Clexane(R)/Lovenox(R) and Taxotere(R). Other
significant research and development projects include Estalis(R)/Aliatis(R), a
transdermal 17-beta-estradiol/progestin combination for osteoporosis and
postmenopausal symptoms, an oral streptogramin antibiotic, and new
formulations that are free of chlorofluorohydrocarbons for Nasacort(R),
Azmacort(R), Tilade(R), Intal(R) and Aarane(R). Commitment to research and
development will remain strong as investment dollars stabilize as a percentage
of sales over the 1997-1998 period.
Operating income for 1996 included charges of $103 million related to the
reassessment of certain intangible and fixed asset carrying values associated
with ex-vivo cell processing projects initiated by AIS before it was acquired
by RPR. The charges resulted from the Company's strategic decision to refocus
its RPR Gencell resources from ex-vivo to in-vivo gene therapy applications.
Even after the impact of these charges, operating income margin grew as gross
margin improvements and reduced selling, delivery and administrative expenses
exceeded the Company's increased investment in research and development.
Interest
Lower net interest expense in 1996 compared to pro forma 1995 reflected the
effect of reduced average debt balances and lower weighted average interest
rates in the U.S. and Europe, excluding the U.K. This favorable impact was
partially offset by imputed interest associated with certain prepaid licensing
fees related to the Medeva transaction. The recording of imputed interest will
continue to affect the Company's interest expense, although at a declining
rate, during the four-and-one-half year license term. The Company's weighted
average interest rate, after the effect of interest rate swaps, approximated
5.8% in 1996.
A reduction in dividends on preferred stock and remuneration on capital
equity notes compared with pro forma 1995 was due to the absence in 1996 of
Market Auction Preferred Shares which were redeemed in the third quarter of
1995. 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 six-month London Interbank Offered Rate plus a
margin.
Gain on Sales of Assets
In 1996, the Company recorded pretax gains of $82 million on the sale of
certain nonstrategic European self-medication product rights and inventories
to Hoffmann-La Roche. Pretax gains on the sales of other nonstrategic assets
in France and Belgium totaled $29 million.
Gain on sales of assets, including the Company's Canadian over-the-counter
business and certain European product rights, totaled $50 million in 1995.
Other (Income), Net
Income from equity affiliates, including the Company's interest in the
Centeon joint venture, totaled $83 million in 1996 as compared with $178
million on a pro forma basis in 1995. Income from equity affiliates was
adversely impacted by Centeon's October 1996 voluntary worldwide recall of
Albuminar(R)/Plasma-Plex(R) as a precautionary measure in response to
manufacturing concerns with respect to these products at a U.S. production
facility. The manufacture of Albuminar(R)/Plasma-Plex(R) and other plasma-
derived products (Monoclate-P(R) factor VIII for use in hemophilia A,
Gammar(R)-P IV immunoglobulin, and Mononine(R) for hemophilia B) at the
location was temporarily suspended by Centeon while the FDA and Centeon
conducted a comprehensive review of the manufacturing processes at the
facility. In December 1996, Centeon voluntarily suspended the production of
certain pharmaceutical products (such as Dilacor XR(R) and calcitonin
products) manufactured for the Company at the U.S. facility. Due to available
inventory and alternate sources of supply, there has been no significant
interruption in supply of the Company's pharmaceutical products.
28
<PAGE>
In January 1997, Centeon entered into a consent decree with the U.S.
Government which specifies conditions for the shipment by Centeon of both
plasma-based products and certain pharmaceutical products. The consent decree,
which has a term of at least five years, provides, among other things, that
Centeon will not distribute product manufactured at the facility until (1) a
third party expert retained by Centeon has inspected the facility and reported
to the FDA the status of both the observations made by the FDA and Centeon's
compliance with current Good Manufacturing Practices ("GMPs"), (2) Centeon has
certified to its compliance with GMPs and (3) the FDA has made such
inspections at the facility as it deems necessary and has notified Centeon
that it appears to be in compliance with GMPs and may distribute the
manufactured products.
Centeon resumed production of both plasma-based and pharmaceutical products
at the facility in late January 1997. In March, Centeon voluntarily halted
production of both plasma-based and pharmaceutical products in order to
address certain production issues. In mid-March, Centeon and the FDA received
a first report from the third party expert as contemplated by the consent
decree. This report indicated that Centeon had made significant corrective
actions consistent with the observations made during the FDA investigation and
identified certain additional actions needed to be taken. Centeon is
addressing these additional actions. Centeon believes that these actions
together with the other conditions of distribution under the consent decree
will be satisfied, so that, based on a phased-in resumption of manufacturing,
distribution of plasma-based products, after completion of testing and lot
release by the FDA, will begin during the second quarter of 1997. Centeon also
expects that it will be in a position to resume distribution during the second
quarter of the pharmaceutical products manufactured for the Company at the
facility.
The Company's interest in Centeon's results included charges of $44 million
for the estimated impact of the recall, including anticipated returns of
recalled products from customers, write-off of certain inventories, and
related expenses. Results for 1996 were also affected by lost sales of
Albuminar(R)/Plasma-Plex(R) in addition to reduced sales of the other plasma-
derived products whose production was also temporarily suspended and/or which
are typically marketed with the albumin products. As a result of the recall
and interruption in supply, the worldwide market share of Albuminar(R)/Plasma-
Plex(R) was significantly reduced, with the greatest impact in the United
States. The U.S. market shares of both factor VIII product and Gammar(R)-P IV
also declined. Although the impact can not be estimated at this time, the
Company's interest in Centeon's results will be adversely affected in 1997 by
the impact of lost sales pending resumption of shipments and by reduced sales
levels until market share is recaptured, as well as by costs to comply with
the terms of the consent decree and to regain market share.
Centeon sales for 1996, including sales to certain RPR affiliates, exceeded
$900 million. Sales in the second half of 1996 were lower than sales recorded
during the first six months of the year principally due to the impact of the
recall and related lost business as well as competitive conditions in certain
markets. Gross margin approximated 42.5% of sales and income before income
taxes approximated 14% of sales.
Other (income), net in 1996 also included increased provisions for anti-
hemophilic factor litigation and gains on sales of nonstrategic cost
investments; the net impact of these items was not material. Pro forma 1995
other (income), net included charges of $25 million from the reassessment of
certain asset carrying values.
Income Taxes
The Company's reported full year effective income tax rate was 31% in 1996
compared with 36% in 1995 on a pro forma basis reflecting favorable geographic
mix in 1996, the impact of certain nonrecurring items in 1995 and current year
tax planning strategies.
29
<PAGE>
1995 AS REPORTED COMPARED WITH 1994 RESTATED
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 of $60 million, acquired research and
development of $44 million and integration and other costs totaling $23
million. Results for 1994 included pretax restructuring charges of $121
million ($.58 per share).
Sales
At $5,142 million, reported sales for 1995 increased 15%. The favorable
effects of currency fluctuations (+5%) offset the impact of product
divestitures (-4%), principally the Company's U.S. and Canadian over-the-
counter businesses. Operational sales growth (+14%) reflected 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%).
Sales in the United States increased 17% from 1994. Sales of prescription
pharmaceuticals (Azmacort(R), Lovenox(R), Dilacor XR(R) and DDAVP(R)) grew at
double-digit rates from 1994 which was affected by trade inventory reductions
in the first half. 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 (+9%)
reflected improved performance of Doliprane(R) and higher sales of Clexane(R),
Maalox(R) and Granocyte(R). Sales also benefited from inclusion of a full year
of Cooper sales compared with nine months in 1994. Sales in Other European
markets grew 11% from 1994. Sales of prescription pharmaceuticals increased in
Germany and in Italy where Granocyte(R) was launched in the second quarter.
Sales of ethical products in the U.K. continued to be impacted by generic
competition. Expansion in Central and Eastern European markets added to
regional sales growth. 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 (+24%) reflected continued expansion in Japan and South American
markets, particularly Brazil and Argentina.
Sales of Clexane(R)/Lovenox(R) reached $300 million in 1995, fueled by
strong performance in the U.S., France and Germany. Dilacor XR(R) recorded
good growth despite the loss of FDA exclusivity in midyear. Although brand
sales of Lozol(R) 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 expansion in South American
markets, particularly of Flagyl(R). Overall performance of anti-infectives in
France improved from 1994 although sales were negatively impacted by
competitive conditions in the marketplace and by the loss of Zagam(R) sales in
the second half of the year due to labeling restrictions following
photosensitivity concerns.
Growth in sales of the Company's oncology products reflected contributions
from sales of Granocyte(R) in European Union countries.
Sales of Doliprane(R) performed favorably compared with the prior year which
was affected by weak demand. Imovane(R)/Amoban(R) registered sales increases
in Europe (France, Germany, and the U.K.) and in Japan.
The major plasma proteins (factor VIII offerings and Albuminar(R)) marketed
by Armour 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
30
<PAGE>
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)-P IV pasteurized
immunoglobulin which replaces Gammar(R) IV.
Sales of Azmacort(R) 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) below
prior year levels. 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 Intal(R) and Tilade(R).
Increased sales of Orudis(R)/Profenid(R)/Oruvail(R) resulted principally
from growth in South American countries. Elsewhere, Orudis(R) experienced
declines in the U.K. and in France. Sales of calcitonin products 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.
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 transferred to Ciba
in December 1994. Reported sales for 1994 included approximately $114 million
of U.S. and Canadian Maalox(R) sales.
Sales of the Cooper and Rhodia Farma subsidiaries and dermatological
products contributed to other therapeutic area sales.
Operating Income
<TABLE>
<CAPTION>
RESTATED
1995 1994
----------------- -----------------
$ % OF SALES $ % OF SALES % CHANGE
------ ---------- ------ ---------- --------
($ IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Gross margin $3,396 66.0% $2,931 65.3% 16%
Selling, delivery and administra-
tive expenses 1,864 36.2% 1,606 35.8% 16%
Research and development expenses 766 14.9% 606 13.5% 26%
Operating income 639 12.4% 598 13.3% 7%
</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.
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 benefited 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.
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) and Lovenox(R) new
indications) to market.
31
<PAGE>
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 had not yet been established and for which no
alternative future use existed. The Company also recorded a $60 million pretax
charge related to the restructuring of RPR operations as a direct result of
the Fisons acquisition. The Company recorded a $121 million charge related to
a global restructuring plan in 1994.
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
Net interest expense increased 80% to $85 million in 1995, primarily as a
result of increased borrowings principally in support of the acquisition of
Fisons. 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.
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.
Gain on Sales of Assets and Other (Income) Expense, Net
Gains on the sales of 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 (income) 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 expense and
charges of $31 million for asset carrying value reassessments.
Income Taxes
The Company's reported effective income tax rate was 34% in 1995 compared
with 28% 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 full year
effective income tax rate was moderated to approximately one percentage point
by other favorable changes resulting from corporate tax planning strategies.
FINANCIAL CONDITION
RESTRUCTURING PROGRAMS
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. In addition, as part of the Fisons purchase price allocation, the
Company recorded a $100 million liability for the restructuring of Fisons
operations. The combined $160 million liability represented expected cash
outlays, principally severance-related, associated with eliminating positions
primarily in the marketing, administrative and manufacturing functions. As of
December 31, 1996, workforce reductions approximated 1,900 positions, many of
which were based in the U.S. and the U.K., although other locations were also
affected. Cash outlays associated with the restructuring programs totaled $116
million in 1996.
32
<PAGE>
In 1994, the Company recorded a $121 million charge related to a global
restructuring plan. Total cash outlays associated with the plan through
December 31, 1996 totaled $89 million, with outlays of $7 million in 1996, $48
million in 1995 and $34 million in 1994.
CASH FLOWS
Net cash provided by operating activities totaled $503 million in 1996 and
was essentially level with the prior year. While cash flows in 1996 benefited
from the prepayment of certain licensing fees associated with the Medeva
transaction, increased working capital needs and greater cash outlays for
restructuring programs, income taxes and interest negatively impacted
operational cash flows. The reduction in 1995 operating cash flows compared
with 1994 reflected increased working capital needs and higher payments for
income taxes.
Investing activities provided cash inflows of $140 million in 1996 and
included proceeds of $610 million from the divestiture of Fisons' Scientific
Instruments Division, the sale of certain European self-medication products
and various other nonstrategic assets in Europe, and Medeva-related proceeds.
Cash outflows in 1996 of $96 million for investments and product rights
included payments to Guilford Pharmaceuticals Inc. related to Gliadel(R) and
investments in certain long-term deposits. Investing cash outflows totaled
$3,093 million and $124 million in 1995 and 1994, respectively. In 1995, net
cash outflows included significant outlays totaling $3,238 million before the
effect of cash acquired related to the acquisitions of Fisons, AIS, Rhodia
Farma and Biogalenique; investments in technologies totaled $80 million and
included the purchase of two million common shares of AIS. 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 and the sale of a portion of
Fisons' Laboratory Supplies Division in 1995. Capital expenditures, including
investments in support of new products, totaled $342 million in 1996 compared
with $281 million in 1995 and $230 million in 1994. Capital spending in 1997
is expected to be at a level comparable to 1996.
Financing activities used cash of $640 million in 1996 with debt repayments
totaling $502 million. Financing activities provided cash of $2,588 million in
1995, principally representing increased borrowings to finance the
acquisitions of Fisons and other businesses and the redemption of preferred
shares. The Company also issued $500 million of capital equity notes to RP in
1995. Financing cash outflows of $481 million in 1994 reflected debt
repayments of $203 million and open market purchases of the Company's common
shares for the Employee Benefits Trust totaling $110 million. Cash dividends
paid to common shareholders totaled $171 million ($1.26 per share) in 1996,
$161 million ($1.20 per share) in 1995 and $152 million ($1.12 per share) in
1994. In February 1997, the Company paid shareholders a first quarter cash
dividend of $.32 per share.
FOREIGN CURRENCY FLUCTUATION RISKS
As the Company conducts a significant portion of its operations in foreign
currencies, foreign currency fluctuations affect the U.S. dollar value of
reported earnings and cash flows associated with foreign currency-denominated
transactions. The Company enters into derivatives transactions, principally
using foreign currency exchange contracts, to help manage the effects of
foreign exchange volatility.
The Company may hedge a portion of its non-U.S.-based forecasted quarterly
pretax earnings based on a cost-benefit assessment which considers naturally
offsetting exposures and the cost of hedging instruments. Such foreign
currency exchange contracts are marked to market in other (income) expense,
net. For the periods reported, the net gains/losses on these contracts were
not significant due principally to the general stability vis-a-vis the U.S.
dollar of the currencies hedged. Cash flows associated with the contracts are
reported as part of cash flows from operating activities.
The Company's policy is to hedge substantially all of its foreign currency
transactional exposures. The gains or losses on these contracts offset the
gains or losses on the transactions being hedged
33
<PAGE>
and are recognized in the basis of the hedged transaction. Cash flows from
these contracts are classified in the same category as the hedged
transactions.
LIQUIDITY
The Company's net debt (short- and long-term debt including notes payable to
RP, less cash and cash equivalents, cash pooling arrangements, short-term
investments and time deposits) to net debt plus equity ratio declined to .47
to 1 from .56 to 1 at December 31, 1995, reflecting the impact of divestiture-
related proceeds, which exceeded $850 million for the year. The Company
expects to achieve further reductions in net debt in 1997 and thereafter
funded by cash flows from operations, possibly supplemented by additional
divestiture proceeds. The ratio of current assets to current liabilities
increased to 1.35 to 1 from 1.16 to 1 a year ago primarily as a result of
reduced short-term debt balances.
At December 31, 1996, the Company had total committed lines of credit of
$2,325 million. Of this amount, $1,825 million represented multicurrency
medium-term facilities with fourteen banks expiring in the year 2000. The
additional $500 million represented two medium-term credit agreements with
Rhone-Poulenc S.A. expiring in 2000 and 2002. At December 31, 1996, borrowings
outstanding under the Company's medium-term arrangements totaled $595 million.
These borrowings plus an additional $1,385 million of short-term borrowings
were classified as long-term debt at December 31, 1996 as the Company had the
ability and intent to refinance these amounts on a long-term basis under the
above medium-term facilities. The weighted average interest rate of total debt
outstanding at December 31, 1996 approximated 6.0% (1995: 6.4%).
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 mid-1996, the Company increased the number of its authorized common
shares to 600,000,000.
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 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, expand its presence in key geographic markets, and maximize the
benefits of business acquisitions and alliances. The Company believes that the
recent approvals of important new products in key markets, strategic
acquisitions and alliances, as well as other innovative products and business
strategies, 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 541 pending lawsuits in the United
States, Canada and Ireland against the Company
34
<PAGE>
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. In August 1996,
the Company, with three other U.S. plasma fractionators defending the U.S. AHF
litigation, signed a Settlement Agreement with the plaintiffs with respect to
this litigation which, subject to certain conditions, provides for payment of
$100,000 to each eligible claimant or claimant group and the payment of up to
$40 million in attorneys fees. One significant condition of the settlement is
that potential subrogation claims by third party medical providers be resolved
to the mutual satisfaction of the parties and that the class members'
eligibility for federal program entitlements be maintained. The Company and
the other fractionator-defendants are working with the plaintiffs' counsel to
resolve these issues; (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 and consumers; and (4) alleged
breach of contract by a subsidiary of the Company with respect to agreements
involving a bisphosphonate compound and Lozol(R).
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 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.
The Company has been advised of its potential liability related to alleged
past waste disposal practices, including potential involvement at five sites
on the U.S. National Priority List created by the Comprehensive Environmental
Response Compensation and Liability Act (Superfund). For the majority of these
sites, the Company's estimated liability is not significant. With respect to
two of the sites, the Company is currently not able to estimate its share of
potential liability as the assessment of site conditions, the identification
of remediation methods and costs, and the quantification of relative
contributions among potentially responsible parties have not yet advanced to
the stage where a reasonable estimate of loss can be made.
RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings per Share," effective for fiscal periods ending after December
15, 1997. The Statement simplifies earnings per share calculations and
requires presentation of both basic and fully diluted earnings per share on
the face of the statement of income. The Company does not expect that adoption
of SFAS No. 128 will have a material impact on the Company's earnings per
share calculations.
35
<PAGE>
SELECTED FINANCIAL DATA
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
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales $5,420.6 $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
Operating income 660.2 639.3 597.7 675.3 675.0 558.5 88.9 125.5 144.1 122.7
Net income before effect
of change in accounting 473.5 356.5 367.1 421.1 423.3 326.5 1.0 86.5 61.8 54.3
Cumulative effect of
change in accounting
for income taxes -- -- -- -- 15.0 -- -- -- -- (35.5)
Net income available to
common shareholders 428.7 337.8 347.9 408.7 428.2 326.1 1.0 85.0 61.8 18.8
Primary earnings per
common share:
Net income before
cumulative effect of
change in accounting 3.16 2.50 2.50 2.96 2.99 2.37 .01 1.33 .98 .84
Cumulative effect of
change in accounting
for income taxes -- -- -- -- .11 -- -- -- -- (0.55)
Primary earnings per
common share 3.16 2.50 2.50 2.96 3.10 2.37 .01 1.33 .98 .29
Fully diluted earnings
per common share 3.16 2.50 2.50 2.96 3.10 2.37 .01 1.21 .97 .29
Cash dividends per
common share 1.26 1.20 1.12 1.00 .68 .445 .42 .405 .40 .386
Research and development
expenses 882.1 766.2 606.1 561.2 521.3 444.5 350.1 121.8 104.0 82.7
BALANCE SHEET DATA:
Working capital $ 720.6 $ 384.5 $ 591.7 $ 446.6 $ 667.1 $ 407.0 $ 391.3 $ 436.9 $ 312.4 $ 226.6
Property, plant and
equipment, at cost 2,987.0 2,876.5 2,310.9 1,958.6 1,855.9 2,027.8 1,930.7 488.2 395.7 363.5
Capital expenditures 341.6 281.5 229.9 250.4 284.3 283.7 216.9 111.4 70.7 45.1
Total assets 8,768.1 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
Long-term debt
(including payable to
RP) 2,525.0 2,684.4 439.9 432.2 779.7 960.5 1,634.3 882.5 564.6 509.7
Shareholders' equity 2,649.8 2,357.2 2,110.4 1,821.2 1,568.3 1,298.6 693.5 439.9 414.2 368.8
Common shares
outstanding at year-end 136.6 134.5 134.1 137.0 138.3 137.9 137.4 63.1 63.6 62.9
Book value per common
share 14.46 12.50 12.75 10.37 9.17 7.24 5.05 6.97 6.51 5.86
OTHER DATA:
Employees 26,000 28,000 25,000 22,300 22,900 22,500 23,500 8,500 8,400 7,400
Sales per employee (in
thousands) $ 208 $ 186 $ 180 $ 180 $ 180 $ 170 $ 150 $ 140 $ 132 $ 124
</TABLE>
- -------
Results include the accounts of Fisons plc ("Fisons") from November 1, 1995
and of the Human Pharmaceutical Business ("HPB") of Rhone-Poulenc S.A. ("RP")
from May 5, 1990.
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 RP in 1995.
Pretax charges for the reassessment of intangibles and fixed asset values
associated with Applied Immune Sciences, Inc. ("AIS") totaled $102.6 million
in 1996.
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, $289.3 million
in 1990 and $10.0 million in 1989. Results for 1995 also included $22.9
million of Fisons-related integration and other costs. Results for 1993
included $105.0 million proceeds from litigation settlement.
Acquired research and development expense charged to operations associated
with the acquisitions of Fisons and 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 nonstrategic assets totaled $110.7 million in 1996,
$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 included a $19.9 million pretax gain on
contract termination fee.
Income from equity affiliates included in other (income) expense, net in 1996
totaled $83.0 million and included Centeon recall-related charges of $44.0
million.
Pretax charges included in other (income) 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 reflected 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 1995 and 1994 reflected 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.
36
<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
1996 1995 1994
---------- ---------- -------------
<S> <C> <C> <C>
Net sales................................. $ 5,420.6 $ 5,142.1 $ 4,486.6
Cost of products sold..................... 1,666.0 1,746.4 1,555.8
Selling, delivery and administrative ex-
penses................................... 2,109.7 1,863.7 1,605.8
Research and development expenses......... 882.1 766.2 606.1
Restructuring and other charges........... 102.6 126.5 121.2
---------- ---------- ----------
Operating income........................ 660.2 639.3 597.7
Interest expense.......................... 212.7 105.2 55.3
Interest income........................... (43.1) (20.3) (8.2)
Gain on sales of assets................... (110.7) (49.5) (46.2)
Other (income) expense, net............... (89.1) 65.9 83.9
---------- ---------- ----------
Income before income taxes.............. 690.4 538.0 512.9
Provision for income taxes................ 216.9 181.5 145.8
---------- ---------- ----------
Net income.............................. 473.5 356.5 367.1
Dividends on preferred stock and remunera-
tion on capital equity notes............. 44.8 18.7 19.2
---------- ---------- ----------
Net income available to common share-
holders................................ $ 428.7 $ 337.8 $ 347.9
========== ========== ==========
Primary earnings per common share:
Net income available to common share-
holders................................ $ 3.16
==========
Net income available to common share-
holders, pro forma..................... $ 2.50 $ 2.50
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
37
<PAGE>
RHONE-POULENC RORER INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1995
-------- --------
<S> <C> <C>
ASSETS
Current:
Cash and cash equivalents.................................. $ 100.6 $ 115.4
Cash pooling arrangements with Rhone-Poulenc S.A........... 3.2 16.0
Short-term investments..................................... 38.7 --
Trade accounts receivable less reserves of $111.3 (1995:
$87.3).................................................... 984.1 956.8
Inventories................................................ 800.7 765.6
Assets held for sale....................................... 1.0 228.8
Other current assets....................................... 845.2 707.0
-------- --------
Total current assets................................... 2,773.5 2,789.6
Time deposits, at cost..................................... 128.4 83.0
Property, plant and equipment, net......................... 1,525.9 1,621.0
Goodwill, net.............................................. 2,739.0 2,953.5
Intangibles, net........................................... 766.7 866.8
Other assets............................................... 834.6 673.2
-------- --------
Total assets........................................... $8,768.1 $8,987.1
======== ========
LIABILITIES
Current:
Short-term debt............................................ $ 119.9 $ 384.2
Notes payable to Rhone-Poulenc S.A. & affiliates........... 6.8 127.6
Accounts payable........................................... 594.7 601.8
Income taxes payable....................................... 110.5 91.0
Accrued employee compensation.............................. 153.2 137.8
Other current liabilities.................................. 1,067.8 1,062.7
-------- --------
Total current liabilities.............................. 2,052.9 2,405.1
Long-term debt............................................. 2,272.0 2,159.0
Notes payable to Rhone-Poulenc S.A. & affiliates........... 253.0 525.4
Deferred income taxes...................................... 218.0 365.5
Other liabilities, including minority interests............ 1,322.4 1,174.9
-------- --------
Total liabilities...................................... 6,118.3 6,629.9
-------- --------
Contingencies
SHAREHOLDERS' EQUITY
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....................................... 500.0 500.0
Common stock, without par value; stated value $1 per share;
authorized 600,000,000 shares; issued and outstanding:
136,615,917 shares (1995: 134,528,487 shares) 141.6 139.5
Capital in excess of stated value.......................... 234.8 153.2
Retained earnings.......................................... 1,837.9 1,580.3
Employee Benefits Trust.................................... (185.7) (185.7)
Cumulative translation adjustments......................... (53.8) (5.1)
-------- --------
Total shareholders' equity............................. 2,649.8 2,357.2
-------- --------
Total liabilities and shareholders' equity............. $8,768.1 $8,987.1
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
38
<PAGE>
RHONE-POULENC RORER INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------
RESTATED
1996 1995 1994
----------- ----------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................... $ 473.5 $ 356.5 $ 367.1
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization.......... 339.0 225.2 193.2
Provision for deferred income taxes.... (61.1) (15.8) (67.5)
Deferred royalty income................ 200.6 (24.0) 24.0
Gain on sales of assets................ (110.7) (49.5) (46.2)
Reassessment of asset carrying values.. 102.6 25.4 30.6
(Increase) decrease in trade accounts
receivable, net....................... (71.3) (35.2) 47.3
Increase in inventories................ (116.8) (104.1) (37.6)
Increase in accounts payable........... 26.7 83.5 19.6
Increase (decrease) in income taxes
payable............................... (24.9) (81.4) 13.3
Restructuring charges (payments), net.. (125.9) 3.5 68.3
Noncash (income) losses of equity
affiliates, net....................... (11.7) 35.4 21.1
Other items, net....................... (117.3) 82.4 52.2
----------- ----------- ---------
Net cash provided by operating
activities.......................... 502.7 501.9 685.4
----------- ----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Assets sold.............................. 462.7 86.2 143.8
Capital expenditures..................... (341.6) (281.5) (229.9)
Sales/prepayments of investments and
product rights.......................... 147.1 34.2 18.8
Purchases of investments and product
rights.................................. (96.0) (154.0) (26.8)
Businesses acquired, net of cash acquired
of $474.7 in 1995....................... (30.0) (2,763.3) --
Net investment hedging, net.............. (1.8) (14.8) (29.8)
----------- ----------- ---------
Net cash provided by (used in)
investing activities................ 140.4 (3,093.2) (123.9)
----------- ----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term borrowings, net............... (364.1) 420.3 (223.1)
Proceeds from issuance of long-term
debt.................................... 2,256.0 2,231.3 67.9
Repayment of long-term debt.............. (2,393.9) (173.0) (47.4)
Shares repurchased for Employee Benefits
Trust................................... -- -- (109.9)
Dividends and remuneration paid.......... (215.9) (179.9) (170.7)
Issuance of capital equity notes......... -- 500.0 --
Redemption of Market Auction Preferred
Shares.................................. -- (225.0) --
Issuances of common stock................ 78.1 14.0 2.6
----------- ----------- ---------
Net cash provided by (used in)
financing activities................ (639.8) 2,587.7 (480.6)
----------- ----------- ---------
Effect of exchange rate changes on cash.. (18.1) .2 2.5
----------- ----------- ---------
Net increase (decrease) in cash and cash
equivalents............................. (14.8) (3.4) 83.4
Cash and cash equivalents at beginning of
year.................................... 115.4 118.8 35.4
----------- ----------- ---------
Cash and cash equivalents at end of
year.................................... $ 100.6 $ 115.4 $ 118.8
=========== =========== =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS
INFORMATION:
CASH PAID DURING YEAR FOR:
Interest, net of amounts capitalized... $ 133.7 $ 99.2 $ 61.7
Income taxes........................... $ 302.7 $ 259.3 $ 201.0
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.
39
<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. Certain prior year items have been reclassified to conform to
current classifications.
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 and has no
control 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, 1996, the Company has $61.5 million (1995: $109.6
million) of restricted cash, of which approximately $40.1 million (1995: $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.
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 $294.9 million in 1996 and $241.6 million in 1995. The Company
assesses potential impairment of enterprise 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 rights, are amortized over
their estimated useful lives and are reported net of accumulated amortization
of $231.4 million in 1996 and $106.3 million in 1995.
40
<PAGE>
RHONE-POULENC RORER INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Impairment of Long-Lived Assets
The Company reviews its long-lived assets, including related allocated
goodwill, and identifiable intangibles whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. In determining the amount of an impairment loss, the Company
compares an asset's carrying value to its fair market value as measured by
market price or discounted future cash flows.
Royalties
The Company recognizes royalties paid (received) as increases (reductions)
in cost of products sold.
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 $238.9 million in 1996 and $200.3
million in 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.
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."
Recently Issued Accounting Standards
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings per Share," effective for fiscal periods ending after December
15, 1997. The Statement simplifies earnings per share calculations and
requires presentation of both basic and fully diluted earnings per share on
the face of the statement of income. The Company does not expect that adoption
of SFAS No. 128 will have a material impact on the Company's earnings per
share calculations.
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, have a liquidation
preference approximating FF645.0 million and pay dividends of 7.5% per annum
on a stated value of FF145.0 million. The acquisition agreements call for
potential adjustments to the purchase price of the businesses based on several
factors, including earnings performance.
41
<PAGE>
RHONE-POULENC RORER INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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
In October 1995, the Company acquired the outstanding shares of Fisons plc
("Fisons"), a U.K.-based pharmaceutical company, for a total purchase price
including expenses of $2,993.0 million. The acquisition was accounted for
under the purchase method and, accordingly, the purchase price was allocated
based upon the fair values of the assets and liabilities acquired. Purchase
price allocations, which were finalized in 1996, resulted in goodwill of
$2,159.0 million and intangibles of $640.0 million, to be amortized on a
straight-line basis over lives of 40 years and 20 years, respectively. The net
reduction to the preliminary goodwill balance of $2,278.0 million estimated at
December 31, 1995 primarily reflected adjustments to tax reserves and pension
liabilities, and contingencies associated with the sale of the Scientific
Instruments Division. Total net deferred tax and other liabilities, including
restructuring of the Fisons business and disposal contingencies, included in
the purchase price allocation approximated $495.0 million. In connection with
the acquisition, the Company recorded a charge of $21.0 million for acquired
research and development in 1995 related to Fisons research and development
activities for which technological feasibility had not yet been established
and no alternative future use existed.
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. In March 1996, the sale of the majority of Fisons' Scientific
Instruments Division to Thermo Instruments Systems Inc. was completed; the
remaining mass spectrometry and PlasmaTrace assets of the division were also
sold in March. Total consideration approximated $271.8 million, representing
$235.9 million in cash and the assignment of $35.9 million of external debt.
At December 31, 1995, the net assets of the Scientific Instruments Division
were recorded at their estimated net realizable value and classified as assets
held for sale on the consolidated balance sheet. Results of operations of the
Scientific Instruments Division from the date of acquisition to the date of
sale were not material.
In July 1996, the Company finalized its agreement with Medeva plc to sell
certain U.S.-based ex-Fisons fixed assets and license certain intellectual
property rights for total cash consideration of $370.0 million. At the end of
a four-and-one-half year period, Medeva has the option to purchase the
intellectual property rights. The upfront cash payment includes fixed asset
sale proceeds and certain prepayments under the licensing arrangement,
including licensing fees and a purchase option payment which are refundable in
certain circumstances.
42
<PAGE>
RHONE-POULENC RORER INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 4. APPLIED IMMUNE SCIENCES, INC.
In both 1995 and 1994, Applied Immune Sciences, Inc. ("AIS"), in which the
Company had a 37% interest, achieved a development milestone requiring RPR to
purchase an additional one million AIS shares approximately equal to an
additional 5% interest. In connection therewith, the Company recorded pretax
charges for acquired research and development expense in equity losses of
affiliates totaling $13.0 million and $11.0 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. 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 had not yet been
established and no alternative future use existed.
In 1996, the Company recorded pretax charges of $102.6 million from the
reassessment of the carrying values of certain AIS-related assets, principally
intangibles and fixed assets, following the Company's decision to
substantially curtail ex-vivo cell processing projects which had been mainly
initiated by AIS.
NOTE 5. CENTEON 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 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; in 1996, the Company's interest in the results of the joint
venture is reported as (income) losses of equity affiliates included in other
(income) expense, net (see Note 9).
In October 1996, Centeon initiated a voluntary worldwide recall of all in-
date lots of Albuminar(R)/Plasma-Plex(R) products as a precautionary measure
in response to manufacturing concerns with respect to these products at a U.S.
production facility. The manufacture of Albuminar(R)/Plasma-Plex(R) and other
plasma-derived products at the location was temporarily suspended by Centeon
while the U.S. Food and Drug Administration ("FDA") and Centeon conducted a
comprehensive review of the manufacturing processes at the facility. In
December 1996, Centeon voluntarily suspended the production of certain
pharmaceutical products (such as Dilacor XR(R) and calcitonin products)
manufactured for the Company at the U.S. facility. Due to available inventory
and alternate sources of supply, there has been no significant interruption in
supply of the Company's pharmaceutical products.
In January 1997, Centeon entered into a consent decree with the U.S.
Government which specifies conditions for the shipment by Centeon of both
plasma-based products and certain pharmaceutical products. The consent decree,
which has a term of at least five years, provides, among other things, that
Centeon will not distribute product manufactured at the facility until (1) a
third party expert retained by Centeon has inspected the facility and reported
to the FDA the status of both the observations made by the FDA and Centeon's
compliance with current Good
43
<PAGE>
RHONE-POULENC RORER INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Manufacturing Practices ("GMPs"), (2) Centeon has certified to its compliance
with GMPs and (3) the FDA has made such inspections at the facility as it
deems necessary and has notified Centeon that it appears to be in compliance
with GMPs and may distribute the manufactured products.
Centeon resumed production of both plasma-based and pharmaceutical products
at the facility in late January 1997. In March, Centeon voluntarily halted
production of both plasma-based and pharmaceutical products in order to
address certain production issues. In mid-March, Centeon and the FDA received
a first report from the third party expert as contemplated by the consent
decree. This report indicated that Centeon had made significant corrective
actions consistent with the observations made during the FDA investigation and
identified certain additional actions needed to be taken. Centeon is
addressing these additional actions. Centeon believes that these actions
together with the other conditions of distribution under the consent decree
will be satisfied, so that, based on a phased-in resumption of manufacturing,
distribution of plasma-based products, after completion of testing and lot
release by the FDA, will begin during the second quarter of 1997. Centeon also
expects that it will be in a position to resume distribution during the second
quarter of the pharmaceutical products manufactured for the Company at the
facility.
The Company's interest in Centeon's results for the year ended December 31,
1996 included charges of $44.0 million, representing charges associated with
anticipated returns of recalled products from customers, writeoff of certain
inventories, and related expenses.
Summarized financial information with respect to Centeon for the year ended
December 31, 1996 is as follows:
<TABLE>
<CAPTION>
1996
---------------------
(DOLLARS IN MILLIONS)
<S> <C>
Current assets $529.4
Noncurrent assets 318.6
Current liabilities 409.0
Noncurrent liabilities 284.0
Net sales* $904.3
Gross margin 384.5
Income before income taxes 125.2
</TABLE>
- --------
* Includes sales to certain RPR affiliates totaling $27.8 million.
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. Adjustments have been made for financing charges and goodwill
amortization, and income taxes are provided at an effective income tax rate of
36%. The pro
44
<PAGE>
RHONE-POULENC RORER INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
-----------------------
1995 1994
----------- -----------
(DOLLARS IN MILLIONS,
EXCEPT PER SHARE DATA)
<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 sharehold-
ers 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 CHARGES
In 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 also recorded a
$100.0 million liability for the restructuring of Fisons operations. The
combined $160.0 million liability represented expected cash outlays,
principally severance-related, associated with eliminating positions primarily
in the marketing, administrative and manufacturing functions. As of December
31, 1996, workforce reductions approximated 1,900 positions, many of which
were based in the U.S. and the U.K. although other locations were also
affected.
A rollforward of the remaining 1995 restructuring provision from January 1,
1996 is as follows:
<TABLE>
<CAPTION>
TRANSLATION
JANUARY 1, ADJUSTMENTS/ DECEMBER 31,
1996 PAYMENTS OTHER 1996
---------- -------- ------------ ------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Social costs $148.5 $ (99.3) $(8.0) $41.2
Third parties 11.5 (17.0) 5.5 --
------ ------- ----- -----
Total $160.0 $(116.3) $(2.5) $41.2
====== ======= ===== =====
</TABLE>
45
<PAGE>
RHONE-POULENC RORER INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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. At December 31, 1996, the remaining reserve was $11.3 million
representing outstanding social costs. Total cash outlays related to the plan
through December 31, 1996 totaled $89.2 million, with outlays of $7.5 million
in 1996, $47.6 million in 1995 and $34.1 million in 1994. Asset writeoffs in
conjunction with certain production facilities totaled $26.9 million, of which
$7.5 million and $19.4 million were recorded in 1995 and 1994, respectively.
NOTE 8. GAIN ON SALES OF ASSETS
In 1996, the Company recorded a pretax gain of $81.5 million on the sale of
certain nonstrategic European self-medication product rights and inventories
to Hoffmann-La Roche. The Company also recorded pretax gains on the sales of a
nonstrategic product in France and its Belgium over-the-counter business
totaling $29.2 million.
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.
NOTE 9. OTHER (INCOME) EXPENSE, NET
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
(Income) losses of equity affiliates $ (83.0) $ 44.4 $ 46.5
Minority interest 8.7 4.9 3.3
Foreign exchange (gains) losses (3.5) (4.7) 10.5
Other, net (11.3) 21.3 23.6
------- ------ ------
Other (income) expense, net $ (89.1) $ 65.9 $ 83.9
======= ====== ======
</TABLE>
(Income) losses of equity affiliates in 1996 principally represented the
Company's interest in the Centeon joint venture (see Note 5). Equity losses
associated with AIS prior to the Company's 1995 acquisition of AIS' remaining
outstanding shares totaled $38.3 million in 1995 and $28.6 million in 1994,
including acquired research and development of $13.0 million and $11.0
million, respectively.
Other, net for 1996 included gains on sales of nonstrategic cost investments
and increased provisions for anti-hemophilic factor litigation. Other, net for
1995 and 1994 included 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).
46
<PAGE>
RHONE-POULENC RORER INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 135,790,590, 134,228,677 and 135,254,692 for the
years 1996, 1995 and 1994, 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>
1996 1995
---------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Finished goods $ 376.9 $ 346.2
Work in process 159.8 140.6
Raw materials and supplies 264.0 278.8
---------- ----------
Inventories $ 800.7 $ 765.6
========== ==========
</TABLE>
NOTE 12. PROPERTY, PLANT AND EQUIPMENT, NET
<TABLE>
<CAPTION>
1996 1995
---------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Land $ 76.3 $ 62.2
Buildings 839.7 880.0
Machinery and equipment 1,731.7 1,604.0
Construction in progress 339.3 330.3
---------- ----------
2,987.0 2,876.5
Less accumulated depreciation 1,461.1 1,255.5
---------- ----------
Property, plant and equipment, net $ 1,525.9 $ 1,621.0
========== ==========
</TABLE>
The Company incurred $217.6 million and $109.9 million in interest cost in
1996 and 1995, respectively, of which $4.9 million and $4.7 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>
1996 1995
---------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Notes payable to banks $ 89.3 $ 354.7
Current portion of long-term debt 30.6 29.5
---------- ----------
Short-term debt $ 119.9 $ 384.2
========== ==========
Notes payable to Rhone-Poulenc S.A. and affiliates $ 6.8 $ 127.6
========== ==========
</TABLE>
The weighted average interest rate of total outstanding short-term debt was
10.8% at December 31, 1996 (1995: 7.9%).
47
<PAGE>
RHONE-POULENC RORER INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Long-term debt, net of current portion, consisted of the following:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Notes payable at variable rates averaging 5.2% and 5.9%
at 1996 and 1995 year-end, respectively (expected to be
refinanced long-term) $ 1,940.5 $ 1,825.0
9.25% Series A Senior Notes due 2004, with interest pay-
able quarterly (guaranteed by Rhone-Poulenc S.A.) 48.3 52.7
9.05% Series B Senior Notes due 1997, with interest pay-
able quarterly (guaranteed by Rhone-Poulenc S.A.) -- 4.3
Notes, mortgages and capitalized lease obligations at
rates averaging 7.8% (1995: 8.1%) 283.2 277.0
---------- ----------
Long-term debt $ 2,272.0 $ 2,159.0
========== ==========
Notes payable to Rhone-Poulenc S.A. and affiliates at
rates averaging 3.9% and 6.0% at 1996 and 1995 year-
end, respectively (expected to be refinanced long-term) $ 39.2 $ 500.0
Notes payable to Rhone-Poulenc S.A. and affiliates prin-
cipally due in 2000 at rates averaging 5.0% (1995:
8.4%) 213.8 25.4
---------- ----------
Notes payable to Rhone-Poulenc S.A. and affiliates $ 253.0 $ 525.4
========== ==========
</TABLE>
At December 31, 1996, the Company had total committed lines of credit of
$2,325.0 million. Of this amount, $1,825.0 million represented multicurrency
medium-term facilities with fourteen banks expiring in the year 2000. The
additional $500.0 million represented two medium-term credit agreements with
Rhone-Poulenc S.A. expiring in 2000 and 2002. Borrowings under these medium-
term credit facilities bear interest at the London Interbank Offered Rate
("LIBOR"), plus any applicable margin and commitment fee. At December 31,
1996, borrowings outstanding under the above arrangements totaled $594.7
million. These borrowings plus an additional $1,385.0 million of short-term
borrowings were classified as long-term debt at December 31, 1996 as the
Company had the ability and intent to refinance these amounts on a long-term
basis under the above medium-term facilities. The $1,979.7 million of
reclassified borrowings were in various currencies with interest rates as
follows: $874.6 million in U.S. Dollars at 5.7%, $140.1 million in French
Francs at 3.8%, $714.7 million in German Marks at 5.7%, $145.0 million in
Japanese Yen at .7% and $105.3 million in Great British Pounds at 6.3%.
Amounts available under unused uncommitted lines of credit approximated
$991.0 million at December 31, 1996 (1995: $624.0 million).
The aggregate maturities of all long-term debt at December 31, 1996,
including related party debt, were: $30.6 million in 1997, $43.2 million in
1998, $206.1 million in 1999, $2,200.4 million in 2000, $17.7 million in 2001,
and $57.6 million thereafter.
The weighted average interest rate of total debt outstanding at December 31,
1996 was 6.0% (1995: 6.4%).
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.
48
<PAGE>
RHONE-POULENC RORER INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 14. LEASE COMMITMENTS
The Company's capital lease obligations pertain primarily to certain
administrative and research facilities. Effective January 1, 1996, the Company
leased to Centeon under capital lease arrangements certain buildings,
machinery and equipment in the U.S. and France which support production and
research and development activities. Related rental income in 1996 totaled
$3.6 million.
The Company 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 $125.5 million, $104.2 million and $55.0 million in 1996,
1995 and 1994, respectively. Related rental income totaled $55.4 million and
$37.7 million in 1996 and 1995, respectively.
Future minimum lease commitments and lease receivables under all leases with
initial or remaining noncancelable lease terms in excess of one year at
December 31, 1996 are as follows:
<TABLE>
<CAPTION>
CAPITAL LEASES OPERATING LEASES
----------------------- -----------------------
LEASE LEASE LEASE LEASE
COMMITMENTS RECEIVABLES COMMITMENTS RECEIVABLES
----------- ----------- ----------- -----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
1997 $ 8.2 $ 6.9 $123.1 $41.4
1998 6.2 6.5 80.0 19.7
1999 3.7 6.3 63.6 11.0
2000 3.2 5.9 45.5 --
2001 3.2 5.7 43.4 --
Thereafter 15.4 94.5 585.7 --
----- ------ ------ -----
Minimum lease
payments/receipts 39.9 125.8 $941.3 $72.1
====== =====
Less imputed interest/unearned
income (8.0) (66.5)
----- ------
Present value of minimum lease
payments
(current--$6.6, noncurrent--
$25.3) $31.9
=====
Net investment in capital
leases
(current--$2.9, non-current--
$56.4) $ 59.3
======
</TABLE>
NOTE 15. INCOME TAXES
The components of income before income taxes are:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
United States $ 23.5 $ 241.3 $ 241.0
Non-U.S. 666.9 296.7 271.9
------- ------- -------
Income before income taxes $ 690.4 $ 538.0 $ 512.9
======= ======= =======
</TABLE>
49
<PAGE>
RHONE-POULENC RORER INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The components of the provision for income taxes are:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Current:
United States $ 62.0 $ 96.9 $ 103.4
Non-U.S. 216.0 100.4 109.9
------- ------- -------
278.0 197.3 213.3
------- ------- -------
Deferred:
United States (89.0) (22.6) (51.7)
Non-U.S. 27.9 6.8 (15.8)
------- ------- -------
(61.1) (15.8) (67.5)
------- ------- -------
Provision for income taxes $ 216.9 $ 181.5 $ 145.8
======= ======= =======
</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>
1996 1995
---------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Assets (liabilities):
Depreciation and amortization $ (231.7) $ (328.2)
Intercompany profit in ending inventory 81.8 60.8
Net operating loss carryforwards 64.0 57.5
Pension 42.1 69.2
Tax credit carryforwards 38.6 --
Deferred royalty income 37.9 --
Restructuring 27.4 35.8
Distributable earnings (6.6) (66.9)
Other, including nondeductible accruals 114.7 188.6
---------- ----------
168.2 16.8
Less valuation allowance (5.1) (91.9)
---------- ----------
Deferred income taxes, net $ 163.1 $ (75.1)
========== ==========
</TABLE>
The portion of the above net deferred tax assets (liabilities) classified as
current was $278.7 million and $211.1 million at December 31, 1996 and 1995,
respectively. At December 31, 1996, total deferred tax assets were $585.0
million and total deferred tax liabilities were $416.8 million before netting.
At December 31, 1995, similar temporary differences gave rise to total
deferred tax assets of $587.0 million and total deferred tax liabilities of
$570.2 million. The decrease in the valuation allowance in 1996 was primarily
Fisons-related and was accordingly reflected as a reduction in goodwill.
50
<PAGE>
RHONE-POULENC RORER INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The differences between the U.S. statutory income tax rate and the Company's
effective income tax rate are:
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
(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 (2.8) (3.1) (5.0)
Non-U.S. tax rate differential 1.4 (2.2) (1.8)
Research and development tax credits (0.8) (1.0) (1.4)
Acquired research and development -- 2.8 --
Other, net (1.4) 2.2 1.6
------ ------ ------
Effective income tax rate 31.4% 33.7% 28.4%
====== ====== ======
</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 $180.7 million for tax
return purposes which expire principally through the years 1997 to 2011.
The Company's U.S. income tax returns have been examined and settled with
the Internal Revenue Service through 1989. The Company believes that potential
adjustments from any open years would not have a material impact on the
Company's financial position or results of operations.
At December 31, 1996, unremitted earnings of subsidiaries which are intended
to be indefinitely reinvested and, accordingly, for which no additional U.S.
income taxes or foreign withholding taxes have been provided totaled $832.0
million. It would not be practical to compute the estimated deferred tax
liability on these earnings.
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.
51
<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>
1996 1995
--------------------------- ----------------------------
PLANS WHOSE PLANS WHOSE PLANS WHOSE PLANS WHOSE
ASSETS EXCEED ACCUMULATED ASSETS EXCEED ACCUMULATED
ACCUMULATED BENEFITS ACCUMULATED BENEFITS
BENEFITS EXCEED ASSETS BENEFITS EXCEED ASSETS
------------- ------------- -------------- -------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Vested benefit obliga-
tions $(676.0) $(449.7) $(716.5) $(428.6)
Nonvested benefits (3.6) (90.7) (3.5) (87.8)
------- ------- ------- -------
Accumulated benefit ob-
ligation (679.6) (540.4) (720.0) (516.4)
Projected future salary
increases (25.6) (76.0) (6.8) (65.5)
------- ------- ------- -------
Projected benefit obli-
gation (705.2) (616.4) (726.8) (581.9)
Fair value of plan
assets (invested
primarily in equities
and bonds) 895.8 226.2 782.0 184.3
------- ------- ------- -------
Plan assets in excess of
(less than) projected
benefit obligation 190.6 (390.2) 55.2 (397.6)
Unrecognized net
transition (asset)
liability .2 5.5 (.8) 2.5
Unrecognized net (gain)
loss (43.6) 67.2 (27.1) 86.6
Unrecognized prior serv-
ice cost 17.4 3.9 20.1 (3.8)
Adjustment required to
recognize minimum
liability -- (66.3) -- (63.5)
------- ------- ------- -------
Prepaid (accrued) pen-
sion cost $ 164.6 $(379.9) $ 47.4 $(375.8)
======= ======= ======= =======
</TABLE>
The accumulated benefit obligation of U.S. plans included in the above table
was $190.0 million in 1996 and $186.1 million in 1995. U.S. plan assets were
$201.1 million and $165.4 million at December 31, 1996 and 1995, respectively.
Of the net accrued pension cost, $356.6 million and $359.4 million are
included in other noncurrent liabilities in 1996 and 1995, respectively.
The following items were the components of net periodic pension cost for the
years ended December 31:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Service cost $ 26.4 $ 21.3 $ 19.5
Interest cost 98.6 56.7 46.2
Actual return on plan assets (102.1) (39.7) (26.6)
Amortization and deferral 17.9 8.2 5.7
------- ------ ------
Net periodic pension cost $ 40.8 $ 46.5 $ 44.8
======= ====== ======
</TABLE>
Net periodic pension cost for U.S. plans included in the above amounts was
$6.7 million, $9.0 million and $12.2 million for 1996, 1995 and 1994,
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>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Discount rate 8.2% 8.1% 7.9%
Expected return on plan assets 9.4% 9.1% 9.6%
Rate of future compensation increases 4.3% 4.7% 3.8%
</TABLE>
52
<PAGE>
RHONE-POULENC RORER INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
For U.S. plans, the discount rate was 7.75% in 1996 and 1995 and 8.5% in
1994. The expected return on plan assets of 9.5% remained constant from 1994
through 1996. The rate of future compensation increases of 4.5% remained
constant from 1994 through 1996.
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
$5.9 million, $7.1 million and $7.3 million in 1996, 1995 and 1994,
respectively.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
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. The Company's non-U.S. affiliates generally contribute
to government insurance programs during the employees' careers and do not
sponsor additional postretirement programs.
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. Effective January 1, 1993, the
Company substantially curtailed the granting of restricted shares to
employees. The Stock Plan, as amended and restated, permits the Company to
grant stock appreciation rights in tandem with stock options. As of December
31, 1996, 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 further supplements the
Stock Plan by providing for an additional 5,000,000 shares. The terms of the
1995 Equity Compensation Plan are substantially the same as those of the Stock
Plan and the Equity Compensation Plan.
The Company applies Accounting Principles Board Opinion 25 ("APB 25") in
accounting for its fixed stock option plans. Under the intrinsic value method
prescribed by APB 25, no compensation expense has been recorded by the Company
in the periods reported. Had compensation expense for awards made in 1996 and
1995 from these plans been determined under the fair value method of
53
<PAGE>
RHONE-POULENC RORER INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SFAS No. 123, "Accounting for Stock-Based Compensation," the Company's net
income and earnings per share would have been reduced to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31
-----------------------
1996 1995
----------- -----------
(DOLLARS IN MILLIONS,
EXCEPT PER SHARE DATA)
<S> <C> <C>
Net income $ 421.3 $ 334.0
Primary earnings per common share $ 3.10 $ 2.48
</TABLE>
The Company used the Black-Scholes pricing model to determine the fair value
of stock options granted in 1996 and 1995 using the following assumptions:
expected life of the option ranging from 5 to 6 years and expected forfeiture
rate ranging from 12.8% to 17.9% depending on the job grade classification;
expected stock price volatility of 22.2%; expected dividend rate of 2.5%; and
risk-free interest rate ranging from 5.6% to 5.9% in 1996 and 7.0% to 7.1% in
1995 depending on expected life of the option. The impact of applying SFAS No.
123 in this pro forma disclosure is not indicative of the impact on future
years' reported net income because SFAS No. 123 does not apply to stock
options granted prior to 1995, the Company's stock options vest over three
years, and additional stock options awards are anticipated in future years.
A summary of the status of the Company's stock option plans as of December
31, 1996, 1995 and 1994 and changes during the years then ended is presented
below:
<TABLE>
<CAPTION>
1996 1995 1994
------------------------ ----------------------- -----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE SHARES EXERCISE SHARES EXERCISE
(IN THOUSANDS) PRICE (IN THOUSANDS) PRICE (IN THOUSANDS) PRICE
-------------- --------- -------------- -------- -------------- --------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at
January 1 7,991 $42.14 7,147 $42.06 5,815 N/A
Additions (deductions):
Granted 1,414 61.56 1,702 40.74 1,898 N/A
Exercised (2,108) 37.07 (433) 32.60 (116) N/A
Canceled (431) 50.44 (425) 44.26 (450) N/A
------------ ------------ ------------
Options outstanding at
December 31 6,866 47.03 7,991 42.14 7,147 N/A
============ ============ ============
Options exercisable at
December 31 4,382 44.98 4,693 41.26 3,443 N/A
============ ============ ============
Weighted average fair
value of options
granted during the
year $15.38 $10.89 N/A
============ ============ ============
Shares reserved for fu-
ture grants 5,564 6,551 2,862
============ ============ ============
Price range of options
exercised during the
year $4.67-$63.00 $4.67-$46.38 $8.24-$30.18
============ ============ ============
Price range of options
outstanding $4.67-$64.00 $4.67-$64.00
============ ============
Price range of options
exercisable $4.67-$64.00 $4.67-$64.00
============ ============
</TABLE>
54
<PAGE>
RHONE-POULENC RORER INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes information about stock options outstanding
and stock options exercisable at December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------ -------------------------------
WEIGHTED AVERAGE
RANGE OF SHARES REMAINING WEIGHTED AVERAGE SHARES WEIGHTED AVERAGE
EXERCISE PRICES (IN THOUSANDS) CONTRACTUAL LIFE EXERCISE PRICE (IN THOUSANDS) EXERCISE PRICE
- --------------- -------------- ---------------- ---------------- -------------- ----------------
<S> <C> <C> <C> <C> <C>
$ 8.24-$14.61 68 1.8 years $12.38 68 $12.38
$30.13-$38.75 1,549 6.2 years $33.85 1,173 $33.45
$40.00-$49.25 2,991 6.8 years $42.12 2,035 $42.80
$52.38-$55.50 31 5.5 years $55.36 31 $55.36
$60.25-$67.38 2,227 7.6 years $63.73 1,075 $63.46
----- -----
$ 8.24-$67.38 6,866 6.9 years $47.03 4,382 $44.98
===== =====
</TABLE>
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 ADJUSTMENTS
--------- --------- ------- -------- ---------- -------- -------- ------------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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 -- -- -- -- -- -- -- 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
employee benefit plans -- -- -- .4 14.2 -- -- --
Translation adjustments,
including hedging -- -- -- -- -- -- -- 53.8
------- ------ ------ ------ ------- -------- ------- -------
Balance, December 31,
1995 -- 175.0 500.0 139.5 153.2 1,580.3 (185.7) (5.1)
Net income--1996 -- -- -- -- -- 473.5 -- --
Cash dividends, $1.26
per common share -- -- -- -- -- (171.1) -- --
Dividends on preferred
shares -- -- -- -- -- (9.6) -- --
Remuneration on capital
equity notes -- -- -- -- -- (35.2) -- --
Issuance of shares under
employee benefit plans -- -- -- 2.1 81.6 -- -- --
Translation adjustments,
including hedging -- -- -- -- -- -- -- (48.7)
------- ------ ------ ------ ------- -------- ------- -------
Balance, December 31,
1996 $ -- $175.0 $500.0 $141.6 $ 234.8 $1,837.9 $(185.7) $ (53.8)
======= ====== ====== ====== ======= ======== ======= =======
</TABLE>
The Company has outstanding $175.0 million of money market preferred stock
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 expiration of the initial
dividend periods, dividends are
55
<PAGE>
RHONE-POULENC RORER INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
determined at separate auctions for each series. The average dividend rate in
1996 on Series 1 stock was 5.21% per annum (1995: 5.11%) and on Series 2 stock
was 5.20% 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 1995, the Company redeemed its remaining outstanding Market Auction
Preferred Shares ("MAPS") Series A, C and D for $225.0 million plus accrued
dividends. Dividend rates, determined at separate auctions for each series,
averaged 5.98% during 1995 (1994: 4.63%).
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, 1996 and 1995, there were 2,676,800 preferred shares without
par value authorized and unissued.
In 1996, the Company increased the number of authorized common shares to
600,000,000. 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 with the acquisition of 3.1 million shares at a cost of $109.9 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.
56
<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, 1996 DECEMBER 31, 1995
--------------------- ---------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
--------- --------- --------- ---------
[ASSET (LIABILITY) IN MILLIONS]
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 100.6 $ 100.6 $ 115.4 $ 115.4
Cash pooling arrangements with
RP 3.2 3.2 16.0 16.0
Time deposits, generally matur-
ing within 1-5 years 146.4 146.4 83.0 83.0
Cost investments:
Practical to estimate 18.0 29.8 9.0 13.6
Not practical to estimate 14.2 N/A 19.9 N/A
Other investments, including re-
stricted cash 85.2 89.4 112.6 118.7
Long-term debt (2,555.6) (2,561.2) (2,713.9) (2,722.7)
Foreign currency exchange con-
tracts 10.4 * 10.4 (7.6)* (7.6)
Interest swap arrangements (23.7)* (42.0) (3.7)* (3.8)
</TABLE>
- --------
* The carrying amount represents the net unrealized gain (loss) or net
interest receivable (payable) associated with the contracts at the end of
the period.
None of the Company's financial instruments are held for trading purposes.
FAIR VALUE
The following methods and assumptions were used to estimate the fair value
of each class of financial instrument:
Cash, cash equivalents and cash pooling arrangements with RP
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 practical, 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.
Foreign currency exchange contracts
The fair value of foreign currency exchange contracts was estimated by
valuing the contracts at current exchange rates.
57
<PAGE>
RHONE-POULENC RORER INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Interest swap arrangements
The fair value of interest swap arrangements 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 currency 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
counterparty is remote as the contracts are entered into with major financial
institutions.
Interest swap arrangements do not involve exchanges of underlying principal
amounts, therefore 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 counterparty is remote as the
arrangements are entered into with major financial institutions.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
NET INVESTMENT HEDGES
Unhedged net investment positions fluctuate with currency movements with
corresponding translation adjustments recorded in shareholders' equity. The
Company may utilize foreign currency arrangements, including foreign currency
exchange contracts and foreign currency-denominated borrowings, to limit the
exposure of its net investments in foreign subsidiaries to currency
fluctuations and limit the volatility of reported equity. Gains and losses
from these arrangements, 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, 1996, the increase in shareholders' equity, net of tax
effects, associated with net investment hedging arrangements totaled $16.8
million (1995: reduction of $5.2 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 the hedging instruments. The Company's significant net foreign
investment positions at December 31, 1996 included the Great British Pound
("GBP"), French Franc, German Mark and Japanese Yen. Throughout the year, the
Company hedged a portion of these net investment exposures utilizing foreign
currency exchange contracts and foreign currency-denominated borrowings. At
December 31, 1996, the Company was party to foreign currency exchange
contracts to sell French Francs with notional amounts totaling FF431.4 million
($82.4 million). These contracts matured in the first quarter of 1997. The
Company also had certain variable-rate foreign currency-denominated borrowings
outstanding in the U.S. including FF499.3 million ($95.3 million) and
(Yen)15,147 million ($130.1 million). The Company had no net investment
hedging instruments outstanding at December 31, 1995.
58
<PAGE>
RHONE-POULENC RORER INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOREIGN CURRENCY TRANSACTION HEDGES
The Company enters into foreign currency exchange contracts to minimize
exposure of foreign currency transactions (such as export sales, raw materials
purchases, and short-term intercompany financings) 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 currency exchange contracts were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
--------------------- ---------------------
LOCAL U.S. DOLLAR LOCAL U.S. DOLLAR
CURRENCY EQUIVALENT CURRENCY EQUIVALENT
-------- ----------- -------- -----------
[ASSET (LIABILITY) IN MILLIONS]
<S> <C> <C> <C> <C>
U.S. dollars* 619 $ 619 139 $ 139
FF 506 97 (332) (68)
GBP (318) (540) (158) (246)
DEM (77) (50) 73 51
All other (generally less than $45
million) various (15) various 82
----- -----
Total $ 111 $ (42)
===== =====
</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, 1996, the Company had entered into
multiple forward contracts maturing in the first quarter of 1997 to buy and
sell various currencies with notional amounts totaling $819.8 million and
$936.9 million, respectively. Similar contracts which matured in the first
quarter of 1996 totaled $478.3 million and $445.7 million, respectively, at
December 31, 1995. At the acquisition date, Fisons had certain foreign
currency 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. The contracts were
settled in 1996.
As the Company conducts a significant portion of its operations outside the
U.S., it is exposed to the impact of foreign exchange fluctuations on the U.S.
dollar value of reported earnings. To manage this exposure, the Company may
hedge a portion of its non-U.S.-based forecasted quarterly pretax earnings
utilizing foreign currency exchange contracts. The portion of earnings that
the Company hedges is based on a cost-benefit assessment which considers
naturally offsetting exposures and the cost of hedging instruments. Such
foreign currency exchange contracts are marked to market in other (income)
expense, net. For the periods reported, the net gains/losses on these
contracts were not significant due principally to the general stability vis-a-
vis the U.S. dollar of the currencies hedged. Cash flows associated with the
contracts are reported as part of cash flows from operating activities. There
were no related contracts outstanding at December 31, 1996 and 1995.
As part of the treasury services the Company performs for Centeon, at
December 31, 1996, the Company had outstanding certain foreign currency
exchange contracts to which Centeon was the counterparty. The notional amounts
of these contracts to buy and sell various foreign currencies totaled $19.9
million and $7.2 million, respectively. The contracts, which expired in
January 1997, reflected rates that were established on an arms-length basis;
the related carrying values at December 31, 1996 was not significant.
59
<PAGE>
RHONE-POULENC RORER INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
INTEREST SWAP ARRANGEMENTS
The Company enters into interest rate swap contracts to manage its exposures
to movements in interest rates and minimize its overall cost of borrowings.
The net receivable or payable under the interest rate swaps is recognized as
an adjustment to interest expense over the life of the underlying contracts.
In 1996 and 1995, 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, 1996 was reduced by 8 basis points or approximately $2.3 million
(1995: 6 basis points or $.5 million; 1994: 17 basis points or $1.3 million)
as a result of interest rate swap contracts.
In 1996, the Company initiated a long-term GBP-denominated intercompany loan
from a U.S. subsidiary to a U.K. subsidiary totaling GBP 544.9 million ($850.0
million). The foreign exchange on the loan is recorded as a translation
adjustment in shareholders' equity in accordance with SFAS No. 52 and resulted
in an increase in shareholders' equity approximating $66.7 million in 1996.
Interest on the intercompany loan is paid in GBP based on one-year LIBOR. With
respect to the transaction, the Company entered into certain five-year
arrangements ("dual currency swaps") with several banks whereby the U.S.
subsidiary pays the banks GBP at rates based on one-year LIBOR times specified
GBP principal amounts equal in total to the intercompany loan. The subsidiary
receives from the banks U.S. dollars at rates based on one-month LIBOR plus a
margin. There is no exchange of underlying principal. The interest
income/expense differential is recorded as an adjustment to interest expense
and was not significant in 1996.
Interest rate swap arrangements outstanding at December 31, 1996 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]
<C> <C> <C> <C> <C> <S> <C>
INTEREST RATE SWAPS*:
$300 $300 Fixed $ (0.1) $ (3.8) 11/95-11/00 Pay 5.81%;
Receive 3-month LIBOR (5.55%)
(Yen)3000 26 Fixed (0.1) (0.4) 4/95- 4/98 Pay 2.01%;
Receive 3-month LIBOR (5.91%)
GBP100 170 Variable 1.4 2.5 3/96- 1/99 Pay 6-month LIBOR (6.0%);
Receive 7.3%
DUAL CURRENCY SWAPS:
GBP545 $843 N/A $(24.9) $(40.3) 8/96- 7/01 Pay 1-year LIBOR (6.34%);
Receive 1-month LIBOR (6.38%)
</TABLE>
- --------
*The Company was party to similar interest rate swap contracts at December 31,
1995.
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 presence, 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, two in the U.S., nine
in Other Europe and twenty-four in the Rest of World region.
60
<PAGE>
RHONE-POULENC RORER INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 1996, 1995 and 1994
by geographic area follows. Inter-area affiliated sales are not significant.
Corporate loss before income taxes includes corporate administrative expenses,
worldwide net interest expense and worldwide (income) losses of equity
affiliates.
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Net sales:
United States $1,280.1 $1,314.2 $1,261.9
France 1,794.6 1,819.6 1,506.7
Other Europe 1,417.4 1,207.4 1,015.5
Rest of World 928.5 800.9 702.5
-------- -------- --------
Total net sales $5,420.6 $5,142.1 $4,486.6
======== ======== ========
Income before income taxes:
United States $ 207.4 $ 351.9 $ 356.9
France 107.2 245.9 172.6
Other Europe 372.5 132.0 92.8
Rest of World 200.3 62.5 77.6
Corporate (197.0) (254.3) (187.0)
-------- -------- --------
Total income before income taxes $ 690.4 $ 538.0 $ 512.9
======== ======== ========
Identifiable assets:
United States $1,467.1 $4,232.9 $1,107.2
France 2,099.6 1,801.9 1,519.6
Other Europe 2,126.8 1,140.4 1,001.7
Rest of World 1,142.1 787.4 518.6
Corporate 1,932.5 1,024.5 505.2
-------- -------- --------
Total identifiable assets $8,768.1 $8,987.1 $4,652.3
======== ======== ========
</TABLE>
In 1996, U.S. income before income taxes ("IBT") included $97.4 million of
charges related to the reassessment of certain intangibles and fixed asset
carrying values associated with the ex-vivo cell processing initiatives of
AIS. France IBT included $23.2 million of gains on the sale of nonstrategic
assets. Other Europe IBT included $87.5 million of gains on the sales of
nonstrategic assets including certain self-medication product rights.
Corporate IBT reflected income from equity affiliates totaling $83.0 million
which included $44.0 million of charges associated with the estimated impact
of Centeon's voluntary recall of all in-date lots of albumin products.
In 1995, U.S. IBT included $13.1 million of restructuring charges and $35.6
million of AIS-related acquired research and development. France IBT included
$22.8 million from gains on sales of certain product rights. Other Europe IBT
included $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.
61
<PAGE>
RHONE-POULENC RORER INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
In 1994, U.S. IBT included gains on asset sales, net of restructuring
charges, of $15.1 million. France and Other Europe IBT included $49.0 million
and $28.8 million, respectively, of restructuring charges, net of gains on
sales of assets. The Rest of World area IBT included restructuring charges of
$13.2 million.
For presentation purposes, goodwill and intangibles and related amortization
expense recorded in connection with the acquisition of Fisons were allocated
to the U.S. at December 31, 1995. In 1996, these balances were reflected in
the appropriate geographic region.
NOTE 21. RELATED PARTY TRANSACTIONS
RHONE-POULENC S.A.
The entities comprising the Company manage their cash separately. In the
largest countries such as the U.S., France, the U.K. and Germany, the local
entities have access to RP cash pooling arrangements whereby they can, at
their own request, lend to or borrow from RP at market terms and conditions.
Amounts receivable from RP and affiliates totaled $48.9 million and $61.3
million at December 31, 1996 and 1995, respectively. The 1996 balance included
$6.3 million of accounts receivable from sales of products and services to RP
(1995: $8.5 million) and $39.4 million classified as other current assets
(1995: $36.8 million).
Accounts payable related to purchase of materials and services from RP and
affiliates were $16.8 million at December 31, 1996 (1995: $12.2 million);
accrued and other liabilities due to RP at December 31, 1996 were $30.0
million (1995: $20.9 million).
In 1996, sales to RP and affiliates were $31.3 million (1995: $31.1 million;
1994: $29.7 million). Materials purchased from RP totaled $38.7 million in
1996 (1995: $41.4 million; 1994: $36.8 million).
At December 31, 1996, debt with RP and affiliates totaled $259.8 million
(1995: $653.0 million). Interest expense incurred with respect to RP
indebtedness in 1996 was $22.3 million (1995: $12.4 million; 1994: $15.8
million).
RP charges the Company for expenses incurred on its behalf, including
research, data processing, insurance, legal, tax, advertising, public
relations and management fees. Such charges are reflected in the financial
statements and amounted to approximately $24.0 million in 1996 (1995: $23.6
million; 1994: $24.5 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 FF645.0 million (approximately $123.1 million) and pay dividends
of 7.5% per annum on a stated value of FF145.0 million. 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 and approximated $35.2
million in 1996.
62
<PAGE>
RHONE-POULENC RORER INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CENTEON
The Company and Centeon participate in a cash pooling arrangement whereby
the entities comprising Centeon can borrow from or lend to RPR at market terms
and conditions. Receivables and investments related to Centeon classified as
current assets totaled $50.2 million at December 31, 1996. At December 31,
1996, the Company's net investment in capital leasing arrangements with
Centeon totaled $59.3 million; related rental income for the year totaled $3.6
million. Current liabilities due to Centeon totaled $35.3 million. Notes
payable to Centeon totaled $8.4 million at December 31, 1996.
Purchases of certain plasma-based products from Centeon totaled $27.8
million in 1996. The Company is a party to a toll manufacturing agreement with
Centeon with respect to the manufacture, finishing and/or packaging of certain
pharmaceutical compounds and products. Charges at full standard cost to RPR
under this agreement totaled $49.5 million in 1996.
In 1996, the Company received a net cash distribution from Centeon totaling
$71.3 million.
The Company and Centeon have entered into certain service agreements which
are generally renewable on an annual basis. The Company charges Centeon for
such services as treasury, accounting, information systems, product
distribution, tax and legal. These charges approximated $6.0 million in 1996.
NOTE 22. CONTINGENCIES
The Company is involved in litigation incidental to its business including,
but not limited to: (1) approximately 541 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. In August 1996, the Company, with
three other U.S. plasma fractionators defending the U.S. AHF litigation,
signed a Settlement Agreement with the plaintiffs with respect to this
litigation which, subject to certain conditions, provides for payment of
$100,000 to each eligible claimant or claimant group and the payment of up to
$40 million in attorneys fees. One significant condition of the settlement is
that potential subrogation claims by third party medical providers be resolved
to the mutual satisfaction of the parties and that the class members'
eligibility for federal program entitlements be maintained. The Company and
the other fractionator-defendants are working with the plaintiffs' counsel to
resolve these issues; (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 and consumers; and (4) alleged
breach of contract by a subsidiary of the Company with respect to agreements
involving a bisphosphonate compound and Lozol(R).
63
<PAGE>
RHONE-POULENC RORER INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
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.
The Company has been advised of its potential liability related to alleged
past waste disposal practices, including potential involvement at five sites
on the U.S. National Priority List created by the Comprehensive Environmental
Response Compensation and Liability Act (Superfund). For the majority of these
sites, the Company's estimated liability is not significant. With respect to
two of the sites, the Company is currently not able to estimate its share of
potential liability as the assessment of site conditions, the identification
of remediation methods and costs, and the quantification of relative
contributions among potentially responsible parties have not yet advanced to
the stage where a reasonable estimate of loss can be made.
As of December 31, 1996, the Company had unused standby letters of credit
outstanding of $101.5 million. The letters of credit are issued primarily in
the form of guarantees or performance bonds.
64
<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 three times in 1996.
/s/ Michel de Rosen
- -------------------------------------
MICHEL DE ROSEN
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
/s/ Patrick Langlois
- -------------------------------------
PATRICK LANGLOIS
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
/s/ Philippe Maitre
- -------------------------------------
PHILIPPE MAITRE
VICE PRESIDENT AND CORPORATE
CONTROLLER
65
<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, 1996 and 1995, and the
related consolidated statements of income and cash flows for each of the three
years in the period ended December 31, 1996. 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, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
- -------------------------------------
COOPERS & LYBRAND L.L.P.
Philadelphia, Pennsylvania
January 22, 1997
66
<PAGE>
RHONE-POULENC RORER INC. AND SUBSIDIARIES
QUARTERLY DATA (UNAUDITED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
QUARTER ENDED 1996 QUARTER ENDED 1995
------------------------------------------- -------------------------------------------
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 $1,272.4 $1,346.1 $1,278.0 $1,524.1 $1,098.4 $1,241.3 $1,212.7 $1,589.7
Gross profit 838.2 902.3 907.4 1,106.7 694.4 813.6 792.8 1,094.9
Net income available to
common shareholders 74.0 91.9 97.4 165.4 89.5 85.7 107.3 55.3
Earnings per common
share .55 .68 .72 1.21 .66 .64 .80 .41
Market price per common
share:
High 66.875 69.250 77.750 80.500 43.500 43.125 45.875 54.500
Low 50.500 58.000 62.125 66.000 36.250 40.375 40.500 43.750
Common dividends paid .30 .32 .32 .32 .30 .30 .30 .30
</TABLE>
- --------
Results for the third quarter of 1996 included charges of $33.8 million ($.17
per share) associated with the estimated impact of Centeon's voluntary
worldwide recall of albumin products sold under the trademarks Albuminar(R)
and Plasma-Plex(R).
Results for the fourth quarter of 1996 included charges of $102.6 million
($.50 per share) from the reassessment of certain intangibles and fixed asset
carrying values related to AIS. Fourth quarter 1996 results also included
gains on the sales of certain nonstrategic European assets totaling $110.7
million ($.51 per share).
Results for the first quarter of 1995 are restated to include the results of
Cooperation Pharmaceutique Francaise and a pharmaceutical business in Brazil,
acquired from Rhone-Poulenc S.A., and earnings per common share for the period
reflect pro forma adjustments giving effect to interest and preferred
dividends relative to these acquisitions.
Results for the first quarter of 1995 included 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 included $126.5 million ($.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.
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. (ticker symbol: 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 February 28,
1997, there were 7,339 holders of record of RPR common shares.
67
<PAGE>
RHONE-POULENC RORER INC.
500 Arcola Road
Collegeville, PA 19426-0107
This Proxy is Solicited on Behalf of the Board of Directors of Rhone-Poulenc
Rorer Inc.
The undersigned hereby appoints 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 7, 1997 and any
adjournment or postponement thereof, for the transaction of such business as may
come before the meeting.
This proxy when properly executed will be voted in the manner directed
herein by the undersigned. If no direction is given, this proxy will be voted
FOR the election of the nominees for director and FOR proposal 2.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR THE ELECTION OF
THE NOMINEES FOR DIRECTOR AND FOR PROPOSAL 2.
(Continued, and to be dated and signed, on the other side.)
RHONE-POULENC RORER INC.
P.O. BOX 11494
NEW YORK, N.Y. 10203-0494
<PAGE>
-------
-------
1. Election for four directors to three-year terms and two directors to one-year
terms.
FOR all nominees [X] WITHHOLD AUTHORITY to vote [X] *EXCEPTIONS
listed below for all nominees listed below
NOMINEES FOR THREE-YEAR TERMS: Jean-Marc Bruel, Charles-Henri Filippi,
Manfred E. Karobath, M.D., James S. Riepe
NOMINEES FOR ONE-YEAR TERMS: Timothy G. Rothwell and Eric J. Topol, M.D.
(INSTRUCTIONS: To withhold authority to vote for any individual nominee, mark
the "Exceptions" box and write that nominee's name in space provided below.)
*Exceptions.....................................................................
2. Proposal to ratify the selection of Coopers & Lybrand LLP, as independent
certified public accountants for Rhone-Poulenc Rorer Inc. and its
subsidiaries for the fiscal year ending December 31, 1997.
FOR [X] AGAINST [X] ABSTAIN [X]
(Please sign, date and return this proxy in the enclosed postage prepaid
envelope.)
In their discretion, the attorneys are authorized to vote upon such other
matters as may properly come before the meeting or any adjournment thereof.
Change of Address and/or
Comments Mark Here [X]
Your signature should appear exactly as your name appears in the
space at the left. When signing in a fiduciary or representative
capacity, please sign your full title as such. If shares are held
in more than one capacity, this proxy will be deemed to vote all
shares held in all capacities. If your imprinted name is
incorrect, please print your correct name in the space below.
Date: _______________________________________________________, 1997
___________________________________________________________________
+ Signature
+
+ ___________________________________________________________________
+++++++ Title
Votes MUST be indicated
(X) in BLACK or Blue ink. [X]
